Exporters claim that the country is losing big on hard currency that can be generated from exporting commodity through the transferable letter of credit (LC) scheme.
On the flipside, experts in the banking system argue that a strong capacity and proper due diligence plays a vital role when exposing the Ethiopian market to such a scheme.
Exporters that Capital spoke to regarding the matter explained that they indeed have trading partner like buyers and suppliers of commodities mainly agriculture commodities. However, they are not able to facilitate the trading because the financial system of the country does not allow for a transferable LC in financial its scheme.
Addisu Alemayehu, a prominent researcher and market expert on species, herbs and related agricultural commodities and export, explained that he once got the opportunity to export commodity to India from other African countries. However, he could not capitalize on the opportunity because of the system in the country.
“One of my customers in India requested me to supply a pulse and spice, while ample supply of the two products was very limited in Ethiopia, I used my well established network that I got because of my role on the sector for the past several decades which led me to get the products in Tanzania and west Africa. My customer from India was happy to get the products through my channel but I wasn’t able to facilitate the product because transferable LC is not permitted in Ethiopia,” Addisu explained his experiences on the issue that has hindered his business endeavor.
“If I were able to facilitate the trading both I and the country would stand the chance to get at the bare minimum a dollar per kg from exporting the two commodities. However that has not come to pass,” Addisu, who is also founder and board secretary of the Ethiopian Spices, Aromatic and Herbs Growers and Processors Association (ESAHGPA) told Capital.
“I was trying to communicate with the regulatory body at the National Bank of Ethiopia, but the short response I got from them is that a transferable LC is not allowed in Ethiopia,” he added.
Experts agreed that the country should opt for new dimensions to expand the export trade and earnings. They said that sometimes foreign buyers that have long established trade relations with Ethiopian exporters simply demand to get more commodities through their channel which presents quite the stretch when the commodity may not necessarily be produced in Ethiopia and or instances when the product shortage is seen locally.
Experts explained that through the transferable LC scheme, exporters facilitate the consignment from their partners in other African countries that are mainly new for the commodities which Ethiopia exports for years to foreign buyers in other parts of the world.
On the scheme, Ethiopian traders open LC for the commodity holder in other African country and the commodity receivers in the other part of the world shall open LC for Ethiopian customers. As per the process, the Ethiopian trader settle the payment for the African partner and he or she directly exports the commodity for instance in India and the final buyer or importer settles the whole agreed payment to the Ethiopian trader when the shipment arrives at the set destination.
“It is common in other countries where the emerging economies are using the scheme to boost their commerce,” experts said.
“In Ethiopia we may communicate with exporters in Singapore, Dubai or other major trading hubs for import of commodities that these countries are not actually producing. We may finalize the trading at Dubai but the commodity shipment may be in other Asian countries or ports in different corridors in the world, but when it come for Ethiopian traders this is not allowed,” experts said while justifying the need for opening up the scheme to the Ethiopian market.
Experts in the financial sector like Dereje Zebebne, President of Zemen Bank, appreciated the concept as he indicated how the country stands the chance to benefit from the scheme in term of hard currency generation and acceleration in financial transactions. On the flipside though, the banking sector guru also warned that the scheme might offer bad consequences.
He explained that knowing both supplier and importer very well is the pillar on such an approach.
Dereje explained that trust and long-established partnership is crucial whilst doing business in this manner but more than that prudent analysis and study on commodity receivers that may have cost, is mandatory.
“On my view pure due diligence is a must to make money and generate foreign currency on transferable LC, the scheme in itself is a highly risky business,” Dereje told Capital.
The banking expert believes that it shall be workable but insisted that trust of counterparts and the background for the supplier and importer are a basic foundational piece to complete the jig-saw puzzle of a successful scheme.
He said that the trading partner here must have tangible and trusted documents like financial capability, reputation, and reliability in terms of settling payments for the commodity buyer, which is crucial. “But the regulatory body is the right authority to explain the reason why it is not allowed for Ethiopia,” he said pushing the case to NBE to evaluate the situation.
Dereje reminded that on the import side, banks in Ethiopia are opening LC for importers on similar approach, “intermediaries let’s say that are based in Dubai know the suppliers or manufacturers very well.”