Thursday, June 13, 2024

Foreign currency depositors to be compensated in birr Negotiations ongoing to establish a repo agreement


By Muluken Yewondwossen

The recently set up fund, the Ethiopian Deposit Insurance Fund (EDIF), which ensures the safety, soundness, and stability of the Ethiopian financial system, announces that it will reimburse foreign currency depositors through birr.

The fund which became operational in April 7, 2023, pointed out that in the event that it has to reclaim its investment in the central bank’s Treasury bills (Tbills); it has been raising the issue with the National Bank of Ethiopia (NBE) on a repurchase agreement (repo).

According to a statement disclosed on October 2 by Solomon Desta, the vice governor for financial institutions supervision at NBE and head of the EDIF board, the fund has officially begun to function in order to safeguard the public’s deposits held in financial organizations, particularly banks and micro financing institutions (MFIs).

He declared that the fund will cover any kind of deposit up to 100,000 birr. According to NBE data, as of the end of March 2023, the total amount of deposits mobilized by MFIs and the banking system was above 2.12 trillion birr.

NBE said on Tuesday that there were 129.52 million deposit accounts as of June 2023, up from 98.59 million in June 2022. It’s unclear, though, if this data includes savings accounts at MFIs or not.

Solomon contended that although the majority of the public will be covered by the coverage amount, over 95 percent of depositors have savings of less than 100,000 birr. Other arrears could be covered by the financial institution’s dissolution revenues, according to EDIF’s founding CEO Merga Wakweya.

Solomon and the CEO both stated, “The coverage shall be growing likewise, gradually, when the fund capacity expands.”

Banks, including the government-owned Commercial Bank of Ethiopia (CBE), are required by law to pay the first 0.04 percent premium payment. Additionally, MFIs are required to pay an initial fee of 30,000 birr.

On the other hand, financial institutions must provide a yearly premium equal to 0.3 percent of deposits. Through the EDIF, which was established in March, with operations kick starting on April, 1.6 billion birr was mobilized in the first quarter of the 2023–2024 fiscal year.

“We have targeted to mobilize a six billion birr premium from financial firms for the current financial year which will be closed on June 30, 2024,” Merga added.

Of the total amount raised, the fund has invested 1.5 billion birr in Tbills; the remaining funds have been placed into the interest-free Mudarabah investment account at CBE.

The fund stated that Tbills will be its main focus for resource investment. The CEO stated, “At this point, it’s a good place to invest our resources; and future operations will entail research.” According to Merga, 1.5 billion birr are now being invested on 184 maturity days at Tbills, which are issued by NBE every two weeks, with a market-based yield. He said, “We chose the 184 because we received an attractive yield on the Tbills auction.”

The fund is now in negotiations with NBE, the fund’s higher authority, to establish a repo agreement in case of emergency. “We will access the money we invested in Tbills prior to the maturity date, but without interest, if we suddenly need it.” But in accordance with the World Bank’s advice, which guided the scheme’s creation, we are in talks with NBE to obtain funding through a repo arrangement,” Merga clarified.

In a repo arrangement, wherein the borrower temporarily lends an investment to the lender for cash with an agreement to buy it back later at a predetermined price, investors will be able to receive income from their investments as long as they withdraw them prior to the maturity date.

Ethiopia hasn’t, however, yet put this kind of scheme into action.

The CEO informed Capital that in the meantime, savings and accounts in foreign currencies exist, and in the event of coverage, the fund will settle the payment in local currency.

“There is a similar trend in other countries,” he explained.

The fund said that foreign banks that will come to the country will be part of the new insurance scheme.

The fund stated, “They will pay the premium on birr since they are investing in the country and mobilizing savings in local currency,” as the government gets ready to allow international institutions into the banking industry.

NBE statistics indicates that in the third quarter of the 2022–2023 fiscal year, there were 46 MFIs, mobilizing approximately 24 billion birr in savings deposits, indicating an annual growth rate of 16.9 percent. During the same time frame, the banking system’s total deposit liabilities reached 2.1 trillion birr, representing a 29.3 percent annual rise. 200 million birr are used as the capital to create the EDIF.

The World Bank and IMF, among other foreign partners, have advised the government to implement the plan for a number of years in order to establish the fund. The regulation that the council of ministers passed in 2021 was followed by the creation of the fund. The fund located at the headquarters of Zemen Bank now employs four people, but that number is anticipated to rise to twenty.

According to the CEO, the fund could require highly trained workers, but it won’t need to hire any more staff. Instead, “We may assign agencies the same way other funds are doing in other countries in case resolution issues happened. If resolution authority is available, we can collaborate with them; otherwise, a large team is not necessary,” Merga expounded.

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