Awash Bank welcomes the Central Bank’s decision to cease the NBE Bill and announced the slashing of interest rates worth half a billion birr in bank revenue.
A week ago the National Bank of Ethiopia (NBE) with its latest directive MFA/NBEBILLS/004/2019, has repealed MFA/NBEBILLS/003/2018 directive forced banks to buy 27 percent of bonds on every fresh loan and advance.
It was a debated issue between the government and the private sector including the business community and international partners based on the claim the private sector would be affected with access to finance and banks would retreat to provide loans due to the directive.
They also stated that the NBE Bill hiked the cost of funds boosted the loan interest rate which contributed to inflation.
Banks have long complained the NBE bills shrink their liquidity and smash their capacity to provide loans for clients. They have also argued the 3 percent interest rate, which was attributed when the directive was issued and later increased to 5 percent in October 2017, was far below what banks pay as interest for the deposit. When the directive, ‘MFA/NBEBILLS/001/2011’, became effective, the minimum interest rate was 5 percent and then increased to 7 percent a year ago when the birr was devalued by 15 percent.
During its latest press conference Awash Bank stated that due to lifting of the NBE Bill it was encouraged to reduce interest rates in all sectors from 0.5 to 4.5 percent.
Desalegn Tolera, Credit Analysis and Portfolio Management Deputy Chief at Awash Bank, said the bank was undertaking a study on loan provisions and how to accelerate the business which had observed a slowdown. “In the meantime, the decision of NBE to lift the 27 percent bond purchase bill encourages us to improve our loan interest rate in favor of borrowers,” Desalegn said at the press conference held on Thursday November 28 at the headquarters.
Since NBE introduced the NBE Bill Awash bought 17.1-billion-birr worth of bonds and currently the amount NBE holds is 12.1 billion birr, while the balance was paid on their maturity started in 2016.
Awash is the second biggest NBE Bill bond buyer after Dashen Bank, both of them are competing for the highest profit, currently Awash appears to be slightly leading.
Desalegn said due to the lifting of NBE Bill the cost of funds has declined. High interest reduction mainly applies to agricultural processing and manufacturing.
According to Desalegn, the service industry like hotels and tourism which contributes a lot of foreign currency will receive preferential treatment in the current loan interest rate reduction. The other priorities are health, education and agricultural.
“Based on our study the bank shall lose 500-million-birr worth of revenue from loan interest by reducing the interest rate,” Desalegn said.
Tomas Fikadu, Commercial Credit Appraisal Department head, said Awash Bank’s interest rate was ranging from 8.5 percent to 17.75 percent and now the maximum range has declined to 15.75 percent.
“The current reduction depends on the sector for instance one received a reduction of 4.5 percent but another three percent,” he added.
According to bank officials, the interest decrease means inflation will go down because it helps borrowers access credit at a lower cost.
Since the introduction of the NBE Bill banks have increased their interest rate to accommodate their cost of funds. Experts argued the interest rate had escalated up to 20 percent in the past few years. Desalegn said banks were forced to transfer the lower interest rate of the NBE Bill to customers.