Banks using LC requests to mobilize deposit

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Private sector actors claimed that they are expected to show up to 500 percent deposit on banks for their letter of credit (LC) request.
The private sector actors told Capital that in the past few months, their effort to get hard currency for their business they are requested by banks to deposit three to five fold of the equivalent of the hard currency they requested at the bank in birr.
“If we do not have the stated percentage of birr deposited the bank will not approve the hard currency request,” one business man who is frustrated with the situation told Capital.
He said that accessing the hard currency by itself is very strange and the new scheme at banks put the business in another challenge.
“Currently the cash shortage is affecting the private sector, even accessing our own money that is deposited at banks is becoming very hard,” another businessman who demanded anonymity, claimed.
The sector actors argued that the current precondition mainly affects industrialists that do not have cash at hand.
“Most of the industries have capital to cover running costs,” one of the sector experts explained, “but the current precondition from banks that are expected to see up to 5 fold cash deposit on their facility from LC demand has become strange for the factories to run their business since they are unable to deposit the expected amount.”
The new precondition on looking the saving amount to give foreign currency initially commenced at the state owned, Commercial Bank of Ethiopia (CBE), which is the main source of hard currency for the private sector since the central government is releasing most of its hard currency via CBE.
The financial sector experts said that the private financial institutions follow the scheme of the financial giant. “Now private banks are also insisting their customers to show significant amount of money deposits on every hard currency requests,” he said.
Experts speculated that looking the saving rate to allow the LC is the result of the cash crunch at banks seen in the past couple of months.
Recently one business man claimed that he could not access about 3,000,000 birr from his account meanwhile he has over 75 million birr in his saving at the same bank.
He said that the cash shortage affects all banks including the financial giant that is why CBE insisted foreign currency buyers to save up to 500 percent of equivalent of their hard currency demand in birr.
“This is the mechanism to increase the deposit mobilization of the bank, while it affects the industries that do not have much cash except covering their operation cost and import of raw material for their production,” he added.
One of the industrialists told Capital that due to the precondition of banks most industry operators that could not fulfill the demand are forced to look to another option to get hard currency to import raw material, spare part and other products.
“We are getting hard currency in indirect and expensive way that would escalate the price of finished products,” the industrialists said.
They claimed that they are forced to buy the hard currency of exporters which highly contributes to exacerbating the already rampant inflation.
According to senior bank expert, CBE’s despot mobilization shrunk significantly recently forcing the bank to assess the way to improve the rate. “The current scheme is one of the ways to boost its deposit mobilization,” he said.
CBE’s deposit mobilization for the first six months of 2019/20 finance year stood at 24.6 billion birr which is 71 percent of its target. The performance in the first half of the past financial year, 2018/19, was 29.8 billion birr, which is 5.2 billion birr higher than this year first half.
In related development mid this week Bacha Gini former President of CBE is replaced by a previous president, Abie Sano, who led the bank from January 2006 to November 2008. Abie was replaced by Bekalu Zeleke now president of Bank of Abyssinia.
Abie is mentioned as a visionary leader and laying the stone for significant growth CBE saw in the last decade.
In the past decade the bank enabled to expand its branches aggressively that allowed CBE to boost its deposit mobilization dramatically.
Abie is also founding president of Oromia International Bank (OIB), which is one of the late coming banks, and served as president until he returned back to CBE. Despite OIB is younger the bank’s actual performance has become almost similar with the oldest private banks.
In its recent Article IV Consultation the International Monetary Fund (IMF) recommended that immediate asset quality review is required for CBE.
It stated that the state-owned CBE has experienced tighter liquidity conditions.
“The CBE’s liquidity ratio dropped in 2018/19 due to a persistent asset-liability mismatch: the CBE has been prioritizing the financing of long-term projects undertaken by state owned enterprises (SOEs) by investing in SOE bonds and extending loans, drawing on its deposit base,” it mentioned on the consultation report.
“Credit to the SOEs has expanded in line with significant growth in SOE investment in recent years, which tightened liquidity conditions of the CBE and exacerbated the maturity mismatch. The CBE’s credit exposure to the SOEs is also highly concentrated in the energy sector, accounting for about 40 percent of its total asset portfolio,” it added.
The IMF consultation indicated that commercial banks reported a risk-weighted capital ratio (RWCR) of 19.2 percent in June 2019, well above the statutory minimum of 8 percent, while the Commercial Bank of Ethiopia in particular, had an RWCR of 34.7 percent, and private banks reported capital levels well in excess of the regulatory minimum.
IMF has been also stated that the CBE also has large exposure to foreign exchange risks as the bank plays central role in foreign exchange transactions.