CAMEL to be used to rate MFIs transition to banks

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Yinager Dessie (Photo: Anteneh Aklilu)

CAMEL rating will determine the transition of microfinance institutions (MFIs) to banks under the new directive of the National Bank of Ethiopia (NBE). State owned enterprises will also hold shares besides 70 percent maximum amount allowed to own by regional governments or city administrations.
Early this week NBE announced that MFIs owned by regional or city administrations will be relicensed as banks.
Yinager Dessie, Governor of NBE, said that the decision to relicensed microfinance institutions as a bank answered the demand that have been raised by the financial institutions for a long time.
According to the directive signed by the Governor, CAMEL is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym. The CAMEL acronym stands for “Capital adequacy, Asset quality, Management, Earnings, and Liquidity.”
The CAMEL rating ranges from 5 to 1 as the 5th rate considered as the best rating and one is the worst.
Article 4 sub article 4.4 of ‘requirements for relicensing a microfinance institution’ states that safety and soundness of a microfinance institution to be relicensed as a bank shall be evidenced by a composite CAMEL rating of at least ‘3’ in the on-site examination report produced within a year preceding the date of application of a microfinance institution to be relicensed as a bank.
The same directive sub article 4.3 states that a regional government shall not hold more than 70 percent shares when the microfinance institution is relicensed as a bank.
During his briefing Yinager also said that NBE decided the share limit for regional governments to give a chance to include the society to be part of the MFIs and included the public from all corner.
However the directive has given a chance for public enterprises to access shares at the transition process as a bank.
Yinager also underlined that meanwhile they are upgraded to bank they are supposed to continue to provide microfinance services.
Article 4 sub article 4.5 said that a microfinance institution to be relicensed as a bank shall state in its mission statement, internal bylaws and business model about the provision of microfinance services as one of its core services and put in place the required resources and system towards that effect.
Sub article 4.6 added that a microfinance institution to be relicensed as a bank shall organize and structure a function that will handle the microfinance as one of its major lines of business.
MFIs mainly regional and city administrations owned have been asking the regulatory body for the transition to regular financial firm.
NBE issued the directive only for publicly owned microfinance institutions, while private microfinance institutions are stated that they have to follow the regular bank formation process to be changed as bank.
Currently there are 38 microfinance institutions operating in the country, while the majority are privately owned.
According to the third quarter report of NBE for the 2019/20 fiscal year MFIs have mobilized 43.3 billion birr in saving deposit by end of the third quarter which was 12.6 percent higher than last year same period. Their total outstanding credit also increased by 17.6 percent and reached 60.8 billion birr.
Similarly, in the stated period their total asset grew by 17.1 percent to reach 89.6 billion birr.
In the stated quarter that is from January to March 2020 the top five MFIs (Amhara, Dedebit, Oromia, Omo and Addis Credit and Saving Institutions) accounted for 82.9 percent of the total capital, 90.3 percent of the total deposit, 85.7 percent of total credit and 86.8 percent of total asset of micro finance institutions.
NBE also disclosed that micro insurances will be formed under a new directive that it issues. The directive targets to improve the insurance coverage, which is the lowest compared with peer Sub Saharan countries.
In related development according to a new directive issued by NBE individuals or companies will not be allowed to hold more than 1.5 million birr in cash at hand.
On the media briefing the Governor added that banks are now allowed to access foreign loans to provide for their customers. The new directive aims to improve the way to access foreign currency and minimize the shortage that becomes a serious bottleneck particularly for industries that demand hard currency to import raw material.