The insurance industry formally submit their protest to the National bank of Ethiopia (NBE) on the decision of the government that forces insurance firms to buy 15 percent bond from Development Bank of Ethiopia (DBE) from their total net profit.
In a letter submitted in the past weeks through the Association of Ethiopian Insurers states that the decision will affect the industry’s growth.
Recently, the government through NBE amended existing rules and directives or introduced new monetary policies and directive to control the inflationary behavior in the market and improve the financial industry.
Similarly, the NBE board announced that it will continue to closely monitor economic and financial developments and stands ready to utilize all available policy tools at its disposal to ensure price and financial stability consistent with its legal mandate.
Under article 4.1 of ‘investing in Development Bank Bond Directive No.SIB/54/2021/’ NBE order all insurers except the state owned Ethiopian Insurance Corporation, stating that an insurance company will invest an amount equal to a minimum of 15 percent of its net income in DBE Bond.
Article 4.2 of the directive says an insurance or Ethiopian reinsurance company shall invest the amount stated under article 4.1 within 90 days after the close of its financial year.
The Bond shall have a maturity period of three years and shall pay a bond rate at least two percent points higher than the minimum interest rate paid on saving deposit at the time of issuance. Currently, the minimum deposit rate is seven percent that means that on this rate the DBE Bond interest rate is nine percent.
The directive that becomes effective as of September 1 stated that DBE Bond shall be paid annually. However, players in the insurance industry did not accept the decision that the government took.
Sources told Capital that the directive may not have bold and direct effect on insurance firms compared with its outcome on shareholders.
“As per the directive of NBE, the amount that would be invested on the bond is the property of shareholders who secure it through annual dividend, due to that it significantly affects shareholders,” a senior insurance industry expert said.
According to another expert the effect on shareholders who would like invest their dividend on other investment activities or for those who are using their annual profit from their share to lead their life would be much higher.
Those who have big share on the insurance company and shall get significant dividend may invest their profit on other projects that is vital for the economy, “but the current decision would affect their investment activity directly and by in large the economy,” added the expert.
Similarly, those who have small share but use their dividend to lead their day to day life as a pension would fall victim to the NBE directive.
“In general it is a decision that would be seen in a command economy. The government cannot pass a decision on private property and it is a tendency of socialist mindset,” another expert on the sector said.
Similarly, under ‘investment on DBE Bonds Directive No.SBB/81/2021/ NBE introduces that commercial banks shall annually invest a minimum of 1 percent of their outstanding loan and advance in DBE Bond until the aggregated bond holding equals 10 percent of their outstanding loans and advances.
In its meeting on August 27, 2021, the Board of Directors of the National Bank of Ethiopia decided to modify the reserve requirement, the interest rate on individual banks’ lending facility, the forex surrender requirement, and the forex retention rights.
The statement announced after the meeting stated that outstanding credit to the private sector grew at 40.8% (year on year) in July, and disbursement during the month grew at about 125 percent, compared to the same period of last year.
“Such a rapid growth of credit poses significant risks to price and financial stability, in the context of a rising inflation which reached 26.4 percent (year on year) in July. Consequently, the Board has decided to raise the reserve requirement on birr and foreign currency deposit liabilities held by commercial banks to 10 percent, from the current level of five percent, effective on September 1st, 2021,” it added. Banks are given a transition period of 3 months to meet the 10 percent reserve requirement.