By Atsebaha Abay
Globally, well over hundred countries have policy banks aimed to expedite their policy objectives. Though, financing long-term development projects is the dominant characteristics of policy banks they are not profit maximizing ventures. Despite various similarities, policy banks differ in terms of their funding mechanism, ownership structure, lending models, etc. Some countries have more than one policy banks each specializing in different development targets: South Korea has 5, china 3, Brazil 2, Germany 6, Ethiopia 1, etc. Policy banks have different ownership structures: Many of these are owned by federal governments while some are owned by regional states and still others by the private sector or a mixture of these. Based on their specialization, policy banks have different names: development bank, investment finance, industrial development bank, agricultural development bank, SME development bank, export development bank, EX-IM bank, etc.
The Ethiopian policy bank was given different names in different times: Agricultural Bank of Ethiopia (1945-1949), Agricultural and Commercial Bank of Ethiopia (1949-1951), Development Bank of Ethiopia (1951-1964), Investment Bank of Ethiopia (1964-1970), Agricultural and Industrial Development Bank of Ethiopia (1970-1994) and currently Development Bank of Ethiopia (aka DBE) since 1994.
The policy mandate of DBE is clearly indicated in its mission statement which says that “ DBE is a specialized financial institution established to promote national development agenda through development finance …….. to viable projects from the priority areas……..”. Further, the priority areas/ sectors are identified as “commercial agriculture, agro-processing, manufacturing and recently lease financing” with a list of potential investment projects under each of these 4 categories. This policy mandate, which can be considered as “narrow based” compared with similar development banks elsewhere, was given to it in 1994, i.e., when it was established anew. Since then, DBE has been delivering long-term and sustainable finance to key economic sectors that are in-line with government policy objectives. However, over the past two decades, a number of changes have been taken place on the economic structure of the country. For instance, the construction sector has been emerged as the second largest sector, only next to agriculture, in terms of volume of economic activities, job creation, etc. In addition, the service sector including education, health, hotel, telecom, real-estate, import-export, etc have enormously grown and contributed to country’s economic growth.
As the survey made by the WB (World Bank) in 2011 revels, 86% of the development banks operating globally said “trade and service sectors” are within their policy mandate, 74% said construction and housing, 48% said health and 45% of them mentioned that education is within their policy mandate. It would, therefore, be commendable for the Ethiopian government to revisit the policy mandate of DBE to broaden its development mandate and bolster its economic development role in the country.
Development banks adopt various business models. Considering source of fund, various development banks operating elsewhere use deferent funding options including saving and deposit mobilization from the public. Others receive budgets from government or get finance from different financial institutions and/ or raise fund from domestic and international capital markets. Indeed, many financial experts believe that development banks should focus on their lending activities to avoid competition with the private banks in mobilizing savings. Coming back to Ethiopia and considering its funding mechanism, DBE (contrary to its establishment purpose indicated in proclamation number 83/2003, Article 6.6) is a non-deposit taking institution and uses first-tire (i.e., direct delivery) business model for over 90% of its credit operation. Further, it is fully owned by the government.
Starting this year, the Ethiopian government (i.e., NBE) is terminating its fund supply to DBE due to the end of the in-famous 27% NBE Bills. The closure of such major financial stream of the bank would undoubtedly undermine its liquidity. In economies such as ours where the private sector has acute shortage of investment finance and that the margin between deposit rate and lending rate is so high, it is advisable for development banks to receive saving and deposits from the public and other institutions in addition to their regular sources. This can help them to remain profitable and improve their sustainability. Applying the same logic, allowing such funding mechanism can help DBE to diversify its funding sources and compensate the fund frozen by the NBE which, according to the writer of this article, has come at a wrong timing.
Investing in other profitable ventures is another cushion used by many governments in shielding their development banks from financial losses. For instance, this year, despite the huge operational loss it faced from its banking operations, the Korean Development Bank did not suffer much because of the sizeable dividend it got from Korean Electric Power Corporation which 32.9% of the capital of this huge corporation is owned by the bank. As per the aforementioned Proclamation Number 83/2003, Article 6.4, DBE is allowed to participate in equity investments which the bank has never exercised it yet partly due to shortage of investment fund. This year, the government has increased the capital of DBE and that it should look into some selected lucrative investments.
The Covid-19 driven economic crisis and its huge impact on the operations of SMEs is another major concern of DBE. The NPL ratio of DBE’s corporate loan portfolio has sharply declined and reached the required single digit level. However, NPLs that come from the SME (project financing and lease finance) credit line is soaring beyond one can imagine. Due to this, DBE is at risk of this potentially devastating threat. Therefore, all concerned bodies should sit and come-up with short and long-term strategies ahead. Here is my two cents proposal.
As a short term solution, the bank can replicate its success story of the corporate credit portfolio to the SME (both project financing and lease finance) loans that are under watch list or have already entered NPL. But, in the long term, i.e., for new SME loans, DBE may reconsider its business model towards adopting a second-tier strategy (i.e., through other financial intermediary). This model is beneficial to DBE because it enables to reach out to a large number of SMEs (project and lease finance) beneficiaries operating throughout the country without increasing its branches or incurring disproportionate branch operation costs. It is also in-line with the government policy because such model helps the growth of other financial intermediaries (private banks, MFIs, SACCOS and RUSACCOs) to serve the under-served clients in the deep rural areas.
What other business models can DBE re-thinks of? Recently (as of August 18), NBE has allowed local banks to borrow from their foreign counterparts. Therefore, broadening its geographic scope through building business partnership with international development banks such as the EX-IM Banks of China and South Korea, European Investment Bank, BRICS’s New Development Bank, etc. can help DBE to absorb foreign currency through both loans and FDIs. In turn, this will help to improve the foreign currency supply that can be used for the purchase of capital goods (machinery, equipment, etc.) for its clients.
Regional states in Ethiopia are one of the political and economic entities in the country that have huge leasable and leased (not fully paid) land collateral but have acute shortage of development finance. Therefore, providing loans to regional states can be considered as one business portfolio of DBE in the future. What else? In Ethiopia, the Muslim community constitutes 35-40% of the Ethiopian population and above 50% of the business community. Therefore, it would be unfair to ignore this community in their efforts to develop their business and country. And as a long term financial specialist, DBE has the most relevant experience to Islamic banking compared with the other commercial banks operating in Ethiopia. It would therefore be wise to re-consider the interest free credit line and introduce to DBE as one of its business portfolio.
So far, DBE has a sound record of balancing the bank’s dual objectives of fulfilling its development mandate and its profitability. This year alone, it accrued a record net-profit (before tax) of 1.1 billion Birr without compromising its grand goals. And if DBE is needed to be profitable and financially sustainable, then it has to revise its policy mandates and business models right now.
Atsebaha Abay is a banking and financial services expert currently serving as director at the Development Bank of Ethiopia (DBE). He can be reached at firstname.lastname@example.org.