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ETHIOPIA: REGULATORY AND SUPERVISORY FRAMWORK FOR DEVELOPMENT BANK OF ETHIOPIA

ETHIOPIA: REGULATORY AND SUPERVISORY FRAMWORK FOR DEVELOPMENT BANK OF ETHIOPIA. Getahun Nana A presentation in working session “ Revitalizing National Development Banks for Accelerating Achievement of the SDGs in Africa ”

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ETHIOPIA: REGULATORY AND SUPERVISORY FRAMWORK FOR DEVELOPMENT BANK OF ETHIOPIA

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  1. ETHIOPIA: REGULATORY AND SUPERVISORY FRAMWORK FORDEVELOPMENT BANK OF ETHIOPIA Getahun Nana A presentation in working session “Revitalizing National Development Banks for Accelerating Achievement of the SDGs in Africa” During A Conference on SDGS Implementation in Africa – Reflections on a Three-Year Journey held in Kigali, Rwanda on 13th June 2019

  2. Financial Sector Land Scape in Ethiopia • Private owned Commercial Banks = 16 • Government owned Commercial Bank = 1 • Government owned Development Bank =1 • Insurance companies = 17 ( one Government owned • Re-insurer company = 1 • Micro-finance institutions = 35 (5 regional govt owned) • Capital goods financing companies = 5 • Savings and credit cooperatives=18 • No capital market Total Banks = 18

  3. ESTABLISHMENT, MISSION & SOURCE OF FUND • DBE is established by Council of Ministers Regulation and licensed by the NBE • Owned by the Government 100% • Its mission is: provision of development credit to viable projects along with technical support and advice in areas designated as priority by the Government which currently include: • Commercial Agriculture projects, • Agro-processing industries, • Manufacturing and extractive industries, and • SMEs • It is not involved in housing, service and infrastructure financing • Major source of funding ( 68% of total Assets or 86% of total lending to Central Gov’t and Businesses as of Dec 2018 ) is Central Bank (NBE) Borrowing • NBE borrowing is non inflationary as the funds are collected from private banks by selling NBE bills

  4. REGULATORY & SUPERVISORY PRACTICE • Ownership role is played by Ministry of Finance • Regulated and supervised by the central bank (NBE) • The NBE applies a combination of differentiated and similar regulatory requirements for DBE and Commercial Banks (CBs) • Similar Requirements to CBs Include: • Corporate Governance (Board and CEO appointments as well as their duties and responsibilities)- applicable only in principle • Capital adequacy (still under Basel I, 8% of RWA) • Foreign Exchange Open Position limit ( ±15% of net worth) (comply) • Reporting and External Audit requirements (comply) • On site examinations and off-site surveillance ( On-site frequency = 2 years) • Risk Management framework • Administrative sanctions ( Comply except Corporate Governance)

  5. Permissible Activities • Allowed to : • underwrite medium and long term credit to borrowers engaged in priority sector businesses • provide all banking services to its medium and long term borrowers including: • extending short-term loans • maintaining current account/transaction accounts/ • Receiving deposits • Providing payment services • Giving international banking services (L/C, remittances, trade ) • Providing advisory services • Issuing bonds and time deposit certificates as well as buying government papers • Borrowing from local and foreign (subject to authorization of Ministry of Finance for foreign) sources • The Bank is not allowed to give any banking services to non-borrowers including receiving retail deposits, payment services and FX services

  6. REGULATORY & SUPERVISORY PRACTICE • Differentiated Regulatory Requirements • Minimum Loan classification and provisioning • Limits on single and related party borrower loan ( Board is required to set the limit, in principle 25%, in practice it exceeds, Gov’t enterprises are not considered related party ) • Liquidity requirement ( no specific requirement)

  7. Current Status • Loans grew fast since 2012 (by 36 on average between 2012 & 2018) • Lends to both Central Government ( direct budget finance 51% of the total ) and business (including public enterprises 49%) • NPLs Reached --% as at June 2018 • Capital Adequacy ratio 12.3 % as of June 2018 • Earning remain very low between 2012 and 2018 • RoE – 4.5% on average • RoA-0.47% on average • Thus the Bank appears unhealthy • There is critical mission drift as it mainly became central government budget financier (which is not stated in its mission)

  8. CHALLENGES • Conflicting social and economic objectives • The Board is dominated by government appointees (mostly politicians) and thus it is vulnerable to undue political interference • High dependence on NBE funding • Financial sustainability and current unhealthy condition • Weak risk-management and project evaluation capacity • Hiring and retain highly qualified staff • Poor innovation capability (financial products) • Lack of clarity in accountability

  9. Thank You June 2019

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