News Column

Distrust Deepens Finance Industry Divisions

June 16, 2014

Transparency and trust are essential for the healthy operation of the finance industry of any nation.

Naturally, these critical factors tend to exist in an environment of open dialogue between the various actors of the industry. The recent fall out between the private banks operating in Ethiopia and the regulatory National Bank of Ethiopia (NBE) serves to illustrate the distrust besetting the industry. Unfortunately, the diametrically opposed views expressed by both sides in the backdrop of this distrust are leading to misunderstanding and confusion.

The distrust came to head last week at a consultative forum convened to deliberate on a study that dwelt on the challenges facing money supply in Ethiopia and the solutions thereof. One of the study's finding states that the laws and directives enacted by the government constrain private banks' access to money supply. The study goes on to say that the restrictive directives issued by the NBE have prompted a decline in the banks' profitability by preventing them from utilizing loans in the desired volume. The principal directives which were said to be blamed for this are the NBE-Bill bond directives, which compel all private banks to purchase bonds which amount to 27 percent of the gross loan they disbursed as well as the directive that requires at least 40 percent of the loan portfolio of these banks to mature in the short-term (one year).

While acknowledging that the finance industry is saddled by a raft of problems, the Governor of NBE, Teklewold Atnafu, underscored that the government has no intention of hobbling private banks and vehemently refuted the claim that the banks' bottom line had suffered as a result of the laws and regulations promulgated by the government. He explained that the NBE acts vigilantly to ensure that the operation of banks is healthy and does not land the country in a crisis. The governor also said that private banks have, in fact, a combined eight billion birr in excess reserve with the NBE, excluding their legal reserve, and that the study's accusation that the banks are cash-strapped was simply not true.

Such divergence of positions between the central bank and private banks casts doubt over the health of the finance industry. Given that the government, shareholders, depositors, borrowers and other customers all have a stake in the operation of private banks, the difference should not have assumed such proportions. While private banks, which play an important role in the Ethiopian economy, have the right to express frustration at the challenges confronting them, they are also obliged to make their views known in a candid and responsible manner as well as to make themselves part of the solution.

On its part, the NBE needs to see to it that the directives it issued while exercising its supervisory power are grounded in the facts on the ground. Admittedly, the bulk of the directives issued by the NBE to date have not only helped private banks remain stable and turn in impressive results year after year, but have also saved some from the brink of collapse. That said, some of the directives need to be revisited in view of the existing reality.

The central bank and private banks seem unable to reach a common understanding on the latter's perceived problems associated with and the way forward pertaining to the 27 percent NBE-Bill directive and the directive requiring the loan portfolio of private banks to constitute of at least 40 percent short-term loans. There can be no denying that the banks have remained profitable despite the directives they describe as being restrictive. However, they are declining to lend the money they could due to the air of distrust. Had this mistrust been dealt with through dialogue, the shortage in money supply that was cited as the reason for not providing to a greater number of potential borrowers would have been averted. The economy is bound to be detrimentally affected when productive citizens sit idle and are unable to contribute their share owing to the lack of financing. This is precisely why a frank discussion is crucial. Another difficulty faced by borrowers in obtaining loans is linked with what the collateral banks demand their customers to provide. The stark problems attending the valuation of the properties put up as collateral are as much sources of distrust as are the aforementioned NBE directives. Consequently they starve citizens who wish to engage in investment activities of the cash they need to commence/expand their operation. This in turn results in increased unemployment and deters creativity and entrepreneurship.

It is imperative that the NBE and private banks sit down and narrow their polarized views over the directives that have been the bones of contention between the two parties. Their reluctance to cede ground and insistence that the other side is to blame solely for the shortage in money supply can neither dispel the distrust between them nor bring about a solution to the problem. Both need to understand that if they do not set in motion immediately the process necessary to restore trust among them, the finance industry's fate will be uncertain. This is a scenario nobody can countenance.

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Source: AllAfrica

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