A notable wave of lending rate increases is reshaping the financial sector, following major banks adjusting their rates upward, with some reaching as high as 22pc. Several banks, including Oromia, Cooperative Bank of Oromia (Coop Bank), Wegagen, Dashen, Awash, and Sidama Bank, as well as the state policy bank, the Development Bank of Ethiopia (DBE), have adjusted their lending rates beginning the past two weeks.
These adjustments come at a time of rising operational expenses, fiscal pressures, and tighter credit availability, which have stirred public anxiety and borrower concern. However, bank executives have blamed a surge in the cost of funds as a primary reason for the adjustments. According to Asfaw Alemu, president of Dashen Bank, a liquidity squeeze across sectors is a key reason for the adjustment.
The cost of funds has surged, forcing banks to reexamine their lending strategies. Fixed-time deposit rates have increased by an average of six percent in over a year, now around 19pc.
Intensified competition among banks has further pressured lenders to revise their strategies to maintain profitability.
The impact of rising costs has been equally pronounced for Sidama Bank. According to its President, Tadesse Hatiya, the Bank's lending rate which was previously between seven and 19pc has now increased to eight to 21pc to balance income with escalating costs better.
“The credit cap is a major obstacle for emerging banks seeking expansion,” Tadesse told Fortune.
Fourth-generation banks rely heavily on lending and interest income to fund deposit mobilisation and branch expansion. The credit cap, which limits banks' ability to extend loans not exceeding 18pc of the previous year's advances, has forced them to generate more income from their existing portfolios, a strategy that comes with its own set of constraints.
"The increase has put additional pressure on banks to attract premium deposits," he said.
However, the regulatory framework gives banks considerable leeway when setting interest rates. The National Bank of Ethiopia (NBE) permits commercial banks to determine their respective lending rates as long as they report to the regulator and secure board approval. Recent data from December 2024 shows that the highest lending rate among banks had reached 23pc, while the lowest was recorded at seven percent, yielding an average of around 15pc.
According to Belete Fola, a portfolio manager at NBE, banks have the right to make interest rate decisions.
"The National Bank has no right to intervene,” he told Fortune.
DBE has increased its rates for the agricultural sector by six percentage points to 13pc, and for the manufacturing sector by five percentage points to 18pc. The new rates, approved by DBE’s board of directors, have been in effect since January 1, 2025, and formal notices have been issued to borrowers. As of December 2024, DBE had 4,000 borrowers with an outstanding loan balance of 97 billion Br, with 60pc allocated to the manufacturing sector, disclosed Getachew Wake, DBE’s vice president.
Enawgaw Belachew, a commercial farmer, is one of these borrowers who farms pulses and oilseeds on 300hcts. He now faces uncertainty about how he will manage his financial burden, taking a 50 million Br loan from DBE two years ago to buy machinery. However, security issues have halted his operations, preventing him from repaying his debt.
"I wasn’t able to pay my debt on time," he told Fortune, shocked at the sudden rise in interest rates.
Recent shifts in monetary policy further complicate the situation. The Central Bank has moved away from quantity-targeting toward an interest-based market model that relies on indirect policy instruments to achieve price stability. Under the new regime, the policy interest rate has been set at 15pc, and the Monetary Policy Committee, chaired by Governor Mamo Mihretu, has raised the allowable credit growth rate from 14pc. These measures are designed to manage inflationary pressures, yet they have also contributed to the rising cost of bank deposits and the tightening of liquidity across the sector.
The rising rates have immediately impacted borrowers, particularly those in the export trade sector.
The Oromia Coffee Farmers’ Cooperative Union, representing more than half a million farmers, has been hit hard by the new rate adjustments. The Union’s 1.5 billion Br term loan from Coop Bank saw its interest rate jump from 8.5pc in September to 14pc by December, a change that added an extra 82 million Br in costs. The Union’s difficulties did not end there; an overdraft facility of 200 million Br with Oromia Bank, which carried an interest rate of 8.5pc, was increased to 18pc.
“We’re under financial strain,” admitted General Manager Dejene Dadi.
Coop Bank's board approved the new rates on December 21, 2024, and they were implemented on December 23, 2024. The changes were formalised in a directive signed by the Bank's President, Deribe Asfaw, issued to management executives and branch offices.
Facing mounting financial strain, the Union has decided to withdraw the overdraft facility entirely and is now seeking a 600 million Br loan from the Commercial Bank of Ethiopia (CBE) at a lower anticipated rate of eight percent.
While these adjustments have raised concerns among borrowers, not all banks have opted to follow suit.
The country’s largest lender, the CBE, has maintained its current lending rates, seemingly resisting the broader trend of upward adjustments.
Other banks, such as Birhan Bank, have chosen a cautious approach. According to Dagmawi Kassahun, vice president for Business & Digital Banking, the Bank deliberately withheld from revising its rates this year.
“We held off adjustments to avoid rattling our customers,” Kassahun told Fortune.
Although economic conditions have undeniably pushed costs higher, Kassahun says that future rate changes might be postponed until the next financial year. Birhan Bank has 17,000 borrowers and an outstanding loan balance of 33 billion Br, demonstrating its moderate approach in the current economic climate.
Several banks' simultaneous rate increases have sparked concerns about possible collusion. Yehualashet Tamiru, a trade lawyer, warned that seemingly coordinated rate hikes could trigger an anti-competitive probe.
“Consumers need protection,” Yehualashet said, arguing that such moves might be scrutinised under anti-competitive laws.
The potential for regulatory intervention adds another layer of uncertainty to an industry struggling with elevated costs and an increasingly challenging market environment.
Experts warn that the broader economic implications of the rate hikes are considerable beyond the immediate impact on borrowers and banks. The Central Bank's Financial Stability Report from November uncovered the concentration of credit within the industry. The top 10 borrowers account for 23.5pc of the 1.9 trillion Br in loans and advances. In a striking illustration of loan concentration, a mere 0.5pc of borrowers, each with credit exposure exceeding 10 million Br, hold nearly three-quarters of all bank loans. Such a high concentration of credit, combined with rising rates, may have far-reaching consequences for the overall stability of the financial system.
Deposits across the banking industry have also been on the rise, reaching a total of 2.2 trillion Br. Despite this growth, banks have maintained a high loan-to-deposit ratio. Although this ratio has slightly declined to below eight percent, it remains elevated. As of June 2024, commercial banks had issued nearly 1.5 trillion Br in loans and advances, while the non-performing loans (NPL) ratio stayed at 3.6pc, comfortably below the regulatory threshold of five percent.
However, the delicate balance between attracting deposits and managing loan growth continues to present the industry with a considerable dilemma.
Shifts in banks’ lending focus further illustrated the changing dynamics within the industry. While export-oriented lending has declined noticeably, dropping by 1.6pc, banks have increasingly targeted domestically oriented sectors such as consumer loans and real estate. The manufacturing sector, in particular, remains the largest recipient of loans, accounting for 23pc of the total, followed closely by domestic trade and services at 20.1pc.
The reorientation signals a broader strategic move by banks to concentrate on sectors deemed more stable or profitable in the current economic environment.
Critics within the financial community have raised concerns about the lack of transparency in banks’ rate-setting processes. Finance expert Worku Lemma noted that lending rate revisions appear to be driven primarily by banks’ efforts to protect profit margins rather than by an objective assessment of market conditions. Worku argued that the stagnant savings deposit rate of seven percent is no longer sufficient to attract depositors.
He believes lending rates are determined by three key factors: the cost of money linked to the deposit rate, the lender’s risk premium, which accounts for borrowers and loans, and the bank’s profit margin, which covers operational costs.
“It needs careful scrutiny,” said Worku. "Without proper regulatory oversight, unchecked rate hikes could further fuel inflation."
PUBLISHED ON
Feb 02,2025 [ VOL
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