Bill Enables Banks to Borrow Forex from External Sources

Banks can now borrow foreign currency from international financial institutions and lend the forex to companies that engage in foreign currency generating activities.

Drafted by the National Bank of Ethiopia (NBE), the directive that was up for consultation with bankers last Monday, enables local banks to borrow from foreign banks in dollars, pound sterling, euro, Chinese yuan, Canadian dollars and Japanese yen. The directive also allowed the banks to act as intermediaries for local borrowers.

"It has become necessary to facilitate access to forex to foreign currency generating activities by allowing banks to intermediate in foreign currency through borrowing from external lenders," reads the draft directive.

The Foreign Currency Intermediation Banks directive also allows the local banks to maintain holdings of foreign currency by depositing it at the central bank or a foreign correspondent bank. While engaging with foreign currency intermediation, the banks are exempted from acquiring a permit from the central bank.

This foreign currency acquired through external loans is also exempted from the foreign exchange surrender requirements to the central bank. Usually, commercial banks are required to surrender 30pc of their forex earnings to the regulatory bank.

Banks that are going to engage in foreign currency intermediation must open a foreign currency reserve account at the central bank, and they are required to maintain five percent of the outstanding balance of the external loan. However, unlike the local currency reserve account, the balance in this reserve account will have an interest rate paid by the central bank.

The interest rate remuneration will be computed equivalent to the one-month London Inter-bank Offered Rate (LIBOR), a benchmark that banks use to lend to one another in the international interbank market for short-term loans. The rate serves different currencies with seven maturity periods of overnight, a week, and one, two, three, six and 12 months.

Local banks are allowed to access external loans with the prerequisite terms of having a grace period of three years from the principal payment of the credit to at least three years. The total repayment period will be at least six years, including the grace period.

In addition, the total cost of the external loan, including the interest rate and other expenses should not exceed LIBOR plus five percent.

In availing the loan to foreign currency generating businesses, banks have to make sure the loan does not exceed 60pc of the total project or the net worth of the borrower's business. During loan disbursement, the foreign currency will be deposited directly to the supplier of the borrower.