View From Arada | Sep 08,2024
The National Bank of Ethiopia’s (NBE) second annual financial stability report reveals growing cracks in the banking system, raising alarms over operational risks, liquidity shortfalls, and a constrained credit environment. With banks accounting for 96.1pc of total financial assets as of June 2024, their systemic importance remains unparalleled. Yet, underlying vulnerabilities threaten the stability of the sector, prompting calls for urgent reforms and risk mitigation strategies.
Operational risks—spanning social engineering schemes, insider fraud, and third-party vulnerabilities—dominate the list of concerns. These risks have intensified fraud cases, with total losses climbing to 1.3 billion Br last year, up from one billion Birr in 2023. Liquidity concerns have also worsened, with 20 out of 29 banks falling below regulatory requirements under stress scenarios. The ripple effects of these issues are felt across credit markets, exporters, and leasing companies, casting a shadow over the financial sector's stability.
According to the report, the banking industry has become a prime target for sophisticated fraud. Social engineering tactics—where attackers manipulate individuals into divulging sensitive information such as passwords or bank account details—have grown in prevalence, leaving both customers and banks vulnerable.
A detailed section of the NBE report outlines how banks are falling prey to counterfeit cash and checks, embezzlement, unauthorised guarantees, and phishing scams. Fraudulent activity has been reported across all 28 commercial banks, reflecting a systemic issue.
Dormant accounts have become a key entry point for fraudsters, according to financial expert Worku Lemma. He raises the competitive banking environment as a contributing factor, arguing that in the race to acquire new customers, some banks have compromised on stringent security protocols.
“They are less monitored and susceptible to unauthorised access,” he said.
The growing pressures of cost of living crisis have also heightened risks from within. Training programs focused on cybersecurity and fraud prevention have been recommended by the expert as immediate priorities for banks to combat these threats.
“Employees under financial stress are more susceptible to unethical behaviour,” Worku said, calling for improved due diligence during the hiring process and robust background checks.
Liquidity issues, described as “severe and growing” in the report, pose another risk to the banking sector. A hypothetical scenario, where the top 10 depositors of each bank simultaneously withdraw their funds, would leave 20 banks unable to meet minimum liquidity requirements. This is a major increase from the 18 banks identified in last year’s report.
Nib Bank’s struggles serve as a case study in liquidity mismanagement. Recently undergoing a major leadership shakeup, the bank’s newly appointed president, Henok Kebede, attributed its difficulties to mismanagement of resources by the previous administration.
“The lack of proactive risk management left us exposed to both liquidity shortfalls and cybersecurity threats,” Henok said.
He has since prioritised overhauling the bank’s risk management strategies and updating its technological infrastructure.
Embezzlement and fraud are not just isolated issues but indicative of systemic vulnerabilities across the sector, according to Henok. Nib Bank’s active role in the interbank money market platform has added to its liquidity constraints.
The NBE report offers a mixed outlook for banking sector. Total banking assets grew by 15.2pc to 3.3 trillion Br as of June 2024, driven largely by loans and advances. Yet, the growth rate slowed compared to 19.9pc last year, reflecting broader economic pressures.
Frezer Ayalew, head of banking supervision at NBE, noted the central bank’s evolving role in managing monetary and price stability. “The digitisation of banking services presents new opportunities but also new obstacles,” he said, noting the importance of proactive liquidity management.
Despite these issues, there have been notable improvements in credit distribution. The top 10 borrowers now hold 14.7pc of the total 1.5 trillion Br in loans, down from 23.5pc last year. Excluding state-owned enterprises, this figure drops to 3.5pc. According to Worku, this trend reflects banks’ compliance with the NBE’s 14pc credit cap, which has pushed financial institutions to diversify their loan portfolios.
However, the geographic concentration of deposits and credit in urban areas continues to exacerbate liquidity risks. Worku noted the need for banks to offer competitive interest rates to attract depositors.
“Seven percent interest is no longer appealing,” he said, stating that innovative deposit mobilisation strategies are crucial.
The report also reveals a decline in export-oriented lending, with credit to the export sector shrinking by 1.6pc. This shift, favouring domestically oriented activities such as consumer loans and real estate, raises concerns about long-term economic competitiveness.
Edao Abdi, a major oilseeds and pulses exporter, voiced frustration with the banking sector’s inability to meet exporters’ financing needs. His request for a 400 million Br loan has been stalled for months, jeopardising a 10 million dollar export deal.
Edao who also leads the Ethiopian Pulses & Oilseeds Exporters Association, warned that financial bottlenecks are undermining the government’s 700 million dollar export revenue target for the sector.
The shift to an interest-based monetary policy framework marks a major reform aimed at stabilising the financial system. Key measures include biweekly central bank auctions, a 15pc policy interest rate, and Open Market Operations (OMO) to manage liquidity imbalances. These policies, coupled with a more active interbank money market, aspire to improve liquidity management across the sector.
Foreign exchange transactions have seen steady growth since the introduction of these reforms. Commercial banks now average 500 million dollars in monthly foreign exchange purchases and hold a combined 2.4 billion dollars in reserves. However, the report notes persistent gaps between official and parallel market exchange rates, which remain around five percent.
The capital goods leasing subsector faces unique difficulties, with Ethio Lease undergoing liquidation and Kaza Capital Goods Finance struggling to operate in the Tigray Regional State. The report reveals that government-affiliated leasing firms now dominate the market, exposing the sector to risks from broader banking shocks. While loans in the subsector grew by 35.3pc to 3.7 billion Br, non-performing loans (NPLs) doubled to 7.5pc, exceeding the regulatory cap of 5pc.
Yonas Geleta, CEO of Oromia Capital Goods Finance, outlined plans to diversify into agriculture and other sectors to reduce exposure. The company reported a profit of 33 million Br, although Yonas stated the need for alternative funding sources to reduce dependence on banks.
“Credit concentration in the manufacturing sector remains a marked risk,” he told Fortune.
PUBLISHED ON
Dec 08,2024 [ VOL
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