The central bank has rejected pleas from the insurance industry to ease demands on firms to invest in bonds issued by the Development Bank of Ethiopia (DBE).
Regulators at the National Bank of Ethiopia (NBE) issued a directive three months ago, binding insurance companies to spend a minimum of 15pc of their net income in buying the bonds. The authorities introduced the bonds hoping to finance public projects launched by the government. Backed by the state, the bonds can be used as collateral.
Claiming the mandatory investment would put the industry under liquidity pressure, leaders of the Association of Ethiopian Insurers (AEI), chaired by Yared Molla, CEO of Nyala Insurance, pleaded earlier this month to review the investment amount down to five or seven percent.
However, the regulators rejected the request and communicated their decision to the Association on November 25, 2021. A letter signed by Belay Tulu, head of the insurance supervision directorate at the NBE, says the insurers' appeal is not "authentic" and "does not align" with the national development agenda.
Reads the letter: “The alleged negative impact on the growth and development of the industry and discouragement of investment in the sector posited as grounds for scaling back the 15pc minimum investment threshold was not substantiated by any evidence and lacks authenticity.”
Industry observers believe the requirement by the NBE would have no significant impact on the insurance companies. Abdulmenan Mohammed, a financial analyst, does not see the requirement threatening their liquidity position and profitability.
"The impact will not be that considerable," he said.
The industry feels otherwise. The central bank's requirement fails to consider the industry's capability, says a senior executive of a private insurance company.
“Although its impact differs, its effects will be felt across the industry,” said the Chief Executive Officer (CEO).
The insurance industry has an aggregate capitalisation of 10.6 billion Br, with the 17 private insurance firms accounting for close to 72pc.
The CEO is also displeased with the central bank's allegation that the plea was unsubstantiated.
"I assume they're telling us to conduct a study," the CEO told Fortune. “Yet, the NBE itself didn’t conduct any study before it picked the minimum threshold."
Industry players are concerned with the low yield rate of DBE bonds. The bonds give two percentage points higher than the interest rate on saving deposits with a three-year maturity period. Insurers earn a significant income by saving their money in the form of time deposits. The average saving interest rate stands at eight percent, while the yield on time deposits can reach 15pc.
“Investing in DBE bonds is like losing money intentionally,” says the CEO of one of the insurance companies that entered the market recently.
The plea the Association leaders made with the regulators failed to include concerns over the low yield rate. The letter from the lobby group did, however, request clarification on the definition of net income. While the regulators say the investment is to be made from net income, they remained unclear whether it factors legal reserves. They later clarified net income is profit after tax.
The industry remains unclear where the mandatory investment is deducted before legal reserves are set aside from net profit, according to a Chief Executive Officer (CEO) of one of the oldest private insurers companies.
“A quarter of the net income of insurance companies will be tied up,” the CEO told Fortune. “This will make the industry less attractive to investors.”
Insurers had also appealed to extend the directive's enforcement date to July 1, 2022, from September 1, 2021. Regulators at the NBE did not deem it fit to accept the proposal.
PUBLISHED ON Nov 27,2021 [ VOL 22 , NO 1126]
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