Commentaries | Dec 04,2021
Nov 6 , 2021
By BERSABEH GEBRE ( FORTUNE STAFF WRITER )
Insurance firms have petitioned the central bank to reduce the minimum amount required to invest in bonds issued by the Development Bank of Ethiopia (DBE), claiming the requirement would put the industry under pressure.
The central bank has yet to respond to the request, disclosed a person familiar with the issue.
The central bank issued a directive two months ago ordering all insurance companies to surrender a minimum of 15pc of their net income to purchase DBE bonds. It serves the administration's policy, which is determined to beef up the financial position and boost the liquidity level of the DBE, often known as a policy bank.
The Ethiopian Insurance Association, an industry lobby group, requested regulators of the National Bank of Ethiopia (NBE) late last month to reconsider the bond investment to between five and seven percent of insurance companies' net income. As it stands, the requirement will have severe negative impacts on the growth of insurance companies while it discourages the much-needed investment in the industry, according to the Association.
The insurance industry is not the only one subject to the new rules. Commercial banks are also obliged to invest one percent of their annual loans in DBE bonds. The bond, which the government fully backs, is issued to financial institutions and social security agencies. Holders are allowed to sell their bond certificates to other eligible investors. It can also be used as collateral.
However, the insurance industry is concerned with the low yield rate of DBE's bonds, which are two percentage points higher than the interest rate on saving deposits, and have a maturity period of three years.
Banks' minimum interest rate on saving deposits was raised from five percent to seven percent in October 2017. The average saving rate stands at eight percent.
“We deposit our money in the form of time deposits, which yields a maximum of 15pc interest,” said Gudissa Legesse, CEO of Awash Insurance.
Awash’s fixed time deposits at commercial banks stood at 1.06 billion Br last year, growing by 37pc compared to the previous year.
“The interest paid on DBE bonds is much lower than this," said Gudissa. "It'll no doubt affect our income and profitability.”
Awash earned 106 million Br from interest income last year while its profit after tax reached 270.1 million Br.
However, Mengesha Tesfaye, executive officer of corporate business resources at Zemen Insurance, a late industry entrant, believes the directive will not impact his firm as much as larger firms.
“Our net income is small; hence the impact of the directive will be insignificant,” he said.
Established in 2020, Zemen registered a net profit of 18 million Br last year.
It is a view echoed by some of the experts following Ethiopia`s financial sector. Abdulmenan Mohammed, a financial analyst, sees the percentage of the net income committed to the DBE bond as not a significant figure affecting the liquidity and profitability of insurance companies. About 18 insurance firms operate in the market, with an aggregate capitalisation of 10.6 billion Br. The state-owned Ethiopian Insurance Corporation (EIC) commands more than half of the market share, enjoying a preferential treatment from public institutions and state-owned enterprises.
Not all experts are on the same page, though.
Ebsa Mohammed, an insurance expert and manager at Alpha Consultancy, begs to differ. He says the requirement will affect insurance companies across the board.
“They have to devise an alternative source of income to make up for the losses they will incur,” said Ebsa.
The Association has also asked the central bank to extend the enforcement date to July 1, 2022, from September 1, 2021. The Association has also requested clarification on the definition of net income to determine whether it includes legal reserves.
The term 'net income' is ambiguous, as the Association claims, according to Abdulmenan.
“It's not clear whether it's after or before tax,” he said.
PUBLISHED ON Nov 06,2021 [ VOL 22 , NO 1123]
Commentaries | Dec 04,2021
Radar | Oct 15,2022
Fortune News | Apr 22,2022
Fortune News | Feb 06,2021
Fortune News | Feb 08,2020
Fortune News | Jan 07,2023
Fortune News | Oct 02,2021
Fortune News | Sep 06,2020
Fortune News | Jan 25,2020
Viewpoints | Oct 19,2019
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Jan 21 , 2023
Eyob Tekalign, state minister for Finance, took to social media platforms last week t...
Jan 14 , 2023
The longing for normalcy and a semblance of individual and collective security in Eth...
Jan 7 , 2023
The hallmark of Ethiopia's contemporary leaders could be a fascination with grandeur...
Dec 31 , 2022
A change of guards in 2018 gave Ethiopians hope for better circumstances from the pre...
I found myself in an awkward situation one of the days last week. The plan was to have lunch with two of my friends, but one of them was fas...
Or see contact page