When the central bank imposed a freeze on collateral-based loans last August, there was no shortage of outcries from businesses across industries and sectors. The freeze was lifted at the end of November, but many are reeling from its consequences.

Yordanos Assemire is among the businesspeople awaiting the approval of a loan she had applied for in the weeks leading up to the freeze. She waited patiently until regulators rescinded the suspension, hoping to get 16 million Br in credit from one of the private commercial banks. An exporter of seeds and an importer of furniture, Yordanos had no trouble having credit approved in the past. The approval process for a loan of a similar amount would have taken the banks no more than a month in her experience.

It has been around six months since she has applied now.

The wait has left her business halted. Yet, she has to service a 9.4 million Br debt previously taken from another commercial bank.

"We're just paying interest," she said. "I could at least set off the payment with the new credit."

The application would be approved by the end of last month, officers at the bank where she applied told her. Yordanos has visited a few other banks to weigh her options, but the effort was in vain. When businesses are short of operating cash, they tend to borrow from one another. However, many businesses are in the same dire situation.

Yordanos' experience and that of many others in business is a telltale sign of a liquidity crisis in the banking industry. Regulators at the central bank had their eyes on restraining what they saw as "unhealthy" loan provisions when they imposed the loan freeze.

The month before the freeze was imposed in the fourth quarter of 2020/21, banks disbursed over 105 billion Br in loans. The state-owned Commercial Bank of Ethiopia (CBE) accounted for 40pc, showing a 66pc year-to-year increase. They had disbursed close to 330 billion Br last year. The month of July alone saw outstanding credit grow by 125pc compared to the same period the previous year. This alarmed the authorities at the National Bank of Ethiopia (NBE), leading the board under Girma Birru to take the unusual decision of a blanket loan freeze.

"The NBE board . . . stands ready to utilise all available policy tools at its disposal to ensure price and financial stability consistent with its legal mandate," read a statement issued by the central bank in September last year.

The authorities gradually relaxed restrictions to exempt importers, coffee exporters, edible oil producers and petroleum companies.

The measure seems to have met its intended purpose as banks' outstanding credit has shown a marginal increase since. At Awash Bank, with the biggest share among the private banks, loans grew by about two billion Birr over the first quarter, five times lower than the average quarterly growth observed in the preceding year. The Bank of Abyssinia, the second-largest private creditor, disbursed 2.4 billion Br in the first quarter. It had disbursed close to 40 billion Br last year, the highest among private banks.

"Loan provision takes up the highest share in deposit mobilisation," said Melaku Kebede, president of Hibret Bank.

Loan provisions in the first quarter may seem smaller compared to past performances. But they still represent a significant amount considering the decline in deposit mobilisation apparent across the industry. Only six of the 17 private banks attained positive deposit mobilisation over the first quarter. Coupled with sluggish loan repayment collection, the banking industry appears to be heading to a liquidity crunch. The industrial average for loan-to-deposit ratio (LDR) reached 82pc in June last year, growing by two percentage points over the first quarter.

The loan-to-deposit ratio serves as one of the essential indicators to measure the banking industry's health. Chris Murphy, an editor and financial writer for more than 15 years covering banking and the financial markets, sees the ratio as a measure of how well a bank is managed.

"If the bank isn't increasing its deposits or its deposits are shrinking, [it] will have less money to lend," says Murphy, writing for Investopedia. "In some cases, banks borrow money to satisfy loan demand in an attempt to boost interest income. However, if a bank uses debt to finance its lending operations instead of deposits, the bank will have debt servicing costs since it will need to pay interest on the debt."

Neither is having a low deposit-to loan ratio a measure of a bank well run. It shows it is not lending, affecting its income from interest, a significant source of revenue for the banks, often comprising over two-thirds of income. Thus, striking a good balance, experts advise not to exceed 90pc.

"The proper LDR is a delicate balance for banks," says Murphy. "If banks lend too much of their deposits, they might overextend themselves, particularly in an economic downturn. However, if banks lend too few of their deposits, they might have opportunity costs since their deposits would be sitting on their balance sheets, earning no revenue. Banks with low LTD ratios might have lower interest income resulting in lower earnings."

Almost all the banks have seen their loan-to-deposit ratios stagnate, if not eroded. Debub Global Bank leads the pack with the highest ratio at 97pc by the end of September last year, followed by Lion Bank at 91pc. Neither have the big banks with a quarter-century of experience under their belts been spared. With the sharpest decline in deposit mobilisation in the industry, Dashen Bank carried through the quarter with a 90pc ratio. Its close contender, Awash sustains 87pc, followed by Abyssinia's 85pc and Hibret's 83pc.

For Abudlmenan Mohammed, a finance expert who has closely followed Ethiopia's financial sector for 20 years, a ratio beyond 80pc should be considered "unhealthy". He argues that when factored for reserves and payments and settlement accounts, the high ratios mean the banks are hungry for cash.

Several factors set off the slow deposit mobilisation in the industry. The loan freeze has reduced the money multiplier effect the banks used to enjoy.

For over a year now, the banks have had to deal with the war in the north, undermining their operation in collecting deposits from the areas active in the conflict. More than 600 bank branches in the Tigray Regional State remain out of business. The experience of Wegagen Bank is particularly illustrative.

About one-third of Wegagen branches are located in Tigray Regional State, an area outside the reach of its operations since June last year. Wegagen had collected a little over 1.4 billion Br in deposits last year, much lower than the industry average and a hundred times less than the state-owned CBE.

The war has significantly affected deposit mobilisation, according to Afework Gebretsadik, director of marketing at Wegagen.

Deposit mobilisation was not the only one affected by the ongoing armed conflict in the north. Loan recovery was halted. Banks have been unable to recoup credit disbursed to clients in areas affected by the war. Non-performing loans (NPLs) have surged as a result.