A recent move by the Central Bank to cap loan growth has sparked an outcry from executives of the newly minted banks, as the fledgling institutions grapple with restricted avenues for lending in a volatile inflationary environment. The National Bank of Ethiopia (NBE) has imposed a 14pc cap on loan growth for the upcoming fiscal year, a decision Governor Mamo Miheretu defended as a "necessary measure to curb spiralling inflation."

Presidents of 10 newly incorporated banks have addressed their concerns in a letter to the Governor, including Zamzam, Goh Betoch, Tsehay, Geda, Hijra, Amhara, Shebele, Rammis, Ahadu, and Sidama banks.

The executives expressed dissatisfaction with the Central Bank's decision. They argued that the cap on loan growth would hinder their ability to make profits and grow the banks, as interest income from loans is their primary revenue source. They also highlighted the precarious position of new banks compared to more established ones, which have larger loan portfolios with better disposition to absorb the impact.

It is a development that reveals a delicate balancing act for Governor Mamo, who is caught between the need to tame inflation and support the growth of newly established banks. While the cap on loan growth aims to manage the money supply and curb inflation, it directly impacts the banks heavily reliant on lending activities. A significant portion of their income, often over two-thirds, comes from interest on loans, making the cap a substantial hit to their bottom line.

Despite the plea from the new banks, the central Cank, backed by macroeconomic advisors, maintained its stance, arguing that the cap is essential to control inflation, which had skyrocketed three weeks before the announcement. Industry insiders disclosed that Governor Mamo spurned the plea following a meeting with their representative at the headquarters last week. Sources from the Central Bank confirmed the meeting.

The Central Bank’s plan also includes lowering headline inflation below 20pc, increasing the interest rate for emergency loans it provides to commercial banks by two percentage points to 18pc, and significantly reducing the forex exporters surrender to the Central Bank down to 50pc and 10pc to commercial banks.

The impact of the cap is expected to be more pronounced on newly established banks, some of which are already grappling with massive losses after their first business year.

Tsehay Bank, which entered the industry in July last year, had posted an outstanding debt of 5.12 billion Br and deposits of 5.1 billion Br during its first general assembly, six months after its inception.

Its President, Yared Mesfin, noted the disparity between the loan records of first and second-generation banks, which are in the multi-billions, and his bank (fourth generation), which struggles to surpass one billion Birr. He contended that the asset base is directly related to loan disbursement, indicating that applying the growth cap indiscriminately, without considering the newcomer’s ability to mitigate impacts, will make it harder for them to grow and compete.

"We should not be put in one basket," Yared told Fortune.

By 2023, the Ethiopian banking industry recorded a notable 35pc growth in loans and advances, reaching 1.4 trillion Br from one trillion Birr the year before. The total deposit within the industry stood at 2.05 trillion Br during the same period, nearly double the amount from two years ago.

Sidama Bank, another newcomer that joined the industry in March with 790 million Br paid capital mobilised from 2,000 shareholders, is also feeling the pinch.

Tadesse Hatiya, president of the Bank, argued that banks could not be treated with the same standard as some have smaller loan portfolios, trying to establish themselves in the market. He disclosed that bank executives are contemplating locking in the time deposit at veteran banks to be mobilised from customers, hoping to make margins from the interest accrued.

"Desperate times call for desperate measures," Tadesse said.

The situation underscores various actors' conflicting needs and responsibilities in the broader economy. Balancing the act of maintaining macroeconomic stability while allowing for healthy competition and growth is a complex yet crucial task that officials of the Central Bank say they are navigating carefully.

Abdulmenan Mohammed (PhD), a finance expert based in London, believes the measure will seriously affect new banks with relatively smaller loans and advances. He foresees that while a bank with a smaller loss in the first year could recover with credit limits, those with substantial losses would struggle to recover when the growth of loans and advances is restricted. He urged the banks to increase non-interest income and control their costs.

"They should postpone any expansion plans," he told Fortune.

While it remains unclear how the new banks will weather the cap on loan growth, it is evident that the decision has the potential to impact their ability to grow and compete in the banking industry. Experts suggest that the Central Bank could ease the cap for new banks or allow them to focus on lending to sectors deemed high-priority for the economy.

PUBLISHED ON Sep 02,2023 [ VOL 24 , NO 1218]

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