Feb 1 , 2020

The lending interest rate was lowered by 0.5 to 3 percentage points

Wegagen Bank, one of the largest commercial banks, lowered its lending interest rate across four priority sectors by 0.5 to three percentage points effective in January.

The lending interest rate adjustment was made following the National Bank of Ethiopia (NBE) move of lifting the 27pc mandatory bond purchase on private banks for every loan and advance they disburse. Wegagen lowered the rate for the manufacturing, hotel and tourism, agriculture and export sectors.

Wegagen lowered the lending interest rate to encourage investment and to maintain the quality of loans, according to Berihun Desta, vice president in charge of credit and international banking at Wegagen, which had outstanding loans and advances of 16.5 billion Br during the last fiscal year, a growth of 9.3pc from the previous year.

"Depending on the importance of the sectors in the economy, the bank will do further reductions," said Berihun. “The rates will be reviewed periodically.”

Following the adjustment in the interest rate, the management of the Bank expects a reduction of profit by 100 million Br to 150 million Br, according to Berihun.

Following the removal of the NBE Bill requirement, Awash Bank and Bank of Abyssinia lowered their lending interest rates as well. Awash reduced its lending interest rate by 0.5 to 4.5 percentage points, while Bank of Abyssinia has lowered the rate by up to six percentage points.

The mandatory bond private banks were required to buy was funneled to the Development Bank of Ethiopia (DBE), the state policy bank. The funds were transferred to DBE in an effort to ensure that nationally mobilised resources are used to finance priority sectors identified by the government, including manufacturing and agriculture.

However, as part of the ongoing economic reform agenda, at the end of 2019 the government repealed the mandatory bond purchase requirement, which threatened the liquidity status of the private banks.

Since the bill was launched eight years ago, Wegagen bought 10.5 billion Br worth of NBE bonds. As of the end of the last fiscal year, the Bank's stock of NBE bill's held at the central bank reached 6.8 billion Br, a 7.3pc increment from the previous year.

In the last fiscal year, the Bank netted 621 million Br in profit, a decline from 793.5 million Br registered the previous year. Until the end of the first half of this fiscal year, the Bank managed to increase its number of branches to 374 with 4,781 permanent employees.

In the past six months of the current fiscal year, Wegagen has generated about 177 million dollars in foreign currency. In the reporting period, the Bank disbursed a total of 5.2 billion Br of loans to players in various economic sectors while collecting 4.1 billion Br loan payments.

Total outstanding borrowing of the banking industry stood at 72.2 billion Br last year, an 11.1pc increase. Out of this, the share of private banks was 50.8pc. Until the end of the last fiscal year, the average lending rate of the banks stood at 13.5pc.

Sintayehu Demissie, a chief sourcing and property officer at the Association for Chartered Certified Accountants (ACCA) and a lecturer in the department of accounting and finance at Addis Abeba University, believes that the interest rate reduction has a positive impact. He says it will encourage investment and increase employment opportunities.

“When interest rates get lower, the government can generate a high amount of revenue from businesses,” Sintayehu said. “It also helps in stabilising the current inflation rate."

PUBLISHED ON Feb 01,2020 [ VOL 20 , NO 1031]

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