A Turkish businessperson, Mehmet Yesildag, came to Ethiopia five years ago with anticipatory energy and big hopes. He planned to establish a large leather factory with a production capacity of manufacturing 30,000 pairs of shoes a year.

Mehmet recalled things were welcoming then, and he had received a positive reception. The low cost of labour and energy were significant factors that contributed to his and his partners’ decision to invest up to 40 million dollars in Ethiopia through their company, My Shoes Shoe & Leather Manufacturing Plc.

He secured 70,000Sqm of land in Debre Berhan, 130Km north of the capital in the Amhara Regional State, and finalised the process of getting loans from the state policy bank, the Development Bank of Ethiopia (DBE).

Ethiopia’s oldest bank, DBE was reformed a decade ago to serve as a policy bank, financing mega projects that the EPRDF government had identified as priorities. Policymakers attached such important significance to its role that the National Bank of Ethiopia (NBE) passed a directive a few years ago whereby all private commercial banks funnel 27pc of their loans to DBE through bonds.

Mehmet’s project was one of the priorities for the government, along with other sectors from agro-processing and mining to extractive industries. My Shoes had hardly any difficulty in securing a 380-million-Br loan from DBE, of which two-thirds were already disbursed.

Mehmet’s project made his company one of the 167 Turkish investments registered in Ethiopia over the last decade alone. These companies obtained licenses to invest in joint ventures with local firms and individuals, some partnered with the government, while many more operated solo as foreign investors. They were hailed as symbols of policy success in attracting investments from overseas with the hope of bringing in capital, technology and marketing know-how. Additionally, their established presence in external markets would help bring in desperately needed foreign currency.

My Shoes was meant to fit into this grand plan. Pledged to employ 1,962 people, its founders had aspired to export products and generate an average of 34 million dollars annually during the first years of its operations. It identified client bases in Spain, England, France, the United States and Middle Eastern countries where it would ship its shoes.

The company began construction of the civil work for the factory’s plant - a steel-structure - five years ago. It took three years to complete with delays attributed to a lack of foreign exchange and the company’s inability to import raw materials. But troubles in servicing the debt with the Bank started even before the company began to bring in the machinery for production.

“Some six months ago, we were told by the executives of the Bank to suspend the project for 10 days,” Mehmet told Fortune.

The executives of the Bank informed Mehmet that they had some concerns about Turkish investments in Ethiopia and were about to initiate investigations of his company along with others. Despite the conclusion of the inquiry, Mehmet’s company was asked to pay interest on its loans during the six months it took the investigation to conclude.

“This led my company to default on the loan,” Mehmet claims.

The company joined the ranks of borrowers listed as carrying bad loans, aka non-performing loans (NPLs). These are loan whose borrowers fail to pay interest for longer than 90 days in a row. Banks are thus compelled to cover possible losses by holding a provision equal to the size of an outstanding loan that is considered non-performing.

DBE carries a massive load of such loans on its books as no other bank does. And its experience with Turkish companies is not one to celebrate. Five Turkish companies are recorded as holding 46pc of its total loans classified as non-performing. The slack has forced its executives to set aside 17 billion Br in provisions in the first three quarters of the current fiscal year. The amount represents 38.5pc of its total loans and advances outstanding, a fact admitted by them as “excessive”.

Some of these loans are lost, not to be recovered in any meaningful way. Close to 300 million Br in loans advanced to companies such as Yirgalem Addis Textile Plc, Hotel De Leopol International and Ruchi Agri Farm are unlikely to be paid back. DBE has identified them as a “loss”.

But these are only three of the top 20 borrowers in the Bank’s NPL books, accounting for 61.1pc of total loans that are either doubtful, sub-standard or a loss. Companies involved in the manufacturing sector, such as Ayka Addis Textile, MNS Textile and BMET, take the lion share of 71.5pc of the bad loans. Those three investments originated from Turkey, and with factory plants in Sebeta and Legetafo between them, they owe DBE close to six billion Birr.

They are followed by those in the agricultural sector, which accounts for about 26pc.

These are, however, sectors the government listed as priority lending areas and directed resources to companies active in them ever since the mid-2000s when DBE’s board of directors was chaired by Girma Birru, a former high ranking minister now advising Prime Minister Abiy Ahmed (PhD). Successive leadership of the DBE, from Melaku Fenta to Ahmed Abitew and Shiferaw Shigutie - all former ministers - pursued these policy objectives, despite dangers looming over the health of the Bank.

Regulators at the central bank have an instrument they use in diagnosing how healthy companies in the financial sector are operating. The banking industry is their primary concern and focus, checking their capital adequacy, the quality of their assets, the competence of their management, and the status of their liquidity and earnings.

Known in the industry parlance as CAMEL, the draft rating report on DBE, issued last year by the central bank, is nothing but alarming. It shows that the Bank has been mired in deep financial woes, for the DBE lacked adequate oversight by the governing board, and its management failed to comply with its directives.

In the reported period, the Bank operated without a board of directors as it was in a transition between the former and the current board, which is now chaired by Tegegneworq Getu (PhD), a retired UNDP staffer. DBE also has had volatile management, with its presidents changing from Issayas Bahre to Getahun Nana and now Haileyesus Bekele, all within three years.

Meanwhile, DBE’s capital adequacy, a ratio of a bank’s capital to its risk, fell to a ‘deficient’ level from ‘satisfactory.’ The ratio, standing at 13.28pc, is lower than the minimum standard established for development financing institutions of 15pc.

Experts see a combination of factors leading to such crises. According to Abdulmenan Mohammed, a financial analyst based in London, DBE might have suffered from declines in its net worth, while at the same time increases in its loan size caused a drop in its capital adequacy ratio.

DBE’s managers may find solace in the fact that the Bank’s accumulated and high liquid assets could be considered a positive achievement. A massive amount of cash maintained in treasury bills while collecting medium-term funding from private banks through the 27pc bond requirement issued by the central bank has helped the Bank remain liquid.

The total assets of the Bank soared to 82.8 billion Br, mainly driven by investment in treasury bills that increased to 30.2 billion Br, whereas loans and advances went up to 42.8 billion Br.

“But its liquid resources were used inefficiently,” said Abdulmenan.

He is referring to the soaring level of sick loans, which led the asset quality of the Bank to severely deteriorate, for it is directly linked to the provisions set aside to cushion the bad loans. The series of defaults seen in the manufacturing sector indicates that there is a severe problem with manufacturing, which the government desperately wants to see flourish.