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Can Ethiopia’s Banking Sector Help to Mitigate the Economic Impact of COVID-19?

By Yoseph Getachew | Tue May 05 2020
With the outbreak of COVID-19, we are observing unprecedented economic changes and Ethiopia is trying to adapt to a new normal. The economy is suffering and sectors like tourism and hospitality are witnessing their worst days. The financial sector in general and the banking sector, in particular, are no exception. However, besides working to resolve its own liquidity issues, is the sector adapting quickly enough and playing its part to help businesses and the economy?
The financial sector plays an important role in the economy through the mobilization of savings from depositors and disbursing that money to businesses in the form of loans. This channeling of resources to businesses is the backbone of the economy and a huge source of local funding for businesses. Tasked with the same responsibility, the Ethiopian financial sector has been recording significant year-over-year growth. According to the National Bank of Ethiopia’s (NBEs) 2018/19 Annual Report, deposit liabilities of the banking system topped ETB 899.6B and the total outstanding borrowing stood at ETB 164.5B.
Considering the role of the banking sector in the national economy, the NBE has availed ETB 15 B for the banking sector as Ethiopia reported the first case of COVID-19 on March 13 (LINK). Simultaneously, NBE has released part of the Great Renaissance Dam Bill Bond[1] that commercial banks have purchased. Nevertheless, by some standards, NBE has been slow to introduce new monetary policy changes that could help fight the impact of COVID-19 on businesses and the economy as a whole. As a governing body of the financial sector, NBE has the obligation and resources to take proactive measures to help flatten the impact of COVID-19 on the economy.
NBE can take three vital measures that could help commercial banks deal with the challenges that COVID-19 brought:
  • Lower the savings interest rate
  • Release part of the legal reserve to commercial banks
  • Release part of the liquidity reserve to commercial banks
Lower the savings interest rate –
NBE last made changes to the savings interest rate in October 2017 pushing it to 7% from 5%. The average lending rate of the banking sector was 13.5% for the 2018/19 fiscal year. Since then, some banks have made changes to the lending interest rates by lowering rates ranging from 0.5% to 5%. Regardless, the industry-wide average lending rate remains high for a challenging time such as this. As such, NBE should intervene and lower the savings interest rate to help commercial banks lower their lending interest rates. Lower interest rates will mean cheaper loans for businesses and households. That will reduce the costs faced by businesses and households in Ethiopia.
Release part of the legal reserve to commercial banks –
Commercial banks in Ethiopia are obliged to set aside 25% of their net profit annually and, currently, each commercial bank has set aside funds accumulated over several years as there have not been incidents forcing the release of these funds. This legal reserve is set aside as a shock absorber to help protect the shareholders and the public interest. The current situation, if not dealt with early, could cause a long-term economic disruption and result in a number of job losses. NBE could release part of the funds to commercial banks in different tranches and set guidelines to help coordinate efforts and avail funds at a lower interest rate to hard-hit sectors such as tourism, hospitality, manufacturing and micro, small and medium enterprises (MSME), sectors that create a large number of jobs in the economy.
Release part of the liquidity reserve to commercial banks –
Commercial banks are also obliged to set aside at least 15% of their net current liabilities to help protect depositors against economic shocks. This could be another source of funding for commercial banks. If NBE allows banks to use part of the reserve by setting the same guidelines as the legal reserve and supervising banks to make sure they disburse the loan to priority sectors at a lower interest rate, it could be a savior for many businesses and the economy in general.
In addition to the monetary policy changes suggested above, commercial banks (both private and public) should also work internally to help the economy bounce back. Thus far, commercial banks have taken some initiatives to that end. These include giving donations to the government, waiving some of the service charges, and lowering the interest rate for certain sectors. Though these are good efforts, I believe these efforts are far behind what businesses and the economy need. This is the time for the executive management and board of directors of each bank to work together and come up with creative solutions. To mention a few, banks should consider suspending payment of accrued dividends and also hold on to future distributions until the economy stabilizes. In addition, banks should refrain from providing bonuses and salary increments to their employees. This will avail funds that can be used to support businesses by freeing millions of birr that banks deploy each year in the form of bonuses, salary increments and dividend distributions.
We are in a time of uncertainty. The effect of COVID-19 is not only taking lives but also disrupting the economy. Thus, it requires the coordinated efforts of both the public and the private players. People and organizations should work hand-in-hand to help mitigate the effects of COVID-19. It is important to be proactive and take measures before things get any worse. The banking sector, as the nucleus of the economy, should present itself as the forerunner in these efforts and continue to push for alternative banking solutions to help the economy recover faster from this crisis. As the regulator and the captain of the banking sector, NBE plays a pivotal role in all of these efforts. Commercial banks, both public and private, should also help and push NBE to make smart and sound monetary policy changes to help equip them with the resources and policy frameworks to fight the economic impact of COVID-19.
[1] The NBE has released between 20% to 25% of the total bill bond that commercial banks have bought over the years.
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