Study warns conditions leave banks vulnerable ahead of industry liberalization
Bankers say the government’s foreign exchange reforms have negatively impacted their foreign currency positions and dulled their competitive edge ahead of the impending entry of foreign banks.
Tewodros Hailu, director of bank transformation at Awash Bank, highlighted the dilemma during a half-day discussion event organized by the Addis Ababa Chamber of Commerce and Sectoral Associations last week.
He told participants that commercial banks’ open positions in foreign currency have fallen in terms of forex, affecting their flexibility and casting doubt on their ability to withstand the challenges that may come with the liberalization of the industry.
“According to the law, the amount of forex a bank can accumulate is 15 percent of its total capital and that is set in local currency. The floating has instantly lowered our capital,” said Tewodros.
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He worries that banks having lower assets and capital in dollar terms is costing them their ability to successfully compete with the possible entry of foreign banks.
“Foreign currency has forced us to face new risks that we have never dealt with before,” he said.
The central bank’s practice of keeping a tight hold on the management and flow of foreign currency reserves for so long has sheltered commercial banks from following up on the risks associated with forex, according to experts.
The questions posed by the forthcoming entry of foreign banks was also in center stage during a parliamentary hearing on the draft Banking Business Proclamation in the works at the National Bank of Ethiopia (NBE).
Bankers in attendance demanded NBE regulators explain the reasoning behind the proposed bill’s provisions on mandatory mergers.
“Why is the presence of several banks always seen as a risk? Over the years, we have been hearing that five strong banks would be sufficient as a way to encourage mergers. But, is having larger capital the only indicator of a bank’s efficiency? Shouldn’t we consider other criteria as well? ”questioned a representative from Geda Bank.
NBE Governor Mamo Mihretu responded that the inclusion of the mandatory merger clause is only meant to provide the sector with a clear legal framework if the need for it arises.
“We included this to help grow banks capacity; we are not forcing mergers. It is not a decision, it’s a banking system legal framework,” he said.
Frezer Ayalew, director of bank supervision at the NBE, said the draft bill does not determine the number of banks that should exist.
“The stipulation only entails that the National Bank may set up a statutory merger to rescue a struggling bank and/or to create a more viable and stronger bank,” he said.
On the other hand, Solomon Desta, NBE vice governor, argued that competition with foreign banks will require domestic counterparts to hold comparable levels of capital.
“Even boxing matches are done between equal forces. Mergers will enable banks to own a corresponding competitive ability,” he said.
However, the paper presented at the Chamber of Commerce argues that domestic banks are being hammered by the central bank’s new slate of policies, affecting their ability to grow their foreign currency operations and capital.
Restrictions on forward exchange contracts (FEC) that allow banks to buy or sell a specific amount of one currency for another at a predetermined rate on a future date were among the challenges mentioned in the study.
Tewodros argues that customers are not willing to take up contracts for a spot price which obligates banks and customers to commit to an agreement that values commodities at the current price levels, irrespective of when the commodities will actually be imported.
“This transaction system is pushing customers towards the parallel market, because they are wary of the risks,” he said.
His paper recommends the NBE allow banks to make use of additional transaction instruments to reduce the risks associated with foreign exchange variation, increase the amount of advance permission without guarantees, and increase the banks’ capital to enable them to be competitive in the liberalized market.
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