NBE Sets Sights On “concentrated” Borrowing In Banking Industry

Ten borrowers account for nearly a quarter of all loans and advances

The National Bank of Ethiopia (NBE) is considering the introduction of legislation that would place credit limits and restrictions on “large borrowers.”

Governor Mamo Mihretu is mulling the inclusion of a clause in the upcoming bank business proclamation which would limit how much a business or individual can borrow from a bank, as well as restrict the number of banks that can extend credit to a single borrower, according to an anonymous source at the NBE.

There are borrowers with hefty lines of credit at as many as 18 commercial banks, according to the source.

“There are companies taking loans from every bank. If business doesn’t go well for these companies, the whole banking system would be stuck,” said the NBE official. “The twenty largest depositors and borrowers are the same at many of the banks.”

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The concentration of credit in the hands of a few is an issue that has not received enough attention from regulators, says the source.

“Very few businesses are making good use of banking,” he told The Reporter.

The phenomenon was described as “shocking” by the NBE Governor during an event at the Skylight Hotel last week.

“The Ethiopian financial sector is characterized by concentration. It is amazing how concentrated the sector is,” he told a gathering of people in tech and finance. “There is concentration in terms of focusing on urban areas; there is concentration in terms of focusing on particular sectors.”

Loans and advances from the banking industry are “concentrated in the hands of a few large borrowers,” according to an NBE Financial Stability Report released on April 11, 2024.

The report disclosed that no more than 10 borrowers accounted for 23.5 percent of all loans and advances from the entire banking industry in 2023. The figure was 18.7 percent the year prior.

The report, however, fails to disclose the identity of the borrowers.

“These borrowers are most probably a handful of state-owned enterprises and government agencies. The report obscures a lot of facts. It should at least provide credit exposure based on ownership, size of bank, and other factors,” said Abdulmenan Mohammed, an experienced financial analyst.

The NBE report reveals the banking industry had 1.9 trillion birr in outstanding loans and bonds at the end of 2022/23.

Abdulmenan notes the credit exposure of the state-owned Commercial Bank of Ethiopia (CBE) is likely much higher than the private banks.

The NBE source disclosed the central bank is looking to enforce credit restrictions akin to limits on equity. The NBE limits bank ownership to five percent for a single shareholder, and any shareholder with more than two percent in equity in any commercial bank is barred from investing in another.

“We will do the same thing on credit for borrowers,” the source told The Reporter.

Abdulmenan warns this could be “problematic for the borrower as well as for the banks.” He urges regulators to focus on single borrower limits, which would enable businesses to open lines of credit at several banks based on a percentage of their capital.

“This means the amount banks can lend to a single borrower is anchored to its capital,” he said. “I think this approach has been working well. If there is a credit risk posed to the industry by a small number of borrowers, revising the single borrower limit seems appropriate.”

The source at the NBE admits a blanket credit cap could choke off access to finance for businesses, but argues it is “the only way to mitigate the risks of credit concentration.”

“It would be difficult to check whether the businesses are investing genuinely or not,” he said. “NBE doesn’t do intelligence works. We can also set rules.”

The rules are set to be included in the banking business proclamation, which is under revision to accommodate the entrance of foreign players. The draft is under review by stakeholders such as the International Monetary Fund (IMF) and the World Bank before being tabled to the Council of Ministers.

The proclamation will also address insider trading and whistleblowers, according to the source.