BY ABEBE WOLDEGIORGIS
Aiming to mitigate economic intrigue, the government of Ethiopia has been taking various measures so far. And to uphold the actions, the National Bank of Ethiopia (NBE) recently introduced directives to the banks not to provide loan to customers through collateral system.
According to the information drawn from Commercial Bank, the directives indicate that providing loan through taking immovable property as collateral is temporarily frozen. Loan provision in relation with import-export trade also banned. However, loans which are provided without collateral form will be continued.
According to the Bank officials, the instruction is issued right after the rise in exchange rate of Dollar against Birr to 30 Birr difference between black market and the legal market.
It is stated that the execution of the instruction will be conducted in a blistering pace. Among the immovable property barred from collateral usage, land and buildings can be mentioned.
Shiferaw Adilu (PhD) is an economist. As to him, the instruction is intended to control the rampant money laundering and inflation through holding money excessively circulating in the market. Some also said that the measure is so timely since it helps to avert the pervasive economic malaise.
The high gap in the exchange rate of Dollar against Birr between the formal and informal markets worried most citizens so that the government’s swift measure is remarkable to contain the repercussion.
Currently, most bank customers due to uncertainty posed by the conflict in the northern part of the country are withdrawing their money from the banks and purchase Dollar in the black market and such practice motivates others to get loan from banks through using their immovable property as collateral. Hence, the government is forced to bar provision of money in such manner for a while.
Regarding the adverse outcome of the government’s action, some experts say that banks might lose some profits because of the interruption of money transactions for the time being however the measure is vital for the sake of the nation’s economic security and stability.
While approached by The Ethiopian Herald, a banker who is working in a private bank and asked hold anonymity of his name said that from business point of view, halting provision of loan through collateral might affect the banks’ business because their profit comes from the interest rate they loaned to their customers. However, in order to curb the informal flow of money in the market and the forex exchange rate which is hiking alarmingly and is critically harmful to the economy, the government’s measure is timely.
“The ongoing black market with high price poses remarkable inflation on basic goods and services in which the poor ill afford it,’’ the banker said.
Criminals who still have connection with the terrorist TPLF intend to create havoc in the economy as one of their activities is money laundering through illegal market and increasing money circulation out of banking system. Hence, citizens must lend their hand to support the government’s stance by abandoning exchanging Dollar in the black market.
According to Dr. Shiferaw, when the economy is disrupted due to inflation, the banks’ business itself is negatively affected and might face bankruptcy. Therefore, the swift measure taken by the government is valid.
Most of the time, Banks provide loan to customers by taking buildings and residential houses or other permanent assets as collateral. Misuse of this privilege only to purchase Dollar from the black market that is being observed among some rich people is invalid since it harms the economy.
When unexpected situation occurs in the market, emergency action is essential to get relief and the government’s action can bring positive result that stabilizes the economy. If there are additional options the government should consider it for the sake of protecting citizens from price hike because the unprecedented gap in the forex exchange rate between the formal and informal markets.
Commendably, as to the experts, the sanction on the collateral assets would be lifted after a while based on the outcome of the measure. Recently, following the new instruction introduced by the National Bank, the Dollar exchange rate in the black market has shown reduction from 70 Birr to 63 and 64 and this indicates that the government’s action can bring a positive outcome.
On the other development issue, the National Bank introduced new instruction last week which helps to inspect high shareholders and influential figures to minimize their dominant role. The instruction denies high shareholders who are indebted from banks to continue exercising their power due to their asset. It also introduced laws enable the National Bank to purchase and sell deposited money and documents. The instruction named as “open market operation and standing” which is ratified by the National Bank as of the Bank’s Governor Yinager Dessie (PhD), helps to tackle shortages of deposited money in the banks in addition to stabilizing the economy.
According to the new directives, Banks can make agreement with the National Bank willingly and join the market.
The financial and documents with financial value market system led by the NB allow Banks to sell their deposited money and documents to the NB and re purchase again. In addition, they can obtain loan through using their financial documents and immovable properties as a collateral.
The directive allows the National Bank of Ethiopia to collect deposited money of the participant banks and hold the money not for more than one year. It also pays the interest to the banks.
According to the experts, the collection of the deposited money by the Bank enables to reduce paper money circulation outside the banking channel which in turn averts inflation and stabilize the economy.
Banks which faced shortage of money based on the created market can obtain loan through using financial documents as collateral. In addition, the directive serves to sell bonds and collect circulated money which poses inflation. The money order documents and promising notes also purchased or sold by the reduced prices.
The created market also enables banks to obtain sufficient money for transaction, to determine and supervise the interest rate and serves banks to obtain long term loan.
Moreover, it helps to stabilize price fluctuation and provide mandates to the NBE to formulate directives which determine the relation between banks and how to provide loan services to other financial institutions.
According to financial experts, the previous NBE directive which obligates banks to purchase 27 percent bond from NBE when they provide loan to customers is now abolished. On the other hand, making auction to banks to purchase the government documents was targeted to collect excess money circulating in the market.
Unfortunately, banks have shown reluctance to act accordingly from time to time. Therefore, the introduction of the new directive is expected to reverse the situation and obtaining money from market can easily be possible, they opined.
THE ETHIOPIAN HERALD AUGUST 20/ 2021
