BY ABEBE WOLDEGIORGIS
The Ethiopian National Bank has continued to take measures to strengthen financial sector and introduced new instruction that micro finance institutions to enhance their capital amount by seven fold. The recent regulation stipulates that the institutions to raise their total capital amount from 10 to 75 million birr.
In the past it is remembered that the NBE introduced instruction that stipulates the financial institutions such as banks to raise their paid capital from 5 hundred million to 5 billion birr. Similarly it implemented new regulation which stipulates that insurance institutions to raise their paid capital from 75 million to 500 million birr.
After the introduction of the new regulation people who want to establish micro finance institutions required to show their document which indicates that, their paid capital amount is 75 million birr.
There are 45 legally registered small scale financial institutions licensed by the National Bank of Ethiopia operating all over the country. Among them five financial institutions promoted to formal banks. Therefore, the new regulation is applied on the rest of the financial institutions. Among the institutions 75 percent of them have bellow 75 million birr capital. Therefore based on the new regulation all the remained micro finance institutions must raise their capital to 75 million birr in the coming seven years.
Teshome Yehise is the Yemisrach micro-finance institution executive director. As to him, for long micro-finances were asked to raise their paid capital hence the new regulation introduced by the NBE is an expected matter. He further said that, in the past in order to encourage micro finance institutions, NBE made their paid capital set to be small. But the small amount of their capital hampered their financial activities. Therefore, the introducing of new instruction can be taken as remedial action. Particularly it eases restricting their loan providing capacity. Hence, the new phase can bring a solution to the problem witnessed in the sector.
In addition, due to the decreasing purchasing power of the birr, the amount of money provided in the form of loan to customers was not sufficient enough to meet their business aspiration. Therefore, the increasing of the capital helps to raise their loan provision capacity. According to the micro finances financial governance, they are required only to provide loan not more than one percent of their deposited money. As the result, for long they were unable to provide sufficient amount of money to customers.
For instance, one micro finance institution with the capital of 10 million birr could only provide 100 thousand birr to its customers. If it has 20 million deposited birr can only provide 200 thousand birr to customers. Therefore, the new regulation can serve as remedy. As to Teshome when the micro finance institutions deposited amount raised to 75 million birr, they will have the capacity to provide loan to customers up to 75 thousand birr. The new regulation also helps the institutions to broaden their capacity to reach their customers.
As to the information obtained from Teshome and others, currently about 15 micro finances have 10 to 20 million paid capital. Therefore, the introduction of new regulation by the NBE helps to strength their loan provision capacity. On the other hand, there are microfinances which have up to 400 million paid capital and the new regulation can serve to narrow their loan provision capacity gap.
But Teshome did not show his reluctance to explain some weak aspect of the new regulation with regard to raising financial capital of the microfinance institutions. As to him, the regulation though it has immense value to strength the institutions loan provision capacity, it has also its own demerit. He said that some micro finance institutions with small capital amount may face hard to full fill the requirement because of shortage of money and might forward their complain to the NBE. But as to him, they have to look options help full to raise their capital and among other not to take their dividend when they make profit and adding it to their deposited capital.
In addition to this, selling shares to shareholders should be taken as mechanism to raise their capital and meet the requirement to enhance their capital amount. The other good opportunity created by NBE is that, micro finance institutions are allowed to sell share to Ethiopian diaspora therefore, they can mobilize resources by taping the opportunity so that they can meet the requirement to make their paid capital to 75 million birr.
Nevertheless, as to Teshome, there are some sub articles on the new instruction introduced by NBE which hampers microfinance institutions not to sell share to Ethiopian diaspora. According to the instruction in order to buy share from MFI diaspora should come here physically and made agreement with MFI and such situation discouraged many diaspora and looked the situation as burdensome because to some of them it might be impossible to come here due to various reasons.
Many diaspora showed interest to purchase share from MFIs but they are dismayed by the new instruction and such a situation made MFIs to miss the opportunity. Therefore, NBE must remove these constraints so that MFIs can sell their share.
In the past many diaspora purchased share from Misrach micro finance and from other finance institutions. They were also allowed to open bank account by Dollar but the newly introduced instruction stipulates that diaspora must come here and must make agreement with MFI and such situation forced diaspora to show reluctance to come here and purchase share. Therefore, NBE must consider the matter and amend the instruction so that MFI also tap the opportunity.
Teshome further said that MFIs play pivotal role in the economy and supporting them enables to increase their capital and to broaden their services to reach out the disadvantageous segment of the society.
Most of MFIs provide small amount of finance to the low income groups and created job opportunities. They also can have more than 5 million customers and provided credit to them. Therefore, paying attention to them is essential. They provided such amount of money not because they are banks but because they have the capacity to reach large segment of the society.
Particularly small scale and medium size business could obtain loan from MFI and this indicates that how MFI are essential and if they raise their capital they can also enhance their capacity and boost the sector.
As to Teshome, previously he conducted study on how MFIs reach the rural community and the study outcome indicates that no rural person get access banks to secure loan and almost all rural population got credit facility from MFI and one can understand how MFI are active in rural areas.
According to the information obtained from NBE, in the year 2013, 250 thousand people could secure loan from Banks and one year later the number reached to 300 thousand. Contrary to these, the number of people obtained loan from MFI is reached to 5 million and this shows how MFI are vital particularly in rural areas. They also play pivotal role with regard to poverty reduction scheme
The NBE 2013 report also explained that the total capital of MFI institutions reached to 27.9 billion birr however, out of it, 84.8 percent of the capital was owned by 4 major MFI institutions which are now promoted to Banks. These institutions are allowed by NBE to provide none interest banking service to customers and their capital amount with other 36 MFI by the year 2014 reached to 15.4 billion birr. MFIs which got license to be promoted to Banks are Amara, Dedebit, Omo and Addis Saving and Credit Association. These institutions by 2013 out of the total amount owned 88.8 percent of saving and credit, 82.7 percent credit and 84.2 wealth. But at the end of 2014 the rest 40 percent saving and credit association’s capital amount reached to 28.3 billion, their total credit amount reached to 36 billion birr and their total wealth amount reached to 58.8 billion birr
The Ethiopian Herald 5 February 2023