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The Development Bank of Ethiopia (DBE) decided to exclude used machines as in-kind contributions for equity after facing many challenges from investors who abused the privilege.
The Policy Bank introduced a new loan policy in 2017 which changed many things including the ration of loan investments for local and international investors.
For local investors investing in industrial parks, the loan to equity ratio was minimized from 85 to 15 percent respectively.
The bank decided to finance an international investor to the maximum of 50% and remaining should be brought by the company on the new policy replacing the previous 70% and 30 % financing ration respectively. The equity contributed from the investor could be in different forms including a machine, building, or vehicle.
The in-kind contributions, which consist of first-degree collateral by the bank, can still be extended to up to the extent of the minimum equity requirements or more if they are brand new, according to the policy.
The Bank was strongly hit in the head with the undervaluing of machines in the case of foreclosure.
“We faced several challenges to recover our investment which includes import of non-functional and outdated machines by the investors,” said Kifle, Public Relations director at the bank. “Previously revaluation of used machines consumed most of our energy”.
Also, the high consumption of energy and high demand for the spare parts was given as another reason for considering used machines by the bank. Import of outdated machines is also marked to decrease production and led to the loss.
The nonperforming loans (NPLs) of the bank was about 25% in the 2016/17 fiscal year which the bank stated that it was the lowest of all times. The bad loans were 15% higher than the previous year, the bank stated.
“We didn’t evaluate if the policy is bringing any change as it is just a few months since its operation and the injection of new loans takes a few months,” said Kifle. “But after the projects are fully functioning we hope we will observe changes.”
The Bank which changed its collateral coverage policy last year states that financing should be equivalent to the assets of the company.