Some banks prohibited from issuing LC

Following the move of National Bank of Ethiopia (NBE) banning some financial firms from issuing letter of credit (LC) the week was catalyzed by a rush for those commercial banks on clearing their problems.
Reliable source in the financial industry told Capital that NBE suspended about seven banks including some of the biggest from issuing fresh LC.
Fikadu Digafe, Vice Governor and Chief Economist of NBE, said that the regulatory body is focusing on supporting local banks than take measures, “When necessary, such kinds of measures that are implemented recently, are taken.”
Meanwhile, the reason was not clearly stated while sources indicated that it has been surly aligned with hindering of the settlement for the required sum with correspondent/ go-between partners abroad.
Experts on the sector said that some Ethiopian banks are alleged by their delay to clear up their undertaking to provide eventual payment for drafts drawn as per the timeframe despite the commodity supplied by sellers.
The foreign currency shortage seriously affects the country’s economy and foreign trade which then in turn forced the central bank to regulate the sector closely.
The current ban imposed on some banks is related with the shortage, according to sources.
Some banks are not hesitating to issue the LC; despite them not really having the resource on hand, which has become a growing challenge for the sector.
One of the bank leaders that Capital talked to about the matter said that the strong measure and close follow up of NBE is crucial for the sector security in general and assuring of trust for corresponding banks abroad, who are working with the issuing banks.
“If such kinds of delay happened frequently, the interest of correspondent banks to be a partner with a local financial firm will be eroded or the commission charge will be high, which then directly affects the country foreign trade in addition to unnecessary fees,” the source added.
The source explained that the problem is mainly seen on some banks. Banks are expected to settle payments within the maturity time that is up to three days.
He said that top leaders of the banks should review and insure overall foreign exchange exposure to ensure that it is maintained at practical levels and is consistent with available resources.
Late this week, Capital was informed that about five of the seven banks have settled their arrears and are back to the normal operation.
“My personal estimation is that banks get in this problem in relation to the issue of their internal management. When they get in to commitment they are supposed to look in to the inflow and out flow of their resource,” Fikadu commented explaining the reason why banks get in difficulty regarding defaulting on the settlement of LC or other payment modalities.
He said that some correspondent banks may not show interest to work with some local banks, which doesn’t have good reputation on settle their commitment, “that is the reason we are controlling banks with directives, not to get on commitment against their capacity.”
“As a country we don’t have a given default rate, but some banks are now being seen getting in trouble. We have advised them to correct the new trend, while if they tried to continue we will be forced to penalize them as per the regulation,” the Chief Economist told Capital.
He said that these banks shall focus and undertake domestic businesses that would allow them to continue on profitability.
About the latest measure that NBE taken on some banks, Fikadu said that the regulatory body preferred consulting them to correct the operation before taking measures. “While at some point we have to act and taking measures on those who are abusing the rule of the system more than once and are unable to retract,” he explained the reason as to why NBE takes measure on some banks.
Fikadu added that the sector is supposed to be followed closely to assure that the relation with correspondent is healthy.
The World Bank Group private wing International Financial Corporation last year estimated that every year, Ethiopian banks end-up with outstanding LC accrued between USD 200 to 300 million payable to foreign banks. However, no defaults were recorded by Ethiopian banks except for the eventual delays.