National Bank of Ethiopia (NBE) relaxes the ‘foreign currency intermediation directive’ aiming to bring life for access to credit from foreign sources.
It is recalled that NBE, the financial sector regulatory body, issued a directive that allow banks to pay an intermediary role to facilitate foreign currency credit for business activities in Ethiopia under foreign currency intermediation by banks directive No SBB/77/2020.
However, the directive which became effective starting from August 2020 was not able to gain traction because of its strict conditions and terms that could not attract foreign finance providers, explained sector experts to Capital.
They said that in different occasions, bankers had provided their comments and recommendations to NBE to look into the matter in order to make the directive effective.
One of the bankers that Capital spoke to said that NBE has now included and revised some new points replacing the former terms to make the directive applicable.
Experts in the banking sector told Capital that access to loan risk grading which works for any individual or country, the rating is often determined by long or short time access to financing under commercial terms.
The interest of foreign financers is aligned with risk rate of the country and companies, “So foreign financers shall not be encouraged if the financing is a long term,” one of the financial experts said.
Now the directive has reduced the grace period and repayment period.
Bankers told Capital that partners had expressed their concern that if the grace period is extended, it would not be attractive for them to facilitate finance under the new scheme.
“We recommended the central bank to ease the grace period and repayment time so that the directive is effective as per the demand of the government,” one of the bank presidents that Capital interviewed said.
Now experts expressed their hope that the directive now shall give life to access to foreign loans on behalf of companies active in Ethiopia.
According to the information Capital obtained from bank leaders, no financial firm is accessing the foreign currency under the 2020 directive, due to the strong terms stated on the directive that is not considering the risk rate and reality in the country.
“We have made different efforts and created communication with potential partners but it did not bear fruit,” a bank president explained.
The new amended directive No SBB/82/2021 stated that the grace period for principal payment to be at least six months, reducing it from three years as per the previous directive.
The new directive has also reduced the repayment period to two years that includes the grace period. The previous directive article 4, sub article 3.2, stated a repayment period of at least six years including grace period.
The former directive article 4, sub article 3.3 has been fully revoked on the latest directive that has become effective as of December 1, 2021.
The revoked part of the former directive addressed the interest rate for the external loan that banks accessed on behalf of their customers here.
The article read ‘the all in cost of the loan shall not exceed 6 months respective currency LIBOR plus 5 percent; USD LIBOR shall be used when the loan currency does not have LIBOR rate’, while the amended directive did not disclose about the interest rate.
LIBOR (London Inter-Bank Offered Rate) is the benchmark interest rate at which global banks lend to one another for short-term loans. The rate serves different currencies with seven maturity periods from overnight to 12 months.
The new amendment has also added a sector that shall access the foreign currency secured under the intermediary directive.
It stated that priority goods shall utilize the foreign currency acquired through external borrowing, besides foreign currency generating activities that is mentioned in the previous directive.
Article 4 sub article 4.2 of the new directive indicated that ‘facilitating import of priority goods as per National Bank’s Directive on Transparency in Foreign Currency Allocation and Foreign Exchange Management’ shall utilize the opportunity.
It is known that the Transparency in Foreign Currency Allocation and Foreign Exchange Management Directive of NBE stated essential goods in three priority categories.
The amended directive article 4 sub, article 5 added that foreign currency acquired through external borrowing can be utilized for facilitating imports of priority goods as per sub article 4.4.2 of this article only with the prior approval of NBE.
Experts on the sector elaborate that the priority sectors that included on the new directive shall only access the foreign currency loan, which is secured under the intermediary scheme, as per prior approval from NBE.
The practice for those engaged on foreign currency generating activities in Ethiopia that is mentioned on article 4 sub article 4.1 on both the old directive and the amended is not expected to get the green light from NBE.
The amended directive article 4 sub article six stated that the prior approval request shall be made to the Banking Supervision Directorate of NBE.
The directive has also included some changes and added further elaborations to make effective the directive and enable banks to make active the motive of the law that targets to boost the foreign currency flow to the country.
The intermediary directive enables local banks to borrow from foreign banks in USD, pound sterling, euro, Chinese Yuan, Canadian dollar and Japanese yen.