The Reporter (Addis Ababa)
22 December 2007
Addis Ababa — During the fourth quarter of 2006/07, inflation continued to be the major challenge for monetary policy, largely associated with structural factors. In order to curb the inflationary pressure, the National Bank of Ethiopia (NBE) has continued to limit its lending to the central government and mop-up excess liquidity of commercial banks through sale of T-bills.
The latest report of NBE shows that broad money supply (M2) reached 56.7 billion birr at the end of the fourth quarter of 2006/07, indicating a quarterly and annual growth rate of 6.3 percent and 22.2 percent, respectively. This was driven by both domestic credit expansions and buildup in net foreign assets. On an annual basis, domestic credit expanded by 25.5 percent, mainly due to 31.1 percent increase in credit to the non-government sector, which was in line with the policy of the government to encourage private investment activities.
On the liability side, the fourth quarter of 2006/07 witnessed increases in all component of broad money. Narrow money, which comprises both currencies in circulation and net demand deposits, grew by 24.4 percent. Quasi-money, that includes both savings and time deposits, also showed an annual growth rate 19.8 percent. Significant growth was registered in time deposits (59.6 percent) followed by demand deposits (28.4 percent), presumably reflecting the higher interest rates paid by banks on time deposits as compared to saving deposits and the surge in transactions demand for money. Average time deposit rate was one percentage point higher than that of savings deposit by end 2006/07.
Reserve money reached 27.4 billion birr at the end of the fourth quarter of 2006/07, expanding by 11.1 percent on quarterly basis and 29.4 percent annually. The expansion in reserve money was largely related to increases in commercial banks' deposits at the NBE by 15.6 percent over the previous quarter and by 41.8 percent annually. Currency in circulation also grew but at a relatively moderate rate of 7.7 percent and 20.8 percent, on a quarterly and annual basis, respectively.
Excess reserve of commercial banks stood at 9.1 billion birr at the end of the review quarter, up by 19.1 and 44.4 percent vis-à-vis the preceding quarter and the same period of last year mainly due to higher collection of loans (over 40 percent increase) and the decline in treasury bills (T-bills) outstanding of commercial banks. During the review quarter, the composition of broad money remained stable except for a marginal change compared with the same period last year. Accordingly, ratio of narrow money to broad money rose from 51.3 percent in the same period of last year to 52.4 percent in the review quarter. Mirroring this development, the ratio of quasi-money to broad money declined to 47.6 percent from 48.7 percent last year. Reflecting the surge in excess reserves of commercial banks and currency in circulation, money multiplier tended to decline in the review quarter. Narrow money multiplier declined to 1.08 from 1.13 in the previous quarter. Similarly, broad money multiplier slowed down to 2.07 from 2.16 in the previous month.
The review quarter witnessed no significant changes in the interest rate structure of commercial banks. Average savings deposit rate remained at 3.08 percent, which was close to the minimum deposit rate of 3.0 percent. Meanwhile, weighted demand deposit rate and weighted time deposit rate slightly increased from 0.05 and 4.05 percent in the preceding quarter to 0.06 percent and 4.08 percent in the review quarter, respectively. Average lending rate of commercial banks also remained unchanged at 10.5 percent, as the maximum and minimum lending rates stood at 14 and 7 percent, respectively. Compared with annual core (non-food) inflation of 15.2 percent at the end of the review quarter, all interest rates, including weighted average yields on T-bills, government bond yields and average real cost of borrowing (real lending rate) remained negative in real terms.
The financial sector in Ethiopia mainly consists of the banking system, insurance companies and micro-finance institutions. There are eleven banks operating in the country, of which eight are private commercial banks. A total of seventeen additional bank branches have been opened during the fourth quarter of 2006/07, raising the total number of bank branches throughout the country to 487. Consequently, the ratio of bank branches to total population reached 158,372 which still shows that Ethiopia is one of the under-banked countries in sub-Saharan Africa. The distribution of bank branches indicates that 38 percent are located in Addis Ababa. Out of the total number of bank branches, the share of private banks was 47.6 percent compared to 43.9 percent a year earlier.
At the end of the fourth quarter of 2006/07, the total capital of the banking system reached 9.3 billion birr, indicating a quarterly growth of 30.2 percent. The share of private banks went down to 31.5 percent compared with 35.2 percent a year ago, largely reflecting the substantial rise in the paid-up capital of the Commercial Bank of Ethiopia. In the meantime, the number of insurance companies remained at the previous quarter level of nine, while the number of their branches increased by 3 to 146 by the end of the fourth quarter of 2006/07. This means that in Ethiopia one insurance branch serves over 520,000 people. Of the total, 48.6 percent of the insurance branches were located in Addis Ababa. Private insurance companies accounted for 75.3 percent of the total branches.
The total capital of the insurance industry grew by 3.5 percent over the previous year to 522 million birr. The share of private insurance companies in total capital remained at 59.4 percent in the review period, almost similar to their share a year ago. With the establishment of a new micro-finance institution (MFI), Lefayeda and Saving Institution, the number of MFIs in the country reached 28, out of which 11 (or 39.3 percent) were located in Addis Ababa. MFIs mobilized total deposits of 1.04 billion birr, which was 12.9 percent higher than the amount mobilized in the previous quarter. Similarly, the outstanding loans of the MFIs grew by 17.3 percent on a quarterly basis and reached 2.74 billion birr at the end of the fourth quarter.
The number of clients served by these institutions reached 1.6 million. Their total assets also reached 3.48 billion birr by the end of the same period. MFIs are increasingly playing a role in contributing to poverty reduction by providing loans to and mobilizing savings from the low income groups. Four MFIs alone accounted for 81.4 percent of the total capital, 86.1 percent of savings, 84.1 percent of credit, and 83.6 percent of total assets of the MFIs.
During the fourth quarter of 2006/07, resources mobilized by the banking system, which consist of deposits, collection of loans and borrowings, reached 6.9 billion birr, 34.2 percent higher than the amount mobilized during the preceding quarter and 54.7 percent over the same quarter of last year. About 64 percent rise in collection of loans and 340.2 million birr increase in net borrowings were the factors behind the quarterly growth in resource mobilization, offsetting the 12.4 percent reduction in net deposits. Year-on-year basis, resources mobilized by the banking system surged by 54.8 percent. The total deposit liabilities of the banking system reached 53.9 billion birr at the end of the fourth quarter of 2006/07, indicating quarterly and annual growth rates of 4.2 and 21.2 percent, respectively.
According to the report, all types of deposits contributed to the rise in total deposits. Demand deposits, which accounted for 48.8 percent of the total deposits, reached 26.3 billion birr, showing quarterly and annual growth rates of 2.1 and 23.5 percent, respectively. Saving deposits, with 44.0 percent share in total deposits, increased by 5.9 and 15.8 percent on quarterly and annual basis to 23.7 billion birr. Similarly, time deposits, which constituted 7.2 percent of the total deposit liabilities of the banking system, increased by 8.2 and 43.3 percent during the same period. The surge in all types of deposit presumably reflects improvements in the income level of the population and the increased financial intermediation. The share of government-owned banks in total deposits declined to 67.7 percent at the end of June 2007 from 70.6 percent last year, while the share of private commercial banks increased from 29.4 percent to 32.3 percent.
Collection of loans by the banking system amounted to 4.4 billion birr during the fourth quarter of 2006/07, up by 63.7 and 39.9 percent vis-à-vis the preceding quarter and same quarter of last year, respectively. The upward trend in loan collection largely reflects increasing repayment and collection efforts on the part of creditors and debtors as the economy showed steady growth. On a quarterly basis, loan collection of both private and public banks increased by 58.0 and 69.0 percent, respectively. Of the total loan collection, private banks collected 2.0 billion birr (46 percent) while public banks collected the remaining balance. About 74 percent of the total loan collection was from the private sector, followed by cooperatives (22.3 percent).
Total outstanding borrowing of the banking system reached 2.4 billion birr at the end of the fourth quarter of 2006/07, registering a quarterly and annual growth rate of 19.0 and 19.4 percent, respectively. On a quarterly basis, both domestic and foreign borrowings increased by 18.8 percent and 20.0 percent, respectively while the corresponding annual growth rates were 17.7 and 28.0 percent. Of the total borrowing, 2.0 billion birr (82.2 percent) was domestic while the remaining 434.3 million birr (17.8 percent) was from foreign sources.
During the fourth quarter of 2006/07, total disbursement of fresh loans by the banking system amounted to 4.3 billion birr, registering respective quarterly and annual growth rates of 10.6 and 33.0 percent. Compared with the same quarter of last year, loan disbursements by both public and private banks have increased by 69.8 and 5.2 percent, respectively. Meanwhile, on a quarterly basis, loan disbursements by public banks increased by 28.8 percent while that of private banks declined by 5.6 percent. Of the total new loans disbursed by the banking system, 45.1 percent was disbursed by private commercial banks. With regard to the beneficiaries of new loans, about 28.2 percent went to agriculture, followed by international trade (27.4 percent), domestic trade (12.2 percent), industry (9.0 percent) and housing and construction (8.5 percent). Another major beneficiary was transport and communication sector, which received about 7.8 percent of the total fresh loan.
NBE's report indicated that total outstanding credit of the banking system (including credit to the government) reached 44.3 billion birr at the end of June 2007, which was 3.8 and 11.6 percent higher than that of the preceding quarter and the same period of last year, respectively. Of the total outstanding credit, credit to the private sector accounted for 62.2 percent, followed by credit to central government (29.9 percent) and credit to public enterprises (7.4 percent). As sectoral distribution, credit to trade, both international and domestic, stood first at 23.1 percent followed by industry (15.8 percent), agriculture (9.5 percent) and housing and construction (8.6 percent) and transport and communication (5.4 percent).
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