The central bank has yet again sent a shockwave through the banking industry late last week, revising its directive issued six years ago in regulating credit provision by commercial banks.

The latest directive released by the National Bank of Ethiopia (NBE) on Friday afternoon, January 11, 2008, and to be effective as of next month, is characterised by industry operators as "the most stringent ever".

Among several requirements governing loans and advances banks make to their borrowers, the new directive limits overdraft facilities of banks to not exceed 25pc of their total loan portfolios.

This will have major consequences in the lending structure of commercial banks, particularly private, because the trade sector (both domestic and international) claims the largest share in their annual loan disbursements. For instance, of the 12.4 billion Br total loans banks disbursed in 2005/06, domestic trade took 23.5pc, only rivalled by international trade that claimed 25.7pc. These are activities that are heavily financed by a limitless lending in overdraft. Once an overdraft facility is renewed for a borrower, it was not necessary to hold a provision for it, according to the first directive issued in 2002.

"There are borrowers who hold an overdraft facility as high as 50pc of their total loans," a senior executive of a private bank told Fortune. "Some of them may have invested the loan they secured in overdraft facility on other businesses, which makes it difficult to downsize it in the specified time."

The new directive has given banks until June 2008 to slash their overdraft size to 30pc of their total loan portfolio, and eventually to 25pc in June the following year. It also compels them to set aside provisions for the amount of overdraft facility they make available to their clients. The central bank asserts that overdraft facilities that are not renewed for over six months are categorised as non-performing loans (NPL). Banks are therefore required to set aside provisions for overdraft facilities that they provide customers.

"The directive will certainly create fallout with our clients," said the senior executive.

Businesses accustomed to using overdraft facilities to finance their operations have yet to learn to show 80pc of the money they get through such facilities in their account within a certain period. The directive also requires banks to review audited financial statements of borrowers before advancing loans over 10 million Br.

Having fallouts with borrowers is, however, part of the problem. The more banks keep their cash as provisions to secure loans and advances the less they could show profits on their balance sheets. The days of showering unprecedented dividends of over 30pc per share are numbered, according to an industry observer.

Understandably, bankers are not happy with this.

"If we are forced to hold provisions for overdraft facilities, we can only do it by slicing our profits," said a president of a private bank. "This will shrink the dividend that we pay to our shareholders."

It is not new for bankers to get dismayed with directives the central bank is imposing in a bid to regulate the industry. Bankers often starkly disagree with directives and draft proclamations that are issued by authorities at NBE.

"What I am stunned at this time is the abruptness of its introduction," said the senior bank executive.