Addis Fortune (Addis Ababa)
Issayas Mekuria
4 February 2008
An inspection report issued by the National Bank of Ethiopia (NBE) dubbed the quality of assets of the state-owned Development Bank of Ethiopia (DBE) "critically deficient".
The report finalised in December 2007 by auditors of NBE gave DBE a rating of five over the five years examined, a label reserved for least performers in the sector. DBE is said to have extremely poor credit quality, huge provisions deficiency for asset impairments and delays in credit processing. Moreover, the report indicates that the Bank has inadequate credit risk management, several credit administration weaknesses and improper reversal of loans from non-performing loans (NPL) to performing loans.
The latest is the second inspection report issued by the central bank in the last 10 years. Industry observers claim that this report shows the worsening of DBE's performance over the report of five years ago.
According to a banking expert, a bank is evaluated on Capital adequacy, Asset quality, Management strength, Earnings per share and Liquidity, encompassed in the acronym 'CAMEL'.
"The most important weight is given to asset quality," the expert told Fortune. "If asset quality of a bank is rated one, it is considered excellent. Two and three are fundamentally sound and fair respectively. However, four and five reflect that the bank is in a seriously bad situation."
The 99-year-old DBE operates with various funds the government secures from loans and grants both from abroad and local sources. In its lifetime, this Bank has exhausted its capital twice according to sources from NBE.
However, the government in 2003 has provided 1.5 billion Br to the Bank to enable it to finance priority areas in the export sector. The fund was secured from the other state-owned bank the Commercial Bank of Ethiopia (CBE) through bonds.
However, disbursing a total of five billion Birr that it secured from other sources in addition to CBE's funds, DBE currently has 84.1pc sick loans. This amount is 385pc of the Bank's paid-up capital.
NBE, which randomly reviewed four branches of the Bank reported that "the loans could even go higher if all branches were reviewed 100pc."
The Audit Service Corporation, external auditor of DBE, in June 2005 also had reported that the working procedures of DBE have defects that violate banking regulations.
"The financial statements have not been properly prepared in accordance with international financial reporting standards by the International Accounting Standards Board," reads the report.
Though the government in 2006 removed the executives of DBE accusing them of mal-practices, according to the report, those who replaced them also could not bring about a meaningful change.
"The executive management performance was also weak," reads the report. "There are high levels of NPLs, deficient asset quality, weak internal auditing and follow-up, weak plan performances, many violations of credit policy, weak operational risk management and weak credit risk management."
Though DBE is governed by the rules and regulations of NBE like any other bank, the report states that DBE does not comply with the regulations.
NBE's criticism includes the appointment of board and management choices.
"More than half of the approved loans during the year were treated on exceptional bases," says the report. "Exceptions have become norm of the Bank."
With eight main branches and 24 branches, DBE has over 900 staffs.
Though the NBE had given DBE three weeks to reply to the inspection report, DBE sent its reply after the deadline.
DBE declined Fortune's effort to obtain comments from the management about the inspection report and the bank's reply.
"This kind of highly classified document will not be given to anyone except the regulatory agency," says DBE's written response to Fortune's repeated requests to the management for comment.
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