No less than 65pc of funding of capital goods held by finance companies should go to the manufacturing sector, according to a new directive issued by the National Bank of Ethiopia (NBE).
The four-page directive was issued last Monday, February 25, 2019, to set a minimum of two-thirds of outstanding capital goods held in the finance portfolios of lending companies should be assigned to the manufacturing sector.
Signed by Yinager Dessie (PhD), governor of the central bank, the directive aims at supporting the manufacturing sector.
"There is a need to ensure the operation of capital goods finance companies align and support the growth and development policy objectives of the government," reads the directive.
Capital goods financing companies have been providing leasing at their own discretion and without any limitations imposed by the central bank until the new directive was issued last week.
Currently, there are five local capital goods finance companies licensed by the National Bank of Ethiopian including Aliya, Oromia, Addis, Debub, and Kaza, all capital goods finance business companies. Two more companies, First Capital Goods and Ethio Lease Capital, are under formation.
Addis Capital Goods Finance Business, established in June of 2014 with a capital of 955 million Br, was already in line with the new requirement, according to Mesay Ensene, director of Addis Capital.
"We have been providing over 80pc of financing to the manufacturing industry," said Mesay of Addis Capital, which was formed by eight city government entities, including Anbessa City Bus Service Enterprise, Abattoirs Enterprise, Addis Credit & Savings and Addis Abeba City Administration.
Since its establishment, Addis Capital has leased machinery valued at 150 million Br to 528 beneficiaries engaged in the garment, leather and leather products, metal works, furniture, stone ornaments and sculpture industries.
Beyond setting limits, the directive allows foreign companies to access and use their foreign currency to finance the import of capital goods. The regulatory bank also permits foreign companies to borrow funds from a foreign source to import the goods but prohibits them from borrowing funds from domestic financial institutions.
Even though the central bank has previously allowed foreign companies to engage in capital goods financing in Ethiopia, no company has registered so far to provide the service.
Three weeks ahead of the new directive the central bank issued another law that limited capital goods financing exposure to a single lessee. The directive restricts the aggregate sum of capital goods financing granted to a single lessee not to exceed 2.5pc of the total capital of the lending company.
"This is aimed at ensuring the finance companies have sufficient diversification to minimise their lease default risks," reads the directive.
The previous directive enabled the companies to finance up to one million Birr for a single lessee.
If the paid up capital of the financier is 400 million Br, the aggregate sum of capital goods financing granted for a single small and medium lessee should not exceed 15pc of the total capital of the company.
The directive has also set an aggregate sum of capital goods financing granted to a large business not to exceed 25pc of the total capital of the leasing company.
The aggregate sum of capital goods finance granted to any lessee was 30pc of the financier's capital in the previous directive.
These two stringent laws came into effect, while banks were expecting that the central bank would relax the sector, according to a financial expert, who wishes to remain anonymous.
"Banks, which have an upper hand in the finance industry, would join the business if the central bank relaxes the minimum paid-up capital requirement," said the expert.
If not, none of the banks will join the industry as they can not raise additional capital to pursue this business segment, according to the expert.