The National Bank of Ethiopia (NBE) has fully removed the cash withdrawal limit rule for government institutions, refugee and disaster management agencies, defence and security bodies, and charity organisations.
The circular that was issued two weeks ago also excluded embassies and credit cooperatives from the cash withdrawal limit rules. To receive the exemption, these institutions have to produce documents that show they need the money and have no other financial access.
The regulatory bank had previously issued a directive that limits the cash withdrawals of companies, institutions and businesses from banks and microfinance institutions. It put a cap on the cash limit for individuals at 200,000 Br daily and one million Birr monthly. For businesses and institutions, the directive limits them to 300,000 Br and 2.5 million Br as daily and monthly pegs, respectively.
The withdrawal limit came into effect after the Ethiopian Bankers Association submitted a study to the central bank following the liquidity crunch that occurred in the banking sector late last year. The study claimed that cash outside banks had increased, thus hurting banks' liquidity. Last November and December, the liquidity crunch hit its highest level ever, triggering the Association to plea for the cash withdrawal limit.
While limiting the daily transaction value, the central bank gave the power to presidents and heads of financial institutions to approve excess cash withdrawals looking up the proposal and evidence submitted by customers. However, the heads of the financial institutions have been facing challenges to implement the exception.
While limiting cash withdrawals, the private and government institutions were forced to pay employees through banks.
"Without looking at other parts of the community, we've observed that there are even public servants who don't have a bank account," said Yinager Dessie (PhD), governor of the central bank, during a panel discussion on the 10-year finance development plan held at the Office of the Prime Minister. "It's even harder in rural areas as well."
To resolve the confusion, the Ethiopian Bankers Association, which has 17 banks as members, sent a letter to the central bank on May 12, 2020, asking for explanations and communal criteria for the financial institutions to make exceptions.
The Ministry of Defense, the National Intelligence Security Service, the Agency for Refugee & Returnee Affairs, and the Disaster Prevention & Preparedness Commission are among the public offices given exceptions. They are allowed to withdraw unlimited cash for salaries and wages, pensions, the purchase of goods and services, per diem payments, aid and emergency support.
From the private sectors, suppliers; intermediaries; processing plants; and traders of agricultural products, livestock and minerals were given the exception. The cash can only be used to pay primary producers, labourers and traders and for the purchase of goods.
It was very hard to buy coffee from farmers, according to Zerihun Kemiso, president of the Southern Region Coffee Supplier Association.
"Unless you have cash at hand, the farmers aren't willing to do business," Zerihun said.
Even after applying to presidents of banks for approval of excess withdrawals, it was quite hard to get the money they want, and there were some lost deals, according to Zerihun.
"Although the aim is good, the reality is quite different. We hope this will make things easier for us," he said.
Nonprofit organisations and embassies are given the entitlement if the cash will be used for aid and emergency support. Savings and credit cooperatives are given the liberty as it pertains to their expenses regarding loan repayments and withdrawing unlimited cash from financial institutions.
The new circular has also widened the reach of the cash limiting directive. Walk-in customers who want to withdraw cash from cheques and recipients of remittance transfers are subject to the cap.
The new circular requires all banks to file a biannual report that lists the customers who withdraw money from their accounts in excess of the limit set by the NBE. The banks are also required to conduct an audit of customer accounts to ensure the excess amount is used for a legitimate purpose.
The circular, in general, has lessened the pressure on bank presidents to entertain all sorts of requests, according to Dereje Zebene, president of Zemen Bank.
However, the new provision on the addition of the biannual report is going to be a bit of a bump, although the intention is to ensure transparency, according to Dereje.
"Just auditing could have been enough. In general, the execution of the directive has been effective," he added.
Abdulmenan Mohammed, a financial expert for almost two decades, shares Dereje's view, further adding that the requirement burdens banks with extra tasks, for which banks probably are not qualified.
"Such a task should be conducted by the central bank itself as a regulatory body instead of the banks," Abdulmenan said.
The other serious problem is the definition of "legitimate," according to Abdulmenan.
"It's a very subjective word, which could have different meanings from company to company," he said, pointing out that operationalising the word in the course of conducting an audit could raise a lot of controversies.
The expert recommended that customers not be subjected to such an intrusive audit for withdrawing their own money.
"As long as the senior bank executives are convinced about the cash withdrawal in excess of the limit," he said, "there should not be any further audit work. And the central bank can conduct a random audit of the banks to ensure compliance with the directive."