Insurance companies are required to invest at least 40pc of their admitted assets in treasury bills (T-bill), according to a new circular issued by the National Bank of Ethiopia (NBE). Signed by Fikadu Digafie, vice governor and chief economist at the central bank, the letter was dispatched three weeks ago informing the insurers to invest the value in T-bills starting from November.
Three months ago, the central bank amended the Investment of Insurance Funds Directive, which required insurers to invest no less than 60pc of their admitted assets of the general insurance funds in treasury bills and bank deposits including checking, savings and time deposits. The directive allowed the insurers only to invest 10pc of their assets in buildings.
"We noticed that most of the companies were depositing the money into banks," Fikadu told Fortune. "We find it necessary to transfer the money into a treasury bill to support the monetary policy."
Last week, the central bank gave training to the staffs of insurance companies. Assefa Sumoro, a capital market development advisor at NBE, was in charge of the training.
Insurance executives, already discontented with the Investment of Insurance Funds Directive and claiming that it did not give them room to invest in areas with a good return, are unhappy with the new rule.
The directive does not seem to understand the nature of the insurance business, according to a senior executive at one of the insurance companies.
"The core insurance business doesn't have much profit," the senior executive told Fortune. "Thus, we make a profit from non-insurance businesses such as investments in shares, properties and time deposits."
The yield rate of treasury bills is far below the time and savings deposits, which often bear more than 10pc a year, according to the senior executive.
Fikadu says that the decision might affect the companies, but the impact is not significant.
"We're using it to balance the macroeconomic instability by financing the budget deficit and controlling inflationary pressure," said Fikadu, who argues that the 28-day and three-month T-bills have a yield rate of eight percent and 28pc, respectively.
Previously, the average weighted yield of the T-bills stood at 1.42pc, which is far lower than the minimum deposit interest rate in the market that stands at eight percent. However, the central bank reformed the T-Bill market, making it so that the market determines the yield rate. The move is aimed at attracting banks and insurance companies as well as individuals to participate in the primary market through auctions.
During the first quarter of this fiscal year, the central bank has sold 33.4 billion Br worth of T-bills. The budget deficit has been fully covered by the revenues generated from the sale of treasury bills, according to Yinager Dessie (PhD), governor of the central bank, who gave a briefing to the media a few weeks ago.
"The Ministry of Finance has borrowed nothing from the central bank, unlike previous times," Yinager told the media.
On behalf of the Ministry of Finance, the central bank has been issuing four types of T-bills with maturities of 28, 91, 182 and 364 days based on the borrowing demand of the Ministry and the forecasted liquidity situation.
The total amount of T-bills sold during the fourth quarter of the past fiscal year was 20.5 billion Br, 83.5pc lower than a year ago. Non-bank institutions bought T-bills valued at 14.9 billion Br, while the remaining balance was sold to banks. Outstanding T-bills at the end of the quarter reached 28.5 billion Br, indicating a 79.4pc annual decrease. Average weighted T-bill yields during the quarter reached 6.6pc, which was significantly higher than a year earlier due to the change in policy stance.
The 18 operational insurance firms had 29.1 billion Br in assets as of the end of the last fiscal year, of which 26.7 billion Br of it was from the general insurance business.
The vice governor and the chief economist say that the government does not expect much money from the insurance companies. Rather, it is using the opportunity to make the companies ready for the capital market that is set to be launched soon.
"Since we're heading to launch a capital market," said Fikadu, "we expect insurance companies to have a great contribution to it."
The measure will seriously hit insurers' interest income, which accounted for 40pc of their underwriting surplus in the middle of this year, according to Abdulmenan Mohammed, a financial statement analysis.
"Tough competition in the insurance business combined with this measure will have an impact on the performance of insurance companies," he said.
The measure shows the government is trying hard to fund budget deficits through the sale of treasury bills, but forcing insurance companies to invest in these bills is contrary to the spirit of the financial sector reforms that Ethiopia is undertaking, according to Abdulmenan.
"Incentivising the insurance companies should be the option," he said.
Eyesuswork Zafu, the board chairperson of United Insurance, also says that the decision is not the right one.
"The law doesn't even explain the basis of the decision," he told Fortune.
Eyesuswork also argues that the insurance industry should not be regulated by the central bank but rather by a board-led autonomous agency, commission or authority for effective operation and regulation.