How Ethiopia’s Largest Lender Almost Crippled The Banking System

Commercial banks operating in Ethiopia were almost crippled by a liquidity crisis last week after state-owned bank and largest lender  in the country, Commercial Bank of Ethiopia (CBE), released a backlog of pending application letters of credit that had been delayed by nearly nine months.

According to Addis Fortune, almost all commercial banks in the East African nation of 93 million people found themselves confronted with a liquidity crises as their customers suddenly demanded to withdraw close to $2 billion that was approved by CBE on Jan. 1.

The massive withdrawals squeezed liquidity in established commercial banks such as Awash, Wegagen, United and Abyssinia.

“Although I acknowledge the seasonality of the issue, two-thirds of the current crisis is caused by the decision of the CBE,” a senior executive at one privately-owned commercial bank told Addis Fortune.

The sudden demand for huge sums of cash by a bank’s customer is usually referred to as “a run on a bank” and could stall a country’s payment system if it happens on a wide scale.

It is not clear why CBE delayed the letters of credit to loan applicants.

Close to $210 million was transferred from private banks to the CBE last week alone, causing panic among baking executives that their entities will be unable to meet immediate and short-term obligations.

This necessitated for a meeting on Thursday last week between executives of commercial banks and central bank officials to resolve the systemic crunch.

Ethiopia, which has one of the fastest economic growth rates in Africa, has been slowly opening up its financial sector that is closely held by the state to private and foreign investors. Bank are however still required to invest the equivalent of 27 percent of their loan portfolio in government debt securities.

Less than 15 percent of the East African nation’s population has access to a bank account.

Most banks in Ethiopia are state-owned and for a while the country has been closed off from foreign banks seeking to venture into its fast growing market.

The country is however now courting foreign investors from as far as China and Europe to participate in the growth story of one of the continent’s fast emerging economies.

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