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Expanding Outreach LOANS IN ETHIOPIA

Linkage BY GEZAHEGN
Banking: The Case of the Commercial Bank of
YILMA
Ethiopia

Expanding Outreach Through Linkage

Banking: The Case of the Commercial
Bank of Ethiopia

By
Habtu Dimtsu
Abraham Tesfaye

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Banking: The Case of the Commercial Bank of
YILMA
Ethiopia

Contents
 Introductory Remark
-Linkage Banking
-Linkage Banking in Ethiopia
 Linkage Banking: The CBE experience
-Profile of the CBE
-Linkage Models and Outreach
 Risks and Potentialities
 Concluding Remarks
-Recommendation

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Banking: The Case of the Commercial Bank of
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Ethiopia
Introductory Remark
Linkage Banking:
 The poor constitutes more than 70 percent of the population in
developing economies
 Access to finance to the poor is one major aspect of the
millennium development goals
 The poor normally don’t have access to finance from
formal financial institutions (such as banks)
 MFIs and RUSACCOs can only reach 10 percent of the poor
in these economies
 The majority of the poor, therefore, meet their financial demand
from informal financial institutions
 Formal financial institutions (mainly banks) have large loanable
funds and wide branch network
 Informal financial institutions have limited financial and structural
capacity to widen their customer base

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Linkage BY GEZAHEGN
Banking: The Case of the Commercial Bank of
YILMA
Ethiopia
Introductory Remark
Linkage Banking:

 Financial linkage is, therefore, necessitated as a result of this

mismatch of resources and abilities between formal and informal
lenders.

 The obvious advantage of the linkage is to increase access to

finance to the previously unserved poor and provision of a variety
of financial services

 The other advantage of the linkage is reduction of transaction

costs in rural credit markets

 Financial linkage can be direct or indirect

 In majority of the cases, the motivation for the linkage is external (driven
by regulatory pressures) than internal

 The state of development of a country’s economy affects the potential for

financial linkage

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Linkage Banking In Ethiopia:

 Financial institutions in Ethiopia:
-Commercial banks
-Development bank
-MFIs and SACCOs
-Insurance Companies
-Pension fund
-Informal financial institutions
 Ethiopia is one of the underbanked countries( bank per capita of
about 6.1 million and population to bank branch ratio of 159,000)
 Total number of CBs branches in December 2007 reached 490
 More than 36 percent of the CBs branches are concentrated in Addis
Ababa
 Total Deposit of CBs in 2007 = 53.9 billion birr
 Total Loans and Advances of CBs in 2007= 24 billion birr
 Total No of MFIs in 2007 = 29

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Banking: The Case of the Commercial Bank of
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Linkage Banking In Ethiopia:
 Major source of fund for MFIs in Ethiopia are saving, paid-up equity,
loan from banks, grants/donations and income from their lending
activity

 Not less than 40 percent of the MFIs operate in Addis Ababa. A good
number of the MFIs also operate in Oromia and Amhara regional states

 Based on outstanding loans balance, MFIs in Ethiopia can be broadly

categorized into large, medium and small
 Total saving mobilization by MFIs (End of Dec.2007)=Br.1235 million)
 Total outstanding loan portfolio of MFIs (End of Dec.2007) = Br.3246
million
 Outreach of MFIs of loan clients in 2007 = 1.725 million
 There will be significant change in the proportion of the loans
financed via mobilized deposits by MFIs during 2008-2017

 The MFIs continue to depend on other sources of fund to

finance their growth

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Linkage Banking In Ethiopia:

 The number of SACCOs in 2006 =5,437 with total members
of 381,000

 Not less than 60 percent of Ethiopians approach informal

financial institutions for loan

 The loan form informal financial institutions can take the

form of family loan, society based loans and loan from
moneylenders

 In Ethiopia there is no as such significant business

linkage between CBs and other formal and semi-
formal financial institutions.

 CBs in Ethiopia tend to cater to mainly for large and medium

enterprises as they consider the poor as credit risk

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Banking: The Case of the Commercial Bank of
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Ethiopia
Linkage Banking In Ethiopia:
 Prior to 1991, series of efforts have been made to meet the
objective of enhancing agricultural growth and reaching the
poor through adequate finance
 The government of the FDRE adopted ADLI strategy in which
the development of a viable rural financial institutions has
been one of the key agendas
 The strategies designed for the purpose include, among
others:
-Strengthen the rural financial system by forging a strong
working relationship between the formal banks and the rural
financial institutions
-Directly expand credit to cooperatives with strong
institutional and managerial capacity through forging a strong
link between rural banks and cooperatives
 The recent bank-rural and microfinancing linkage practice in
Ethiopia takes mainly two forms: equity investment and/or
shareholding, and indirect linkage/financing
 Equity investment: the case of CBE linkage with SFPI
 Indirect linkage: DBE through RUFIP fund channeled to
selected MFIs, and CBE and AIB linkage with MFIs

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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Profile of the CBE:
 Established in 1963
 Engage in banking activities customarily carried out by
CBs
 Render services to millions of its customers through
its 205 branches spread across the country
 Capital and reserve = 4.5 billion enabling it to provide
about Birr 1 billion to a single borrower
 No of staff(June 2008), about 8,000
 Total Deposit(June 2008)=36.97 billion birr, share of
demand deposit(60.2 percent)
 Outstanding loan balance(June 2008)= 17.3 billion birr
 Loan Disbursement(2008)=13.6 billion birr
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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Profile of the CBE:

 Major sectors financed by the CBE: agriculture, manufacturing,

DTS, foreign trade and Bldg and construction

 Average Growth Rate(2001-2008)

-Total Deposits(11.4%)
-Loan Disbursement(39.3%)

 The CBE managed to achieve a record profit during 2006-2008. In

June 2008, the profit amounted to Br.1.86 billion birr

 The CBE is launching full implementation of a BPR on its core and

support activities

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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Linkage Models and Outreach:
 The CBE extends Short, Medium and long term loans

 In the past, substantial amount of loans were

disbursed to the agricultural sector for purchase of
fertilizer and other agricultural inputs

 The Bank is at the forefront of efforts to meet the

objectives mentioned in the ADLI strategy of the
FDRE government

 The Bank established SME and agricultural loans

Division to efficiently facilitate mainly
rural/agricultural credit and expand outreach in this
regard
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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Linkage Models and Outreach:

 Three types of linkage models are practiced in the CBE:

-Equity Investment
-Direct linkage, and
- Indirect linkage

 The Bank has involved in equity investment/shareholding of about 50

percent in the SFPI operating in Addis Ababa

 The Bank provides credit to commercial farms (ranging from 3 to 8)

and coffee processing cooperatives( about 35) through direct linkage
financing

 The Bank also extends loans to unions of cooperatives(ranging from 7

to 12) and regional governments, that buy fertilizers from the unions
for distribution to farmers, using indirect linkage financing

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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Linkage Models and Outreach:
Coffee

Loan Facility
Commercial Processing
Farms
Cooperative
s

Repayment
Loan Facility

Loan
Unions of
CBE
Wholesale Loan MFIs
Wholesale Loan
Cooperative
s Loan Repayment
Loan Repayment

Loan Recovery
Retail Loan
Loan Recovery

Wholesale Loan

Repayment
Retail Loan

Loan

SMEs
Small .Household
Farmers Regional .Cooperatives
Governments and Unions

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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Linkage Models and Outreach:
 Outreach:

Geographic/area coverage in four regions and one city

-
administration;

-47 unions of cooperatives(12 unions and 35 coffee

processing cooperatives);

-8 Commercial farms and 5 MFIs; and

-Credit volume disbursement outreach increased from 1.3

billion birr in 2005/06 to 4.1 billion birr in 2008/09

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Banking: The Case of the Commercial Bank of
YILMA
Ethiopia
Linkage Banking: CBE’s
Experience
CBE’s linkage and outreach in rural/agricultural
credit(2008/09)
Amount in millions of Birr

Beneficiaries Appoved Disbursed Linkage Security

Module
Regional Govt 2,161 1,472 Indirect Regional govt
guarantee

Unions of 2,200 2,100 Indirect 20% of govt

and
cooperatives merchandise

Commercial farms 9.5 9.5 Direct Buildings and

the projects

Coffee processing 24.9 24.9 Direct Clean

farmers’
cooperatives
MFIs 830 520 Indirect Regional govt
guarantee

Total 5,225 4,126

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Banking: The Case of the Commercial Bank of
Linkage Banking: CBE’s
YILMA
Ethiopia

Experience
Future plan

The Bank has set a plan for the upcoming crop year to disburse about 5.1
billion
birr, i.e.,

 Agriculture input loan for 4 regional governments( Br. 2,161,396,634);

 Loans for 4 commercial farms( Birr 10,219,581);

 For 9 MFIs( Birr 357,000,000);

 Coffee loans for 15 farmers/cooperatives Birr 30,000,000); and

 Fertilizer import term loans for 15 unions of cooperatives( Birr

2,550,000,000)

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Banking: The Case of the Commercial Bank of
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Ethiopia
Risks and Potentialities
Risks:
It seems a risky business to forge a linkage with rural operators, mainly
MFIs
due to lack of physical collateral and high administrative costs

 Lack of sustainability of MFIs as most of them are sponsored and

initiated by NGOs and regional governments

 Governance problems of MFIs emanated from their ownership strucutre

dual mission

 MFIs problem in offering saleable collateral and security

 The fact that the largest MFIs are region based and the risk of default if
severe natural calamities occur(e.g. drought), especially in the absence
of crop insurance coverage

 Poor infrastructure in the rural areas and the increase in costs on part of
the MFIs which will affect their cash flow and repayment to the CBE

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Banking: The Case of the Commercial Bank of
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Ethiopia
Risks and Potentialities

Risks:

 Lack of dependable data from MFIs for credit decisions

 Absence of significant regulatory policy on part of the

concerned bodies in forging a linkage between banks
and MFIs

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Banking: The Case of the Commercial Bank of
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Ethiopia
Risks and Potentialities
Potentialities:

 Huge demand for rural finance

 Information facilitation and experience sharing from MFIs which

have good experience and knowledge in handling
rural/agriculture related financial schemes

 Credit facilities to MFIs graduating clients

 Current efforts by MFIs to introduce local transfer service,

housing loan and micro-bank on village banking scheme and this
could help to outsource the bank’s services

 High loan recovery rate on the part of MFIs

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Banking: The Case of the Commercial Bank of
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Concluding Remark
 The CBE is likely to be in advantageous position if it continues to forge
a linkage with rural finance operators, mainly MFIs
 The bank has disbursed billions of birr to these institutions though the
magnitude of the loan is unmatched with the huge financing need
from the rural sector
 The task now is to widen the scale and cover a large number of MFIs
and cooperatives in the bank’s lending package
 However, priority will continue to be given to MFIs with relatively
good performance as evidenced by
-years of experience
-outreach capacity
-potential demand for credit
-asset quality
-operational self-sufficiency, etc

 The CBE will follow gradual and learning by doing business

partnership to minimize its business associated costs

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Banking: The Case of the Commercial Bank of
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Ethiopia
Concluding Remark
Recommendation

 Good performing MFIs need to be treated same as

traditional borrowers who approached the bank for a loan

 Credit needs assessment should be performed so as to

identify the likely volume of credit that could efficiently
be absorbed by MFIs

 Detailed and comprehensive procedure manual for

financing MFIs needs to be prepared

 Targeted training on MF activities need to be given to the

staff involved in handling MF credit

 CBE’s linkage should also target towards other MF

activities e.g time deposit

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Thank You!!

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