Banking sector faces liquidity risks due to high depositor concentration, Central Bank Report Warns

The financial sector is said to be threatened by a significant depositor concentration in the banking sector.

A new report launched by the National Bank of Ethiopia (NBE), a central bank, aims to address risks and promote financial stability in Ethiopia.

The report, ‘Financial Stability Report’, examines developments and risks in Ethiopia’s economy in general, and in the financial sector in particular. It evaluates the risks that the financial sector, including the banking industry, faced in the fiscal year that ended in June of last year.

It states that the high concentration of deposits and the difference in maturities between deposits and loans may create liquidity risk in the banking sector, despite the existing high liquidity ratio.

According to the report, at the end of June 2023, 56.3 percent of the total banking sector deposits were held by only 0.5 percent of the total banking sector depositors. “In addition, the liquid assets of banks only included a small share of high-quality liquid assets (cash).”

“As a result, some banks were facing real-time transaction-level liquidity shortages,” it added.

The report elaborates that the liquidity stress test considers the aggregate impact on the banking sector liquidity if the top ten depositors in each bank suddenly withdraw all their money.

It states that the stress test results show that the banking sector liquidity ratio would fall from 24 percent in the pre-shock situation (based on data as of the end of June 2023) to 13.0 percent, slightly below the 15 percent regulatory minimum requirement.

However, some of the banks would be in a worse situation than the industry average. “Even though the systemic bank, Commercial Bank of Ethiopia (CBE), shows resilience to the shock, 18 banks would fail to meet the regulatory minimum requirement – four medium-sized banks and 14 small banks.”

These results suggest that many Ethiopian commercial banks are highly sensitive to liquidity risk from sudden withdrawals by a few big depositors. The banking industry has also become more sensitive at the end of June 2023 than in the previous year.

The report also reveals that the banking sector’s loans and advances are concentrated in the hands of a few large borrowers.

It states that the top ten borrowers from the banking industry held 23.5 percent of total loans and advances of the banking industry at the end of June 2023, a significantly higher share than a year earlier, which was 18.7 percent.

The report said that even though borrowers with an individual credit exposure of above 10 million birr constituted only 0.5 percent of the total, they held almost three-quarters (73.7 percent) of the entire banking sector loans – again, a higher share than the year before. Virtually all loans (99.8 percent at the end of June 2023) were held by borrowers from urban areas.During the same period, the ratio of loans to deposits rose by 0.9 percentage points to 60.6 percent. Meanwhile, the ratio of loans and bonds to deposits dropped slightly to 90.3 percent. “This is still very high, though, and suggests that nearly all depositors’ money is held by borrowers rather than being liquid assets, which could lead to a liquidity problem under unfavorable circumstances.”

Total deposits at end-June 2023 reached 2.2 trillion birr, accounting for 24.8 percent of GDP, while the total loans and bonds of banks amounted to 1.9 trillion birr, representing 21.7 percent of GDP. Total bank deposits grew by 24.6 percent, reflecting rapid growth in both saving and time deposits. Similarly, loans and bonds grew by 24.3 percent. However, GDP increased at a faster rate than the share of deposits, causing it to decrease from 28.2 percent in the previous year to 24.8 percent by end-June 2023. The share of loans and bonds also decreased from 16.0 percent to 14.3 percent.

Total assets of commercial banks reached 2,845.9 billion birr by end-June 2023, marking a 19.9 percent increase from the previous year.

By end-June 2023, the total assets of the financial sector amounted to 3.12 trillion birr, which was 20.4 percent higher than the previous year. These assets accounted for 35.8 percent of GDP, compared to 42.1 percent at the end of June 2022.

Tighter regulatory standards on credit and deposit concentration risks are necessary, given the high concentration of loans and deposits. NBE intends to mitigate market risks by implementing prudent measures and enhancing governance standards and practices.

The report classified commercial banks into three categories based on their assets: large, which includes only CBE; medium, which includes five banks (Awash, Abyssinia, Dashen, Hibret, and Cooperative Bank of Oromia); and small, which includes the remaining financial firms.

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