Insurers furious over gov’t bond stance

The insurance industry express their anger on the decision of the government that forces insurance firms to buy 15 percent bond from Development Bank of Ethiopia (DBE) from their total net profit. They said it seems like a command economy behavior that the government has passed a decision on private property in that manner.
Recently, the government through National Bank of Ethiopia (NBE), a financial industry regulatory body, amended existing rules and directives or introduced new monetary policies and directive to control the inflationary behavior in the market and improve the financial industry.
Similarly, the NBE Board announced that it will continue to closely monitor economic and financial developments and stands ready to utilize all available policy tools at its disposal to ensure price and financial stability consistent with its legal mandate.
Under article 4.1 of ‘investing in Development Bank Bond Directive No.SIB/54/2021/’ NBE order all insurers except the state owned Ethiopian Insurance Corporation, stating that an insurance company shall invest an amount equal to a minimum of 15 percent of its net income in DBE Bond.
Article 4.2 of the directive says an insurance or Ethiopian reinsurance company shall invest the amount stated under article 4.1 within 90 days after the close of its financial year.
The Bond shall have a maturity period of three years and shall pay a bond rate at least two percent points higher than the minimum interest rate paid on saving deposit at the time of issuance. Currently, the minimum deposit rate is seven percent that means that on this rate the DBE Bond interest rate is nine percent.
The directive that becomes effective as of September 1 stated that DBE Bond shall be paid annually.
However, the sector commentators and CEOs of insurance industry did not accept the decision that the government took. Capital learnt that the association, Association of Ethiopian Insurers, would discuss the issue and pass its statement in the near future.
One of the oldest and biggest insurers CEO told Capital that the directive may not have bold and direct effect on insurance firms compared with its outcome on shareholders.
“As per the directive of NBE the amount that would be invested Bond is the property of shareholders who may secure through annual dividend, due to that it is significantly affects our shareholders,” a senior insurance industry export and CEO elaborated.
According to another big insurance CEO, the effect on shareholders like who invest their dividend on other investment activities or for those who are using their annual profit from their share to lead their life would be much higher.
Those who have big share on the insurance company and shall get significant dividend may invest their profit on other investments that is vital for the economy, he says “but the current decision would affect their investment activity directly and by large the economy.”
Similarly those who have small share but use their dividend to lead their day to day life as a pension would fall victim to the NBE directive.
“In general it is a decision that would be seen on the command economy. The government shall not pass a decision on private property but if it happens it is a tendency of socialist mindset,” an expert on the sector said.
An insurance CEO said that the decision has disappointed shareholders, “it would be better that the government shares its view and convinces shareholders on their assembly to surrender the amount of money to invest on the Bond rather than pass such kind of decision.”
“The government may say that the government has this and that project and it needs investment like bonds which investors in the insurance industry shall invest,” the CEO added.
On the other hand, the new decision was also described as a directive that would have pressure on insurance industry expansion.
It is common that at the general assembly the board of directors and the leadership of a given insurance company tabled a proposal of capital expansion from annul profit, experts in the sector explain, “at this point of view the expansion rate shall be reduced or capital expansion payment would take more time since the volume of dividend shall contract because of DBE Bond investment that have a maturity of three years.”
Similarly under ‘investment on DBE Bonds Directive No.SBB/81/2021/ NBE introduces that commercial banks shall annually invest a minimum of 1 percent of their outstanding loan and advance in DBE Bond until the aggregated bond holding equals 10 percent of their outstanding loans and advances.
In its meeting on August 27, 2021, the Board of Directors of the National Bank of Ethiopia decided to modify the reserve requirement, the interest rate on individual banks’ lending facility, the forex surrender requirement, and the forex retention rights.
The statement announced after the meeting stated that outstanding credit to the private sector grew at 40.8% (year on year) in July, and disbursement during the month grew at about 125 percent, compared to the same period of last year.
“Such a rapid growth of credit poses significant risks to price and financial stability, in the context of a rising inflation which reached 26.4 percent (year on year) in July. Consequently, the Board has decided to raise the reserve requirement on birr and foreign currency deposit liabilities held by commercial banks to 10 percent, from the current level of five percent, effective on September 1st, 2021,” it added. Banks are given a transition period of 3 months to meet the 10 percent reserve requirement.
Regarding interest rate on banks’ individual lending facility, it says that while the purpose of the individual banks’ lending facility is to help commercial banks meet unexpected liquidity needs by borrowing from the NBE, some banks are seen repeatedly accessing the facility to finance their aggressive lending, “hence, the Board has decided to increase the interest rate on facility to 16 percent, from its current level of 13 percent to discourage overutilization of the facility for lending purposes.” According to the NBE board statement, the measures are expected to contain banks’ ability to lend aggressively, bring the growth of credits to a healthy level, and help control inflation.

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