Central Bank “manifesto” puzzles industry

ETHIOPIA – The financial industry is bewildered with a new central bank “manifesto” authorities are calling a “guideline” setting out detailed prescriptions on how to restore good governance and fight rent seeking behaviours in banks, insurance companies and microfinance institutions.

They have instructed senior executives of these entities to submit action plans on how to ensure good corporate governance and the clean conduct of business.

Comprising nine items, the 15-paged draft “guideline” focuses on fighting nepotism, and the widespread manifestation of corrupt and unethical behaviours identified across the industry.

Authors of the document hope that this will help the financial sector meet targets designated in the second  Growth & Transformation Plan.

Among the issues to be addressed are lack of governance, poor delivery of services and the prevalence of rent seeking practices in the industries named.

Authorities at the central bank claim the financial industry is prone to the habit of poaching trained staff and executive staff.

They have thus decided to compel each company to allocate two per cent of its recurrent budget to human resource development, and submit detailed reports on the results to the National Bank of Ethiopia (NBE).

Failure to do so subjects the financial firms to penalties of unused funds to be transferred to a training centre to be operated by the central bank.

The “guideline” also lists numerous complaints directed at banks from members of the public, alleging various forms of malpractice in the provision of loans, allocation of ForEx and abuse of offices to advance individual interests.

Insurance companies are no less prone to such alleged practices as mutually damaging price wars in premiums; meeting claims on premiums not paid for; unethical ways of procuring supplies and services from third parties; and colluding to benefit from compensation paid for fraudulent claims.

Those in the microfinance industry are accused of holding on to advances to borrowers in order to get commissions and the provision of loans to those who are not targeted beneficiaries.

Authorities at the NBE want to see executives of companies begin a process of evaluation with ordinary staff members all the way to the Boards of Directors. Part of the evaluations should also be carried out with members of the public, they ordered.

They hope these evaluations could be deployed as armour to fight instances of weak governance, before compiling the required monthly reports. The authorities also hope to present their findings from these reports to a meeting among executives of the financial sector planned for every other month.

Non-compliance will subject the firms to a 10,000 Br penalty, warned central bank authorities who were unavailable to comment on both the “guideline” and the directive, despite several attempts to reach them.

But executives are puzzled about what the “guideline” is meant to accomplish, when corporate governance manuals, previous directives of the central bank and the Commercial and Criminal Codes of the country have not been effective.

Many in the industry find the way the “guideline” is authored and the terminologies used no different from what heads of conglomerates write to discipline executives and lower level staff working in their subsidiaries.

Those in the industry see a central bank that has over-stepped its role rather out of desperation at seeing unbecoming practices rampant in an industry with a paucity of funds and a crunch in the ForEx reserve.

A president of a private bank believes the source of the problem in relation to hard currency is not mismanagement, but rather the shortage, which caused a degree of manipulation.

“The directive does nothing to overcome the shortage,” he said.

Senior executives of banks are in consultation with their legal experts and are planning to submit a letter of reservation to the authorities of the central bank, according to industry sources.

“We’re reviewing the document,” a member of the Ethiopian Bankers’ Association told Fortune. “We’ll submit a written comment on the draft.”

The essence of their reluctance to accept the “guideline” is in their view that the Central bank is demanding of them what is not in its mandate, according to industry leaders.

“They want us to have a social code overriding consideration of business objectives,” said a senior executive of a private bank.

Another bank’s executive would like to see the central bank concentrate on policy matters as it is meant to do.

“I’m afraid it [the guideline] will further constrain the industry’s competitiveness,” he told Fortune.

A senior insurance executive finds the NBE’s list of requirements “a bit too exaggerated and tedious. It may backfire on the regulatory body,” he warned.

The resistance from the sector comes at a time when critics argue that the banking sector in particular is tightly regulated; there are 62, 24 and 20 directives issued to govern banking, insurance and microfinance institutions, respectively.

One such directive came out last week, instructing banks to serve applicants for Forex on a “first come, first served basis.”

“Impractical!” declared another senior banking executive.

Authorities at the Central bank appear to have been troubled with recent incidents where some of the private banks were found to hold on to transfers of Forex to importers’ clients abroad, although importers here pay the equivalent of hard currency in Birr.

This has damaged the credibility and trustworthiness of the country in bilateral trade, according to those in the industry.

The new draft directive prohibits banks from releasing cash against document (CAD) to customers without effecting payment for supplies based on the modality of payment consistent with international practices.

It also prohibits banks from approving purchase orders under CAD without first collecting the full amount in Birr.

“The central bank is at the driving seat of the problem,” said a businessman.

“And it is looking elsewhere for solutions. The more bureaucratic hurdles, the higher corruption there is.”

February 8, 2016; http://addisfortune.net/articles/central-bank-manifesto-puzzles-industry/

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