Transcript internet business loan

By: Sewagegn Chane
ANNUAL EAST AFRICA FINANCE SUMMIT
(ANNUAL EAFS)
DECEMBER 2016

Vibrant financial system is thought to be a necessary
condition for economic growth and development
.Because

Strong financial intermediation system facilitates the
flow and efficient allocation of funds throughout the
economy.

Financial intermediaries such as banks play crucial
role in connecting parties with surplus fund and those
who lack it.
08/12/2016
2
Financial intermediaries facilitate the smooth flow of
transactions in an economy
 Promote technological innovation, and
 contribute to economic development.
 Ethiopia’s financial sector consists of formal,
semiformal and informal institutions.
 The major formal financial institutions are banks,
insurance companies and microfinance institutions
 Banks are the most dominant financial institutions in
the country with nineteen (18) banks operating in the
country

4/3/2017
3

Commercial banks branch network has considerably
increased from 246 branches (in 1999/2000) to 2,208
branches (in 2013/14).

Population per commercial bank branch ratio has
declined from around 224,719 per 1 branch (in
1999/2000) to around 51,000 people per 1 bank
branch (2013).
4/3/2017
4

Insurance companies’ branch network has also increased
from 79 branches (in 1999/2000) to 332 branches (in
2013/14);

population per insurance branch had declined from 659,341
to 1 branch (1999/2000) to around 270,000 people per one
(1) branch (in 2013/14).

MFIs has increased from around 16(in 1999/2000) to over
31(in 2013/14).

Semi-formal institutions (such as saving and credit
cooperatives) and other traditional informal institutions is
also growing.
4/3/2017
5

Deposit
mobilized
by
commercial
banks
and
specialized banks altogether has increased from
around 27.98 billion birr (in 2002/03) to around 128.79
billion birr (in 2013/14).

Loan disbursement has increased from around 6.2
billion birr (in 2013/14) to 59.96 billion birr (in
2013/14) )

Collection has increased from around 5.2 billion birr to
51.74 billion birr between the same period.

Outstanding credit has also increased from 31.6 billion
birr (in 2003/04) to 168.36 billion birr (in 2013/14).
4/3/2017
6

The saving mobilization, credit provision, asset
building and capital level of MFIs and Saving &
Credit
Cooperatives
have
also
increased
considerably over time

Financial services/products such as ATM, internet
banking, agent banking, funeral insurance etc are
also introduced

The aggregate/growth/ domestic saving to GDP
ratio of the country has reached about 22.5% as of
2013/2014.
4/3/2017
7

Despite the improvements registered in the financial
sector of the country over a decade and so, the
sector in general and the banking industry in
particular has remained at a relatively low status
thus far.

E.g. the banking industry has problems of capital
inadequacy/weak
liquidity
position/,
limited
accessibility & outreach, small banking & narrow
range of services
4/3/2017
8

The provision of ranges of financial services such as
loans, savings products, insurance and payment
services etc to all types of businesses is indispensable
in
promoting
equity,
in
creating
adequate
employment, in alleviating poverty and in ensuring
broad based & sustainable growth/development and
transformation.

Yet, the supply of loan/credit facilities do not seem to
parallel with the ever growing demand for loan in the
economy.
4/3/2017
9

There
is
measured
still
by
considerable
the
gap
resource
between
gap
saving
(as
and
investment growth rate).

E.g. domestic saving grew by about 31% of GDP as
of 2013/14, as compared to 40.3% growth rate for
investment, with 8.6% gap (MoFED, 2014).
4/3/2017
10

The gap in the growth rate of saving and investment
is also increasing overtime as the pace of investment
growth continued to surpass the pace of saving
growth.

Indicators
of
existing
excess
loan
demand
by
businesses in the economy.

E.g. increasing loan demand regardless of interest
rate, growing use of loan services from informal
institutions such as ‘Iqub’, ‘iddir’ and illegal ones
such as ‘Usury’.
4/3/2017
11

inadequacy of banks’ budget& loanable funds

approval of lower amount of loan than what is
required by customers/businesses/

inability to release the approved loan timely

increasing banks’ credit rationing practices

high collateral requirement and sudden changes in
credit policies/requirements

lack of transparency & efficiency among others.
Collectively, these problems have given rise to
growing customers/businesses/’ dissatisfaction over
banks’ loan disbursement 4/3/2017
processes/practices
12
Objectives

The general objective of the study is to assess factors
that affect business loan delivery in Ethiopia.
Specifically, the study addresses the following issues.
1. Identify and describe factors affecting business load
demand in Ethiopia,
2. Assess and describe factors affecting business loan
delivery by financial institutions such as banks in
Ethiopia,
3. Indicate issues of policy consideration.

4/3/2017
13
The scope of the study is to assess factors affecting
business loan demand, and its delivery in the
country with specific reference to public banks.
 the performance of private banks and MFIs is slightly
touched
 the performance of saving and credit cooperatives
and other informal institutions such as Iquib, Idir etc
is not addressed in this study.

4/3/2017
14
 Theoretically,
bank borrowing and lending
practices results from the interaction
between demand and supply factors in the
financial market.
 These factors/variables could be of different
nature
 variables of scale
 variables related to financing conditions


variables related to the position of households and
corporations
factors related to structural changes in the banking
sectors among others
15
4/3/2017
Methodology
 Desktop
review of relevant theoretical and
empirical literatures and periodic performance
reports of financial institutions such as banking
sector and MFIs.
 Both quantitative and qualitative data or
information on variables of importance in
relation to loan delivery are presented using
graphs and tables, and analyzed/described
accordingly.
4/3/2017
16
Factors Affecting Business Demand for Bank Loan

Theoretically, businesses’ demand for (bank) loan is
affected by many factors, some of which are macro
level and others are micro level.

Macro variables are interest rate, the prospect of
economic activity, inflation expectation, level of
financial sector development, access to foreign bank
lending.

The micro level factors include performance of
business (like return on investment), amount of
investment required, nature of business activity,
banks loan delivery system 4/3/2017
17
 Monetary
policies have direct effect on the
banks’ loan delivery to businesses/borrowers,
and thereby affect the real economy(bank
lending thesis)
 Monetary policy affects bank loan delivery in
part through its impact on bank equity capital
( bank capital channel thesis)


Bank’s lending depends on its financial structure, on
availability of lending opportunities and on market
interest rate (Modigliani-Miller thesis)
Loan delivery to businesses is interest rate.
(Buttari,1995),
4/3/2017
18
Empirical evidences

Credit standards (like internal guidelines or criteria
that guide a bank’s loan policy),

Credit terms and conditions (such as interest rate,
collateral requirements and maturity period) as
important variables. Likewise,

Interest rate margin, corporate net worth and bank
profitability are some of the important factors that
affect (bank) lending to businesses
4/3/2017
19
Chapter 3:- Trends of Loan Delivery in
Ethiopia
 The
trend of domestic credit, total
deposit and broad money supply has
considerably grown over time.
 The increasing trend of domestic credit
shows expansion of credit supply over
time in the country.
 The increment of domestic credit goes
with that of deposit and broad money
supply
4/3/2017
20
250000
200000
150000
100000
50000
0
Total Net domestic Credit(tndc)
Total Deposite(td)
Broad Money Supply/M2/(bms)
4/3/2017
21
 There
is strong positive correlation between
total net domestic credit, total deposit and
broad money supply.
 Correlation total net domestic credit and
broad money supply is 0.9967
 Correlation total net domestic credit and
total deposit is 0.9959.
 Similarly, total deposit is also strongly
correlated with broad money supply (M2)
4/3/2017
22
Growth Rate
50
45
40
35
30
25
20
15
10
5
0
2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/
05
06
07
08
09
10
11
12
13
Gross GDP Growth Rate 22.9 23.6 30.6 44.4 35.1 14.2 33.5 45.6 15.5
Real GDP Growth Rate 11.8 10.8 11.5 10.8
8.8
12.6 11.2
8.5
9.7
Investment Rate
26
27.6 24.2 24.5 24.9
27
27.9 34.6
33
Gross Domestic Saving
9.5
8.3
12.4
9.2
9.8
9.3
12.8 16.5 17.7
Gross National Saving
24.1 22.2 27.5 23.2
23
24.8 27.3
28
28.5
Gross Domestic Credit
22.3 11.5 17.1 29.8 39.5 23.4
4/3/2017
23
 Growth
domestic credit has remained below
investment rate for most of the years under
consideration.
 This could be partly due to high inflation rate
(which can be implied from the difference
between gross GDP growth rate and real GDP
growth rates).
 Low saving growth rate (though increasing)
could continue to constrain the supply of
financial credit to businesses/investors.
4/3/2017
24
Amount in Millions of Birr
Trend of Reserve Requirement & CBs' Reserve
30,000.00
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
2007
2008
2009
2010
2011
2012
2013
/08
/09
/10
/11
/12
/13
/14
Reserve Requirement(CB's) 9,112.90 11,183.3 14,368.0 20,495.2 18,080.6 11,708.8 14,479.4
Actual Reserve (CB's)
15,233.0 19,569.4 20,620.9 27,757.3 21,791.8 21,160.9 24,493.3
Excess Reserve (CB's)
6,120.10 8,386.00 6,252.90 7,262.10 3,711.30 9,452.10 10,013.9
4/3/2017
25
The legal reserve requirement for commercial
banks has shown a declining trend from around
2010/11 (10% to 5%),
 which could have positive effect on the CB’s
ability to deliver loan as lower proportion of the
deposit they collected,
 Reduced commercial banks’ liquidity
requirement reduced to 15% (from its previous
level of 20%) of net current liabilities
 Such policy amendments are meant to
encourage banks’ lending ability by improving
their liquidity position.

4/3/2017
26
The trend of commercial banks’ level of actual
reserve has remained above the legally required
level,
 indicating excess reserve held by commercial
banks, which also has an increasing trend.
 The different indicators of unsatisfied demand
for bank loan in the economy
 High increasing loan request regardless of level
of interest rate
 increasing demand for informal financial service
such as ‘Iqub’, and that of illegal services like
Usury), this apparently seems a paradox.

4/3/2017
27
 The
amount of loan disbursements by public
and private banks has increased considerably
over the period 2004/05 to 2013/14.
 The share of loan disbursed by public banks
has increased from around 51% (in 2004/05)
to 65% (in 2013/14).,
 The share of private banks had declined from
around 49%(in 2004/05) to 35%(in 2013/14).
(relative to public banks share of loan
disbursement)
4/3/2017
28






The trend of loan disbursement by CBs in the country
is generally increasing over time. E.g.
trend of loan disbursement to industry sector has
shown a considerable increase since 2009/10.
The loan disbursement to domestic trade and housing
& construction has shown a modest increment.
loan to agriculture and international trade has been
increasing though it has exhibited some fluctuating
trend since recently.
The amount of loan disbursement to sectors such as
transport& communication, and hotel & tourism has
shown limited increment
That of mining, power & water resources and loan to
individuals has remained very low and stagnant
4/3/2017
29
25000
20000
15000
10000
5000
0
Agriculture
Industry
Domestic Trade
International Trade
Hotels and Tourism
Transport and Communication
Housing and Construction
Mines, Power and Water Reso.
Personal
4/3/2017
30
Conclusion
 Factors affect business loan demand, and its
delivery by banks are
 tendency of banks to focus on very limited
number of customers
 unfavorable credit terms and collateral
requirements
 lengthy collateral valuation, dissatisfaction of
the customers in loan delivery /disbursement/
 lack of transparency and inefficiency in
acquiring and administrating loan & foreclosed
properties.
4/3/2017
31
shortage of loanable fund
 limited accessibility & availability of
financial services/products
 higher bank concentration & limited
competition among banks seem to have
affected loan demand and supply in the
country.
 Moreover, factor like absence of secondary
capital market and the associated difficulty
of bond and equity financing practice,

4/3/2017
32
 shortage
of venture capital
 government deficit financing
 low capital base of banks
 limited application/availability of
technology & technology based
services/products
 information asymmetry and high interest
rate spread are also among the factors
believed to affect the demand for and
supply of credit in the country.
4/3/2017
33
To improve banks loan delivery management
system the possible measures are: Credit terms/standards/stringent bank loan
policy & others (collateral requirement,
maturity period, attractiveness of cash flows,
credit worthiness, nature of business&
technology) need revisit
 The pros and cons of the existing bank
interest rate need to be investigated
carefully
4/3/2017
34
 Increase
bank capital/asset position and
their access to various loanable funds
should be considered
 Focusing on organizational set up & the
working rules thereof, work process
arrangements, and behavioral factors
among others
 Promote financial sector competition, and
thereby promote financial deepening
need to be considered
4/3/2017
35
 Financial
intermediaries such as banks
need to adopt technology based advanced
risk management techniques,
 Reduce information asymmetry in the
financial sector seems essential in
boosting the demand for and supply of
loan services
 Expanding financial literacy are among
the issues that deserve attention.
4/3/2017
36
4/3/2017
37