Coins: Associated with the Poor

The Commercial Bank of Ethiopia is the biggest financial institution in the country. Its total asset is over Birr 50 billion; its total capital Birr 4.7 billion as at June 30, 2008—the last day of Ethiopia’s fiscal year—and boasts a total of 8,000 employees, most of whom are well-trained professional bankers.

During the 2007/08 fiscal year, CBE was able to make a gross profit of Birr 1.9 billion, thereby showing a 60% increase over the gross profit it had earned at the end of the previous fiscal year. It has also done a laudable job of upgrading the quality of its assets by reducing the rate of its non-performing loans to an all-time low of 5.3%. Furthermore, it has been working in full gear to expand its branch network. Accordingly, it now has a total of 205 branches, though it had only 176 during the same period two years ago.

The world is fast coming together and being, more or less, like one village. That, nonetheless, has brought with it certain challenges—one of which is the need for adopting internationally accepted best practices. To that end, the CBE is in the process of transforming itself by reengineering its business processes and by automating its operations. The CBE’s recent performance—in terms of its business profitability, asset quality and branch network has led us to believe that it (the CBE) is on the right track and that it will not be very long before it can attain its stated vision of being a world-class commercial bank and thereby move with the times, in tandem with the rest of the world.

In addition to making strides by operating as efficiently and effectively as some of the well-known banks in the world are, the CBE has certain responsibilities that it cannot loose sight of. It is entrusted with the responsibility of making a significant contribution to the national development effort. That means, it has to find creative ways and means of financing small-holder farmers, given the fact that they constitute 85% of the Ethiopian population and agriculture is the mainstay of the country’s economy and a source of livelihood for close to 90% of the peoples of Ethiopia.

The CBE cannot stand by and watch passively as Ethiopia’s small-holder farmers and owners of cottage industries and small-scale businesses grope in the dark for want of financial support, simply because they cannot meet all the requirements that other applicants for credit must meet. Even though these groups of people, in general, fall short of being credit-worthy, as per the conventional banking measurements, CBE cannot ignore them. On the contrary, the fact that the Ethiopian economy is based on agriculture compels it to finance the provision, for instance, of fertilizer and selected grain seeds to these farmers. That in turn goes a long way in availing the urban Ethiopian population with the agricultural products without which it cannot survive. 

The CBE has devised a mechanism whereby it can provide input loans to small-holder farmers, in collaboration with the regional governments. Accordingly, CBE’s current agricultural input loans, including loans for the purchase of fertilizer, account for Birr 4 billion.

Another thing that our Bank has been doing to rise to the challenge that rural financing normally poses is creating a linkage with a number of microfinance institutions (MFIs) in order to provide them with the funds they need to lend to the poor but productive segments of society in the rural areas of the country. In the last two years alone, the CBE has extended loans amounting to more than Birr 800 million to five MFIs for on-lending purposes. In addition to earmarking these funds for the MFIs, CBE’s Management has seen it fit to reduce the collateral requirement that they have to meet, as well as the interest rate. 

Ethiopia is an agrarian society. Some of its towns can, therefore, be defined as nothing more than bigger rural villages. After all, they are effectually characterized by a rural and/or a semi-urban economic lifestyle. Cognizant of the fact that the dwellers of such places require certain financial services, CBE has established a specialized unit called “Small and Medium Enterprises (SME) and Agricultural Unit.” The unit is, of course, entrusted with the responsibility of meeting the financial needs of the petty trade operators in these towns and the small-holder farmers in the nearby rural areas.

Actually, the CBE has been demonstrating its commitment to improving the living conditions of these people by extending to them loans for the construction of low-cost housing units as well. Its current commitment in this regard translates into a little over Birr 9.3 billion—which will benefit a total of 400,000 residents in the various types of towns.

CBE has all along been happily financing mechanized farming. As you no doubt know, these farms use advanced technology and selected inputs. That means, the people in the rural villages where they operate will benefit from the knowledge and technology transfer that that invariably results from. Besides, they get to secure part-time employment. Put differently, CBE’s financing of mechanized farming has a multiplier effect.
 
Financing the construction of low-cost housing units for use by the rural and semi-urban Ethiopian population, too, has a multiplier effect, in that, in addition to making some of them owners of the units, it creates for many employment and market opportunities—the latter being strictly for the suppliers of local construction materials.

In short, by financing such endeavors and by expanding its branch network to the remote parts of the country, the Commercial Bank of Ethiopia is trying to cater to the rural parts of Ethiopia and thereby seize the opportunity that such financing presents to it (the CBE). Still, there is no denying the fact that the CBE alone cannot meet all the requirements of these people; nor would it be fair to expect it to shoulder all the risks that financing the “unbankable” is bound to entail due to the obvious limitations of the formal banking system. 

Regional and international organs interested in financing the rural parts of Ethiopia ought to join hands with the CBE and share with it these risks through various schemes, including guarantee schemes, and help it properly finance rural Ethiopia.

The Commercial Bank of Ethiopia will do everything it can to rise to the challenge of financing these segments of society with a view of  addressing the challenges of rural financing in Africa.

By Ato Abie Sano,

President, Commercial Bank of Ethiopia.