MFIS transition to banks triggers financial sector dips

The evolution of some dominant microfinance institutions (MFIS) to banks fizzle the number of MFIS in the sector. Following the green light from the National Bank of Ethiopia (NBE), financial sector supervisory body, for MFIS to graduate to banks, the financial institutions are now changing their structure to provide fulfilled financial services.

So far Oromia Credit and Savings Institution, Amhara Credit and Savings Institution and Somali Microfinance Institutionhave been transformed to banks in the form ofsiinqee, Tsedeyandshabelle banks; of which Shabelle is an interest free bank.

These three former MFIS had significant contributions in the sector, while as per the NBE rule they have to continue to provide financial service for the greater mass. According to the NBE latest economic evaluation document that was reviewed in the third quarter of the 2021/22 fiscal year, following the transition of three Mfisto banks, the number of MFIS has declined to 37 in the reporting quarter.

Hence, their savings deposit declined by 44.6 percent to 26.3 billion birr compared with the previous quarter. Similarly, their total outstanding credit shrank by 40.1 percent to 35.2 billion birr while total asset dipped to 52.8 billion birr, showing a 43.1 percent quarterly decline. Their total capital shrank by 47.4 percent to 11.6 billion birr compared to the preceding second quarter of 22 billion birr. As of June 30, 2021 the five largest MFIS; Amhara, Dedebit, Oromia, Omo and Addis Credit and Savings Institutions accounted for 84.8 percent of the total capital, 88.8 percent of total deposit, 82.7 percent of total credit and 84.3 percent of total assets of MFIS.

In related developments, in the third quarter of the past fiscal year NBE’S deposit liabilities has surged by 42.6 percent compared to same quarter of last year due to a change in the Bank’s monetary policy to increase reserve requirement ratio from 5 percent to 10 percent, which was applied at the first quarter of the 2021/22 budget year and was effective with a three months transitional period.

However in the second week of June, 2022 the reserve requirements of banks were revised to be reduced to 7 percent, which is a new rate when compared to the preceding experience. According to the NBE report that was issued last week, the expansion of the reserve requirement reached 149.8 billion birr which is an incline of39.9 percent compared with 107.09 billion birr of March 2021.