Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia By Habtu Dimtsu Abraham Tesfaye

1. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia By Habtu Dimtsu Abraham Tesfaye

2. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Contents • Introductory Remark -Linkage Banking -Linkage Banking in Ethiopia • Linkage Banking: The CBE experience -Profile of the CBE -Linkage Models and Outreach • Risks and Potentialities • Concluding Remarks -Recommendation

3. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Introductory Remark Linkage Banking: • The poor constitutes more than 70 percent of the population in developing economies • Access to finance to the poor is one major aspect of the millennium development goals • The poor normally don’t have access to finance from formal financial institutions (such as banks) • MFIs and RUSACCOs can only reach 10 percent of the poor in these economies • The majority of the poor, therefore, meet their financial demand from informal financial institutions • Formal financial institutions (mainly banks) have large loanable funds and wide branch network • Informal financial institutions have limited financial and structural capacity to widen their customer base

4. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Introductory Remark Linkage Banking: • Financial linkage is, therefore, necessitated as a result of this mismatch of resources and abilities between formal and informal lenders. • The obvious advantage of the linkage is to increase access to finance to the previously unserved poor and provision of a variety of financial services • The other advantage of the linkage is reduction of transaction costs in rural credit markets • Financial linkage can be direct or indirect • In majority of the cases, the motivation for the linkage is external (driven by regulatory pressures) than internal • The state of development of a country’s economy affects the potential for financial linkage

5. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking In Ethiopia: • Financial institutions in Ethiopia: -Commercial banks -Development bank -MFIs and SACCOs -Insurance Companies -Pension fund -Informal financial institutions • Ethiopia is one of the underbanked countries( bank per capita of about 6.1 million and population to bank branch ratio of 159,000) • Total number of CBs branches in December 2007 reached 490 • More than 36 percent of the CBs branches are concentrated in Addis Ababa • Total Deposit of CBs in 2007 = 53.9 billion birr • Total Loans and Advances of CBs in 2007= 24 billion birr • Total No of MFIs in 2007 = 29

6. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking In Ethiopia: • Major source of fund for MFIs in Ethiopia are saving, paid-up equity, loan from banks, grants/donations and income from their lending activity • Not less than 40 percent of the MFIs operate in Addis Ababa. A good number of the MFIs also operate in Oromia and Amhara regional states • Based on outstanding loans balance, MFIs in Ethiopia can be broadly categorized into large, medium and small • Total saving mobilization by MFIs (End of Dec.2007)=Br.1235 million) • Total outstanding loan portfolio of MFIs (End of Dec.2007) = Br.3246 million • Outreach of MFIs of loan clients in 2007 = 1.725 million • There will be significant change in the proportion of the loans financed via mobilized deposits by MFIs during 2008-2017 • The MFIs continue to depend on other sources of fund to finance their growth

7. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking In Ethiopia: • The number of SACCOs in 2006 =5,437 with total members of 381,000 • Not less than 60 percent of Ethiopians approach informal financial institutions for loan • The loan form informal financial institutions can take the form of family loan, society based loans and loan from moneylenders • In Ethiopia there is no as such significant business linkage between CBs and other formal and semi-formal financial institutions. • CBs in Ethiopia tend to cater to mainly for large and medium enterprises as they consider the poor as credit risk

8. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking In Ethiopia: • Prior to 1991, series of efforts have been made to meet the objective of enhancing agricultural growth and reaching the poor through adequate finance • The government of the FDRE adopted ADLI strategy in which the development of a viable rural financial institutions has been one of the key agendas • The strategies designed for the purpose include, among others: -Strengthen the rural financial system by forging a strong working relationship between the formal banks and the rural financial institutions -Directly expand credit to cooperatives with strong institutional and managerial capacity through forging a strong link between rural banks and cooperatives • The recent bank-rural and microfinancing linkage practice in Ethiopia takes mainly two forms: equity investment and/or shareholding, and indirect linkage/financing • Equity investment: the case of CBE linkage with SFPI • Indirect linkage: DBE through RUFIP fund channeled to selected MFIs, and CBE and AIB linkage with MFIs

9. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Profile of the CBE: • Established in 1963 • Engage in banking activities customarily carried out by CBs • Render services to millions of its customers through its 205 branches spread across the country • Capital and reserve = 4.5 billion enabling it to provide about Birr 1 billion to a single borrower • No of staff(June 2008), about 8,000 • Total Deposit(June 2008)=36.97 billion birr, share of demand deposit(60.2 percent) • Outstanding loan balance(June 2008)= 17.3 billion birr • Loan Disbursement(2008)=13.6 billion birr

10. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Profile of the CBE: • Major sectors financed by the CBE: agriculture, manufacturing, DTS, foreign trade and Bldg and construction • Average Growth Rate(2001-2008) -Total Deposits(11.4%) -Loan Disbursement(39.3%) • The CBE managed to achieve a record profit during 2006-2008. In June 2008, the profit amounted to Br.1.86 billion birr • The CBE is launching full implementation of a BPR on its core and support activities

11. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Linkage Models and Outreach: • The CBE extends Short, Medium and long term loans • In the past, substantial amount of loans were disbursed to the agricultural sector for purchase of fertilizer and other agricultural inputs • The Bank is at the forefront of efforts to meet the objectives mentioned in the ADLI strategy of the FDRE government • The Bank established SME and agricultural loans Division to efficiently facilitate mainly rural/agricultural credit and expand outreach in this regard

12. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Linkage Models and Outreach: • Three types of linkage models are practiced in the CBE: -Equity Investment -Direct linkage, and - Indirect linkage • The Bank has involved in equity investment/shareholding of about 50 percent in the SFPI operating in Addis Ababa • The Bank provides credit to commercial farms (ranging from 3 to 8) and coffee processing cooperatives( about 35) through direct linkage financing • The Bank also extends loans to unions of cooperatives(ranging from 7 to 12) and regional governments, that buy fertilizers from the unions for distribution to farmers, using indirect linkage financing

13. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Coffee Processing Cooperatives Commercial Farms Loan Repayment Loan Facility Loan Repayment CBE Unions of Cooperatives MFIs Wholesale Loan Wholesale Loan Loan Repayment Loan Repayment Retail Loan Loan Recovery Loan Repayment Loan Recovery Wholesale Loan Retail loan Loan Recovery SMEs • Household • Cooperatives and Unions Small Farmers Regional Governments Linkage Banking: CBE’s Experience Linkage Models and Outreach: Loan Facility Loan Facility Retail Loan

14. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Linkage Models and Outreach: • Outreach: -Geographic/area coverage in four regions and one city administration; -47 unions of cooperatives(12 unions and 35 coffee processing cooperatives); -8 Commercial farms and 5 MFIs; and -Credit volume disbursement outreach increased from 1.3 billion birr in 2005/06 to 4.1 billion birr in 2008/09

15. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience CBE’s linkage and outreach in rural/agricultural credit(2008/09) Amount in millions of Birr

16. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Linkage Banking: CBE’s Experience Future plan The Bank has set a plan for the upcoming crop year to disburse about 5.1 billion birr, i.e., • Agriculture input loan for 4 regional governments( Br. 2,161,396,634); • Loans for 4 commercial farms( Birr 10,219,581); • For 9 MFIs( Birr 357,000,000); • Coffee loans for 15 farmers/cooperatives Birr 30,000,000); and • Fertilizer import term loans for 15 unions of cooperatives( Birr 2,550,000,000)

17. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Risks and Potentialities Risks: It seems a risky business to forge a linkage with rural operators, mainly MFIs due to lack of physical collateral and high administrative costs • Lack of sustainability of MFIs as most of them are sponsored and initiated by NGOs and regional governments • Governance problems of MFIs emanated from their ownership strucutre dual mission • MFIs problem in offering saleable collateral and security • The fact that the largest MFIs are region based and the risk of default if severe natural calamities occur(e.g. drought), especially in the absence of crop insurance coverage • Poor infrastructure in the rural areas and the increase in costs on part of the MFIs which will affect their cash flow and repayment to the CBE

18. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Risks and Potentialities Risks: • Lack of dependable data from MFIs for credit decisions • Absence of significant regulatory policy on part of the concerned bodies in forging a linkage between banks and MFIs

19. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Risks and Potentialities Potentialities: • Huge demand for rural finance • Information facilitation and experience sharing from MFIs which have good experience and knowledge in handling rural/agriculture related financial schemes • Credit facilities to MFIs graduating clients • Current efforts by MFIs to introduce local transfer service, housing loan and micro-bank on village banking scheme and this could help to outsource the bank’s services • High loan recovery rate on the part of MFIs

20. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Concluding Remark • The CBE is likely to be in advantageous position if it continues to forge a linkage with rural finance operators, mainly MFIs • The bank has disbursed billions of birr to these institutions though the magnitude of the loan is unmatched with the huge financing need from the rural sector • The task now is to widen the scale and cover a large number of MFIs and cooperatives in the bank’s lending package • However, priority will continue to be given to MFIs with relatively good performance as evidenced by -years of experience -outreach capacity -potential demand for credit -asset quality -operational self-sufficiency, etc • The CBE will follow gradual and learning by doing business partnership to minimize its business associated costs

21. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Concluding Remark Recommendation • Good performing MFIs need to be treated same as traditional borrowers who approached the bank for a loan • Credit needs assessment should be performed so as to identify the likely volume of credit that could efficiently be absorbed by MFIs • Detailed and comprehensive procedure manual for financing MFIs needs to be prepared • Targeted training on MF activities need to be given to the staff involved in handling MF credit • CBE’s linkage should also target towards other MF activities e.g time deposit

22. Expanding Outreach Through Linkage Banking: The Case of the Commercial Bank of Ethiopia Thank You!!