A group of financial experts is advocating that a project to build an Ethiopian Export-Import (EXIM) Bank with an alliance of the country's big financial institutions should be initiated, in part to make letters of credit (L/Cs) more available for Ethiopia's businesses and especially its small- and medium-sized enterprises (SMEs).

Foreign exchange shortages, government regulation and control, limited financial infrastructure and bureaucratic challenges have all, for several years, left the process of obtaining L/Cs in Ethiopia burdened with bureaucratic hurdles.

Compounding these difficulties, the financial experts say one of the main factors making L/Cs hard to come by is the increasing charges levied by local banks on their clients for conducting business abroad for service charges that international correspondent banks collect.

Easing the burden

In an article written for Ethiopia's Capital News, Muluken Yewondwossen says that financial sector analysts claim that the payments made to foreign banks for their services represent an extra burden on a nation that is already severely short of hard currency.

They propose that, in addition to other options and temporary fixes, the establishment of the EXIM Bank is crucial to controlling this issue.

L/C proposal

In Yewondwossen's article, veteran financial industry commentator and consultant Eshetu Fanataye, presents a proposal in which he suggests that small banks, whose L/C and transaction volume is very small, will greatly benefit if a local EXIM Bank is established to coordinate bulk payments to foreign banks.

Currently, he says small banks are paying four to six per cent for partners abroad. He argues that if the country's larger banks such as Commercial Bank of Ethiopia, Awash, or Dashen, would join with a locally formed EXIM Bank, then comparatively cheaper correspondent banking services for small banks to favour local businesses could become a possibility.

Forex and government controls

While easing correspondent banking arrangements may help, Ethiopian businesses will still be faced by perhaps the most significant issue behind L/C shortages, which is Ethiopia's chronic lack of foreign exchange which L/Cs typically require to facilitate international trade.

The Ethiopian government may therefore also need to look at loosening strict controls over the banking sector, including foreign exchange allocation.

This centralised control has often led to inefficiencies and delays in the issuance of L/Cs while the National Bank of Ethiopia, the country's central bank, has implemented tight controls on forex allocation to prioritise essential imports like fuel, pharmaceuticals, and machinery, often at the expense of SMEs that need L/Cs for their operations.

Muluken Yewondwossen's article, Mergers, EXIM Bank: Experts propose solutions to curb Ethiopia's high foreign transaction costs, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.