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Country Commercial Guides FY 2000: Eritrea Report prepared by U.S. Embassy Asmara, released July 1999 Note*

CHAPTER VIII: TRADE AND PROJECT FINANCING

THE ERITREAN BANKING SYSTEM CAN BE CHARACTERIZED AS "STRONG BUT PRIMITIVE". THE HOUSING AND COMMERCE BANK OF ERITREA, THE AGRICULTURE & INDUSTRY DEVELOPMENT BANK AND THE COMMERCIAL BANK OF ERITREA OPERATE ALONGSIDE THE CENTRAL BANK OF ERITREA. THE COMMERCIAL BANK OF ERITREA DOMINATES THE COMMERCIAL BANKING SYSTEM IN THE COUNTRY. PRESENTLY THERE ARE NO FOREIGN OWNED BANKS, OR BRANCHES OF FOREIGN BANKS, IN THE COUNTRY; NOR IS THERE A DEPOSIT INSURANCE SCHEME IN ERITREA'S BANKING SYSTEM. THE CENTRAL BANK OF ERITREA, THOUGH A GOVERNMENT ENTITY, IS INDEPENDENT FROM THE MINISTRY OF FINANCE; ITS GOVERNOR AND POLICY COMMITTEE FORMULATE AND IMPLEMENT POLICY WITH INPUT FROM THE MINISTRY OF FINANCE. THE CENTRAL BANK OF ERITREA LICENSES AND REGULATES THE OTHER BANKS IN ERITREA AS WELL AS THE NATIONAL INSURANCE CORPORATION OF ERITREA. IN TURN AN INDEPENDENT LOCAL ACCOUNTING FIRM AUDITS THE CENTRAL BANK OF ERITREA. ITS FINANCIAL STATEMENTS ARE COMPLIANT WITH INTERNATIONAL STANDARDS.

SINCE THE MAY 1, 1998 FLOAT OF THE NAKFA THERE ARE NO FOREIGN EXCHANGE CONTROLS. BANKS ARE ALLOWED TO SET UP FOREIGN CURRENCY ACCOUNTS AND MAKE FOREIGN CURRENCY LOANS. THE CENTRAL BANK MONITORS THE DAILY EXCHANGE VERY CLOSELY AND HAS FOUND THAT THE MID RATE HAS FLUCTUATED VERY LITTLE SINCE THE FLOAT, LESS THAN HALF A PERCENT, COMPARED WITH 2.7% FLUCTUATION FROM THE NAKFA LAUNCH IN NOVEMBER 1997 TO THE FLOAT ON MAY 1ST. THE CENTRAL BANK HAS CORRESPONDING BANKING ARRANGEMENTS WITH CITIBANK IN NEW YORK AS WELL AS A NUMBER OF EUROPEAN BANKS. THE CENTRAL BANK DOES MAKE SHORT-TERM ADVANCES TO THE GOVERNMENT FOR THE PURPOSE OF SHORT FALL FINANCING. THE BORDER CONFLICT WITH ETHIOPIA NEGATIVELY AFFECTED THE FOREIGN CURRENCY RESERVE OF THE COUNTRY RESULTING IN A SUBSTANTIAL SHORTAGE OF HARD CURRENCY. THIS HAS CAUSED A SUBSTANTIAL FLUCTUATION OF THE NAKFA (30.0%) AGAINST THE U.S. DOLLAR IN THE UNOFFICIAL EXCHANGE MARKET.

THE COMMERCIAL BANK OF ERITREA'S TOTAL ASSETS AMOUNTED TO 7.3 BILLION NAKFA OR ABOUT U.S.$ ONE BILLION AS OF JUNE 1998. SURPRISINGLY, THE COMMERCIAL BANK HAS A HIGH DELINQUENCY RATE BUT A LOW DEFAULT RATE; THIS PHENOMENA IS DUE TO THE PHYSICAL GEOGRAPHY OF THE BORROWERS, IN RELATION TO THE CLOSEST BRANCH, RATHER THAN THE INABILITY OF THE BORROWER TO SERVICE HIS OR HER DEBT. ITS ASSETS ARE VERY LIQUID, WITH A LOAN TO DEPOSIT RATIO OF 27%. APPROXIMATELY 20% OF THE COMMERCIAL BANK'S LOANS ARE MADE TO THE GOVERNMENT OR GOVERNMENT ENTITIES AND 80% ARE MADE TO PRIVATE BORROWERS. THE LARGEST PRIVATE BORROWER IS THE PFDJ OR ITS SUBSIDIARIES. THE BANK LENDING POLICY TENDS TO BE VERY CAREFUL, AS ILLUSTRATED BY THE LOAN TO DEPOSIT RATIO. ANOTHER REASON THE LOAN TO DEPOSIT RATIO IS SO LOW IS THE LACK OF SKILLED PERSONNEL TO MAKE THE LOANS. BECAUSE THE SALARIES ARE NOT COMPETITIVE ALL THE BANKS IN ERITREA HAVE EXPERIENCED A BRAIN DRAIN TO THE PRIVATE SECTOR.

THERE IS NO PRIME LENDING RATE IN ERITREA; THE VARIABLE LENDING RATE IS BASED UPON THE TYPE OF ENTERPRISE FINANCED. PRIORITY IS GIVEN TO PROJECTS DEALING WITH FOOD SELF SUFFICIENCY, EXPORT DEVELOPMENT AND IMPORT SUBSTITUTION. PREFERENCES ARE DONE IN TERMS OF THE LENDING RATE, FROM A MODEST 8.5% FOR THE ABOVE PROJECTS TO 12% FOR DOMESTIC IMPORTS. THE MARGINAL COST TO THE BANK IS RECKONED TO BE 7.2%, SO LENDING RATES ARE A BARGAIN.

NEARLY ALL IMPORT FINANCING IS DONE ON A LETTER OF CREDIT BASIS, THERE ARE VIRTUALLY NO OPEN ACCOUNT TRANSACTIONS AT THIS PRIMARY STAGE OF BANKING DEVELOPMENT. AT THE TIME OF WRITING THE CCG THE US EXPORT-IMPORT BANK (EXIM BANK) DOES NOT YET PROVIDE COVERAGE FOR ERITREA. HOWEVER, OPIC NOW INSURES U.S. INVESTMENTS.