The Development Bank of Ethiopia (DBE) has been proactive of late in creating innovative new policies that seem quite promising on paper. If implemented in an efficient and diligent manner, these shifts in priorities and procedures have great potential to not only boost balance sheets that had been lingering in the red for too long, but also catapult the Bank closer in line with its mission; to aid in Ethiopia's agricultural-led development.

In a fledging financial sector such as is found in Ethiopia, any forward-looking managerial decisions are more than welcomed and will have ripple effects through an industry struggling to deepen the financial instrument offerings needed by the burgeoning entrepreneurial class. While many of the services and strategies known throughout the developed world have failed to take root in the country, growth is impeded. It is only when leaders emerge that examples may be followed and progress realised.

The new management that took control of DBE in early 2006 must be credited with developing good policies. Their work, however, is cut out for them in implementing the ambitious schemes in an effective manner.

The process of conducting the primary business of banks, dolling out loans for promising projects, has many variables to tinker with in order to insure profitability and repayment. DBE has now established five such adjustments that may turn out to be a viable medicine to its past performances.
 

Encouraging regional development by giving out long term loans to the states for infrastructural development follows upon great achievements by this government in promoting transportation network development outside the capital. Roads have been laid to facilitate investments in the hinterlands; it is just a beginning though.
 

The lower interest rates offered by DBE on these regional states loans may be viewed as giving a jump-start to economies struggling to get products to markets and exploit rich resources.

While around 95pc of Benishangul Gumuz Regional State residents earn their living from oil seed production, studies have shown that underproduction due to a lack of market access has led to lost potential income. Granting access to buyers will encourage investment and innovation of efficient means of production for these poor farmers.
 

As Addis Abeba's population spirals out of control, beyond the capacity of the city's infrastructure, housing, services and elusive to any reliable estimates of its actual size, incentives for the herds of rural to urban migrants to stay put is a market-based solution that deserves recognition, especially in a country that has too often resorted to heavy-handed government regulation to tackle problems. If people in rural areas continue to increase incomes and buying power as indirect beneficiaries of the loans, the hopes the metropolis holds of a better life will begin to diffuse in the minds of people more eager to stick to their birthplace and conduct the beginnings of the development that natives of a region best know how to go about.

While critics have criticised the government in general, and this particular DBE policy as being conducive to furthering run-away inflation, estimated at around 20pc, the urban centres have been the hardest hit. Therefore, extending credit to regional states may not be so detrimental, and has the potential rather to tap into unexplored markets.
 

The Bank's latest credit policy revision, the seventh in its history, should throw-up some red flags in the minds of inflation concerned observers though. Previously, borrowers were required to post 30pc of the loan amount in a blocked account, while DBE financed the remaining 70pc of the project. The option to put up as collateral a 30pc equity contribution represents a creative approach to financing projects so long as due diligence is taken on the part of loan evaluators at the Bank. The policy exposes DBE to more risk and requires a deeper examination of the potential for companies to produce profits.

On the balance, the innovation of the policy will only outweigh the inflationary effects on the economy as a whole, that has registered high growth based on highly speculative construction and infrastructure development, of flooding the market with more credit will only produce positive results if the Bank is particularly careful in forecasting reports.

One particularly crucial policy that must become more of a trend than an exception in the banking industry in order to build better partnerships between banks and entrepreneurs is the recent collateral loan system DBE has developed. Taking as models many Asian banks that have reaped profits by injecting working capital into companies with non-performing loans (NPLs) who have profit potential but have run into difficulty for often unforeseen circumstances, DBE is showing the will to follow-up on its loan decisions with confidence.

The previous trend of DBE was to concentrate on recapping losses through painful foreclosures on NPLs, a category on DBE's balance sheet that was too thick to consider its initial loan approval system solid. The new policy seems to be governed by more confidence in the capital projects the Bank is funding and more receptive to the unforeseen circumstances, such as rising input costs or changes in international markets, that can make good projects turn sour, shocks that may be weathered with closer follow-up on DBE's chosen partners.
 

It remains to be seen whether the Bank has the capacity and resources to correctly evaluate the potential recipients of capital injections. The idea, though, is a positive movement towards becoming more involved in the life of a project the Bank deems to have potential.

Moreover, the Bank is changing its focus sectors in a positive way. In a country that earned 424.1 million dollars from coffee exports, creditors should be hungry to fund projects capitalising on Ethiopia's rich potential, both in terms of comparative advantages in land and labour, as well as marketing strategies exploiting the birthplace of coffee. The product was strangely missing from DBE's priority sectors until recently, however.

While much of the potential for coffee exports has been realised, notwithstanding the rather disappointing conclusion to the Starbucks trade marking battle, Ethiopian soil is still ripe for further development. It is in this area, beginning to develop the coffee production in zones that have potential but are not tapped due to infrastructural impediments and are characterised by small-scale farming, that DBE finds a good niche, considering its country-wide development strategy and pairing with the regional loans.

The most promising of DBE's new policies, and certainly with the most potential to be emulated by other financial institutions, is the drastic reduction in its loan approval system in terms of time and procedures. Reducing the time from around six months to a more palatable 34-day goal will do wonders for capitalising on projects that may capture greater profits if implemented before market conditions change. Moreover, slashing the number of procedures from around 200 to a mere single-digit figure signals the cutting of bureaucratic red-tape rife in the country, but certainly undesirable to a Bank that must act quickly to be an attractive source of credit for the most promising endeavours.
 

The loan approval system comes as part of DBE’s finalised Business Process Re-engineering (BPR) that all state institutions are meant to be undertaking. While the Ministry of Trade and Industry (MoTI) shined as the first to begin implementation, others have delayed progress on a project that seeks to streamline services. In this sense, DBE should be recognised as an institution that is working to undertake the reforms necessary to make the state services more efficient, though such changes in the private sector would have come about through a more natural market-driven catalyst.
 

DBE has shown prowess in setting its policies; businesses now must test the waters to see if the decisions will be followed with proficient implementation. If the Bank continues in this vain, the growth Ethiopia is experiencing will be enhanced and development will take more needed steps in the regions.