The National Bank of Ethiopia (NBE) has introduced a new directive aimed at regulating the investment activities of banks within the country. This move is part of the NBE’s broader strategy to deepen Ethiopia’s capital markets and ensure the stability and soundness of the banking sector.
Key Highlights of the Directive
Equity Investment Limits:
The directive imposes limits on the equity investments banks can hold. Banks are now restricted to holding up to 5% equity in a single insurance company. However, they are permitted to acquire up to 100% equity in capital market service providers, excluding credit rating agencies. Additionally, the aggregate equity investment in non-bank businesses must not exceed 15% of a bank’s total capital.
Real Estate Investment:
Banks are restricted from investing more than 10% of their total capital in real estate acquisition and development unless they receive prior approval from the NBE. This measure is intended to prevent excessive exposure to the real estate market and ensure banks maintain diversified investment portfolios.
Interest-Free Banking:
For banks engaged in interest-free banking, the directive mandates that all asset exposures to such activities be treated as large exposures. This is subject to the NBE’s Large Exposures to Counterparty or Group of Connected Counterparties Directive, which aims to manage the risk associated with significant financial exposures.
Reporting Requirements:
Banks are required to report any equity investments, except those in financial infrastructure and interest-free banking services, to the NBE within 30 working days of making the investment decision. This reporting requirement is designed to enhance transparency and enable the NBE to monitor investment activities effectively.
Impact and Expert Opinions
The new directive is part of the NBE’s ongoing efforts to strengthen the regulatory framework governing the banking sector. By promoting prudent investment practices and diversification, the directive seeks to mitigate risk exposure and ensure financial stability. Experts believe these measures will help banks focus on their core operations, such as debt financing and interest-free banking, while effectively managing investment-related risks.
The move is also expected to encourage domestic lenders to increase their stakes in investment banks, brokerages, and other capital market operators, thus contributing to the growth and development of Ethiopia’s nascent capital markets.
The NBE’s new directive represents a significant step towards enhancing the stability and soundness of the banking sector while fostering the growth of Ethiopia’s capital markets. By imposing clear guidelines and restrictions on bank investments, the directive aims to promote a balanced and diversified financial system that can support the country’s economic development.
