Introduction
On July 19, 2024, the National Bank of Ethiopia (NBE) issued Directive No. SBB/92/2024, updating the regulatory framework for the investment activities of banks. This Directive supersedes and repeals the previous Directive No. SBB/65/2017. The primary objective of the recent Directive is to ensure financial stability by encouraging banks to focus on their core banking operations while effectively managing investment-related risks.
Rationale Behind the Directive
From the reading of the preamble, overall purpose and objective of the Directive, it can be inferred that the rationale behind the recent Directive includes maintaining the integrity and stability of the banking sector through prudent risk management.
The Directive sets stringent investment limits to ensure banks effectively manage investment risks, minimizing financial instability. It encourages banks to concentrate on core activities such as debt financing and interest-free banking, preventing overextension into non-banking activities that is feared to pose significant risks.
Additionally, the Directive intends to promote the banks’ investment in capital market services by encouraging the development of capital market service providers, aiming for a more diversified and competitive financial sector. This diversification is thought to mitigate risks and foster resilience, though it also acknowledges the competitive challenges banks face from capital market operations. Overall, the Directive underscores the need for banks to prioritize their core business activities, ensuring efficient and effective resource allocation, thereby supporting economic growth and stability.
Limits on Investments and Financing
The Directive outlines specific limitations on the types and amounts of investments banks can undertake:
- Insurance Companies: Banks may hold up to 5 (five)% equity share of the total subscribed capital of an insurance company.
- Capital Market Service Providers: Banks are permitted to acquire up to 100 (one hundred) % equity shares in a capital market service provider.
- Financial Infrastructure: Banks can hold equity interests in financial infrastructure entities. From the reading of the Directive, it seems no limitation is imposed on the amount of equity banks hold in financial infrastructure.
- Non-Banking Businesses: Banks may hold up to 10 (ten) % equity shares of non-banking businesses, except for insurance companies.
Prohibitions
To mitigate risks, the Directive establishes several prohibitions:
- Insurance Business: Banks are not allowed to engage directly in the insurance business.
- Capital Market Service Providers: Banks cannot operate directly as capital market service providers.
- Non-Banking Business: Banks are prohibited from engaging in non-banking business activities.
- Credit Rating Agencies: Banks cannot hold equity shares in credit rating agencies.
- Aggregate Equity Investments: Banks are restricted from investing more than 15 (fifteen) % of their total capital in non-banking businesses.
- Real Estate: Banks are limited to investing no more than 10 (ten) % of their total capital in real estate acquisition and development without NBE's permission, unless the investment is for banking business premises.
Reporting Requirements
The Directive imposes specific obligation upon banks to report any equity investments to NBE within 30 (thirty) working days, with exceptions for investments in financial infrastructure and interest-free banking services. Investments made before the new Directive took effect are exempt from the new limitations.
Conclusion
The Directive is part of the NBE's ongoing efforts to strengthen the regulatory framework for Ethiopia's banking sector. By setting clear limitations and prohibitions on bank investments, the Directive aims to enhance financial stability and encourage banks to concentrate on their core operations, such as debt financing and interest-free banking, while effectively managing investment risks.
However, it should also be noted that the Directive empowers NBE to waive the prohibitions and limitations upon reasons it may deem necessary.
July 23rd, 2024
Disclaimer: This legal update is intended for informational purposes only and does not constitute legal advice.
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