1. Introduction
The Banking Business Proclamation that has amended Proclamation No. 592/2008, i.e., Proclamation No. 1159/2019 came into force as of September 9th 2019 (herein after the amendment), which is attached herewith. In its preamble the amendment states the two reasons that necessitated its enactment: namely, lifting the legal restriction that prohibits foreign nationals of Ethiopian origin not to invest in the banking sector and including new provisions that contributes to safety, soundness and effectiveness of banks as well as consumer protection and to clarify unclear provisions of the amended Proclamation. We will delve into the amendments from the perspectives of these two reasons.
2. On the Lifting of Legal Restrictions on Investment by Foreign Nationals of Ethiopian Origin
2.1. The provision of Article 9 of Proclamation No. 592/2008 that used to prohibit foreigners and foreign nationals of Ethiopian origin not to invest in banks is amended so as the prohibition only relates to foreigners. On foreigners, the provision of Article 15 (1) of the amendment, which is added as new sub-article, explicitly prohibits “foreign nationals or organizations fully or partially owned by foreign nationals not to open banks or branch offices or subsidiaries of foreign banks in Ethiopia or acquire the shares of Ethiopian banks”.
2.2. The amendment has defined “Foreign national of Ethiopian origin” by cross-referring it to Proclamation No. 270/2002 (Proclamation Providing Foreign Nationals of Ethiopian Origin with Certain Rights to be Exercised in their Country of Origin). Article 2 (1) of Proclamation No. 270/2002 has defined Foreign national of Ethiopian origin as “a foreign national other than a person who forfeited Ethiopian nationality and acquired Eritrean nationality, who had been Ethiopian national before acquiring a foreign nationality; or at least one of his parents or grandparents or great grandparents was an Ethiopia national.”
2.3. As per Article 9 of the amendment, “foreign nationals of Ethiopian origin or an organization owned fully by foreign nationals of Ethiopian origin or jointly by foreign nationals of Ethiopian origin and Ethiopian nationals are allowed to acquire the shares of an Ethiopian bank or open a bank in Ethiopia.” However, foreign nationals of Ethiopian origin who holds a share of bank directly or indirectly by holding a share in another organization that holds a share in a bank, is required to pay the values of the shares only “in foreign currencies” and yet such shareholder is entitled to get the dividend earned from the shares in a bank, or the proceeds from the transfer of shares in banks or proceeds from the sales or liquidation of a bank or any other payments “in local currency (in Birr) and the shareholder is not allowed to repatriate any asset or interest obtained in this manner.” In relation to the investment in a bank by foreign nationals of Ethiopian origin, the national bank of Ethiopia is mandated to issue directives (Article 9 (4) of the amendment).
3. On the Inclusion of New and Clarifying Unclear Provisions
3.1. The definition that was given to “company” is re-amended by the amendment so as it achieves the aim of the amendment to allow investment by foreign nationals of Ethiopian origin in banking business. Accordingly, it is defined as “a share company as defined under the Commercial Code of Ethiopia, in which the capital is (a) fully owned by Ethiopian nationals or foreign nationals of Ethiopian origin or jointly owned by Ethiopian nationals and of foreign nationals of Ethiopian origin; or b) organizations fully owned by Ethiopian nationals or foreign nationals of Ethiopian origin or jointly owned by Ethiopian nationals and foreign nationals of Ethiopian origin and registered under the laws of and having its head office in Ethiopia.”
3.2. Article 2 (9) of the amendment has widened the definition of “financial institution” so as it includes “capital goods finance company, reinsurer, micro insurance provider and digital financial service provider”. In addition, as per the 2 (2) (f) of this amendment the provision of “digital financial service” and “agent banking” are recognized as additional banking business activities. “Digital financial service” is defined as “financial service including payments, remittances and insurance accessed and delivered through digital channels” (Article 2 (21) of the amendment).
3.3. Article 3 (1) of the amendment prohibits provision of banking business or provision of digital services in Ethiopia without obtaining a banking business license or authorization from the National Bank of Ethiopia, the regulator of banking business. As per Article 3 (3) (g) of the amendment, banks are prohibited not to register its amended Memorandum and articles of Association without obtaining the prior written approval of the regulator. As per Article 3 (3) of the amendment, the regulator is also empowered to issue a directive “on short time saving mobilization campaigns for a short period and/or cash collection services at the customer’s premise.”
3.4. The provision of Article 22 (1) of Proclamation No. 592/2008 envisaged the possibility of giving financial guarantees by banks as per the terms and conditions of the directives to be issued by the National Bank of Ethiopia. As no definition was given to “guarantee” by Proclamation No. 592/2008, its amendment under its Article 2 (20) has decided to define it as “written promise made by a bank to a person to meet an obligation if another person fails to meet his obligations” and Article 22 (1) of Proclamation No. 592/2008 is redefined just to use the word “guarantee” instead of “financial guarantee”. In the same way, the provision of Article 22 (2) that used to mandate the National Bank of Ethiopia to issue directive on “non-interest-bearing deposit mobilization” is rephrased to refer “interest-free deposit mobilization” by the amendment. Similarly, the definition given to “loan" or “advance” by the provision of Article 2 (13) of Proclamation No. 592/2008 is re-written with the view of adding the phrase “in line with provisions of relevant law” to the phrase “a lease financing transaction”. Finally, sub-article 3 is added to Article 22 with the view of prohibiting banks not to “…grant loans against the security of their own shares.”
3.5. The provisions of Proclamation No. 592/2008, puts various limitations on “directly” or “indirectly” owning of shares of banks by “influential shareholder”. However, as no definition was given to what constitutes “indirectly owning of shares of a company”, the provision of Article 2 (24) of the amendment has clarified it to meant “owning share of a company holding direct ownership in a bank.”
3.6. Proclamation No. 592/2008 used the phrase “in the normal course of business” (of banks) in many instances, without defining it and the provision of Article 2 (25) of the amendment has defined it to refer to “transaction in full compliance with the bank’s policies and procedures and without any preferential treatment in line with market terms and conditions.”
3.7. The provision of Article 14 (1) of Proclamation No. 592/2008 required a director to be a person with honesty, integrity, diligence and good reputation “to the satisfaction” of the National Bank and the amendment rephrased it so as such person meets “the qualification requirements to be determined by a National Bank directive”. Similarly, the provision of Article 14 (4) (c) of Proclamation No. 592/2008 that mandated the National Bank of Ethiopia to issue directive on “the duties, responsibilities and good corporate governance of the board of directors of bank” is rephrased by the amendment as “the duties and responsibilities of board of directors and manner of good corporate governance of banks.” Likewise, the provision of Article 17 (2) (b) of Proclamation No. 592/2008 that has defined what constitutes “sufficient cause” for suspension or removal of a director, a chief executive director or a senior executive officer of a bank for “any action detrimental, in the opinion of the National Bank of Ethiopia” is amended to refer to “any action, in line with a directive to be issued by the National Bank” that is deemed to be “detrimental to the stability or soundness of the financial sector, the economy or the general public interest…” Equally, the provision of Article 28 (4) of Proclamation No. 592/2008 that entitles the National Bank of Ethiopia to collect any information from banks “as it may deem appropriate” is rephrased by the amendment so as it entitles the National Bank of Ethiopia to collect any appropriate information from banks “in line with the requirements of a directive to be issued” by it.
3.8. Article 15 (3) of Proclamation No. 592/2008 prohibited a director or chief executive officer of another financial institution not to be a director of a bank. The first part of the amendment to this provision has excluded the inclusion of chief executive officer of another financial institution from serving as director of a bank; however the second part of the amendment has maintained its prohibition on a business entity or a company in which such director or chief executive officer holds ten percent or more equity interest not to serve as a director of a bank.
3.9. The provision of Article 23 (1) of Proclamation No. 592/2008 that mandated the National Bank of Ethiopia to “direct banks to prepare financial statements in accordance with the international financial statements standards, whether their designation changes or they are replaced, from time to time” is deleted as whole by the amendment. Similarly, the provision of Article 24 (3) of Proclamation No. 592/2008 that empowered the National Bank of Ethiopia to “issue directives from time to time on the minimum professional experience and knowledge required of external auditors appointed to perform audits of banks” is appropriately deleted by the amendment, as this power is bestowed onto the Accounting and Auditing Board of Ethiopia, which is established as per Council of Ministers' Regulation No. 332/2014.
3.10. The provision that requires government banks to conduct their meetings to approve their financial statements within four months from closing their financial year and that obliges them to publish their financial statements within two weeks from the date of the approval of their financial statements by their board of directors, is added as Article 28 (4) of the amendment to Proclamation No. 592/2008.
3.11. The amendment to provision of Article 32 of Proclamation No. 592/2008 has added a bank becoming “illiquid” or “insolvent” or a bank’s failure “to abide by laws and National Bank’s directive” as additional reasons for “revocation of license of banks”. The provision of Article 2 (23) of the amendment has defined “illiquidity” as “financial condition of a bank where such bank becomes unable to meet its immediate obligations.”
3.12. Provision that entitles the National Bank of Ethiopia to issue directive on minimum security measures expected of banks, on minimum conditions for consumer protection expected of banks and on minimum conditions to provide digital financial services are added under Articles 53, 57 and 58, respectively, of the amendment. The newly added Article 56 requires banks to provide suitable banking services to their disabled customers and mandates the National Bank of Ethiopia to issue directive “to ensure suitability of banking services to disabled customers…
3.13. The other newly added Article 54 of the amendment empowers the National Bank of Ethiopia to issue directive that entitles it, “…at any time to direct a bank in writing to withdraw, amend, or refrain from issuing a paid radio or television announcement, a poster, billboard, brochure, circular, or other document, and a paid advertisement in a regularly published newspaper or magazine that it considers to be false, misleading, deceptive, or offensive”. Similarly, the newly added Article 55 of the amendment entitles banks to outsource their “critical or important functions” as per the terms and conditions of the directive to be issue by the National Bank of Ethiopia, and these functions are defined as “deposit mobilization, granting loans, remittance, international banking and other function as determined by the National Bank.”
3.14. A provision that authorizes the National Bank of Ethiopia to issue directive on additional conditions of licensing, supervisions and requirements to establish interest free bank is provided under Article 59 (1) of the amendment. This provision has defined “interest free bank” as “a company licensed by National Bank of Ethiopia to undertake only interest free banking business”. Sub-article 2 of Article 59 of the amendment has maintained the right of the National Bank of Ethiopia to issue directive to regulate a banking business related to interest free deposit mobilizations and fund utilizations within a conventional banking.
3.15. Finally, the amendment has introduced the concept of “sub-branches” under its provision of Articles 28 (2) (a) and 31 (5), without defining it. The amendment has also repealed the concepts of “inspection”, “inspect”, “inspector” and “inspected” and replaced it by the concepts of “examination”, “examine”, “examiner” and “examined”, respectively.
Posted on 07 December 2019
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 Banking Business Proclamation_Amendment_Proclamation No. 1159_2019.PDF | 2076 kB |