National Bank of Ethiopia Issues New Directive to Limit Bank Investments

The National Bank of Ethiopia (NBE) has issued a new directive aimed at regulating the investment activities of banks operating in the country. The “Limitation on Investment of Banks Directive No. SBB/92/2024” sets clear guidelines and restrictions on the types of investments banks can make.

The directive is intended to ensure sound and prudent practices in bank investment activities, promote diversification, and manage risk exposure. It also seeks to encourage bank investment in capital market service providers while ring-fencing banking business from capital market operations.

Key highlights of the new directive include:

Equity Investment Limits: Banks are limited to holding up to 5% equity in a single insurance company and up to 100% equity in a capital market service provider (excluding credit rating agencies). Overall, a bank’s aggregate equity investment in non-bank businesses cannot exceed 15% of its 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 obtain prior approval from the NBE.

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, subject to the NBE’s Large Exposures to Counterparty or Group of Connected Counterparties Directive.

Reporting Requirements: Banks must report any equity investments, except in financial infrastructure and interest-free banking services, to the NBE within 30 working days of the investment decision.

The new directive is part of the NBE’s ongoing efforts to strengthen the regulatory framework for the banking sector and promote financial stability in the country. Experts believe the directive will help banks focus on their core debt financing and interest-free banking operations while managing investment-related risks effectively.