Banks move into new business

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The National Bank of Ethiopia (NBE) is set to roll out a new directive that will make it easier for banks to become directly involved in non-banking businesses, such as agriculture, commerce and industry.
The directive that will replace a previous one issued in 1996, entitled ‘Limitation on the Investment of Banks’, allows banks to directly engage in businesses not related to banking, provided that they do so in a joint venture or partnership agreement with their customers, through an interest free banking service.
“We expect the directive to be ratified in the coming few weeks,” President Abi Sano of Oromia International Bank said. “It will help us in our endeavor to be the best service provider in the Islamic banking sector,” he added.
NBE in 2011authorized interest free banking, as part of the services given by a conventional bank and not as an independent operation in and of itself.  Zemzem Bank, which began mobilizing funds in December 2010 to establish a purely interest free bank, was deterred by this restriction, and was later forced to dissolve.
In interest-free banking, funds are mobilized and advanced without payment or receipt of interest, in accordance with Islamic principles.

Instead, such banks depend on investments in client businesses, equity financing and charges for services rendered, to mobilize funds.
“It is this restriction that the new draft directive is trying to resolve,” the president said.
In the 1996 directive, banks were allowed to invest only up to 20 percent of the company’s share capital in a single non-banking business and total holdings in such businesses can only reach 10 percent. However the new directive will increase banks involvement in the investment sector.
Currently, insurance companies enjoy relatively more freedom in investing.