The National Bank of Ethiopia (NBE), which regulates the financial industry, has ratified a new directive that allows banks to allocate 25% of their capital to other commercial ventures.

According to the revised 2017 ‘Limitation on Investment of Banks’ Directive No. SBB/65/2017, banks can now allocate a quarter of their total capital to other businesses, such as the insurance industry and capital market services.

The new NBE directive, primarily intended to enable banks to form subsidiary companies, states that any bank can acquire up to 100% equity shares in a capital market service provider, excluding credit rating agencies, as per Capital Market Proclamation No.1248/2021.

In addition, banks are permitted to own up to 10% of the equity shares in a single non-banking company that is not in the insurance industry, or to hold ownership interests in financial infrastructure.

The current version of the rule does not change the previous one, which allowed banks to hold up to 5% of an insurance firm.

Article 4.3 of the new directive, released on Friday, July 19, states that a bank’s total equity interest in all non-bank enterprises, including insurance firms and capital market service providers, should not exceed 15% of its total capital, with an increment of five percent.

According to the previous law, banks could invest up to 10% of their capital in non-bank businesses, such as the insurance industry.

According to article 4.4, a bank cannot acquire or develop real estate for more than 10% of its total capital without first obtaining clearance from the National Bank, except for its own business premises.

For the previous statute, the article is almost identical.

The directive defines total capital as the sum of a bank’s paid-up capital, legal reserve, and any additional unencumbered reserve.

Subsidiary incorporation is included in the newly proposed Banking Business Proclamation.

The new banking legislation has several important elements, including allowing local financial institutions to establish subsidiaries and specialized financial institutions, and allowing foreign corporations to enter the market.

The draft proclamation that will amend the proclamation no. 592/2008, issued in 2008 and amended in 2019, will allow banks to form subsidiaries.

It has been stated that the involvement of existing deposit-taking banks is crucial to bring the upcoming capital market, Ethiopian Securities Exchange, to life.

However, their involvement must be separate from their existing business.