The National Bank of Ethiopia (NBE) has issued a draft directive that excludes small and newly established financial firms from operating branches in Special Economic Zones (SEZs).
Experts suggest this decision is part of a broader strategy to encourage mergers among banks.
Released this week alongside two other directives—one addressing insurance business regulations and another related to minimum reserve requirements for banks—the draft directive stipulates that only banks with a market share of at least 2% of the total assets in the banking sector can open branches in SEZs.
According to Article 4.6.1 of the directive, a bank’s total assets must constitute at least 2% of the sector’s total assets, based on the latest fiscal year-end calculations.
Industry experts estimate that a bank seeking to operate in an SEZ would need a total capital of at least 66 billion birr, based on last year’s figures. As of the end of the 2023/24 financial year, the total assets of Ethiopia’s banking sector stood at approximately 3.3 trillion birr, reflecting a 15.2% increase from the previous year. Loans, advances, and bonds were the primary drivers of this growth, accounting for 66.9% of total assets.
However, experts note that very few banks, apart from state-owned institutions like the Commercial Bank of Ethiopia (CBE) and the Development Bank of Ethiopia (DBE), meet the 2% threshold.
The CBE, Ethiopia’s largest bank, holds 43.5% of the sector’s total assets, with its assets reaching 1.35 trillion birr as of June 30, 2024, according to its annual report and the NBE’s Financial Stability Report.
Critics argue that the new directive discriminates against smaller banks and is part of a broader effort to consolidate the banking sector.
The NBE has been granted authority under the recently approved banking business proclamation to enforce mandatory mergers, aligning with the government’s plan to strengthen the financial sector ahead of its opening to foreign players.
With 32 banks currently operating in Ethiopia, officials have emphasized the need for mergers and acquisitions to create stronger, more competitive institutions.
The NBE’s Financial Stability Report reveals that the combined assets of the five medium-sized banks in the sector account for 28.9% of the total assets, while the combined assets of the 25 small banks, excluding the DBE, account for 23.3% of the entire banking sector—an annual increase of 0.8%.
Meanwhile, the central bank has also released a draft directive revising reserve requirements, which have been amended eight times over the past three decades.
Additionally, a new corporate governance directive for the insurance industry has been proposed, requiring that one-third of board members be independent. A similar directive was introduced for the banking sector in June 2024.
“These regulatory changes reflect the NBE’s efforts to streamline and strengthen Ethiopia’s financial sector, though smaller banks may face significant challenges in meeting the new requirements,” experts say.
