Hybrid banks—institutions transitioning from microfinance providers to commercial banks—are urging the National Bank of Ethiopia (NBE) to develop differentiated non-performing loan (NPL) regulations. They argue that the current uniform 5% NPL cap for all commercial banks stifles lending to the agricultural sector, compromising efforts to expand financial access where it is most needed.
The NBE’s 5% NPL limit, designed to protect the financial system and depositors, has become a significant barrier for hybrid banks serving high-risk yet vital agrarian markets. Due to agriculture’s vulnerability to unpredictable events like droughts, pests, and price fluctuations, loans to smallholder farmers often exceed this threshold, forcing lenders to curtail credit availability in rural areas.
Firew Bekele (PhD), Vice President of Corporate Strategy & Business Development at Omo Bank—a former microfinance institution now operating as a hybrid bank—highlighted the dilemma: “When we provide loans to smallholder farmers, crop loss due to unforeseen droughts can rapidly increase the NPL rate. Under current regulations, this risks limiting our ability to lend to the very communities we aim to serve.”
Under the prevailing directive, hybrid banks face the same 5% maximum NPL ceiling as established commercial banks. Experts warn that this inflexible threshold compels banks to withdraw from critical agricultural and small enterprise lending, thus depriving the sector of essential capital for modernization and growth.
Industry analysis confirms a sharp decline in agriculture loan shares for hybrid banks—from 57% of total loans before transformation to 32% a year later—directly attributed to the NPL cap. This contraction threatens Ethiopia’s agricultural development as farmers and cooperatives struggle to secure financing.
The Oromia Finance Bureau has publicly supported calls for regulatory differentiation, critiquing the NBE’s “one-eyed” approach that hampers hybrid banks’ ability to fulfill their rural finance mandate. They emphasize that easing the cap would be a gamechanger in achieving national financial inclusion goals.
These concerns were voiced at the recent National Financial Inclusion Regional Workshop organized by FSD Ethiopia, focusing on infrastructure gaps that severely limit many Ethiopians’ access to banking and credit despite existing flexible lending regulations.
FSD Ethiopia’s Melaku Kebede urged stakeholders to prioritize tangible impacts beyond statistics: “Families traveling great distances for basic financial services, entrepreneurs lacking startup capital, and youth facing digital finance barriers all illustrate the pressing need for expanded, modern, inclusive financial systems.”
Agriculture remains Ethiopia’s economic backbone, contributing nearly 32% of GDP, employing two-thirds of the population, and driving export earnings. Yet commercial bank loans to agriculture represent only 8% of their portfolio—a stark mismatch that the National Agricultural Finance Implementation Roadmap (NAFIR) 2025-2030 aims to address.
