The National Bank of Ethiopia (NBE) has lifted its three-year-old credit cap, acknowledging its increasing ineffectiveness after the International Monetary Fund (IMF) reported that 20 of Ethiopia’s 28 banks had already surpassed their annual lending growth limits by the third quarter of the 2025/26 fiscal year.
The central bank is replacing the quantitative lending restriction with a targeted reserve requirement framework. This signals a shift toward an interest rate-based monetary policy, aiming to guide bank lending toward productive sectors using indirect policy instruments rather than administrative controls.
The NBE Board of Directors, chaired by Prime Minister’s Economic Advisor Girma Biru (Amb), approved the decision following a recommendation from the Monetary Policy Committee (MPC).
This policy change marks a significant and earlier-than-expected shift in the NBE’s monetary policy framework. Although the central bank had previously indicated the credit growth cap would remain until the end of 2026, economists largely welcomed its removal, arguing that it had constrained lending to productive sectors, particularly manufacturing.
However, experts cautioned that the new framework’s effectiveness hinges on the implementation of the targeted reserve requirement and its success in encouraging productive-sector lending without creating new distortions.
Some also warned that commercial banks might remain reluctant to expand private-sector lending if uncertainty surrounding the new reserve requirement leads them to continue channeling excess liquidity into government securities instead of extending loans to businesses.
Worku Lemma, a former senior banking executive with extensive experience in Ethiopia’s financial sector, praised the removal of the lending cap as a positive step toward strengthening financial stability and supporting macroeconomic growth.
He stated, “Lifting the lending cap is a good move. It is also part of the IMF’s recommendation, although the Fund advocated for a gradual removal.”
According to Worku, the credit cap had restricted financing for critical long-term development sectors, including manufacturing and related industries, thus limiting their contribution to economic growth.
At the same time, Worku noted that the MPC’s decision to raise the National Bank Rate (NBR) from 15 percent to 16 percent is likely to further increase commercial lending rates, raising borrowing costs for businesses where loan rates already exceed 20 percent.
Worku also questioned the practical implementation of the targeted reserve requirement, noting that the central bank has not yet provided sufficient operational guidance.
He explained, “Unlike the general reserve requirement or the overall lending cap, this mechanism will be applied individually to each bank. It remains unclear how it will work in practice and whether it will effectively influence lending behavior.”
He emphasized that the NBE should issue detailed implementation guidelines to ensure transparency and predictability.
Under the new framework, the central bank announced it would impose additional reserve requirements on individual banks after regularly assessing their loan-to-deposit ratios whenever credit expansion is deemed to pose inflationary risks.
This policy builds on the reserve requirement directive issued in December 2025, which increased the minimum reserve ratio from seven percent to ten percent by June 30, 2026.
During Monday’s MPC press conference, NBE Governor Eyob Tekalign reported that the loan-to-deposit ratio of private banks had fallen to 72.7 percent from 90.3 percent in the 2022/23 fiscal year, reflecting improved liquidity management across the banking sector.
Despite welcoming the lending cap’s removal, Worku maintained that a tight monetary policy remains appropriate given persistent inflationary pressures, external economic shocks, and geopolitical uncertainties.
Banking expert and economist Eshetu Fantaye, with over three decades of financial sector experience, shared a similar assessment.
He argued that while Ethiopia should maintain its anti-inflationary stance, it ought to learn from other East African central banks that utilize market-based monetary instruments and targeted incentives to encourage lending to productive sectors.
“Every one of Ethiopia’s East African peers manages inflation through price-based tools, and each has developed incentive mechanisms to channel credit toward productive sectors without administrative rationing. Even Rwanda, facing inflation pressures comparable to Ethiopia’s, has chosen rate hikes and guarantee schemes over credit ceilings,” Eshetu wrote in a recent research paper.
Speaking to Capital, he elaborated that central banks across the region encourage lending to agriculture, manufacturing, and export-oriented industries by offering regulatory incentives instead of imposing blanket lending restrictions.
“They encourage banks to utilize their reserve capacity if they extend loans to priority sectors. Such policy instruments are more effective in controlling inflation, including imported inflation, while simultaneously stimulating economic growth through job creation, import substitution, exports, and higher tax revenues,” he said.
Eshetu also questioned whether the removal of the lending cap alone would significantly increase private-sector credit, given the government’s plans to finance a substantial share of its budget through domestic borrowing.
Under the recently approved 2026/27 federal budget, the government intends to cover approximately 330 billion birr of its financing gap through Treasury bills and other domestic debt instruments.
He contended that directing these financial resources toward productive sectors such as manufacturing, agriculture, exports, and small-scale industries would generate stronger economic growth, employment opportunities, and tax revenues than financing recurrent government expenditure.
Overall, Eshetu recommended that the central bank create a policy environment that enables productive sectors—particularly manufacturing, which has been constrained by the lending cap over the past three years—to access adequate financing.
However, he cautioned that banks might continue favoring government securities if uncertainty surrounding the targeted reserve requirement leads them to avoid the risk of having additional funds locked up as mandatory reserves.
Governor Eyob, meanwhile, maintained that removing the credit cap would significantly improve manufacturers’ access to finance and support lending to other productive sectors.
Several analysts also noted that Ethiopia had previously experimented with similar policy tools nearly two decades ago, suggesting that the new reserve-based framework could again be used to encourage banks to expand lending to productive sectors while preserving overall monetary discipline.
The IMF’s Fifth Review of Ethiopia’s reform program, released on the same day as the MPC statement, concluded that the credit cap had become increasingly ineffective, with 20 of the country’s 28 banks already exceeding their lending limits by March 2026.
The Fund welcomed Ethiopia’s continued transition toward an interest-rate-based monetary policy framework but cautioned against replacing one form of administrative intervention with another.
“Staff advised against a possible new law requiring banks to allocate a portion of their credit to the manufacturing sector, which is not consistent with market determination of lending rates and credit decisions, and could weaken credit quality,” the IMF stated.
The Fund added that fostering a competitive, market-oriented financial sector requires removing direct monetary controls and quantitative lending limits to strengthen monetary policy transmission.
Echoing that position, the Monetary Policy Committee stressed that removing the lending cap does not represent a relaxation of monetary policy.
“The removal of the credit cap is the result of a successful transition to an interest-rate-based policy framework with full implementation of indirect monetary policy instruments. It is not a change in NBE’s monetary policy stance. The NBE will continue to maintain a tight monetary policy stance by effectively using all available indirect monetary policy instruments,” the committee affirmed.
The central bank now faces the challenge of demonstrating that its new targeted reserve requirement can simultaneously contain inflation and encourage greater lending to Ethiopia’s productive sectors without undermining market-based credit allocation.
