The draft proclamation establishing the National Bank of Ethiopia (NBE) has reinstated the direct advance limit that the federal government can take from the bank. It has also set a time limit for the executives and board members serving in the central bank. The proposed bill would also grant the NBE sole responsibility for overseeing franco-valuta imports, revoking the previous powers held by the Ministry of Finance.

The draft bill, which was presented to parliament on Thursday, June 20, includes several changes to the previous proclamation no. 591/2008, which was issued sixteen years ago.

The draft bill brings back the provision stating that the government can borrow from the central bank.

Before Proclamation No. 591/2008 superseded the Monetary and Banking Proclamation No. 83/1994, three separate central bank proclamations were amended. These proclamations contained provisions that limited the amount of money the central government could borrow from the financial sector regulatory body and specified the repayment period.

However, the 2008 proclamation opened up access to funds from the NBE for the government, which analysts believe was a significant factor in the country’s unprecedented rate of inflation.

According to Article 27.2 of the draft proclamation, the National Bank may provide temporary overdrafts to the government on a cash flow facility for a duration of no longer than 12 months. “These temporary overdraft facilities shall not exceed 15% of the average annual general government domestic revenue of the previous three fiscal years.”

Sub-article three states that a temporary overdraft made to the government must be repaid upon maturity and cannot be rolled over. It further adds that “Any such temporary [overdraft facilities] shall bear an interest rate calculated at the monetary policy rate as determined by the National Bank.”

The same article, sub-article four, states that the National Bank cannot make further overdrafts in a subsequent financial year unless the amounts due in respect of the outstanding overdrafts have been fully repaid within the maturity period.

However, sub-article five states that in the event of a force majeure, the government may request the National Bank for an advance or loan beyond the limit provided under this article. “Any such additional advance or loan shall be without prejudice to the National Bank’s objective of ensuring price stability, comply with the government’s limits on public debt, be limited in time as determined by the National Bank, and remunerated at a market interest rate.”

Sub-article six clearly defines force majeure as an unexpected public health issue, natural disaster, drought, or a general state of emergency as promulgated by relevant law, or significant external economic developments that negatively impact government revenue.

The draft proclamation also sets a term limit for the governor and vice governors, stating that they cannot serve for more than six years but can be renewed for another term.

Similarly, the draft proclamation states that a board member shall hold office for a period of six years and may be eligible for reappointment for one more term.

Regarding remuneration, the draft proclamation states that it will be consistent with the comparable average rate in the financial sector in the country.

It also states that the authorized capital of the National Bank is 20 billion birr, with a minimum paid-up capital of 10 billion birr, increased from the current 500 million birr.

Moreover the draft proclamation has revoked the Ministry of Finance’s (MoF) authority to allow franco-valuta imports, transferring this responsibility solely to the central bank.

According to the draft bill, the NBE will now be in charge of overseeing franco-valuta imports, with the amended Regulation No. 88/2003 – which previously permitted the MoF to approve such imports – set to be abolished.

Specifically, Article 39.5 of the draft proclamation states that “goods shall be imported on a franco-valuta basis, subject to the terms, circumstances, and conditions determined by the National Bank’s Directive.”

The proclamation also includes a clause exempting the central bank from all property taxes, including urban house tax and urban land rent. This tax exemption comes despite the Addis Ababa City Administration’s previous requests for the NBE to fulfill its obligations regarding these levies.

However, the recent proclamation has clarified that the central bank will not be responsible for the specified taxes and levies, solidifying its exempted status.

The transfer of franco-valuta authority to the NBE and the central bank’s tax-exempt status are significant changes that are expected to impact Ethiopia’s import regulations and the financial operations of the country’s monetary authority.

The parliament has discussed the long-awaited bill to restructure the banking sector. The existing proclamation, which was issued sixteen years ago, has been significantly altered by the new law.

A few of the key provisions of the new banking legislation include permitting local financial institutions to create subsidiaries and specialized financial institutions, as well as welcoming international companies to the market.

The highly anticipated proclamation that allows foreign players to invest in the banking industry in Ethiopia is under discussion in parliament.

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 the existing deposit-taking banks is crucial to bring the upcoming capital market, Ethiopian Securities Exchange, to life.

However, their involvement shall only be separate from their existing business. Accordingly, the National Bank of Ethiopia (NBE) is expected to issue a law that will allow commercial banks to form a subsidiary that would not have a direct link to their existing business.

The Ethiopian Capital Market Authority has also stated on different occasions that it has discussed the issue with the NBE to allow banks to have a separate company, which is now permitted under the existing law.

Based on the draft proclamation, a clause for the establishment of subsidiaries has been included. Article 66.1 of the draft proclamation states that the NBE may allow a bank to establish a subsidiary, while the details will be determined by a directive.

Similarly, the draft directive has also allowed for the formation of specialized banks. It states that the NBE may allow for the establishment of a specialized bank or conversion from/to a specialized bank.

According to the definition in the draft proclamation, a specialized bank is defined as a bank other than an investment bank that focuses on specialized banking services tailored to specific sectors of the economy or market segment, such as export/import, mortgage, agriculture, cooperative, and small and micro enterprises, and other similar sectors as determined by the NBE directive.

There is an interest in investing in the financial industry as specialized banking players in the country; however, the lack of proper laws has been stated as a barrier.

Financial institutions like Goh Betoch Bank, which was formed as a commercial bank but wants to focus on a few sectors, have requested the regulatory body to create a conducive environment that allows them to operate according to their plans.

One of Goh’s requests, as the one and only mortgage bank, is for the regulatory body to provide more opportunities for long-term financing and other issuances, including resource mobilization and partnership mechanisms, in addition to allowing the formation of a subsidiary to invest in housing and related schemes.The Goh leadership has been requesting that the government provide the regulatory framework that mortgage banking needs, as it does not already exist. They said that housing is a significant concern for the people of the country, and the government must issue an order to support the sector.

According to the bank’s former president, Mulugeta Asmare, weak legislation and an unfavorable climate for mortgage banking have negatively impacted the bank’s operations.

This was stated in the annual report released towards the end of the previous year.

The bank has made several recommendations to the relevant government agencies in an attempt to foster an environment that would allow it to process mortgages swiftly. Goh proposed a number of policy ideas, including the creation of a housing fund.

The highly anticipated proclamation includes provisions for foreign players to establish partially or fully owned foreign bank subsidiaries, open foreign bank branches, establish representative offices, or acquire shares of a bank.

It also states that foreign nationals, other than foreign banks and foreign-owned Ethiopian organizations, may acquire shares in banks. However, direct shareholding by a strategic investor in an existing or new domestic bank is limited to 40 percent of the total subscribed shares of a bank.

This is a revision of the previous proposal mentioned in the policy document.

Non-strategic foreign national investors and foreign juridical persons are limited to seven percent and ten percent of subscribed shares of a bank, respectively.

Regardless of the above provisions, the aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations in a bank is limited to 49 percent of the total subscribed shares of a bank.

The draft proclamation also adds that, “for the purpose of attracting strategic investments that would benefit the economy and/or as a way of resolving a distressed bank and preserving financial stability, the National Bank may, on an exceptional basis and subject to fulfillment of other preconditions, allow well-established, reputable, and financially sound foreign banks to partially or fully acquire existing domestic banks through acquisition.”

The government’s strong desire to join the World Trade Organization is being thwarted by its strong stance to delay the opening up of the telecom and financial sectors, which was one of the main demands made by member nations, mainly the US and Canada.

However, the administration of Prime Minister Abiy Ahmed made a daring choice to soften the previous stance and allow foreign businesses into the market to accelerate the negotiation process that has been going on for more than 20 years.

There is now one more competitor in the telecom market.