Central bank Governor Yinager Dessie (PhD) ordered all commercial banks last week to downgrade branches operating in the border towns of Togochale and Moyale to sub-branches status.

The Governor is concerned with a growing number of illicit operators using bank branches in border towns, circumventing the foreign currency account regime to transfer foreign currencies without permits from the central bank. Non-resident Ethiopians, native Ethiopians in the diaspora, and companies in the export sector are allowed to open foreign currency accounts with commercial banks. Spouses, employers and business partners can make deposits into these accounts in forex.

The Governor's instruction forces banks to limit services in their branches at border towns to deposit and cash withdrawals after carrying out due diligence based on Know Your Customer (KYC) rules, which became effective six months ago. The central bank has also suspended all types of transfers through the sub-branches.

Togochale and Moyale towns are prone to contraband trade, with reputations as hotspots for the parallel currency market. Almost all banks have branches in these small towns. Their presence is justifiable.

With a population of a little over 20,000, Togochale, in the Somali Regional State bordering Somaliland, is a cross-border trade hub 230Km from the Port of Berbera and 80Km from Hargeisa, the capital of the statelet Somaliland Republic. Livestock, khat and camel milk are the main traded items that make their way to neighbouring Somalia. Processed food items such as wheat, canned fish and edible oil are brought in.

Located 774Km south of Addis Abeba, which straddles the border between Ethiopia and Kenya, Moyale is prone to illicit trade. Agricultural products, livestock, as well as manufacturing items are heavily traded in the town, with a population of close to 25,000.

A study conducted last year by Global Financial Integrity on illicit financing in Ethiopia revealed that the forex acquired from parallel markets in these towns is used to make informal payments, acquire properties, and finance under-invoiced transactions.

Experts are wary. The arbitrary enforcement of the measure could hurt the local population, whose lives are dependent on the banks, according to Arega Shumetie (PhD), a senior researcher at the Ethiopian Economics Association.

“Tackling contraband trade should be given priority before imposing rules,” said Arega. “Preventing illegal traders from finding other options to launder their money is difficult.”

Some welcome the Governor's move in the industry, such as Genene Ruga, president of Nib International Bank.