Spurred by a set of directives the National Bank of Ethiopia (NBE) issued lately, commercial banks have embarked on a quiet overhaul of their governance structures.

Details of how the rules will be enforced continue to emerge. However, central bank officials have issued five directives covering corporate governance and risk management. In addition to guidance on board composition, their regulations compel banks to maintain comprehensive databases of related-party transactions and updated credit profiles. They hope transparency at this granular level will lower systemic risk, a vital consideration for an industry susceptible to connected lending in a rapidly evolving economy.

A regulation requires one-third of banks board of directors to be independent individuals with no direct ownership stakes or day-to-day involvement in the institution’s operations. An existing board nominates these independents and then is elected by shareholders, a measure intended to bring neutrality and more robust oversight to boardroom decisions. Banks whose boards have reached their tenure under prior governance structures are among the first to comply.

Under the revised rules, regulatory authorities also enforce additional constraints on board composition. Another third of directors should be nominated and elected by non-influential shareholders, a category defined by ownership of less than two percent of the subscribed capital. The central bank has also tightened requirements for board members’ competence, mandating that directors have the time, expertise, and independence needed to contribute effectively.

The authorities have also capped the number of concurrent directorships individuals may hold. The new directives also restrict the participation of senior executives on boards, limiting the number of bank employees on a board to two, including the president. Those employee directors are barred from serving as chairpersons.

The NBE now requires at least two female directors on each board to ensure diversity.

According to Frezer Ayalew, the head of NBE’s Supervision, shortcomings in banks’ governance prompted these reforms. Internal assessments and the regulator’s most recent stability report uncovered repeated lapses, including insufficient board objectivity, a dearth of independence, and an undervaluation of credit risk concentration. Frezer attributed poor identification of connected borrowers to stagnant oversight. By forcing banks to include directors from outside their traditional circles, the regulators expect more thorough scrutiny of lending decisions.

“Weaknesses were identified in the existing governance structure,” Frezer told Fortune. "Changes have been crucial to ensure greater safety and soundness."

Bankers say these changes target the financial sector with international corporate governance practices. Several banks have moved swiftly to meet the new rules by selecting and nominating board members who appear to meet the tightened criteria.

The Cooperative Bank of Oromia (Coop Bank), Global Bank Ethiopia, Hibret, and Bunna banks, and are among those that have taken action following recent general assemblies.

At the Coop Bank, the new board was chosen on December 30, 2024, where Deribe Asfaw, the president, was nominated, alongside other new members such as Abinet Tarekegn, Tigistu Shiferaw, and Fikru Deksisa (PhD). Shareholders also picked from a roster of additional professionals, some with specialised expertise in cybersecurity, investment banking, environmental matters, and mergers and acquisitions. The Bank's newly nominated board includes four independent directors: Assefa Sumro, Yeshi Jema, Lema Yadecha, and a consultant, Douglas Manshuva. Several directors represent the category of non-influential shareholders, including nominees such as Meseret Assefa and Jemal Kedir.

Coop Bank officials say they devoted close attention to skill sets that might fill knowledge gaps, with the Bank’s executives claiming the directive brought clarity to the areas where the board needed reinforcement. The final group of 32 nominees was presented to shareholders, and the Bank is now preparing to send the 12 nominees to the NBE for approval within the required 20-day window.

Deribe spoke of optimism about the tighter governance rules at the general assembly where these appointments were finalised. Deribe and other bank leaders welcomed the regulations, pointing out the growing complexity of the finance sector and the need for additional oversight. While acknowledging that layered approval processes can slow certain decisions, they maintain that a stronger board structure will bolster the resilience of financial institutions.

Across town, Hibret Bank convened its 27th general assembly, announcing new appointments to its board. Unlike the Coop Bank, however, Hibret did not nominate any staff members to serve on its board. Instead, the Bank selected three external directors, among them Mesfin Tessema, Azalech Yirgu and Worku Lemma, former vice president at the state-owned Commercial Bank of Ethiopia (CBE). With a quarter century of experience in the domestic banking industry, Worku also co-founded Oromia Bank and Global Bank Ethiopia.

According to Tsigereda Tesfaye, Hibret Bank’s acting president, the reorientation to include independent directors, particularly those with institutional knowledge but no direct stake, would help ensure impartial decisions. She believes bringing onboard such outsiders with seasoned industry veterans will sharpen the Bank’s risk management and strategic planning. She also noted the directive’s insistence on female directors, hoping to see a broader shift in the banking culture toward balanced representation.

“It'll bring big changes to the Bank,” she told Fortune.