Central Bank regulators would merge commercial banks’ reserve and payment accounts, a departure that will grant lenders greater flexibility in handling daily cash obligations.

The National Bank of Ethiopia (NBE) published the proposal for public consultation, which also introduces a system of partial reserve averaging. Rather than meeting a fixed daily reserve requirement, the new arrangement would allow banks to hold an average balance over a set period to better manage short-term liquidity.

Currently, banks are required to keep reserves separate from payment accounts, tying up cash that could otherwise be put to work. Under the new arrangement, these funds would be combined into a single reserve account, lowering administrative barriers and offering a unified view of liquidity. The authorities want an annual minimum reserve ratio of seven percent of net deposits, covering both local and foreign currency.

Banks are mandated to hold at least five per cent of daily deposit liabilities during each reserve maintenance period, which starts on the first Thursday of each month and ends on the first Wednesday of the following month. They are also required to maintain an average reserve in their payment and settlement account equal to seven percent of the previous month’s average daily reserve base.

According to Martha Hailemariam, advisor to the Vice Governor, the revised arrangement is part of a broader effort to ease rigid rules that have, at times, constrained banks trying to handle urgent payment needs.

“The requirements for liquidity management have been relaxed,” she said.

The Central Bank has introduced additional measures to streamline liquidity management, including allowing commercial banks to trade liquidity among themselves in the interbank money market. By borrowing and lending against their excess reserves, banks can more efficiently address short-term gaps. According to its recent reports, 183 billion Br in liquidity has changed hands in this market.

However, daily requirements remain firmly in place, and penalties loom for non-compliance. Under the proposal, failing to meet obligations triggers a fine calculated at seven percentage points above the Central Bank's standing lending facility rate, applied for each day a bank falls short. Lenders also face a 20,000 Br penalty for every day they miss submitting monthly reserve reports after each calendar month.

Another change revises how reserves are calculated. Instead of relying on net deposit balances at the end of each reporting week, officials will use a monthly daily average reserve base, encompassing all domestic and foreign deposit liabilities. Total deposits in the commercial banking industry reached 2.5 trillion Br by June 2024. Though liquidity ratios stay above required minimums, a stress test showed potential risks if the top 10 depositors at each bank withdrew their funds all at once.

According to the International Monetary Fund (IMF), nearly 90pc of central banks worldwide employ reserve requirements to keep a portion of deposits on hand, promoting stability and guiding monetary policy. In Ethiopia, the shift is seen as an attempt to lessen liquidity pressures without undermining the safety net that these reserves provide.