Banks are scrambling to comply with new credit exposure regulations as the National Bank of Ethiopia's (NBE) 90- day action plan submission deadline approaches. Among the five directives approved by the central bank in midJune, the prudential provisions governing large exposures to counterparts or groups of connected counterparties aim to mitigate credit concentration risks.

Banks must ensure that the total aggregate sum of their on-balance sheet items, including loans and advances, and off-balance sheet items, such as letters of guarantee or credit, to related parties does not exceed a quarter of their capital. This requirement excludes credit risks from lending to the federal or state governments and state-owned enterprises.

Central bank's inaugural financial stability report, released two months ago, revealed a high degree of credit concentration, with the top 10 borrowers in the banking industry holding nearly 23.5pc of the total 1.9 trillion Br in loans and advances.

Belete Fola, portfolio manager & principal examiner, said the directives were informed by consultations with international partners like the International Monetary Fund (IMF) and the World Bank to reflect international best practices. He noted that banks are likely to submit their plans in the final quarter of the three-month deadline due to the operational implications for future lending practices.

“They need to conduct deep assessments of their overall exposure,” Belete told Fortune.

He said each bank's unique credit portfolio and lending history should inform how they plan to meet the threeyear compliance deadline.

"Some will need a short time while a few could struggle," he said.

The financial stability report also revealed that a mere 0.5pc of borrowers with a credit exposure above 10 million Br held nearly three-quarters of the banking sector's loans.

Abiy Berhane, director of the credit analysis & appraisal department at Berhan Bank, said they have formed teams to determine what adherence to the directive looks like in the long run. He noted the complexity of establishing the exact nature of the relationship between counterparties amid the overall challenges of customer information nationally.

“This is something that all banks will struggle with,” Abiy told Fortune. Abiy said a thorough understanding of the directives' implications is needed before developing an action plan. He referred to the potential relationship between people with major influence at a bank and how it could affect credit exposure risks from related parties.

“NBE could assist with information disclosure,” Abiy said, “especially about people who have a say on boards.” Yehualshet Zewdu, deputy president of Wegagen Bank, expressed a similar sentiment, noting that the bank is preparing an explanation letter to send to the central bank for a comprehensive understanding.

“We would not want to be in violation unknowingly,” Yehualashet told Fortune.