In a new regulatory move, commercial banks and microfinance institutions are set to pay insurance premiums to establish a safety net for their depositors. Should the proposed legislation be enacted, this mandate would be managed through an insurance fund.

It is a development that underscores the authorities' desire to fortify the financial sector against economic headwinds and ensure the protection of depositor funds. It also reflects a global trend towards safeguards in the banking industry.

Whether these new safeguards bolster confidence or result in an increased financial burden that hampers growth has operators and keen observers of the financial sector debating for the weeks to come.

The plan requires that the financial institutions contribute an initial premium fee of 0.05pc of their deposits, and annual premiums that represent 0.3pc of their four-quarter average deposit balance, paid in four instalments. These charges, if approved, could introduce 60 billion Br in premium charges to Ethiopia's banking industry. It comes at a time when deposit mobilisation across the country's 85 financial institutions has reached a staggering 2.05 trillion Br.

The bill does not only apply to existing banks but also targets new entrants in the sector. Commercial banks that receive operational licenses after the directive comes into effect and have deposits lower than 12 billion Br will be required to pay six million Birr premiums. Microfinance institutions with deposits less than 200 million Br will pay a 100,000 Br premium.

The draft directive, dispatched last week by Mergia Wakweya, the Ethiopian Deposit Insurance Fund (DIF) CEO, has now been presented to the heads of 31 commercial banks and 54 microfinance institutions. Central bank regulators are seeking consultation meetings with these financial institutions' heads this week.

The proposed mandate has its roots in efforts by the National Bank of Ethiopia (NBE) to boost depositor confidence and secure the financial system's stability. This move to establish the Fund was endorsed by the Council of Ministers two years ago.

In the event that an institution fails to repay depositor money, penalties are in place. The central bank could revoke the banking license of the offending institution, while the Fund would reimburse the depositors. The Fund's proposed coverage minimum of 100,000 Br was decided upon recognizing that most, not more than four percent of depositors in Ethiopia hold larger than 200,000 Br in their accounts.

The Fund's board oversees this new framework and includes representatives from the central bank, banking supervision, microfinance supervision, and two from the banking and insurance industry. The board membership comprises Solomon Desta, vice governor; Frezer Ayalew, head of banking supervision; Sintayehu Desalegn, head of microfinance supervision; Dereje Zenebe, president of  Zemen Bank; and Teshome Abebe, CEO of Dire Microfinance.

"We function just like any other board," Solomon told Fortune.