Central Bank Orders Banks to Map Their Own Safety Net

May 31 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

Regulators at the National Bank of Ethiopia (NBE) have issued a notice to commercial banks, instructing them to develop a clear roadmap for staying afloat in the event of trouble and to do so promptly.

Under a new directive released this month, every bank is required to assemble a comprehensive recovery plan within eight months and then update it annually or whenever a major change occurs, such as an ownership shake-up, strategic shift, or period of financial stress.

Regulators will have six months to review each submission and can order revisions at will.

The mandate pulls the banking industry closer to the template promoted by the Financial Stability Board after the global financial crisis. Its plans are simple, if demanding. Banks should be able to rescue themselves without needing to call on the state for a bailout. To get there, the Central Bank has laid out a checklist that leaves little room for improvisation.

Stress testing sits at the heart of the rule. Banks are required to model an array of shocks such as market turmoil, internal mishaps, system-wide disruptions, and prove that their recovery steps are “practical” and “executable.” Public support is explicitly off the table. Instead, lenders have to map out how they would raise fresh capital, shrink risk-heavy assets, renegotiate debt, cut operating costs, sell assets or reshape liabilities, sometimes all at once.

Each move should come with projected outcomes, costs and timetables. Lenders also need to design playbooks for managing liquidity crunches, protecting capital buffers, and securing emergency funding. Interest-free banks are told to run every option past their Shariah Advisory Committees to ensure that nothing violates Islamic principles.

Behind the balance-sheet math, the directive forces banks to know themselves and their surroundings in fine detail. Plans should outline internal structures, cross-company connections, and relationships with external financial institutions, and then integrate these findings with broader risk-management strategies.

“It's a new territory for many institutions," said Demessew Kassa, secretary general of the Ethiopian Bankers Association. "Time will be needed to gauge its industry-wide impact fully.”

According to Demessew, the National Bank has adopted a noticeably tougher position in recent years, rolling back policy measures such as a lending cap and a compulsory treasury-bill purchase rule. The recovery-plan directive, according to him, “is a major and novel addition to the local banking industry.”

Executives are already scrambling.

Wolde Bulto, president of Gadaa Bank, has assembled a cross-departmental team but worries the eight-month deadline could prove too tight.

“If the timeline proves insufficient, we will request an extension,” he told Fortune.

Sidama Bank has tapped five directors to steer its effort. Vice President Shebeku Magane ticked off the pressures piling up from inflation, rising technology and talent costs to stiffer competition, security risks that slow branch expansion, and the spectre of cyberattacks.

“Even with the interbank system, liquidity remains tight,” he said. “Volatile deposits and weak loan recovery persist as challenges."

Early-warning “recovery triggers” are another pillar of the rule. Banks are required to set quantitative and qualitative tripwires that sit above the regulatory threshold and flash red before solvency, liquidity, or asset-quality ratios slide too far. Ratios such as capital adequacy, liquidity, liquidity coverage, net stable funding, and loan-to-deposit, as well as realised losses, are all on the list, along with sharp deposit withdrawals, funding snags, exchange-rate jolts and credit-rating downgrades.

Miss the first filing deadline, and the fine is 100,000 Br; miss an update, and it is 50,000 Br. Central Bank officials say that a separate directive will spell out broader administrative sanctions.

Worku Lema, who has spent three decades in the banking industry, called the move a milestone in risk management.

“It forces banks to assess their positions under every conceivable scenario,” he said. “It's a bit unusual in our country to hear about bank failures, but the rest of the world experiences it daily.”

Historically, the NBE stepped in when lenders faltered. The new focus, he said, is on proving banks can fix themselves first.

Whether they can is an open question. The Central Bank’s 2024 Financial Stability Report praised the state-owned Commercial Bank of Ethiopia (CBE) for holding capital well above the eight percent minimum and liquidity above the 15pc threshold. However, it also warned that an abrupt withdrawal by CBE’s 10 largest depositors could sink liquidity below safe levels, and it flagged that much of CBE’s capital still remained in the form of a government promissory note that had not yet been converted to cash.

Credit-risk stress tests showed that while every bank could weather a moderate shock, four would come up 6.5 billion Br short in a severe one, about 4.8pc of their risk-weighted assets. A year earlier, 12 banks would have failed under the same test. However, liquidity risk is increasing, with 20 banks failing to meet minimum standards in a stress scenario, up from 18 the previous year. Non-performing loans (NPLs) edged up by three percentage points to 3.9pc.

The deposit structure exacerbates liquidity concerns. Large clients account for nearly three-quarters of loans while making up half a percent of borrowers. Most of those loans are concentrated in urban areas, heightening geographic risk. Deposit growth itself slowed to 15.4pc in the year to June 2024, well below the prior year’s 24.6pc pace, evidence of cooling financial intermediation even as the industry's assets grew to 3.4 trillion Br, 15pc higher than a year earlier.

Nonetheless, banking’s share of nominal GDP slipped to eight percent from 37pc, revealing how fast the broader economy has been expanding.

Regulators are betting that forcing banks to confront their own weaknesses will shore up the system before it is tested. The directive leans heavily on international frameworks, shifting Ethiopia's accounting standards away from International Financial Reporting Standards (IFRS) toward the Basel III guidelines. That transition, said banking veteran Ameha Tefera (PhD), is prudent.

“International financial crises, like the 2008 crash, were driven by lax regulations and surging non-performing loans,” he said. “This move could help avoid similar pitfalls.”

Ameha, a former staff member of the CBE, called depositor protection the core benefit.

“While the industry has about 400,000 loan customers, it serves billions in deposits," he said. "These regulations help shield that broader base.”

Ameha applauded the recent decision to lift an 18pc credit cap but warned that lending freedom should be matched by oversight. He also pointed to the market-based policy position as a source of liquidity volatility, arguing that depositors often value safety over returns, which undermines stability.

Sidama Bank’s Shebeku echoed that view, saying the one of their challenges is the Central Bank’s five billion Birr paid-up capital requirement, not nimble foreign competitors or new rules. Sidama Bank is confident it'll meet the requirement as it is 70pc owned by the regional government and is lining up a fresh share issue to meet the bar.

PUBLISHED ON May 31,2025 [ VOL 26 , NO 1309]