Central Bank Gains More Autonomy, Targets Five Foreign Banks in Five Years

Dec 22 , 2024

Parliament approved a new proclamation strengthening the National Bank of Ethiopia's (NBE) autonomy, granting it independence over monetary policy and foreign exchange management. The proclamation caps the government's access to central bank financing, limiting the fed’s access to credit to temporary overdrafts of no more than 15pc of the average annual domestic revenue from the previous three fiscal years. These overdrafts must be repaid within 12 months and cannot be rolled over. The legislation also establishes a financial stability committee responsible for managing bailouts during financial crises. The new law replaces the 2008 National Bank Establishment Proclamation and raises the minimum paid-up capital of the NBE from 500 million Br to 10 billion Br. While the proclamation seeks to limit the executive’s influence, the Prime Minister still retains the right to appoint the governor, vice governor, board chairperson, and six additional board members. Parliament also passed new legislation allowing foreign banks to establish subsidiaries, purchase shares in local banks, and open branches or liaison offices. However, the law prohibits foreign investors from owning more than 40pc of shares in local banks. It also limits the combined shareholding of foreign nationals and foreign-owned Ethiopian organizations to 49pc of a local bank’s total shares. The law stipulates that foreign banks can employ foreign nationals as senior executives and mandates the inclusion of resident Ethiopians on their boards. The government plans to issue banking permits to five foreign investors over the next five years. Some MPs opposed the bill arguing that the domestic banking sector, which suffers from a shortage of working capital and foreign currency, is not ready to face foreign competition. They added that the Central Bank lacks the capacity to effectively regulate foreign financial institutions. Three MPs voted against the proclamation. Governor Mamo Mihretu defended the law, stating that opening up the banking sector to foreign investors will benefit domestic banks and that the NBE has spent the past three years preparing regulatory mechanisms to oversee foreign banks.