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BusinessNew ‘Financial Service Code’ to fully liberalize financial sector

New ‘Financial Service Code’ to fully liberalize financial sector

Justice ministry, bankers split over codification work plan

A new steering committee is in action to amend Ethiopia’s half a century old financial code. The new Financial Service Code will determine engagement modalities of foreign banks in Ethiopia’s financial industry.

Led by Alemante Agidew, Legal and Justice Service Division State Minister at the Ministry of Justice, the committee convened at Hyatt Regency hotel on March 17, 2022, just a week after the Prime Minister told the Parliament opening up of the financial sector is within reach.

Alemante confirmed to The Reporter that the new Code will allow the opening up of the financial sector, among others.

“The new code is necessitated to cope with the new direction the economy is going in. This includes a capital market and opening up of the economy for foreign players,” said Alemante.

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Ethiopia’s Commercial Code, which was introduced during the imperial regime six decades ago, is compiled of five books. Two of these books focusing on company formation, were separately amended and approved by the Parliament just last year.

Amending the three remaining books, which focus on financial services, was postponed. But now, the government seems to be in a rush to amend the financial section of the Code within the shortest time possible.

The former Office of the Attorney General had prepared a draft financial service code two years ago. However, the draft was later dropped and crafting a new one, which encompassed the government’s intention for the financial sector, was necessitated.

Following the PM’s direction, Gedion Timotiwos (PhD), Minister of Justice and Yinager Dessie (PhD), governor of National Bank of Ethiopia (NBE), have already discussed and passed down the skeleton of the plan.

The steering committee is comprised of NBE, MoJ, Ministry of Trade, CBE, bankers and insurance associations.

Nonetheless, the meeting at Hyatt Regency was adjourned following disagreements over the work plan that was presented to prepare the code.

The work plan states the first draft of the financial services code must be ready by December 2022, while bankers and industry players argued the time was to short. Experts from the steering committee and MoJ stated it can be done in less than six months.

The participants also could not agree over the scope of the code.

Maintaining the code in the spirit of the old commercial code is deemed to exclude new fronts in the financial sector. Some said the scope should focus on regulatory aspects, while others emphasized on transactional aspects between consumers and financial institutions.

“The code should focus both on regulatory and transactional aspects. But the code should not detail everything. The Code is a framework. Detailed issues should be addressed in regulations and directives,” said Muluneh Aboye, vice president at Commercial Bank of Ethiopia (CBE).

The other major bone of contention was the composition of the team members. The Ministry installed only two teams for banking and insurances. However, participants stated that microfinances, lease finance, and Fintech’s are not represented.

The banking team included two members from the NBE, one from the CBE and one from the bankers association. The insurance team includes two members from the NBE, one from the EIC, and one from insurers association.

However, bankers and insurance companies complained they are not well represented, which will lead to avoidance of the business side of the code.  The associations also asked to prepare the drafts by themselves.

“If bankers are given space, it means allowing giant bankers to take advantage of the code, because there is conflict of interests,” said Yazachew Belew, team leader of the working team formed for the banking team.

Mehretab Leul, a legal expert specialized in investment laws and an owner of a law firm, is also among who is against the idea of involving the central bank and the Ministry of Justice in the coding process.

“The coding requires global experience and thus a firm that could handle this should be hired through competitive tender. There are modern financial concepts that authorities and local entities unaware of,” said Mehretab, adding the hired firm must undertake a study and draft the code for the approval of authorities. “The experience of countries like France should be taken as a benchmark during the coding process, which cannot be completed within six months as the government hoped.”

However the most difficult part of the codification, is finding a global best practice and model. “We looked for almost all countries and none has a financial service code model. Therefore, we must focus on diagnostic and market gap analysis in the domestic financial sector. Based on the studies, we will then craft the first draft,” said Yazachew.

The steering committee promised to come up with solutions for all the disagreements, by the next session.

“The making of the new code should not be in a hurry. It also must take into account new directions in the economy and finance industry,” said Getahun Nana, former vice governor at the NBE.

Fikru woldetinsae, a senior expert in the finance industry, agrees.

“The coding will take a longer time, if bankers are involved,” said Fikru woldetinsae, a senior expert in the finance industry. “The government is highly pro-liberal now, contrary to previous regimes. Opening the financial sector completely at once will entail the demise of the financial industry. The government must be cautious and should not hurry to open-up, just to reverse the closed policy of the previous regime,” warned Fikru.

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