One-year grace period will be given to local banks
In a bid to usher foreign banks entry into Ethiopia in line with the banking open-up policy passed by the Council of Ministers last month, the National Bank of Ethiopia (NBE) is finalizing amendments to the Banking Business Proclamation that was introduced in 2008.
The draft of the amended proclamation, which is currently ready to be tabled for the Council, is expected to be ratified by the parliament before the end of this year. The NBE has been working on the amendment for over eight months now.
The new articles in the draft include issues like banking activities by foreign nationals, employment of foreign nationals, establishment of a subsidiary, cooperation and collaboration with foreign supervisors and local authorities, and the adoption of international banking principles and standards, among other categories.
Some parts of the proclamation are similar to the policy, while the majority of issues are yet to be articulated in directives underway by the NBE.
The draft proclamation defines a “bank” as a company, or a subsidiary of, or a branch of a foreign bank, or a federal government bank, licensed by the National Bank to undertake a banking business.
Regarding the modalities allowed for foreign banks to enter the sector, it includes opening a subsidiary, a bank branch, a bank representative office or acquiring shares of Ethiopian banks.
The minimum capital thresholds and minimum requirements for the licensing and renewal of the modalities will be determined by a directive. Irrespective of the form of company, a subsidiary of a foreign bank needs both supervisory and executive boards composed of the parent bank and non-shareholder Ethiopians.
Local banks can also open subsidiaries abroad, and vice versa. A foreign bank’s equity investment as a strategic investor in an existing or new domestic bank is limited to 30 percent, while such investment by a non-bank foreign national or an Ethiopian organization is limited to five percent.
The total equity investment in a bank by foreign nationals and Ethiopian organizations is capped at 40 percent.
However, Ethiopian organizations fully owned by foreign nationals can invest in a bank only through foreign direct investment in an acceptable foreign currency.
“Owning a stake in local banks is allowed for foreign banks. However, this is not allowed for local banks. For instance, Awash, Dashen, and other big local banks cannot acquire stakes in other local banks,” Abdulmenan Mohammed, a London-based financial expert with decades of experience, said.
He says the amendment is necessary to allow foreign banks and that 40 percent of the substance of the draft is about foreign banks.
If a foreign bank intends to open a deposit-taking branch, it must remit a minimum capital equivalency, the amount to be determined by a directive, according to the draft. A non-deposit-taking branch of a foreign bank is only allowed to engage in lending and collecting repayments in Ethiopia and borrowing from foreign sources or repayments thereof.
However, a foreign bank is not allowed to open both deposit-taking and non-deposit and other debt-taking branches. In simpler terms, foreign bank branches that collect deposits are considered conventional commercial banks, whereas a bank that only lends is an investment bank.
This is intended mainly to encourage capital inflow, instead of taking capital from the domestic economy and lending it. This approach is in line with the main purpose of the banking open-up, which is to attract foreign currency, transfer skills and technology, and, above all, improve the efficiency of local banks.
“Non-depository banks are investment banks, like the Development Bank of Ethiopia (DBE). They do not have to collect a deposit. Investment banks do not need deposits. They source funds from other sources. But depository banks are commercial banks,” Abdulmenan said. “However, there are restrictions on investment banks because they are usually cited for causing crises.”
Except for its banking business purposes, a subsidiary of or a branch of a foreign bank will not be allowed to own a mortgaged property for a period exceeding five years.
Abdulmenan says Ethiopian banks are also not allowed to own buildings, unless it is for their own office purposes, and even if it is allowed, owning much property ties down banks’ capital. He believes this article was made by sensing foreign trends.
“There are different types of property lease. If the lease life of a building is capped at less than five years, it is the property owner that will be responsible for the insurance, maintenance, and other expenses,” he said.
“In other countries, if a bank rents a building for 50 years or 25 years, it is the bank that covers the cost of insurance, maintenance, and other building costs, creating a sense of ownership for the leasing firms. So the draft aims to create such a sense of ownership for the incoming foreign banks,” Abdulmenan explained.
Dividends earned by foreign nationals from bank investments, as well as proceeds or sales of shares in liquidation of such investments, can be repatriated in accordance with NBE directives, the Ethiopian Investment Proclamation and Regulation, and other relevant laws, according to the bill.
The 2008 banking business proclamation was first amended in 2019, mainly to accommodate interest-free banks or Islamic banks. However, the new draft amendment proclamation repeals the 2019 amendment.
As a result, interest-free or Islamic banking will have newly amended chapters in the new proclamation. The draft states that the “NBE may issue a directive to regulate banking business related to interest-free banking, deposit mobilizations, and fund utilizations within conventional banking.”
Issues related to banking in the 2020 Investment Regulation are also repealed by the draft proclamation.
The draft gives due emphasis to consumer protection.
A Memorandum of Understanding will be signed between the NBE and relevant domestic authorities as well as foreign supervisors for information exchange; effective and consolidated supervision of banking groups and group entities; effective handling of crisis situations; and taking seats in supervisory colleges. Such arrangements should include the protection of confidential information.
It is good that NBE included the issue of collaboration with foreign authorities, according to Abdulmenan.
“Basically, the performance of foreign banks in Ethiopia will be affected by the performance of their parent banks abroad. Therefore, the NBE must be able to supervise the parent bank too. But unless there is transparent and regular information exchange, foreign banks can cause a crisis in Ethiopia. The question is, will the NBE be able to do so?” asks Abdulmenan.
Credit Reference Services (CRS) provided by a Credit Reference Bureau (CRB) to enable lenders to know how borrowers repay their loans may be allowed to be provided by private investors, including foreign nationals, Ethiopians, or on a public-private partnership basis. The modality of investment and operation and/or cost apportionment of credit information sharing may be determined by NBE directives.
Licensing of foreign banks under the allowed modalities will resume within a year after the draft proclamation is ratified. An official at the central bank believes the proclamation will be approved soon.
“Once the proclamation is amended, regulations and directives will follow. This task can take six months or a year. Although we cannot say definitely that banks will be open one year after the proclamation is finalized, it depends on our pace of finalizing the proclamation and the regulations and directives required to implement it,” the official said.
The policy has therefore given a one-year grace period for local banks before they open up. In that one-year period, local banks will be forced into a scenario where each formulates a competition strategy, working closely with the central bank.
The foreign banks will come once a survival roadmap is designed for each local bank.
Over all, Abdulmenan rates the draft as “workable.”
“Though the draft proclamation allows foreign banks, many restrictions are still in place in the Ethiopian banking industry. If the NBE is able to maintain the same restrictions and strong supervision on foreign banks, the open-up will be successful,” Abdulmenan said.