Wednesday, July 17, 2024
NewsFull acquisitions on table for foreign entrants: draft banking proclamation

Full acquisitions on table for foreign entrants: draft banking proclamation

Bill proposes to allow banks to hire foreign nationals

The Council of Ministers has forwarded to Parliament a draft Banking Business Proclamation that envisages permitting foreign banks full or partial ownership of domestic commercial banks.

The draft tabled to lawmakers this week proposes to allow regulators at the central bank to approve the acquisition of a bank by another domestic or foreign bank for the purpose of ensuring financial stability. The version of the bill tabled to MPs also suggests capping foreign ownership in domestic commercial banks at 49 percent, up from the 30 percent threshold proposed when the draft was first tabled to the Council in 2022.

The existing banking proclamation reserves the banking business solely for Ethiopian nationals.

“Aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations in a bank shall be limited to 49 percent of the total subscribed shares of a bank,” reads the bill.

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However, according to the draft, the National Bank of Ethiopia (NBE) will be able to grant exceptional approval for a foreign bank to acquire a local bank in full after conducting due diligence. It sets out that full acquisitions may be permitted to “attract strategic investments” and “resolve a distressed bank and preserve financial stability.”

The draft limits shareholding by “foreign strategic investors” to 40 percent in an existing or new domestic bank, while the threshold for “nonstrategic foreign investors” and foreign juridical persons will be limited to seven and 10 percent, respectively.

If Parliament ratifies the bill, foreign investors will be able to enter the Ethiopian banking industry via a number of modalities for the first time since the imperial era.

“A foreign bank which is well established, reputable and financially sound may be allowed to establish a partially or fully-owned foreign bank subsidiary, or open a foreign bank branch, or a representative office, or acquire shares of a bank,” states the bill.

Foreign nationals and foreign-owned Ethiopian organizations fully owned by foreign nationals will be permitted to invest in banking using only direct investment in foreign currency, according to the bill.

It proposes to allow dividend reinvestment in Birr, while profits and proceeds from the sale of shares or liquidation may be repatriated in line with a directive from the central bank and other laws. The draft states that a foreign bank subsidiary or foreign bank branch may own property for its banking business purpose while ownership of other properties including foreclosed and acquired mortgaged property shall be in accordance with relevant laws.

Both deposit taking and non-deposit taking foreign bank branches or subsidiaries will be beholden to the same rules as domestic banks, according to the draft. The central bank may also impose additional conditions and requirements as it sees fit.

The draft also stipulates that foreign bank subsidiaries must include local resident non-shareholder Ethiopians on their board of directors, the composition of which is to be specified in an upcoming NBE directive. The bill prohibits foreign banks from opening both deposit taking and non-deposit taking branches simultaneously, and states that the central bank will determine minimum capital thresholds.

The bill also proposes to raise the share ownership ceiling in a banking venture for “natural persons” to seven percent from the prevailing five percent. It states a juridical person may hold up to 10 percent of a bank’s subscribed shares, and rules that a shareholder with significant ownership in one bank may not acquire stakes in another.

The bill also addresses the ownership of microfinance institutions (MFIs) turned banks, most of which still see significant ownership by regional administrations. The Amhara, Oromia, Omo, and Somali MFIs recently transformed into Tsedey, Siinqee, Omo, and Shabelle banks. 

The draft states that the “maximum shareholding that may be held by regional governments and their enterprises in a bank transformed from a microfinance institution shall be determined by a national bank directive.”

The draft also seeks to allow banks to employ foreign nationals in senior executive roles (including as president) with permission from the NBE, which is set to determine the threshold for how many foreign employees a bank can employ in an upcoming directive.

The bill will enable mergers to “rescue a problem bank or create a more viable bank” with the permission of the NBE, which will have the power to approve the acquisition of a bank by another bank, including a foreign one. It provides that any merger or acquisition proposal will also need to be decided by an extraordinary general shareholders’ assembly.

The NBE will be able to appoint an official administrator for a bank if its capital adequacy ratio falls below threshold levels, its paid-up capital is eroded by half or more, or when the central bank has reason to believe its senior executives, management, or shareholders are engaging in illegal activity.

The bill also proposes to allow banks to borrow from foreign sources.

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