Africa

Ethiopia's council of ministers approves key banking reforms

Ethiopia's council ministers at a meeting held on March 5, 2024. (Photo: PMEthiopia)

By Hanifa Adan | Monday, June 17, 2024

These legislations represent a significant step in laying a strong foundation for growth and enhancing the credibility, accountability, transparency, and governance of the National Bank of Ethiopia.

Ethiopia's Council of Ministers has approved the draft National Bank of Ethiopia (NBE) Proclamation and the Banking Business Proclamation.

These draft proclamations will shortly be referred to the House of Peoples' Representatives for review, comment, and final ratification.

These legislations represent a significant step in laying a strong foundation for growth and enhancing the credibility, accountability, transparency, and governance of the National Bank of Ethiopia.

The NBE has prepared these proclamations, taking into account the current and future level of development and policy direction, as well as the rapid technological advancement, international principles, and best practices and experiences of peer central banks.

These proclamations are an integral part of the NBE reform agenda, as indicated in the bank's strategic plan.

Key policy changes being addressed by these proclamations include the following;

The NBE Proclamation allows the NBE to set a hierarchy for its monetary policy objectives and to choose appropriate monetary policy instruments to achieve its goals.

Ethiopia's council ministers undertake the 2nd quarter performance review at a meeting held on March 5, 2024. (Photo: PMEthiopia)

It provides for the establishment of a Monetary Policy Committee to ensure the quality and effectiveness of its monetary policy.

It further provides for the bank to set a price stability target in consultation with concerned government entities. It also advocates for increasing the bank's capital and establishing a National Financial Stability Committee to ensure the soundness of the financial sector.

The NBE proclamation further defines the number, composition, tenor, and eligibility criteria for NBE Board members and the tenor and employment criteria for the governor and vice governor.

It also defines the bank's relationship with the government, particularly in terms of the amount of government borrowing and the modalities of loan repayment.

Alongside the aforementioned key policy changes, it also highlights the role of macroprudential policy formulation in the risk management of the financial sector and sets a clear legal basis for financial services consumer protection.

Lastly, it establishes a legal framework for the introduction of central bank digital currency, as necessary.

The Banking Business Proclamation provides for opening up the banking sector to foreign investment. Foreign banks can invest in the banking business by opening foreign bank subsidiaries, and branches, or by investing in shares of existing domestic banks. Representatives of foreign banks will be under the regulatory umbrella of the National Bank.

It also introduces a range of prompt corrective actions to be taken on problem banks by the National Bank. It sets a regulatory sandbox framework for introducing new and innovative financial services.

It further gives resolution authority to the National Bank of Ethiopia to deal with likely-to-fail or failed banks to minimise the cost to customers. It also introduces changes to the composition of commercial banks' boards of directors.