The National Bank of Ethiopia has released a draft directive limiting small banks’ ability to operate in SEZs, requiring a minimum 2% market share. This move is aimed at prompting mergers within the banking sector, which currently consists of 32 banks. The financial stability of the banking industry may be at stake, as critics argue that smaller institutions will face challenges meeting new requirements.
The National Bank of Ethiopia (NBE) has proposed a new directive that restricts small and newly established banks from opening branches in Special Economic Zones (SEZs). This regulation necessitates that banks must possess a minimum market share of 2% of total banking sector assets to be eligible for SEZ operations. Currently, only a few banks, mainly state-owned institutions, meet this threshold.
The new rule, which is part of a broader initiative to consolidate the banking sector, aligns with a government strategy promoting bank mergers. As of the end of the 2023/24 fiscal year, the banking sector’s total assets reached approximately 3.3 trillion birr, a 15.2% increase compared to the previous year. This growth was primarily driven by loans, advances, and bonds, which constituted 66.9% of total assets.
Industry analysis indicates that a bank wishing to operate in an SEZ would need about 66 billion birr in capital. The Commercial Bank of Ethiopia (CBE), the largest bank, holds 43.5% of the banking sector’s total assets with 1.35 trillion birr in assets as of June 30, 2024. Critics of the directive argue that it discriminates against smaller banks, which could struggle under the new requirements.
Currently, there are 32 banks in Ethiopia, with the NBE highlighting the need for mergers to establish more viable financial institutions. The NBE International Financial Stability Report notes that medium-sized banks constitute 28.9% of total sector assets, compared to 23.3% held by small banks, excluding the Development Bank of Ethiopia (DBE).
In tandem with the SEZ restrictions, the NBE introduced revised reserve requirements and proposed new corporate governance regulations for the insurance sector. These changes aim to enhance oversight and stability in Ethiopia’s financial landscape, but they may impose significant operational challenges for smaller banking entities.
The NBE’s proposed directive limits small banks’ access to SEZs, necessitating at least a 2% market share in total sector assets. This move aims to encourage mergers and strengthen the banking sector in Ethiopia. However, it raises concerns about the viability of smaller banks amid increasing regulatory demands and consolidation efforts. Further regulatory changes, including updated reserve requirements, reflect NBE’s commitment to improving the financial sector’s stability, albeit challenging for smaller institutions.
Original Source: capitalethiopia.com
