Ethiopia’s central bank plans to amend reserve requirements for commercial banks, simplifying the reserve architecture and introducing tighter reporting deadlines and penalty structures. A proposed daily reserve balance requirement of 5% may replace the current average of 7%, in an effort to enhance financial stability amidst declining inflation rates. The changes aim for clearer definitions and structured oversight of reserves, alongside new directives for the insurance sector.
The National Bank of Ethiopia (NBE) is set to amend the reserve requirements for commercial banks through a new draft directive currently available for public consultation for one month. NBE aims to integrate the reserve account with the payment and settlement account, simplifying the existing structure. This revision marks the second round of amendments in three years and seeks to establish more comprehensive requirements for reserve maintenance, reporting, and penalties.
Under the proposed amendments, banks must adhere to specific reporting deadlines, including a monthly reserve base report and a statutory reserve requirement report. Currently, banks maintain an average reserve ratio of 7% of their total deposit liabilities, but they may soon need to maintain a daily reserve balance of 5% during the maintenance period. As of June 2024, commercial bank deposits at NBE increased by 12.1% to approximately 215 billion birr, despite a year-on-year contraction of 1.1% in overall reserve money.
Reserve requirements are crucial tools for central banks globally to ensure financial stability. Higher reserve requirements compel banks to retain a larger percentage of deposits as reserves, thus limiting their lending capacity, which can lead to reduced system liquidity. NBE has adopted stringent economic policies in response to persistent high inflation, which has decreased to about 17%.
In the new proposal, terms like “reserve maintenance period” are explicitly defined. The maintenance period will start on the first Thursday after calculating the reserve base and end on the first Wednesday of the following month. During this period, banks must maintain a 7% average reserve based on the prior month’s average daily reserve base, encompassing all forms of domestic and foreign deposits.
Additionally, the draft directive revises how penalties for reserve deficiencies are calculated. Instead of penalties based on the maximum lending interest rate, banks will incur charges based on a rate 3% higher than NBE’s Standing Lending Facility rate. Late reports will incur a fee of 20,000 birr each day they are overdue. The average reserve base will now be calculated monthly rather than weekly, marking a substantial shift in reporting practices.
These amendments are complemented by four additional directives, including updates relevant to the insurance sector and regulations pertaining to bank branches in special economic zones. This series of changes aims to enhance the regulatory framework overseeing commercial banking operations in Ethiopia.
The National Bank of Ethiopia is proposing significant changes to the statutory reserve requirements for commercial banks. These changes include simplified reserve maintenance protocols, more stringent reporting requirements, higher penalties for violations, and a shift in how reserves are calculated. The overall objective is to strengthen financial stability while continuing to address inflationary pressures in the economy.
Original Source: shega.co
