July 19, 2024

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National bank of Ethiopia

Ethiopia Cracks Down on Concentrated Lending with New Banking Rules

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The National Bank of Ethiopia (NBE) has initiated significant reforms to enhance the country’s banking regulations, aiming to support financial stability and align with international standards. This move involves revising five key directives related to risk management, governance, and financial reporting, as guided by global best practices outlined by organizations such as the Basel Committee on Banking Supervision.

According to the National Bank of Ethiopia FSR (Financial Stability Report) April 2024, the top ten borrowers in the banking industry collectively held about 23.5% of all loans and advances by June 2023. This percentage went up from 18.7% the previous year, showing an increasing concentration among these major borrowers. These borrowers owe 440 billion ETB to private and government banks. Read More…

“It is critical for public savings to be mobilized, protected, and deployed safely for the purposes of economy-wide lending, investment, and growth,” NBE said.

The first directive limits a bank’s total lending to any single borrower or group of connected parties to a maximum of 25% of its capital. This tighter restriction is intended to prevent a default by a major borrower from destabilizing an individual bank or the entire banking system.

The second directive focuses on related-party lending. It sets a 15% capital limit on loans to any single related borrower, such as a director, and an overall cap of 35% for lending to all related parties combined.

Previously, there were no explicit numerical limits on this type of lending, which created opportunities for abuse.

The new directive requires all non-performing loans to be immediately placed on non-accrual status, regardless of collateral and aligns with global standards. Additionally, loans are now classified as non-performing more quickly if borrowers miss payments. This change forces banks to set aside larger reserves against potential losses upfront, rather than delaying through restructures.

The directive also introduces stricter limits on loan restructures. Banks are now limited to three short-term restructures and four long-term restructures before declaring a default, down from five and six previously.

The NBE’s Financial Stability Report highlighted the uneven distribution of credit in the country. While a small group of borrowers dominates the lending landscape, the report revealed that 99.8% of loans are concentrated in urban areas, leaving many rural residents underserved. The report also identified significant risks in terms of loan diversification, as indicated by key financial metrics.

These governance reforms, along with the new lending limits and asset classification requirements, aim to create a more stable, equitable, and transparent banking system in Ethiopia. By addressing risk concentration, improving oversight, and promoting financial inclusion, the NBE hopes to support the country’s economic growth and development goals.

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