In a move designed to bolster the security and stability of the Ethiopian financial sector, the National Bank of Ethiopia (NBE) announced a series of revisions to its regulatory framework. Accordingly, it revised five of its directives.
The revisions encompass a broad range of areas. Banks will now face stricter limitations on the total amount of credit they can extend to a single customer or entities with related ownership structures. The new directives establish a cap of 25% of a bank’s total capital for individual exposure, 15% for related-party exposure, and a combined maximum of 35% for exposure to all entities connected through ownership ties.
Furthermore, the NBE emphasizes the importance of fairness and transparency in loan transactions. The updated directive requires that all transactions with related parties be conducted under the same terms and conditions as those with unrelated parties, effectively mitigating potential conflicts of interest. Additionally, banks are mandated to report on any loans exceeding 5% of their total capital and disclose any modifications made to the terms of such loans.
The NBE has also introduced stricter classifications for bad and doubtful loans. Loans deemed unlikely to be repaid, even with collateral provided, will be classified as bad loans. The new framework also implements a domino effect, whereby if a borrower defaults on more than 20% of their total loan portfolio with a bank, all loans from that borrower will be reclassified as bad. Doubtful loans, under the revised directives, are those where repayment seems increasingly improbable due to various circumstances.
Another key element of the revisions pertains to loan renewals. In a bid to prevent defaults, the NBE has reduced the permissible number of loan modifications. Short- and medium-term loans can now be restructured only three times, down from the previously allowed five renewals. Similarly, long-term loans can undergo a maximum of four modifications, compared to the prior limit of six.
Promoting diversity and inclusion within the financial sector is another objective of the NBE’s revisions. The new directives mandate that all bank boards of directors include at least two women, fostering a more inclusive leadership landscape.
Source: Sheger FM 102.1
