The National Bank of Ethiopia (NBE) has revised banking business issues in several

ways, including monetary policy, financial stability, and regulatory standards.

Monetary policy

 Interest-rate based monetary policy: The NBE has transitioned to a monetary policy
regime based on interest rates, which includes Open Market Operations (OMOs).

 Exchange rate regime: The NBE has liberalized the exchange rate regime.

 Benchmark policy rate: The NBE has set a benchmark policy rate.

 Overnight facilities: The NBE has introduced overnight facilities for banks.
Financial stability

 Stress testing

The NBE has revised its Bank Risk Management Guidelines to include stress testing.

 Early remedial action

The NBE has established a system for early remedial action on deteriorating credits.

 Credit review process

The NBE has established a systematic credit review process to identify weakened or
problem credits.
Regulatory standards

 Large Exposure Limit Directive

The NBE has revised the Large Exposure Limit Directive to reduce vulnerabilities and
improve risk management.

 Fit and Proper Test Directive

The NBE has revised the Fit and Proper Test Directive to enhance the effectiveness of
banks' oversight and management functions.

 Corporate Governance Directive

The NBE has revised the Corporate Governance Directive to enhance the effectiveness
of banks' oversight and management functions.
The National Bank of Ethiopia (NBE) has issued several directives in 2024, including
directives on foreign exchange, bank corporate governance, and investment limitations.

Foreign exchange directives

 FXD/01/2024: This directive modernizes foreign exchange policies in Ethiopia. It allows

exporters and commercial banks to keep foreign exchange, which increases the supply of
foreign exchange in the private sector. It also removes interest rate ceilings for private
companies and banks borrowing from abroad.

 FXD/87/2024: This directive is related to the customs declaration of foreign currency.

Bank corporate governance directives

 SBB/91/2024: This directive aims to ensure that banks are managed and directed in a
prudent and sound manner. It also aims to maintain the safety and soundness of the
financial system.
Investment limitations directives

 SBB/92/2024: This directive limits the investment and financing of banks. It includes
restrictions on where, how, and for what purpose funds can be invested.
Other directives issued by the NBE in 2024 include:

 NBE|ELA|001|2024 – Emergency Liquidity Assistance Directive

 MFAD/IBM/03/2024 Interbank Money Market Directive

Ethiopia makes major changes to foreign exchange regime
Executive summary

The National Bank of Ethiopia (NBE) on 29 July 2024 announced (in Directive No.
FXD/01/2024) (the Directive)a reform of the foreign exchange regime with immediate effect.
The reform introduces a competitive, market-based determination of the exchange rate and
addresses a long-standing distortion within the Ethiopian economy.

The Directive involves significant policy changes in the areas listed in this Alert.

Policy changes

1. Shift to a market-based exchange regime

Banks will be allowed to buy and sell foreign currencies from/to their clients and among
themselves at freely negotiated rates. The NBE will make only limited interventions to support
the market in the regime's early days and if justified by disorderly market conditions.

2. End of surrender requirements to the NBE and improvement of retention rules

Exporters and commercial banks are allowed to retain foreign exchange (i.e., foreign currency).
Exporters of goods and services shall immediately convert into Ethiopian Birr (ETB), at a freely
negotiated rate, 50% of their export proceeds to the Bank used in processing their foreign
exchange transaction, while keeping the remaining 50% in their Foreign Exchange Retention
Account. However, the conversion requirement is not applicable to foreign exchange inflows
related to foreign direct investment (FDI), foreign grants, all foreign currency (FCY) accounts,
external loans, and portfolio inflows.

3. Removal of import restrictions

Authorized banks are mandated to allow import of goods for any value, against submission
(including via electronic methods) of required documents by the importer.

4. Removal of rules governing banks' allocation of foreign exchange

The NBE has repealed its previous directives that allowed imports based on a waiting-list system
for different categories based on priority.

5. Introduction of non-bank foreign exchange bureaus

By the authorization of the NBE, foreign exchange bureaus may operate either as a specialized
window of banks or as independent (non-bank) foreign exchange bureaus without any bank
affiliation.
Independent foreign exchange bureaus are to engage solely in the business of buying and selling
foreign exchange cash notes and are not to engage in any other area of banking activity. These
independent foreign exchange bureaus are required to fulfill the capital requirement of ETB15m
and should be able to provide an ETB30m security deposit to be placed in a blocked account
(which can be interest-earning) at any bank, among other requirements.

6. Removal of restrictions on franco-valuta imports

Any imports of goods that do not utilize foreign exchange resources from the banking system
(widely known as "franco-valuta imports" and not requiring the use of Letters of Credit, Cash
Against Deposit, advance payment or other payment modalities) shall be permitted to enter the
country subject to all the usual customs, tax, health and other pertinent regulatory standards and
implementation shall be set by the relevant authorities or regulations.

7. Foreign currency accounts

Eligible individuals and entities may establish FCY accounts upon fulfilling the requirements
applicable for specific accounts. The following three categories of FCY accounts are authorized
by the NBE, and additional types of accounts may be permitted from time to time.

1. FCY Accounts for Foreign Entities, including FDI companies, international

organizations, embassies, and foreign nongovernmental organizations (NGOs)

2. FCY Accounts for Resident and Nonresident Ethiopians, including for nonresident
foreign nationals of Ethiopian origin

3. Retention Accounts for exporters of goods and services

8. External loans

No person or entity may enter into a foreign loan contract without first consulting with the NBE
(in the case of the Government) and obtaining the NBE's approval (in all other cases). If a loan
contract is entered into without fulfilling these requirements, foreign exchange for the repayment
of the loan may be denied.

Note, however, that the NBE has removed the interest rate ceiling that previously applied to
private sector companies and banks when borrowing from abroad.

9. Securities market to foreign investors

An NBE press release dated 29 July 2024 indicated that the securities market is open to
foreigners, although the terms and conditions are to be specified further in the near future.

10. Industry parks and Special Economic Zones (SEZs)

Industry parks not designated as SEZs may:

• Buy, in FCY, raw materials or inputs manufactured by another investor within the same
industrial park or across another industrial park from its FYC and/or retention account

• Sell its manufactured product within the industrial park as an input to another investor
within same industrial park or across another industrial park in FCY via credits to its retention
account

• Open an FCY account to foreign employee of industrial park

• Issue export and import permits for trade within and between industrial parks

Consistent with other relevant laws related to Special Economic Zones (including industrial
parks designated as SEZs) companies operating in SEZs shall enjoy some special benefits in
their foreign exchange dealings.

11. Foreign currency cash notes for travelers

For personal travel outside Ethiopia (such as for holiday, education, medical and other personal
reasons), a foreign exchange bureau may sell foreign exchange to an individual Ethiopian
national or a foreign resident upon presentation of passport, valid entry visa, if applicable, and air
ticket.

For personal travel foreign exchange sales:

• Travelers are entitled to US$5,000 or its equivalent in other convertible currencies, which
may be provided as cash notes or via a debit card.

• FCY account holders are entitled to US$10,000 or its equivalent in other convertible
currencies, which may be taken in cash notes or via a debit card. In addition, the account holder
can take up to 10% of their outstanding FCY account balance via a debit card.

• Unless otherwise authorized by the NBE, any Ethiopian resident may not carry cash notes
exceeding US$10,000 or equivalent per travel excursion.

For business travel allowance:

• Government travelers may receive total cash notes not exceeding US$10,000 or the
equivalent in other convertible currencies, as per the Council of Ministers Directive in relation to
Government institutions per diem, accommodation and other related expenses. These funds may
be received in cash notes or via a debit card.

• FCY account holders may receive up to US$10,000 or its equivalent in other convertible
currencies in cash notes or via a debit card. In addition, the account holder can take up to 10% of
their outstanding FCY account balance via a debit card.
• Withdrawals of cash notes for the purpose of convening conferences, workshops,
meetings and per-diem payments by embassies, international organizations and regional
organization can be made based on the request submitted and requirements of the program to be
carried out.

• If a chartered plane trip is arranged, the amount approved shall be based on the related
documents presented for the trip and charter arrangement with an airline.

• Travelers who are going to neighboring countries using their own transport means or
surface transport, in lieu of an air ticket, may purchase FCY upon presentation of a car passage
certificate or letter from the concerned government organization or company.

• Unless otherwise authorized by the NBE, no Ethiopian resident may carry cash notes
exceeding US$10,000 or equivalent per business trip.

Transitional provisions

All foreign exchange directive and circulars that the NBE has issued to date are hereby repealed
and replaced by this Directive, effective as of 29 July 2024.

Loan Classification and Provisioning

The National Bank of Ethiopia (NBE) has revised its Loan Classification and Provisioning
Directive to address issues such as loan restructuring, non-performing loans, and provisioning
requirements. The revisions aim to strengthen the financial sector's oversight and prevent ever
greening of loans.

 Loan restructuring

The number of times a bank can restructure a loan has been limited.

Banks must set aside larger reserves upfront to cover potential losses.

 Non-performing loans

Loans are automatically reclassified as non-performing if one of a client's loans is non-

performing and accounts for at least 20% of the bank's exposure to the client.

Banks must place all non-performing loans on non-accrual status.

 Provisioning requirements

Banks must provide provisions for on-balance sheet and off-balance sheet exposures.

Banks must maintain minimum prudential provisions for loans categorized as "losses,"
"doubtful," and "substandard".
Banks must report exposures and bad loans in accordance with International Financial Reporting
Standards (IFRS).

 Governance

Requirements for directors and managers have been enhanced.

Corporate boards must include at least two independent directors and two women.

Bank corporate governance

The National Bank of Ethiopia (NBE) revised its bank corporate governance directive to
improve board independence, diversity, and effectiveness. The directive also aims to
enhance business prudence and corporate accountability.

Key revisions

 Independent directors

The directive requires that a minimum of one third of the board be made up of
independent directors. Independent directors are non-executive directors who are not
affiliated with the bank.

 Female board members

The directive requires that at least two female directors be on the board.

 Board committee functions

The directive changes the functions of board nomination and election committees.

 Board member qualifications

The directive requires higher qualifications and relevant experience for board
members.

 Board member training

The directive requires that board members receive at least one training session a year on
financial, legal, regulatory, and corporate governance matters.

 Board member remuneration

The directive requires that the remuneration structure for board members be consistent
with the bank's long-term interest and financial soundness.

 Board meeting frequency

The directive requires that board meetings be held at least once a month.

 Board member attendance

The directive requires that board members attend a minimum of 75% of meetings in
person every year.
The directive also ensures that the bank's operations are run prudently and in compliance
with relevant laws, regulations, policies, and procedures.

The National Bank of Ethiopia (NBE) has revised its interbank money market
directive to address a number of issues, including:
 Liquidity management
The NBE has created an online interbank money market platform to help
banks manage liquidity. The platform allows banks to borrow and lend short-
term, which can help them cover shortfalls and invest surplus funds.
 Foreign exchange trading
The NBE has revised its policy on foreign exchange trading to limit the
spread between buying and selling rates. The NBE also requires banks to
disclose foreign exchange fees and commissions to their customers.
 Corporate governance
The NBE has introduced stricter requirements for bank boards of directors
and senior management. These requirements include a limit on the number
of directorships, higher qualifications, and relevant experience.
 Risk management
The NBE has introduced stress testing to help banks identify and manage
credit risk. The NBE also requires banks to have a system for early remedial
action on deteriorating credits.
The NBE's goal is to create a stable financial system that provides access to
financial services for all citizens.
The National Bank of Ethiopia (NBE) limits the amount of loans and advances
a commercial bank can extend to a single person or related party. The NBE
also limits the total amount of loans a bank can extend to related parties.
Single borrower limit
 The total amount of loans a bank can extend to a single person who is not
related to the bank cannot exceed 25% of the bank's total capital.
Related party limit
 The total amount of loans a bank can extend to a single related party cannot
exceed 15% of the bank's total capital.
 The total amount of loans a bank can extend to all related parties cannot
exceed 35% of the bank's total capital.
Enforcement
 Banks must immediately notify the NBE if they breach these limits.
 The NBE can prohibit a bank from extending loans to any person if it deems it
necessary.

To open a branch in Ethiopia, a bank must obtain authorization from the

National Bank of Ethiopia (NBE). The bank must submit an application, pay a
fee, and meet certain requirements.
Application Complete and sign the application form, Include a covering letter,
and Pay the required fee.
Requirements
 The branch must be adequately guarded
 The branch must have proper ventilation and air circulation
 The branch must have a safe vault
 The branch must have a cashier's till that is only accessible to authorized
personnel
 The branch must have fire extinguishers in the appropriate places
 The branch must have insurance for fire, theft, burglary, and cash
 The branch must display its license and working hours in a visible area
 The branch must distribute the bank's policy and procedure manuals to the
staff
 The branch must display required information to the public
Operation
 The bank must start operating within six months of receiving authorization
 The bank must notify the NBE 15 days before the planned opening date

The National Bank of Ethiopia (NBE) has issued directives to monitor fraud in
the financial sector. These directives require financial institutions to establish
systems to detect and report fraud, and to provide training to employees on
anti-fraud measures.
Fraud monitoring directives
 Fraud Monitoring Directives No. MFI/26/2014
This directive requires microfinance institutions to report fraud to the NBE,
and to assess fraud cases quarterly.
 Directive-No.-SIB-39-2014-Insurance-Reinsurance-Business
This directive requires insurers and reinsurers to establish systems to detect
and report fraud, and to provide anti-fraud training to employees.
 Bank Risk Management Guidelines
This directive requires banks to establish systems to assess their credit risk
management processes, and to communicate the results to senior
management.
Fraud monitoring requirements
 Financial institutions must establish systems to detect and report fraud.
 Financial institutions must provide anti-fraud training to employees.
 Financial institutions must maintain a fraud register with detailed records of
fraud.
 Financial institutions must communicate fraud to their board of directors and
senior management.
 Financial institutions must ensure that their systems facilitate communication
about fraud.
The National Bank of Ethiopia (NBE) sets requirements for opening accounts,
including the minimum deposit amount, types of accounts, and documentation
required.
Minimum deposit amount
 The minimum deposit to open a current foreign currency account is USD 100
or its equivalent
 The minimum deposit to open a fixed deposit foreign currency account is USD
5,000 or its equivalent
Types of accounts
 Banks can open interest-bearing or interest-free foreign currency saving
accounts
 Banks can open fixed or time deposit accounts for non-residents
Documentation required
 Proof of permanent address
 Personal reference
 Prior bank reference
 Source of wealth
 Verification of employment or public position
 Financial institutions where the applicant owns shares
 Source of funds for increasing shareholding