The NBE’s draft directive bars small banks from operating in SEZs, potentially driving industry mergers. Only banks with at least 2% market share can qualify for SEZ branches, a requirement few meet. This move aims to enhance the banking sector’s competitiveness as it prepares for foreign entry, prompting concerns regarding smaller banks’ viability.
The National Bank of Ethiopia (NBE) has proposed a new draft directive restricting small and newly established financial institutions from establishing branches in Special Economic Zones (SEZs). This move appears to be a component of a larger strategy aimed at promoting mergers within the banking sector. This directive, released alongside two other regulatory updates, requires banks to possess at least a 2% market share of total banking sector assets to qualify for operations in SEZs.
As stipulated in Article 4.6.1 of the draft directive, eligibility for SEZ branch openings hinges on a bank’s assets constituting no less than 2% of the banking sector’s total assets, determined at the close of the prior fiscal year. Estimates suggest that a bank would need to amass a total capital of approximately 66 billion birr to vie for an SEZ presence based on recent data.
The overall assets of Ethiopia’s banking industry reached around 3.3 trillion birr as of the conclusion of the 2023/24 fiscal year, indicating a notable 15.2% growth year-on-year primarily driven by loans, advances, and bonds, which represent 66.9% of total assets. However, only a few banks, mainly state-owned entities, meet the requisite 2% threshold necessary to operate in SEZs. The Commercial Bank of Ethiopia (CBE), for instance, commands an impressive 43.5% share of the sector’s total assets as of June 30, 2024.
Critics of the new directive contend that it unfairly disadvantages smaller banks and contributes to a trend of consolidating the banking industry. The NBE is empowered under the recently ratified banking business proclamation to mandate mergers, part of an initiative to enhance the financial sector’s robustness before integrating foreign competitors. Officials have expressed a compelling need for mergers among the current 32 banks in Ethiopia to enhance their competitiveness.
The NBE’s Financial Stability Report highlights that the collective assets of five medium-sized banks account for 28.9% of total assets, while the combined assets of 25 smaller banks—excluding the Development Bank of Ethiopia—total 23.3%, with a slight annual rise of 0.8%. Additionally, revisions to reserve requirements and corporate governance in the insurance sector have been proposed, underscoring the NBE’s dedication to refining and fortifying Ethiopia’s financial landscape amidst rising challenges for smaller banking entities.
In summary, the NBE’s recent draft directive restricts small banks from branching into SEZs, potentially accelerating industry consolidation through mandatory mergers. This reflects a strategic effort to strengthen the banking sector ahead of foreign competition. While the directive presents major challenges for small institutions, it emphasizes the NBE’s intent to enhance financial stability and governance standards in Ethiopia’s evolving banking landscape.
Original Source: capitalethiopia.com
