The National Bank of Ethiopia (NBE) has issued a draft directive that restricts small and newly established financial institutions from opening branches in Ethiopia’s Special Economic Zones (SEZs). The move is seen as part of a broader effort to consolidate the banking sector and encourage mergers among financial institutions.
The NBE’s draft directive, released this week alongside new regulations on insurance business operations and minimum reserve requirements for banks, stipulates that only banks with a market share of at least 2% of the total assets in the banking sector will be eligible to establish branches in SEZs.
These zones, designed to attract investment, foster industrial growth, and drive economic development through tax incentives and regulatory benefits, will now be accessible only to major players in the banking industry.
Stricter Entry Requirements for SEZ Operations
The directive sets clear financial benchmarks that banks must meet to qualify for SEZ operations. According to Article 4.6.1 of the directive, a bank’s total assets must account for at least 2% of the sector’s total assets based on the latest fiscal year-end figures.
Industry estimates indicate that to meet this threshold, a bank would require a minimum total capital of 66 billion birr. The total assets of Ethiopia’s banking sector reached approximately 3.3 trillion birr by the end of the 2023/24 financial year, marking a 15.2% increase from the previous year. Growth in loans, advances, and bonds contributed significantly, making up 66.9% of total assets.
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To further regulate financial stability within SEZs, the directive outlines additional eligibility requirements, including:
- Liquidity Ratio: Banks must maintain a liquidity ratio at least three percentage points above the NBE’s minimum threshold.
- Non-Performing Loan (NPL) Ratio: The NPL ratio must not exceed 5%, ensuring that only banks with strong financial health can participate.
- Forex Services: SEZ branches must provide foreign exchange services to support international trade.
- Capital Adequacy: Specific capital and asset adequacy ratios must be met, depending on final directive provisions.
Implications for Small and Medium-Sized Banks
The directive effectively excludes smaller banks from operating in Ethiopia’s Special Economic Zones, a decision that has drawn criticism from industry experts. Currently, only a few banks—mainly state-owned institutions like the Commercial Bank of Ethiopia (CBE) and the Development Bank of Ethiopia (DBE)—meet the 2% market share requirement. The CBE, Ethiopia’s largest bank, dominates the sector with 43.5% of total assets, reaching 1.35 trillion birr as of June 30, 2024, according to the NBE’s Financial Stability Report.
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Critics argue that the directive disproportionately favors larger institutions and is aligned with the government’s push for banking sector consolidation. The NBE, under its recently granted regulatory powers, can now mandate mergers among banks, a strategy aimed at strengthening financial institutions before the sector opens to foreign competition.
With Ethiopia currently home to 32 banks, officials have emphasized the need for consolidation through mergers and acquisitions. According to the NBE’s Financial Stability Report, the combined assets of five medium-sized banks account for 28.9% of the sector’s total assets, while the 25 smaller banks (excluding DBE) collectively hold 23.3% of total assets, an annual increase of just 0.8%.
Broader Regulatory Reforms
The release of the SEZ directive follows a series of regulatory reforms initiated by the NBE. In addition to setting new SEZ banking requirements, the central bank has proposed revisions to reserve requirements, a policy that has been adjusted eight times over the past three decades. Moreover, a corporate governance directive for the insurance industry has been introduced, mandating that one-third of board members be independent—a similar measure was imposed on the banking sector in June 2024.