The National Bank of Ethiopia has introduced fresh amendments to its foreign exchange directive, expanding the role of commercial banks in trade finance and revising the structure of fees applied to Letters of Credit. The changes are part of ongoing reforms aimed at improving efficiency in the foreign exchange market, reducing transaction bottlenecks, and supporting smoother trade flows for businesses operating in Ethiopia.
Since the introduction of a market-based foreign exchange regime in July 2024, the central bank has been implementing a sequence of policy adjustments intended to strengthen market operations and improve transparency in FX transactions. The latest directive updates continue along this path, targeting administrative delays and inconsistencies that have affected trade finance processing.
Expanded Bank Authority in Trade Finance Transactions
Under the revised FX Directive FXD/01/2024, commercial banks have been granted increased authority to approve key trade finance instruments without requiring prior approval from the National Bank of Ethiopia. This shift is intended to reduce dependency on central bank clearance for routine transactions and improve turnaround times in import and export financing.
Banks are now authorized to approve Letters of Credit on acceptance for institutions holding foreign currency accounts, including retention account holders, without seeking prior approval from the central bank. In addition, commercial banks can also approve Cash Against Documents arrangements for eligible account holders under the same conditions. These changes place more operational responsibility on banks while maintaining documentation requirements for payment processing.
Institutions holding foreign currency accounts, including retention account holders, are also permitted to initiate shipment of goods under Cash Against Documents arrangements. However, payment execution remains subject to the submission and verification of required documents, ensuring that compliance checks remain embedded within the system.
Revised Structure for Letter of Credit Charges
The Ethiopia central bank has also introduced a revised framework for fees and charges applied to Letter of Credit transactions. The previous structure had been characterized by inconsistencies across commercial banks, prompting the need for a more standardized approach aligned with international trade finance practices.
Under the new rules, fees and charges on LC transactions for institutions holding foreign currency accounts, including retention account holders, will now be calculated on an annualized basis. These charges will be applied on a pro-rata basis depending on the duration of each Letter of Credit, ensuring that costs are more closely aligned with the actual tenor of the transaction.
At the same time, the annualized fee rate for Letter of Credit transactions will not exceed the maximum limit previously set by the National Bank of Ethiopia. This maintains an overall cap while introducing greater consistency in how fees are structured and applied across the banking sector.
Impact on Trade Finance and Business Costs
The adjustments are expected to ease the cost burden associated with trade finance, particularly for importers and exporters who rely heavily on Letters of Credit to facilitate cross-border transactions. By shifting to an annualized and pro-rata fee structure, businesses are likely to experience more predictable and transparent pricing when engaging in trade finance activities.
The expanded authority granted to commercial banks is also expected to reduce processing delays linked to prior approvals, allowing transactions to move more efficiently through the banking system. This is likely to improve the speed of import clearance and export processing, especially for firms operating under foreign currency accounts and retention accounts.
In addition, the standardization of fees across banks is expected to reduce discrepancies in pricing practices, contributing to a more uniform trade finance environment. For businesses, this could translate into improved cost planning and reduced uncertainty when structuring international trade transactions.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.