NBE- ETHIOPIA'S BANKING BIG BROTHER

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001639 SIPDIS DEPT FOR AF/E AND EEB DEPT PLEASE PASS TO USTR BILL JACKSON E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ET SUBJECT: NBE- ETHIOPIA'S BANKING BIG BROTHER ¶1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's central bank) wide ranging and extensive power over the operations of private banks and Ethiopians' rights to invest in the financial sector. The Proclamation gives NBE the ability to vet and remove bank board members and executives; limit shareholders; control the timing and agenda of shareholders' meetings and place banks into receivership. While many of these provisions are a part of standard bank oversight, the ability for NBE to take action based upon the bank or its officers engaging in "actions detrimental, in the opinion of the National Bank, to the financial sector stability, soundness, the economy and the general public" is disturbingly undefined and arbitrary. Many of these provisions are not new. They do, however, point to the GoE's desire to maintain strict control over the country's banking and finance sector. END SUMMARY. NBE CONTROLS BANK BOARDS OF DIRECTORS AND EXECUTIVES ¶2. The Proclamation requires NBE written approval at the time of licensing for the following Directors and Officers: Board members, the chief executive officer and senior officers, and "influential shareholders." Influential shareholders are those who hold directly or indirectly 1% or more of total subscribed capital. Any subsequent appointment of board members also requires approval by NBE, and no board member can leave until their incoming replacement is central bank approved. ¶3. All of these individuals must "meet qualifications or standard criteria [set] by the National Bank." Qualifications are described as "required education, experience, fitness and propriety **or any other criteria or requirement** prescribed by directives issued by NBE," leaving the possibility that NBE could issue directives severely limiting who may serve as a board member or officer, or even hold significant shares in, Ethiopia's private banks. ¶4. In contrast, U.S. banking law gives regulators the power to vet board members pre-licensing. According to U.S. banking expert Gary Dorminey, the approval is, for the most part, pro-forma. Persons can be denied for felonies, any past misconduct in the financial world, or "unsavory" backgrounds in general. In a start up bank they are now requiring that at least one or two members have previous banking experience at the executive management level or at the Board level. Once a bank is out of "de novo" status, board approvals are still required, but less stringent, and denials are generally only for a past history of felonies, or financial improprieties either personally or having been connected with a firm experiencing problems. A bank must inform regulators of any entity that acquires or plans to acquire more than 9.9% of shares, as that may trigger a change in control. Ethiopia's banking law clearly provides NBE with broader and more extensive ability to approve and disapprove board members and executives than U.S. law. ¶5. In addition to establishing the "qualifications" test, the Proclamation further limits who may serve as a bank executive or board member. An employee of the bank may not be appointed as the chairperson of the board. Moreover, individuals may not serve as directors for more than one bank. According to Mr. Dorminey, U.S. banking regulators prefer non-employee board chairs, but do not prohibit them. In fact such "executive chairs" are prevalent in U.S. banking. ¶6. Board members and bank executives "must", per the Proclamation, be removed in a number of circumstances. These include filing for or declaring personal bankruptcy; being convicted of any offense involving dishonesty or fraud; carrying (individual) non-performing loans from any bank; being certified as mentally ill; or failing to meet the NBE's nebulous "qualification requirements." Further, no one who has been a director or senior officer of a bank that has been wound up (put out of business by a regulatory authority) in any country may be involved in the management of an Ethiopian bank. Violation of these provisions may result in fines from 50,000-100,000 Birr and/or imprisonment for up to fifteen years. In contrast, Mr. Dorminey stated that U.S. bank regulators cannot remove board members per se. If, however, there is evidence of criminal behavior in the conduct of business, regulators may issue a cease and desist order that effectively removes the person in question. ¶7. Perhaps most ominously, the Proclamation states that the NBE may "for sufficient cause, remove or suspend a director, chief executive officer or a senior officer of a bank." "Sufficient cause" includes the items in paragraph 6 as well as "actions detrimental, in the opinion of the National Bank, to the financial sector stability, soundness, the economy and the general public carried out by one or more directors, the chief executive officer or a senior officer." When the number of directors falls, for any reason, below the minimum legal threshold, then the NBE "shall immediately assume powers of the board of directors." In short, these provisions allow the NBE to assess a bank's board or officers as performing detrimental actions, remove them from the board and take control of the bank, all without legal proceedings. NBE CONTROLS SHAREHOLDERS AND SHAREHOLDERS' MEETINGS ¶8. The Proclamation allows NBE to call a general shareholders' meeting if it "finds it necessary in the interest of depositors, ADDIS ABAB 00001639 002 OF 002 ¶1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's central bank) wide ranging and extensive power over the operations of private banks and Ethiopians' rights to invest in the financial sector. The Proclamation gives NBE the ability to vet and remove bank board members and executives; limit shareholders; control the timing and agenda of shareholders' meetings and place banks into receivership. While many of these provisions are a part of standard bank oversight, the ability for NBE to take action based upon the bank or its officers engaging in "actions detrimental, in the opinion of the National Bank, to the financial sector stability, soundness, the economy and the general public" is disturbingly undefined and arbitrary. Many of these provisions are not new. They do, however, point to the GoE's desire to maintain strict control over the country's banking and finance sector. END SUMMARY. shareholders or banking sector stability and soundness." NBE reserves the right to assign an observer at any bank shareholders' meeting. In addition to the well-known prohibition on foreign ownership of bank shares, NBE places further limits on share ownership. No one may leverage funds to buy bank shares. In an apparent effort to prevent substantive individual or family control of banks, no person may individually, jointly or severally own more than 5% of any bank. An "influential shareholder" (one who owns more than 1% of a bank) in one bank may not hold shares in any other bank. The GoE, on the other hand, can own more than 5% of any bank, and is not limited in the number of banks in which it may hold shares. ¶9. U.S. banking law does not limit a shareholder's stake in any bank, nor does it limit the number of banks in which an individual may hold shares. Shareholders' meetings cannot be called by any entity other than the shareholders or board of directors of a bank. NBE HOLDS DIRECTORS PERSONALLY AND CRIMINALLY LIABLE FOR BANK PERFORMANCE ¶10. If NBE determines that directors or executives did not immediately inform the central bank of business difficulties (inability to meet obligations to creditors; inadequate capital; indications that the bank may not be a going concern),then the directors, chief executive and senior officers "shall be guilty of an offence and liable to a fine from Birr 50,000 to Birr 100,000 (approximately US$5,000-10,000) and upon conviction further liable to imprisonment of five years." This is in sharp contrast to U.S. law, in which directors and executives are only held liable if it is found that they acted negligently in performing their fiduciary responsibilities. NBE CAN TAKE OVER BANKS ¶11. If NBE's examination of a bank (which may be made at any time and without prior notice) finds that the bank is not in compliance with laws, directives, terms and conditions of licensure, "is engaged in any manner in practices detrimental to, or not in the best interests of, depositors," or has serious weaknesses of corporate governance, NBE may take any of several measures. These measures range from calling a shareholders' meeting to discuss the issues found and making written instructions to the bank to imposing fines on the bank, its directors and officers; dismissing or suspending directors or officers; and placing the bank into receivership. An additional reason for placing a bank into receivership is "the bank follows policies which would endanger Ethiopia's or the Ethiopian peoples' general economic interest through inappropriate, illegal or imprudent banking practices." In essence, if NBE feels a bank is acting "inappropriately" or against the interests of the Ethiopian people, terms which are undefined, then NBE can take over the bank, dismiss its directors and officers and run the bank for an indeterminate amount of time. ¶12. A bank put into receivership does have the right to appeal the decision, but the sole question before the Federal High Court in such an appeal is "whether the Bank (NBE) acted in an arbitrary and capricious manner in establishing the receivership." ¶13. COMMENT: While many of the above provisions are not new to the revised Proclamation, they nonetheless shed light on the GoE's absolute control of the banking system in Ethiopia. Septel addresses the pervasive GoE control of NBE through the appointment of NBE executives and directors as well as the NBE chain of command. Not only does this law prevent foreign participation in the financial sector, it gives NBE extraordinary power to control the management of private banks through "qualifying" board members and shareholders. The provision for receivership is new to the revised Proclamation, and certainly raises the specter of politically-motivated takeovers by NBE for the "Ethiopian Peoples' general economic interest." While the ruling party-controlled NBE has not, to date, exercised these abilities, they offer yet another avenue for the GoE to consolidate economic power and silence voices of dissent. This draft proclamation re-iterates the GoE's move to consolidate economic and political power despite commitments to more private sector openness as part of the WTO accession process. END COMMENT. YAMAMOTO