PARLIAMENT CONSIDERS TWO BANKING LAWS

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001640 SIPDIS DEPT FOR AF/E AND EEB DEPT PLEASE PASS TO USTR BILL JACKSON E.O. 12958: N/A TAGS: ECON ETRD EINV EAGR ET SUBJECT: PARLIAMENT CONSIDERS TWO BANKING LAWS ¶1. SUMMARY: The National Bank of Ethiopia (NBE, Ethiopia's central bank) presented an amendment to the monetary and banking proclamation to Parliament on June 2. The principal objectives of the amendment include removing the borrowing ceiling of the Government of Ethiopia (GoE) from the NBE, introducing a deposit insurance payment system including electronic payments and interbank check clearances, increasing NBE's paid up capital, and empowering NBE to undertake functions pursuant to its mandate of ensuring price and exchange rate stability. The Parliament also discussed a revised Banking Business Proclamation on June 5, which gives enormous power to the National Bank and continues to prohibit foreign investment in the financial services sector. Opposition members of Parliament (MPs) criticized the bill as contradictory to the ideology of a market economy, while advocates argued that strong regulation ensures a healthy financial system and macroeconomic stability. The Parliament referred both bills to the Budget and Finance Standing Committee for further scrutiny. END SUMMARY -------------- BACKGROUND -------------- ¶2. The National Bank of Ethiopia was established during the Imperial Regime by order No 30 of 1963 to undertake the conventional central banking functions. NBE was reestablished by Proclamation No 99 of 1976 by the Derg to perform socialist central banking functions. After the fall of the Derg regime in 1991, NBE was reestablished by the Monetary and Banking Proclamation No 83 of 1994. Subsequently, the Licensing and Supervision of Banking Business Proclamation No 84 of 1994 was issued in which the National Bank of Ethiopia was given the power to license and supervise banking and insurance businesses in the country This proclamation also limited the establishment of private bank and insurance businesses to Ethiopian nationals only. -------------- NATIONAL BANK OF ETHIOPIA PROCLAMATION -------------- ¶3. The proposed amendment to the monetary and banking proclamation stated that it has been in place for over fourteen years and needs to be amended to fit into the changing economic realities in the country. The Governor of NBE, Teklewold Atnafu, told Parliament that the principal objective of amending the law is to increase the Bank's independence in implementing prudent monetary policy to �0A;ensure price and exchange rate stability as well as such other functions conducive to the balanced growth of the Ethiopian economy. The new law states that there is no need to put a ceiling on government borrowing from NBE. While the current proclamation imposes a ceiling of 15 percent of the annual government revenue on direct advance, 25 percent on treasury bills, and 50 percent on government bonds, NBE advances loans to government simply in consultation with the Ministry Finance and Economic Development and in line with price stability objectives. In view of enabling the NBE to bear costs associated with managing liquidity of the economy the Bank's paid up capital is raised from $5.2 million to $52.2 million. Whereas previously NBE was accountable to the Council of Ministers, the Bank is now directly accountable to the Prime Minster, and the Governor and Vice Governor of the Bank will be members of the board of directors of the Bank with five other members, including the chairman, appointed by the government. The law also has additional provisions that grant power to NBE to establish a deposit insurance scheme for commercial banks, improve and modernize the payment system of the country by automating commercial banks' services, introducing an electronic payment system, and other improvements, maintain international financial reporting standards, and establish an audit committee for the board of directors. -------------- BANKING BUSINESS PROCLAMATION -------------- ¶4. The Parliament also discussed amending the Licensing and Supervision of Banking Business Proclamation No 84 of 1994 to the Banking Business Proclamation. The draft revised Proclamation is very stringent and gives more power to NBE. The law stipulates that NBE will decide the minimum paid up capital of banks operating in Ethiopia. The appointment of directors, CEOs and senior officers of banks must meet standard criteria set by NBE. It also prohibits an individual who has borrowed money from a bank in which he or she is a share holder from voting as a board member. The law limits equity shares held by individuals and institutions, except for the GoE, to 5 percent of the total subscribed capital of a bank. Article 2(8) of this proclamation reiterates the prohibition on foreign nationals and/or organizations opening banks or branch offices in Ethiopia. ¶5. Opposition MPs criticized the bill as contradictory to the ideology of a market economy. Temesgen Zewede, a member of the opposition, said "This is typical of command economy policy. Why ADDIS ABAB 00001640 002 OF 002 should the central bank restrict the voices of share holders? After all, it is their bank." Advocates of the revised bill, on the other hand, argued that strong regulation ensures the health of the financial system and macroeconomic stability. ¶6. COMMENT. The new National Bank of Ethiopia Proclamation gives an enormous mandate to the Bank to ensure price and exchange rate stability as well as perform other functions conducive to the balanced growth of the Ethiopian economy. Nonetheless, with NBE accountable to the Prime Minster, the Governor and Vice Governor political appointees and the board of directors appointed by the government, it would be naive to expect that the Bank will implement an independent monetary policy. The Banking Business Proclamation gives rigorous power to the National Bank strongly to control banking business in the country. This law limits the maximum equity share of entities to 5 percent of a bank's capital, and influential share holders are not allowed to own shares in other banks, which discourages investment in the sector. Moreover the law still prohibits foreign investment in the sector despite the fact that the country desperately needs foreign capital inflows and its application to WTO requires liberalizing the service sector. In practice, these revised laws may not bring significant changes other than harnessing government controls in the sector in particular and in the economy in general. END COMMENT YAMAMOTO