The National Bank of Ethiopia (NBE) recently issued a new directive, “Limitations on Investment of Banks Directive No. SBB/92/2024,” aimed at fostering prudent investment practices among banks. Effective from July 19, 2024, this directive introduces significant changes in how Ethiopian banks can engage in investment activities, with far-reaching implications for investment banking and startup investments in Ethiopia.

The directive applies to any private or state-owned entity licensed by the NBE to undertake banking business, including investment banks. Most importantly, the new rules provide clear guidelines on how banks can invest in their subsidiaries, following their recent empowerment under a revamped national banking proclamation.

Investment Limits under the New Rules

Insurance Companies: Banks can hold equity shares in a single insurance company, limited to 5% of the subscribed capital.

Capital Market Service Providers: Banks may acquire up to 100% equity shares in capital market service providers (excluding credit rating agencies) with prior NBE approval.

Financial Infrastructure: Banks are allowed to invest in financial infrastructure.

Non-Banking Businesses: Banks can hold up to 10% equity shares in a single non-banking business other than insurance.

Aggregate Investments: A bank’s total equity investment in all non-bank businesses, including insurance companies and capital market service providers, must not exceed 15% of its total capital.

Real Estate: Investment in real estate acquisition and development beyond what is required for business premises is capped at 10% of total capital without NBE approval.

Restricted Activities

Banks are prohibited from directly engaging in the insurance business, capital market service provision, non-banking businesses, and holding equity in credit rating agencies. Banks engaging in interest-free banking must adhere to the NBE’s directives on large exposures to counterparties, treating all asset exposures to interest-free activities as defined exposures.

Reporting and Policy Requirements

Ethiopian banks must now report equity investment activities to the NBE within 30 working days of the investment decision. Investment policies must cover allowable investments, portfolio diversification, reporting procedures, internal audit responsibilities, and risk management, including stress testing.

Exceptions

Prudential limits do not apply to interest-free banking business funded by restricted or unrestricted investment accounts. Investments made before the effective date of the repealed Directive No. SBB/65/2017 and prior to transformation from microfinance institutions are exempt from certain limitations. Transactions with the NBE or Federal Government Securities, or any other securities fully backed by the Federal Government, are not subject to these limits as long as their purchase price does not exceed their face value.

Impact on Ethiopia’s Tech Scene

Startups in Ethiopia, particularly those in fintech and capital markets, may face both opportunities and challenges under the new directive. The National Bank of Ethiopia ’s (NBE) updated rules encourage investment by banks in capital market service providers, which could foster the development of crucial financial infrastructure and services vital for startup growth.

However, the investment rules limit Ethiopian banks to owning no more than 10% equity in any single non-banking business, including fintech ventures. While this ensures that Ethiopian startups retain a degree of competitive leverage, their ability to attract significant investment may be affected, particularly if they lack robust capital access.

The stringent restrictions on non-banking investments and the requirement for NBE approval could slow the flow of capital to startups, especially those outside the banking and insurance sectors. These limitations on banks’ investment freedoms may lead to a more cautious approach, potentially impacting the overall growth and innovation within the startup ecosystem.

Comparatively, across Africa, similar regulatory environments have seen banks actively investing in local startups. For example, in South Africa, banks are making substantial investments in local startups, a trend that is relatively rare elsewhere on the continent. In early March, Standard Bank South Africa, the continent’s largest lender by assets, made a significant investment in Planet42, a Pretoria-based car subscription company. The bank provided $16 million (R300 million) to the company. 

All Roads Cleared for the Ethiopian Capital Market Authority

The “Limitations on Investment of Banks Directive No. SBB/92/2024” by the National Bank of Ethiopia marks a significant step towards ensuring prudent investment practices and effective risk management in the banking sector. The Ethiopian Capital Market Authority (ECMA) recently announced the issuance of a groundbreaking directive that will enable the licensing of the first securities exchange in Ethiopia.

Ethiopia’s capital market regulator prepared the legal documents fully named as ‘Directive on Licensing, Operation, and Supervision of Securities Exchanges, Derivatives Exchanges, and the Over-The-Counter Market №1009/2024.’ The authority states that the directive took effect on July 16, 2024, after registration by the Ministry of Justice.

This comprehensive directive sets forth the documentation, related terms, and requirements necessary to obtain a license for operating exchanges and over-the-counter markets. For the first time in Ethiopia, this directive facilitates the licensing of securities and over-the-counter markets, enabling both government and private companies to utilize the market for selling shares and bonds.