National Bank of Ethiopia (NBE) amended its directive that limited banks investment portfolio to 10 percent of their overall equity investment. The new investment gave central bank the discretion to waive the limit on case by case.

It is to be recalled that the previous directive allowed banks only to invest up to 10 percent of their overall equity in all non-banking businesses. This included insurance companies.

However, the amendment has not changed anything from the previous directive’s provision that stipulates commercial banks are not allowed to invest more than 10 percent of their net worth in real estate acquisition and development, other than for own business premises, without prior approval from the central bank.

In addition to this, the new directive has set aside banks’ direct engagement in the insurance business. “No bank shall directly engage in insurance business.
However, a bank may hold equity shares not exceeding 5 percent of an insurer’s subscribed capital in a single insurance company.”

The amendment does not stipulate on what grounds the waivers will be applied or when NBE will be forced to waive the limit.

Ever since the banking business was opened for private investors in 1994, the central bank has introduced 3 similar directives. The first one was back in 1996; which allowed banks to engage in insurance business with a cap of 20 percent shareholding. Another limit the directive set was that the investment cannot pass 10 percent of the bank’s equity capital.

Banks were also allowed to invest in non-banking businesses as long as they do not exceed 20 percent of the company’s share capital and total holdings in such business shall not exceed 10 percent.

In addition to all these, the 1996 directive prohibited banks from engaging directly in non-banking businesses such as agriculture, industry, and commerce.

Source: The Reporter