NBE RECONSIDERS BANK INVESTMENT LIMIT 01 Jul, 2017
The National Bank of Ethiopia (NBE) revises its directive which limits the investment portfolio of banks to 10 percent of their overall equity investment. The new directive states that although the 10 percent limit is still there, NBE will henceforth retain the right to waive the limit on a bank-by-bank basis as it sees fit.
For years, banks were allowed to invest up to 10 percent of their net worth in all non-bank businesses, including insurance companies.
However, the newly revised directive which became effective since the beginning of June, 2017 gave the central bank the power to lift the investment limit when it deems it necessary.
“Notwithstanding the 10 percent limit, the National Bank may waive the investment limit where it deems necessary,” reads the article.
This gave the central bank the power to regulate commercial bank’s investment based on their respective performance, said a senior banker working at a private bank.
One of the basic reasons behind placing cap on the investment portfolio of banks is risk, comments one former bank director. “There are areas of investments which are risky and may lead banks into failures,” he said.
The amended directive kept the basic provision which is 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 bank regulator (NBE).
Similar to the same directive introduce in 2015, the amendment is aimed at setting aside bank’s direct engagement in 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 new amendment has not yet clarified how these exception are applied and who will be the beneficiaries of this directive. And where will the NBE be forced to waive the limit.
The specific article is open for different interpretation.
“I see in both ways,” said another CEO of Bank whose name withheld upon request.
One is that when the central bank says it may lift the 10 percent limit this might be to allow private banks to invest their money in government projects beyond the mentioned investment limit. The way around this specific provision gave the central bank a power to force some of the banks from investing, explain the CEO.
Since the financial opening in 1994, Central Bank has introduced three similar directives concerning limitations of investment of banks. The first was introduced back in 1996 where it introduces much relaxed provisions.
In this respect bank were not allowed engage in insurance business but may hold up to 20 percent in an insurance company and up to a total of 10 percent of the bank’s equity capital in such business.
The banks were also allowed to hold shares in a non-banking business only up to 20 percent of the company’s share capital and total holdings in such business shall not exceed 10 percent.
Moreover, 1996’s directive prohibited banks from engaging directly in non-banking businesses such as agriculture, industry, and commerce.
Currently, there are now 16 private banks operating in the country with a total capital of 43 billion birr as of June 30, 2016.