NBE Raises Capital Adequacy Standards, Orders Banks To File Quarterly Reports

The National Bank of Ethiopia (NBE) has issued a new directive that significantly raises the capital adequacy requirement for commercial banks and introduces quarterly reporting obligations.

Under the ‘Risk-Based Capital Adequacy Requirements for Banks’ directive effective beginning November 10, 2025, banks must maintain a minimum common equity tier 1 (CET1) ratio of seven percent, a tier 1 capital of nine percent, and a total capital of 11 percent of risk weighted assets.

CET1 refers to the core capital that truly belongs to a bank, mainly paid-up shares, retained earnings, and legal reserves and serves as the first line of defense when a bank incurs losses.

The directive states that the CET1 must consist of the sum of common shares issued by the bank, stock surplus (share premium), legal or statutory reserves, retained earnings and common shares issued by consolidated subsidiaries.

It also includes other comprehensive income and disclosed and unencumbered reserves, bonds issued by the federal government, donated capital, and regulatory adjustments.

The directive’s provision regarding the minimum capital to risk weighted assets ratio replaces previous rules which required banks to keep a single capital adequacy ratio of eight percent under a simpler, less risk sensitive model.

While NBE obliges full compliance, including the prudential minimum capital requirement by December 31, 2026, all banks must submit quarterly electronic reports to the NBE showing both financial figures and written explanations on how they manage capital and risk exposures by the end of March 2026.

Each bank’s board of directors will be directly responsible for ensuring compliance and must prepare a one- to three-year capital management strategy, subject to the NBE’s review and approval.

The new directive also broadens how risks are measured. Banks will now have to calculate capital requirements not only for credit risk (the risk of borrowers failing to repay) but also for market and operational risk, which cover potential losses from foreign-exchange movements, changes in interest rates, or internal failures such as fraud and system breakdowns.

This marks a structural change in how banks measure and hold capital. The directive requires that each type of exposure be assigned a specific risk weight, ranging from zero to 150 percent, depending on the quality of the borrower or investment.

This means banks must hold more capital against riskier assets, such as unsecured loans or volatile market positions, and less for safer exposures, like government securities.

The rule also sets standards for how risks are controlled within institutions. Banks are now required to establish internal procedures for identifying, monitoring, and reporting risk exposures, as well as to document how their capital levels are sufficient to absorb those risks. Regulators will evaluate these systems supported by the new quarterly reporting format.

The directive also introduces additional safeguards for capital quality. It outlines specific regulatory adjustments and deductions that must be made from the capital base, including goodwill and other intangibles, deferred tax assets, intangible holdings, and investment in own shares, to ensure that only assets capable of absorbing losses are counted as capital.

For the first time, the central bank has also set fixed administrative penalties for breaches. Delayed reports will incur a 50,000 Birr fine, while inaccurate capital calculations can see that figure double.

Failure to meet the minimum capital requirement carries a 450,000 Birr penalty, with the central bank reserving the right to impose further sanctions through provisions in the Banking Business Proclamation.