Regulators Seek To Bar Sub-Investment-Grade Banks From Entering Ethiopian Market

Foreign banks seeking to operate through subsidiaries in Ethiopia will be admitted only if they hold an investment grade credit rating of at least BBB- or its equivalent, according to a directive in the making at the National Bank of Ethiopia (NBE).

The draft ‘Requirements for Licensing and Renewal of Banking Business and Representative Office Directive’ seeks to set entry standards for foreign entrants and marks the first time that Ethiopia has made an external credit-rating threshold a statutory prerequisite for market access.

The draft requires any foreign bank wishing to establish a subsidiary, branch or representative office to submit a formal “no-objection letter” from its home supervisory authority directly to the NBE.

An assurance from the Bank’s home supervisory authority is also expected to confirm the applicant is in good financial standing, maintains the home supervisor’s risk management standards, meets prudential requirements and has been rated investment grade, “that is, at least BBB- or BAA or equivalent, by rating agencies such as Standard & Poor’s, Fitch or Moody’s.”

Regulators require applicants to present reports on the amount, composition, and geographical distribution of capital, while would-be entrants will also need to disclose if they have previously had an application to conduct banking operations in another country rejected.

Under the same provision, the home regulator’s letter must also confirm that the applying bank is supervised on a consolidated basis and complies with Basel capital and liquidity standards.

Besides the credit-rating criteria, the draft directive also obliges all foreign bank subsidiaries to maintain a minimum paid-up capital of five billion Birr, fully remitted in acceptable foreign currency and deposited in a blocked account prior to licensing.

Applicants must disclose source of funds for the minimum capital, according to the draft.

On the other hand, the directive stipulates that before a license is granted, the NBE and the home supervisor must sign a Memorandum of Understanding covering information sharing, joint supervision and crisis-management cooperation.

It also states that if the proposed foreign bank subsidiary is of significance to the foreign bank, a supervisory college shall be established between the home supervisor and the National Bank to ensure a common and aligned work program and harmonized supervisory decisions.

While the investment-grade clause screens for external soundness, ownership and governance provisions impose internal safeguards.

Aggregate foreign ownership in a domestic bank is capped at 49 percent, with a single strategic investor limited to 40 percent, a juridical person to 10 percent, and a natural person to seven percent of total subscribed shares

Every prospective director and chief executive officer must pass the NBE’s fit-and-proper test supported by recent tax and criminal-clearance certificates,  while at least one-third of board members of a foreign bank subsidiary must be Ethiopian nationals.

The draft directive states that the central bank will decide on a banking business license within 90 days of the last date of receipt. However, this time frame excludes any waiting time spent by the applicant in attending to queries raised by the NBE in addressing such queries, according to the draft.

An applicant will have a full year to begin operations after receiving approval from the NBE.

Regulators say the directive aims to “promote a strong and viable banking sector in Ethiopia” and “ensure safety and soundness of the banking system” through proper licensing and supervision.