LICENSING
AND SUPERVISION OF BANKING BUSINESS
Limitations
on Investment of Banks (as Amended)
Directives
No.SBB/60/2015
Whereas, investment
related activities of banks require sound and prudent practices to effectively
manage risks;
Whereas, diversification
of business activities and setting limits for investments are essential tools
for risk management;
Whereas, there is a need
to ensure that banks focus on their core business which is debt financing
managed at arm’s length;
Now, therefore, in line
with powers vested in it by articles 22(1) and 59(2) of Banking Business Proclamation
No. 592/2008, the National Bank of Ethiopia has issued these directives.
1.
Short Title
These Directives may be
cited as “Limitation on Investment of Banks (as Amended) Directives No.
SBB/60/2015”.
2.
Definitions
For the purpose of these
Directives:
2.1 “bank” refers to a
company licensed by the National Bank to undertake banking business or a bank
owned by the Government;
2.2 “banking business”
means the business of receiving or accepting money or its equivalent on deposit
and lending out this money in order to earn a profit; transfer funds; the
buying and selling of gold and silver bullion and foreign exchange; discounting
and negotiation of promissory notes, drafts, bills of exchange and other evidence
of debt; and any other activity recognized as customary banking business as stipulated
in article 2(2) of Banking Business Proclamation No. 592/2008;
2.3 “dealing in
securities” refers to the business of buying and selling equity and debt securities
for own account, whether through a broker or otherwise, so as to make profit from
the trading;
2.4 “financial
infrastructure” refers to a set of institutions or systems that enable effective
operation of financial intermediaries including such elements as payment and settlement
systems, credit information bureaus, collateral registries and other financial services
systems as may be determined by the National Bank Directives No. SBB/60/2015
2.5 “insurance business”
refers to an undertaking by an insurer to indemnify another person, in exchange
for consideration called premium, against damage, destruction, loss or
liability in respect of a certain risk or peril to which the object of the
insurance may be exposed or to pay a sum of money or other thing of value
depending on the happening of a certain event;
2.6 “insurer” means a
person that issues or agrees to issue an insurance policy or undertakes, or
agrees to undertake the obligations of an insurance policy;
2.7 “interest free banking
business” refers to banking business in which mobilizing or advancing funds is
undertaken in a manner consistent with Islamic finance principles and mode of
operation that avoids receiving or paying interest;
2.8 “National Bank” means
the National Bank of Ethiopia;
2.9 “net worth” means the
difference between total assets and total liabilities of a bank;
2.10 “real estate
acquisition and development” refers to the business of buying or developing
property consisting of houses or other buildings, or leasing land and developing
it, to sell and generate revenue or profit;
2.11 “restricted
investment account” means an account in which restrictions are placed by the
account holder on where, how and for what purpose the funds placed in the account
can be invested.
3. Scope of the Directives
These Directives shall be
applicable to all banks operating in Ethiopia.
4.
Limits on Investment and Financing of Banks
4.1 No bank shall directly
engage in insurance business. However, a bank may hold equity shares not
exceeding 5% of an insurer’s subscribed capital in a single insurance company.
4.2 A bank that currently
holds equity shares in excess of the limits stated under sub article 4.1
herein above shall reduce such holdings to the stated limits or below in line with
article 3 of the National Bank Directives No. SIB/35/2013.
4.3 No bank shall engage
directly in non-banking business or in businesses other than
those indicated under
sub-article 2.2 hereinabove.
4.4 Notwithstanding
sub-article 4.3 hereinabove, a bank may:
i.
engage in interest free banking services in
line with the National Bank Directives No.SBB/51/2011;
ii.
hold equity interest in financial
infrastructure; or
iii.
hold up to 10% equity shares in a single
non-banking business other than insurance.
4.5 Where a bank engages
in interest free banking business, the National Bank Directives on Credit
Exposure to a Single and Related Counterparty No. SBB/53/2012 shall also apply
to the bank mutatis mutandis by treating all asset exposures of such bank to interest
free banking activities as loans and advances as defined in the above directives.
4.6 A bank’s aggregate
equity investment in all non-bank businesses, including insurance companies,
shall not exceed 10% of its net worth.
4.7 No bank shall invest
more than 10% of its net worth in real estate acquisition and development,
other than for own business premises, without prior approval of the National
Bank.
4.8 No bank shall deal in
securities. However, a bank may provide securities brokerage services to its
customers acting as their agent;
4.9 A bank’s equity
participation in any financial institution other than an insurance company in
line with sub-article 4.1 hereinabove shall be subject to prior authorization of
the National Bank.
5.
Specific Requirements
5.1 A bank shall report
any equity investment, except investment in financial infrastructure and
businesses in relation to interest free banking services, to the National Bank
within 30 working days from the date of decision of the investment using the
form annexed to these directives.
5.2 A bank shall develop
investment policies that at a minimum cover:
a) allowable investments,
b) criteria for
classifications,
c) portfolio
diversifications/limitations,
d) structure and reporting
procedures,
e) responsibilities of
internal audit/control,
f) risk management,
including stress testing,
6.
Exception to Limitations
Prudential limits and
restrictions of these directives shall not apply to:
6.1 interest free banking
business funded by restricted investment account which shall take place in line
with the interest of the holder of the fund in the account; or
6.2 not withstanding
articles 4.4(iii), 4.6 and 4.7 of these directives, investments made prior to
the effective date of these directives; or
6.3 dealing with the
National Bank or Federal Government Securities, or any other securities fully
and unconditionally backed by Federal Government of Ethiopia, as long as the buying
prices of such securities do not exceed their face value.
7.
Repeal
Limitation on Investment
of Banks Directive No. SBB/12/1996 is hereby repealed and replaced by these
Directives.
8.
Effective Date
These Directives/shall
enter in/to force of the 1 st day of October 2015
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