Ethiopia’s Central Bank revised its directive to allow commercial banks establish a subsidiary company to engage in capital market services.
After more than two years laying the groundwork, Ethiopia is now on the brink of launching its first fully fledged stock market.
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The latest decision by the National Bank of Ethiopia or (NBE) gives banks an increased role in nurturing an “effective capital markets system.”
“Strategic decision”
NBE’s Board of Directors issued the revised “Limitation on Investment of Banks directive” on Friday.
This directive, NBE says, allows “banks to invest in and establish subsidiary capital market service providers, including investment banks.”
“This strategic decision is anticipated to significantly enhance the role of banks in nurturing a robust and effective capital market ecosystem,” NBE said in a statement.
Economists often argue for restricting banks from investment banking activities to protect depositors from potential losses through stock speculation and avoid financial crises.
The revised directive also bans commercial banks from “directly engaging” in non-banking businesses or being a capital market service provider.
Financing and Investment of banks
The directive allows commercial banks to acquire 100% percent equity share in all capital market service providers except rating agencies.
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They can also hold interest in financial infrastructures, and up to 10% equity share in a single non-banking business other than insurance.
However, a bank’s aggregate investment in equity shares can not exceed 15% of its capital, per the revised directive.
