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In a decisive push to safeguard financial stability and bring domestic banking practices in line with international standards, the National Bank of Ethiopia (NBE) has issued a new directive giving commercial banks eight months to comply with sweeping changes in risk exposure, loan classification, and related-party lending.
This major regulatory overhaul marks a turning point for Ethiopia’s financial sector, which is undergoing a wave of reforms as part of a broader economic liberalization agenda. The NBE’s directive, issued in early 2025, mandates banks to reassess and restructure their lending portfolios to align with tighter risk management controls and prudent banking standards.
New Limits on Large Exposures
One of the key provisions of the directive is the imposition of exposure limits to prevent excessive risk concentration. Banks are now prohibited from lending more than 25% of their core capital to a single borrower or group of related borrowers. This measure is designed to mitigate the systemic risk posed by large, concentrated loans that, if defaulted, could threaten the solvency of an institution.
Previously, such large exposures were more loosely regulated, allowing certain banks to lend heavily to select corporate clients or conglomerates. The new rule seeks to diversify credit risk across the banking system and ensure no single borrower wields excessive influence over a bank’s health.
Crackdown on Related-Party Transactions
Another pillar of the reform is stricter governance around related-party lending. The NBE now requires that total loans to related parties such as board members, executives, and their immediate families not exceed 15% of a bank’s capital per individual, with a total combined limit of 35% for all related parties.
In addition, these transactions must be conducted at arm’s length, with interest rates, collateral, and repayment terms consistent with market standards. This provision is aimed at reducing self-dealing, nepotism, and conflicts of interest that have plagued certain banks and weakened public trust in the sector.
Tougher Asset Classification and Loan Loss Provisioning
The NBE has also redefined how banks must classify and provision for non-performing loans (NPLs). Under the new guidelines:
• All NPLs must be placed on non-accrual status, regardless of the existence of collateral.
• Banks must conduct regular reviews of loan performance and make timely provisions.
• Restructured loans are subject to stricter oversight, and the number of allowable restructurings has been limited to prevent repeated deferrals of bad debt.
These changes aim to ensure that banks reflect the true quality of their loan portfolios and maintain adequate capital buffers to absorb potential losses.
Alignment with International Standards
The directive is a step toward aligning Ethiopia’s banking regulations with Basel Core Principles and global risk management practices. The NBE emphasized that strengthening the resilience of financial institutions is critical to supporting sustainable economic growth and protecting depositors.
In its official release, the central bank noted that the reforms are not merely corrective but also preparatory, as the country prepares to open its banking sector to foreign competition and deeper financial integration within the African continent.
Compliance Timeline and Enforcement
Banks have been given a grace period of eight months to fully comply with the new rules. During this transition period, institutions are expected to adjust their loan books, governance structures, and internal controls.
Failure to comply within the stipulated time frame may result in regulatory penalties, including restrictions on lending, limitations on dividend distribution, or in severe cases, supervisory intervention.
The NBE has also committed to ongoing monitoring and dialogue with banks to ensure smooth implementation. Training sessions, technical assistance, and follow-up audits are planned to support compliance.
Sector-Wide Implications
The directive has already stirred significant debate within Ethiopia’s banking sector. Some executives warn that the changes may constrain credit growth in the short term, particularly in sectors with few large borrowers such as construction, logistics, and manufacturing.
However, many analysts and economists have welcomed the reform, saying it promotes credit discipline, greater transparency, and stronger bank governance. By compelling banks to diversify their lending and focus on quality, the NBE hopes to reduce systemic risk and foster long-term resilience.
Conclusion
Ethiopia’s central bank is sending a clear message: stability, transparency, and accountability must be the foundation of its financial system. As the eight-month countdown begins, banks will need to demonstrate not only compliance but also a genuine commitment to stronger risk governance. The outcome of these reforms could redefine the future of Ethiopian banking making it more robust, competitive, and aligned with global norms.
