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Cablegate: Nbe- Ethiopia's Banking Big Brother

VZCZCXRO0382
RR RUEHROV
DE RUEHDS #1639/01 1681404
ZNR UUUUU ZZH
R 161404Z JUN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0973
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGV/USMISSION GENEVA 4274
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001639

SIPDIS
DEPT FOR AF/E AND EEB
DEPT PLEASE PASS TO USTR BILL JACKSON

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ET

SUBJECT: NBE- ETHIOPIA'S BANKING BIG BROTHER
1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host
of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's
central bank) wide ranging and extensive power over the operations

of private banks and Ethiopians' rights to invest in the financial
sector. The Proclamation gives NBE the ability to vet and remove
bank board members and executives; limit shareholders; control the
timing and agenda of shareholders' meetings and place banks into
receivership. While many of these provisions are a part of standard
bank oversight, the ability for NBE to take action based upon the
bank or its officers engaging in "actions detrimental, in the
opinion of the National Bank, to the financial sector stability,
soundness, the economy and the general public" is disturbingly
undefined and arbitrary. Many of these provisions are not new.
They do, however, point to the GoE's desire to maintain strict
control over the country's banking and finance sector. END SUMMARY.

NBE CONTROLS BANK BOARDS OF DIRECTORS AND EXECUTIVES
2. The Proclamation requires NBE written approval at the time of
licensing for the following Directors and Officers: Board members,
the chief executive officer and senior officers, and "influential
shareholders." Influential shareholders are those who hold directly
or indirectly 1% or more of total subscribed capital. Any
subsequent appointment of board members also requires approval by
NBE, and no board member can leave until their incoming replacement
is central bank approved.
3. All of these individuals must "meet qualifications or standard
criteria [set] by the National Bank." Qualifications are described
as "required education, experience, fitness and propriety **or any
other criteria or requirement** prescribed by directives issued by
NBE," leaving the possibility that NBE could issue directives
severely limiting who may serve as a board member or officer, or
even hold significant shares in, Ethiopia's private banks.
4. In contrast, U.S. banking law gives regulators the power to vet
board members pre-licensing. According to U.S. banking expert Gary
Dorminey, the approval is, for the most part, pro-forma. Persons
can be denied for felonies, any past misconduct in the financial
world, or "unsavory" backgrounds in general. In a start up bank they
are now requiring that at least one or two members have previous
banking experience at the executive management level or at the Board
level. Once a bank is out of "de novo" status, board approvals are
still required, but less stringent, and denials are generally only
for a past history of felonies, or financial improprieties either
personally or having been connected with a firm experiencing
problems. A bank must inform regulators of any entity that acquires
or plans to acquire more than 9.9% of shares, as that may trigger a
change in control. Ethiopia's banking law clearly provides NBE with
broader and more extensive ability to approve and disapprove board
members and executives than U.S. law.
5. In addition to establishing the "qualifications" test, the
Proclamation further limits who may serve as a bank executive or
board member. An employee of the bank may not be appointed as the
chairperson of the board. Moreover, individuals may not serve as
directors for more than one bank. According to Mr. Dorminey, U.S.
banking regulators prefer non-employee board chairs, but do not
prohibit them. In fact such "executive chairs" are prevalent in
U.S. banking.
6. Board members and bank executives "must", per the Proclamation,
be removed in a number of circumstances. These include filing for
or declaring personal bankruptcy; being convicted of any offense
involving dishonesty or fraud; carrying (individual) non-performing
loans from any bank; being certified as mentally ill; or failing to
meet the NBE's nebulous "qualification requirements." Further, no
one who has been a director or senior officer of a bank that has
been wound up (put out of business by a regulatory authority) in any
country may be involved in the management of an Ethiopian bank.
Violation of these provisions may result in fines from
50,000-100,000 Birr and/or imprisonment for up to fifteen years. In
contrast, Mr. Dorminey stated that U.S. bank regulators cannot
remove board members per se. If, however, there is evidence of
criminal behavior in the conduct of business, regulators may issue a
cease and desist order that effectively removes the person in
question.
7. Perhaps most ominously, the Proclamation states that the NBE may
"for sufficient cause, remove or suspend a director, chief executive
officer or a senior officer of a bank." "Sufficient cause" includes
the items in paragraph 6 as well as "actions detrimental, in the
opinion of the National Bank, to the financial sector stability,
soundness, the economy and the general public carried out by one or
more directors, the chief executive officer or a senior officer."
When the number of directors falls, for any reason, below the
minimum legal threshold, then the NBE "shall immediately assume
powers of the board of directors." In short, these provisions allow
the NBE to assess a bank's board or officers as performing
detrimental actions, remove them from the board and take control of
the bank, all without legal proceedings.
NBE CONTROLS SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
8. The Proclamation allows NBE to call a general shareholders'
meeting if it "finds it necessary in the interest of depositors,

ADDIS ABAB 00001639 002 OF 002

1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host
of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's
central bank) wide ranging and extensive power over the operations
of private banks and Ethiopians' rights to invest in the financial
sector. The Proclamation gives NBE the ability to vet and remove
bank board members and executives; limit shareholders; control the
timing and agenda of shareholders' meetings and place banks into
receivership. While many of these provisions are a part of standard
bank oversight, the ability for NBE to take action based upon the
bank or its officers engaging in "actions detrimental, in the
opinion of the National Bank, to the financial sector stability,
soundness, the economy and the general public" is disturbingly
undefined and arbitrary. Many of these provisions are not new.
They do, however, point to the GoE's desire to maintain strict
control over the country's banking and finance sector. END SUMMARY.

shareholders or banking sector stability and soundness." NBE
reserves the right to assign an observer at any bank shareholders'
meeting. In addition to the well-known prohibition on foreign
ownership of bank shares, NBE places further limits on share
ownership. No one may leverage funds to buy bank shares. In an
apparent effort to prevent substantive individual or family control
of banks, no person may individually, jointly or severally own more
than 5% of any bank. An "influential shareholder" (one who owns
more than 1% of a bank) in one bank may not hold shares in any other
bank. The GoE, on the other hand, can own more than 5% of any bank,
and is not limited in the number of banks in which it may hold
shares.
9. U.S. banking law does not limit a shareholder's stake in any
bank, nor does it limit the number of banks in which an individual
may hold shares. Shareholders' meetings cannot be called by any
entity other than the shareholders or board of directors of a bank.
NBE HOLDS DIRECTORS PERSONALLY AND CRIMINALLY LIABLE FOR BANK
PERFORMANCE
10. If NBE determines that directors or executives did not
immediately inform the central bank of business difficulties
(inability to meet obligations to creditors; inadequate capital;
indications that the bank may not be a going concern), then the
directors, chief executive and senior officers "shall be guilty of
an offence and liable to a fine from Birr 50,000 to Birr 100,000
(approximately US$5,000-10,000) and upon conviction further liable
to imprisonment of five years." This is in sharp contrast to U.S.
law, in which directors and executives are only held liable if it is
found that they acted negligently in performing their fiduciary
responsibilities.
NBE CAN TAKE OVER BANKS
11. If NBE's examination of a bank (which may be made at any time
and without prior notice) finds that the bank is not in compliance
with laws, directives, terms and conditions of licensure, "is
engaged in any manner in practices detrimental to, or not in the
best interests of, depositors," or has serious weaknesses of
corporate governance, NBE may take any of several measures. These
measures range from calling a shareholders' meeting to discuss the
issues found and making written instructions to the bank to imposing
fines on the bank, its directors and officers; dismissing or
suspending directors or officers; and placing the bank into
receivership. An additional reason for placing a bank into
receivership is "the bank follows policies which would endanger
Ethiopia's or the Ethiopian peoples' general economic interest
through inappropriate, illegal or imprudent banking practices." In
essence, if NBE feels a bank is acting "inappropriately" or against
the interests of the Ethiopian people, terms which are undefined,
then NBE can take over the bank, dismiss its directors and officers
and run the bank for an indeterminate amount of time.
12. A bank put into receivership does have the right to appeal the
decision, but the sole question before the Federal High Court in
such an appeal is "whether the Bank (NBE) acted in an arbitrary and
capricious manner in establishing the receivership."
13. COMMENT: While many of the above provisions are not new to the
revised Proclamation, they nonetheless shed light on the GoE's
absolute control of the banking system in Ethiopia. Septel
addresses the pervasive GoE control of NBE through the appointment
of NBE executives and directors as well as the NBE chain of command.
Not only does this law prevent foreign participation in the
financial sector, it gives NBE extraordinary power to control the
management of private banks through "qualifying" board members and
shareholders. The provision for receivership is new to the revised
Proclamation, and certainly raises the specter of
politically-motivated takeovers by NBE for the "Ethiopian Peoples'
general economic interest." While the ruling party-controlled NBE
has not, to date, exercised these abilities, they offer yet another
avenue for the GoE to consolidate economic power and silence voices
of dissent. This draft proclamation re-iterates the GoE's move to
consolidate economic and political power despite commitments to more
private sector openness as part of the WTO accession process. END
COMMENT.

YAMAMOTO

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