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Cablegate: Parliament Considers Two Banking Laws

VZCZCXRO0384
RR RUEHROV
DE RUEHDS #1640/01 1681405
ZNR UUUUU ZZH
R 161405Z JUN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0975
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGV/USMISSION GENEVA 4276
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001640

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

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: PARLIAMENT CONSIDERS TWO BANKING LAWS

1. SUMMARY: The National Bank of Ethiopia (NBE, Ethiopia's central
bank) presented an amendment to the monetary and banking
proclamation to Parliament on June 2. The principal objectives of
the amendment include removing the borrowing ceiling of the
Government of Ethiopia (GoE) from the NBE, introducing a deposit
insurance payment system including electronic payments and interbank
check clearances, increasing NBE's paid up capital, and empowering
NBE to undertake functions pursuant to its mandate of ensuring price
and exchange rate stability. The Parliament also discussed a revised
Banking Business Proclamation on June 5, which gives enormous power
to the National Bank and continues to prohibit foreign investment in
the financial services sector. Opposition members of Parliament
(MPs) criticized the bill as contradictory to the ideology of a
market economy, while advocates argued that strong regulation
ensures a healthy financial system and macroeconomic stability. The
Parliament referred both bills to the Budget and Finance Standing
Committee for further scrutiny. END SUMMARY

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BACKGROUND
----------

2. The National Bank of Ethiopia was established during the Imperial
Regime by order No 30 of 1963 to undertake the conventional central
banking functions. NBE was reestablished by Proclamation No 99 of
1976 by the Derg to perform socialist central banking functions.
After the fall of the Derg regime in 1991, NBE was reestablished by
the Monetary and Banking Proclamation No 83 of 1994. Subsequently,
the Licensing and Supervision of Banking Business Proclamation No 84
of 1994 was issued in which the National Bank of Ethiopia was given
the power to license and supervise banking and insurance businesses
in the country This proclamation also limited the establishment of
private bank and insurance businesses to Ethiopian nationals only.

--------------------------------------
NATIONAL BANK OF ETHIOPIA PROCLAMATION
--------------------------------------

3. The proposed amendment to the monetary and banking proclamation
stated that it has been in place for over fourteen years and needs
to be amended to fit into the changing economic realities in the
country. The Governor of NBE, Teklewold Atnafu, told Parliament that
the principal objective of amending the law is to increase the
Bank's independence in implementing prudent monetary policy to
ensure price and exchange rate stability as well as such other
functions conducive to the balanced growth of the Ethiopian economy.
The new law states that there is no need to put a ceiling on
government borrowing from NBE. While the current proclamation
imposes a ceiling of 15 percent of the annual government revenue on
direct advance, 25 percent on treasury bills, and 50 percent on
government bonds, NBE advances loans to government simply in
consultation with the Ministry Finance and Economic Development and
in line with price stability objectives. In view of enabling the NBE
to bear costs associated with managing liquidity of the economy the
Bank's paid up capital is raised from $5.2 million to $52.2 million.
Whereas previously NBE was accountable to the Council of Ministers,
the Bank is now directly accountable to the Prime Minster, and the
Governor and Vice Governor of the Bank will be members of the board
of directors of the Bank with five other members, including the
chairman, appointed by the government. The law also has additional
provisions that grant power to NBE to establish a deposit insurance
scheme for commercial banks, improve and modernize the payment
system of the country by automating commercial banks' services,
introducing an electronic payment system, and other improvements,
maintain international financial reporting standards, and establish
an audit committee for the board of directors.

-----------------------------
BANKING BUSINESS PROCLAMATION
-----------------------------

4. The Parliament also discussed amending the Licensing and
Supervision of Banking Business Proclamation No 84 of 1994 to the
Banking Business Proclamation. The draft revised Proclamation is
very stringent and gives more power to NBE. The law stipulates that
NBE will decide the minimum paid up capital of banks operating in
Ethiopia. The appointment of directors, CEOs and senior officers of
banks must meet standard criteria set by NBE. It also prohibits an
individual who has borrowed money from a bank in which he or she is
a share holder from voting as a board member. The law limits equity
shares held by individuals and institutions, except for the GoE, to
5 percent of the total subscribed capital of a bank. Article 2(8)
of this proclamation reiterates the prohibition on foreign nationals
and/or organizations opening banks or branch offices in Ethiopia.

5. Opposition MPs criticized the bill as contradictory to the
ideology of a market economy. Temesgen Zewede, a member of the
opposition, said "This is typical of command economy policy. Why

ADDIS ABAB 00001640 002 OF 002


should the central bank restrict the voices of share holders? After
all, it is their bank." Advocates of the revised bill, on the other
hand, argued that strong regulation ensures the health of the
financial system and macroeconomic stability.

6. COMMENT. The new National Bank of Ethiopia Proclamation gives
an enormous mandate to the Bank to ensure price and exchange rate
stability as well as perform other functions conducive to the
balanced growth of the Ethiopian economy. Nonetheless, with NBE
accountable to the Prime Minster, the Governor and Vice Governor
political appointees and the board of directors appointed by the
government, it would be naive to expect that the Bank will implement
an independent monetary policy. The Banking Business Proclamation
gives rigorous power to the National Bank strongly to control
banking business in the country. This law limits the maximum equity
share of entities to 5 percent of a bank's capital, and influential
share holders are not allowed to own shares in other banks, which
discourages investment in the sector. Moreover the law still
prohibits foreign investment in the sector despite the fact that the
country desperately needs foreign capital inflows and its
application to WTO requires liberalizing the service sector. In
practice, these revised laws may not bring significant changes other
than harnessing government controls in the sector in particular and
in the economy in general. END COMMENT

YAMAMOTO

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