allAfrica.com: Ethiopia: NBE Intends to Play Hardball with Bankers (Page 1 of 1)

The National Bank of Ethiopia (NBE) has finalized the first draft of a much anticipated but a very controversial law regulating banking business that would carry new fines and even prison terms for offenders.

A member of one private bank's board of directors described the proposed framework as "the most Draconian banking law in the world". Unlike its predecessor, the revised draft law contains at least six provisions that penalize offenders with a jail term of up to 15 years.

Initiated a year and half ago, this draft law will replace the January 1994 banking law, which has paved the way for private banks and insurance firms to flourish over the past 12 years. The government and small shareholders, however, have raised concerns over the conduct of bank management and the quality of corporate governance - both allegedly resulting from the inordinate influence of powerful shareholders - and called for stronger regulatory oversight.

Advocates of the revised law argue that stronger regulation will ensure the health of the financial system an in turn help provide macroeconomic stability, which is one of the three major goals of the EPRDF-led government.

Fortune obtained a copy of the 31-page draft law, which contains 47 provisions divided into five sections. Indeed, the proposed regulation is much tougher than the 1994 law.

For instance, the draft revised law, in its Article Five Sub Article Seven, will penalize persons serving in a senior position at a bank with up to 15 years in prison should he or she be found to personally have non-performing loans (as defined by the central bank) between 50,000 Br and 100,000 Br.

The draft law will also prohibit "influential shareholders", defined as someone who owns one per cent or more of the subscribed capital of a bank, from holding equity shares in other banks.

The revised law prohibits shareholders from buying equity in banks using borrowed money, and restricts bank shareholder from owning more than five per cent of a bank's subscribed capital "jointly or severally." This prohibition also precludes owning more than five per cent of a bank's shares with a spouse or a person younger than 21 years of age and having a first degree relationship with the shareholder.

Shareholders (whether an individual or a company) would have their voting rights limited should they receive loans and advances from the bank where they have 10pc or more equity interest. The limitations of voting rights, the draft law says, is calculated on the basis of loans advanced to the shareholder that are equal to their shares (share equivalent of loans).

Article Eight Sub-Article 10 says on prohibitions and penalties: "Any person who contravenes [this provision] shall be guilty of an offence and shall be liable to a fine of Birr 20,000 in respect of each day on which the contravention continues."

Offenders of these articles, whether as individuals or company representatives, are also punishable by jail terms between 10 to 15 years, subject to conviction. The revised law requires banks under operation and their shareholders to comply with these set of rules within a period that will be determined by the central bank.

The revised law is also drastically different from its predecessor in way that it empowers depositors. Depositors numbering one-fifth of the bank's total depositors or those depositors who hold one-third of the bank's total deposits can petition the central bank to conduct on-site inspections to determine whether the bank is functioning according to the law.

The revised law also allows the National Bank of Ethiopia to appoint "a receiver" to take over control of a bank should it found to be involved in one of the 13 activities described in Article 21 Sub-Article One. Conditions for take-over include a revocation of the financial institution's licence by the central bank, falling into insolvency, engaging in unsafe and unsound practices that "involve significant danger to depositors", or any other activities that "would endanger Ethiopia's or the Ethiopian peoples' general economic interest through inappropriate, illegal or imprudent banking practices".

The receiver of a bank would receive all the powers held by shareholders, the board of directors and executive management. The revised law, however, leaves room for NBE's appointment of a receiver to be challenged in a court of law within a month of its decision, should shareholders representing 25pc of the bank's voting right file a lawsuit with the Federal High Court. The Court, which is expected to conduct a hearing within 10 days and pass ruling in 20 days, is limited to look at "the sole question . . . whether the bank [NBE] acted in an arbitrary and capricious manner in establishing the receivership."

The revised law also imposes a huge burden of legal responsibilities on directors, chief executive officers and senior officers of banks in violation of the regulation. Directors and executives are punishable by up to five years in jail and fines of 50,000 Br to 100,00 Br for failure to report to the regulatory body when the bank is unable to meet its obligations to depositors or other creditors, fails to meet capital adequacy prescribed by the central bank or "may not be able to properly conduct business as a going concern".

Directors and executives are also subject to similar penalties should they fail to report to the central bank when (the law implies that ignorance is no excuse) a bank continues to receive, authorise or permit the acceptance of deposits while being insolvent.

The revised draft law will meet strong resistance from the industry and shareholders, according to observers. However, sources disclosed to Fortune that it will be passed on to the Council of Ministers for approval before being sent to Parliament to become a law.

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