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Ethiopia: Concerns Expressed Over the Draft Banking Law
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The Reporter (Addis Ababa)
15 December 2007
Posted to the web 17 December 2007
Hayal Alemayehu
By imposing fines of 50,000 to 100,000 birr and by sentencing to terms of imprisonment of up to fifteen years for the infringement of the law, the draft revised banking business proclamation has raised the concerns of bankers.
The draft law, which contains six parts and 48 articles, is more severe than the previous banking business proclamation while it has a potential to discourage investment and investors in the sector, according to some of the directors and chief executive officers of the commercial banks operating in the country
"The draft law is definitely not a positive one and is more severe than the previous proclamation," a president of one of the commercial banks told The Reporter on condition of anonymity. "The question will be whether the new draft law encourages investment as it potentially restricts capital formation, which is desperately needed in the sector."
The draft proclamation stipulates that no person other than the government shall hold more than five percent of a bank's total subscribed equity shares, while a person who holds one percent or more of a bank's subscribed capital can not hold equity shares in another.
"No person other than the Federal Government of Ethiopia shall hold more than five percent of a bank's total subscribed equity shares, jointly or severally, with his/her spouse and /or with a person who is below the age of 21 and related to him/her in the first degree of relationship," stipulates the draft proclamation. "An influential shareholder shall mean a person who holds directly or indirectly one percent or more of the total subscribed capital of a bank."
According to some of the chief executive officers and directors of the banks, the draft law also contains stringent measures that could be taken against the management personnel of commercial banks while it protects officers of the National Bank of Ethiopia from any personal liability in carrying out its directives.
"Without prejudice to provisions of any other law, any person who is a director or chief executive officer or senior officer or otherwise concerned, directly or indirectly, in the management of a bank shall cease to exercise such function if such person has been involved in court proceedings relating to any default on credit (bank or otherwise) repayments or tax payment, ....No person who has been a director, chief executive officer or otherwise concerned in the management of any bank that has been wound up, whether in Ethiopia or abroad, shall act as a director, chief executive officer or otherwise be directly concerned in the management of any bank in Ethiopia," the draft proclamation maintains. "Any person who contravenes the provisions of these sub-articles shall be guilty of an offence and liable to a fine from 50,000 to 100,000 birr and upon conviction, further liable to imprisonment of fifteen years."
The draft law stipulates: "No act or thing done by any officer of National Bank of Ethiopia or any person acting under the direction of National Bank shall, if the act or thing was done bona fide for the purpose of carrying out the proclamation into effect, subject that officer or person to any liability, action claim or demand whatsoever."
According to the draft law, the National Bank of Ethiopia may remove or suspend a director, a chief executive officer or a senior officer of a bank for "sufficient cause," which include actions detrimental, in the opinion of the Bank, to the financial sector's stability, soundness, the economy and the general public carried out by one or more directors, the chief executive officer or a senior officer.
The draft law, which bankers say very much broadens the power of the National Bank of Ethiopia on commercial banks operating in the country, stipulates that every commercial bank should appoint an external auditor satisfactory to the National Bank of Ethiopia where the appointment shall be approved by the National Bank of Ethiopia.
According to the draft proclamation, the board of directors of a bank should immediately report in writing to the National Bank where it appears likely that the bank cannot meet its obligation to depositors or other creditors. The bank should also immediately notify when it may have to suspend payment to depositors or other creditors cannot meet its capital adequacy prescribed by the National Bank or may not be able to properly conduct business as a going concern. Failure to do so, according to the draft law, subjects the director, or chief executive officer or senior officer of a bank to be guilty of an offence entailing liability to a fine from 50,000 to 100,000 birr, and upon conviction, further liable to imprisonment of five years. The national bank could also order the dismissal or suspension of one or more directors, the chief executive, and other senior officers of the inspected or examined bank.
The draft proclamation, which was circulated to banks last week so that they will lodge their comments concerning its provisions and contents, was met by criticisms among top bankers, while there were other groups- minor shareholders and some higher bank officials -who seemed content with it. "This draft proclamation, when passed into law, will have more capability to control top officers of banks and major shareholders from inappropriately using their positions and power in order to secure loans and related services the banks offer."
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The draft proclamation is expected to be sent to the Council of Ministers before being presented to parliament for ratification. In the meantime, banks operating in the country are ordered to submit their comment on the draft proclamation in writing on Friday, yesterday, at the latest.
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