National Bank of Ethiopia Introduces Reforms to Ease Liquidity Issues

The National Bank of Ethiopia (NBE) has implemented new reforms designed to tackle liquidity challenges within the commercial banking sector. These reforms include introducing a lagged reserve system and merging reserve and payment accounts into a single payment and settlement account. This is expected to encourage more interbank lending.

A key part of the NBE’s directive is the introduction of a five percent daily minimum reserve, allowing banks to utilize excess funds. While intended to improve financial stability, there are concerns about the potential strain on smaller banks, particularly given existing pressures to increase paid-up capital and the 18 percent credit growth cap.

The NBE will now calculate its seven percent average reserve requirement based on monthly deposit averages instead of real-time balances, aiming to provide banks with greater stability. The directive also replaces weekly reporting requirements with a bi-monthly schedule to lower compliance costs.

These reforms come as the Ethiopian banking industry navigates challenges such as inflation and currency devaluation, influenced by IMF and World Bank-imposed reforms.