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Exposure To Related Party Transaction (Directive No. 1017/2024)

National Bank Of Ethiopia1017/2024

Summary

This directive sets limits and requirements for banks in Ethiopia regarding exposure to related party transactions to prevent conflicts of interest and ensure financial soundness.

Who's affected

Commercial banks licensed by the National Bank of Ethiopia, including their board members, influential shareholders, senior executives, and related entities.

Action required

Commercial banks must review and update their internal policies and procedures to comply with the exposure limits and reporting requirements outlined in the directive within 90 days and ensure full compliance within three years if currently non-compliant.

Key points

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  • Sets new limits on bank exposures to related parties.
  • Requires arm's-length transactions and enhanced monitoring.
  • Mandates specific approval processes and internal controls.
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    • Imposes monthly reporting requirements to the National Bank.
    • Repeals the Credit Exposures to Single and Related Counterparties Directives No. SBB/53/2012.

Requirements

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  • Aggregate exposure to any one related party shall not exceed 15% of the bank's total capital.
  • Aggregate exposure to all related parties shall not exceed 35% of the bank's total capital.
  • Banks must immediately communicate any breach of limits to the National Bank and comply promptly.
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    • Transactions with related parties must be conducted at arm's-length, without preferential terms.
    • Exposure value calculation must be based on book value, with off-balance sheet items converted using credit conversion factors.
    • Cash collateral and cash substitutes may be deducted when computing exposure value.
    • Transactions exceeding Birr 15 million or posing special risks require prior board approval.
    • Board members with conflicts of interest must not be involved in approving or managing related party transactions.
    • Audit Committees must provide reasoned opinions on related party transactions before board approval.
    • Banks must establish internal control functions for compliance, risk management, and audit.
    • External auditors must have access to information regarding related parties and their transactions.
    • Banks must have policies and procedures for maintaining an updated related party database, identifying exposures, preventing conflicts of interest in transaction processes, and monitoring/reporting exposures.
    • Banks must report aggregate exposures to related parties to the National Bank on a monthly basis.
    • Shareholders with less than 2% of subscribed capital are not treated as related parties for the purpose of this directive.
    • Banks are responsible for identifying related parties and implementing IT systems to map relationships.
    • Non-compliant banks must submit an action plan within 90 days and achieve compliance within three years.

Rights and permissions

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  • The National Bank may require banks to collateralize related party transactions with cash or cash substitute.
  • The National Bank may prohibit a bank from exposure to any related party on grounds it deems sufficient.
  • The National Bank may provide exemptions to prudential limits under special considerations.
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    • Board members may approve a transaction despite a negative Audit Committee opinion, provided full disclosure to the National Bank.

Restrictions

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  • Aggregate exposure to any one related party shall not exceed 15% of the bank's total capital.
  • Aggregate exposure to all related parties shall not exceed 35% of the bank's total capital.
  • Transactions with related parties cannot be on preferential terms compared to unrelated parties.
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    • Board members with conflict of interest shall not be involved in the approval process and in managing related party transactions.
    • Persons benefiting from related-party transactions or having conflicts of interest are prevented from being part of the process of granting and managing such transactions.

Objectives

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  • To prevent abuses arising from transactions with related parties.
  • To address the risk of conflict of interest.
  • To prevent an increase in non-performing loans and jeopardize a bank's financial soundness.
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    • To ensure that a bank's transactions with related parties are adequately monitored and conducted at arm's-length.

Organizations

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  • National Bank of Ethiopia
  • Commercial banks

Legal references

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  • Banking Business Proclamation No. 592/2008
  • Banking Business Proclamation No.1159/2019
  • Capital Adequacy Directive
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    • Asset Classification and Provisioning Directive
Original sourcehttps://justice.gov.et/en/directives/exposure-to-related-party-transaction-directive-no-1017-2024/
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