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Foreign Currency Intermediation by Banks (Directives No. 191/2021)

National Bank Of Ethiopia191/2021

Summary

This directive establishes rules for banks in Ethiopia to engage in foreign currency intermediation, allowing them to borrow from external sources and lend to foreign currency generating activities within Ethiopia. It outlines conditions for external borrowing, utilization of acquired foreign currency, and prudential and reporting requirements for banks.

Who's affected

Banks operating in Ethiopia that engage in foreign currency intermediation.

Action required

Banks must develop and implement policies to manage foreign exchange risks associated with foreign currency intermediation and ensure compliance with all stipulated requirements, including reporting.

Key points

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  • Banks are permitted to intermediate foreign currency.
  • External loans for this purpose have strict conditions on cost, tenor, currency, and prepayment.
  • Funds must be used for lending to foreign currency generating activities or deposited at the central bank/correspondent banks.
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    • Lending to domestic businesses requires a 30% equity contribution from the borrower and a debt service coverage ratio of at least 1.
    • Banks must maintain reserve accounts (5% of outstanding external loans) and manage maturity mismatches.
    • Comprehensive reporting is required weekly and monthly.
    • Penalties apply for non-compliance with loan utilization and terms.

Requirements

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  • Banks must meet specific terms and conditions for external loans, including grace period, repayment period, all-in-cost limits, acceptable currencies, and no prepayment without approval.
  • Foreign currency acquired through external borrowing must be used for extending credits to foreign currency generating activities or for depositing at the National Bank or correspondent banks.
  • When extending credit, banks must ensure the loan does not exceed 70% of project cost/net worth, the borrower contributes 30% equity, the borrower has a projected annual debt-service-coverage ratio of at least 1, and loans are disbursed with strict follow-up.
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    • Borrowers must open a foreign currency debt services reserve account with a minimum balance equivalent to 6 months of debt services.
    • Banks must have board approval and established policies for managing foreign exchange risks prior to intermediation.
    • Banks must register external loans with the National Bank within 5 business days.
    • Banks must maintain a foreign currency reserve account with the National Bank, holding 5% of the outstanding balance of external loans.
    • Banks must maintain a weekly average balance of foreign currency current assets not less than 15% of their foreign currency current liabilities.
    • Banks must maintain cumulative maturity mismatch for foreign currency borrowing and lending within a maximum of 1% of the bank's total capital.
    • Banks must submit weekly foreign currency reserve and liquidity reports.
    • Banks must submit monthly reports on external borrowing and domestic credit in foreign currency.

Rights and permissions

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  • Banks may engage in foreign currency intermediation without acquiring a separate permission from the National Bank for transactions expressed in foreign currency.
  • Foreign currency acquired through external borrowing may be exempted from the foreign exchange surrender requirement pursuant to Directives No. FXD/50/2018.
  • Banks may buy debt service insurance in foreign currency against their external debt service obligations.
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    • Deposits in excess of required reserves in the reserve account with the National Bank do not receive remuneration.

Restrictions

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  • External loans for intermediation must have a grace period of at least 3 years and a repayment period of at least 6 years.
  • The all-in-cost of external loans shall not exceed 6 months respective currency LIBOR plus 5%.
  • Loans must be denominated in US Dollar, Pound Sterling, Euro, Chinese Yuan, Canadian Dollar, or Japanese Yen.
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    • No prepayment of external loans shall be made without approval by the National Bank.
    • Foreign currency acquired through external borrowing cannot be used for purposes other than extending credits to foreign currency generating activities or depositing in designated bank accounts.
    • Credit extended to foreign currency generating activities cannot exceed 70% of the total cost of the project or net worth of the business.
    • Borrowers must contribute at least 30% of the project cost in the form of equity.
    • The reserve account with the National Bank requires a 5% deposit of the outstanding balance of external loans.
    • Foreign currency deposits in excess of required reserves do not receive remuneration.

Penalties

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  • Any bank contravening sub-article 4.3 of Article 4 shall be subject to a penalty equivalent to 10% of the amount of the loan acquired through such contravention, payable in the loan's currency.
  • Any bank contravening sub-article 4.4 of Article 4 shall be subject to a penalty equivalent to 20% of the amount of foreign currency not utilized in accordance with sub-article 4.4, payable in the loan's currency.

Objectives

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  • To facilitate access to foreign exchange for foreign currency generating activities.
  • To allow banks to intermediate in foreign currency through external borrowing and lending.
  • To ensure banks properly manage their foreign exchange and credit risks.

Organizations

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  • National Bank of Ethiopia

Legal references

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  • National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008, Article 5(9 and 10)
  • National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008, Article 17(3)
  • National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008, Article 27(2)
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    • Directives No. FXD/50/2018
    • Directives No. FXD/48/2017
Original sourcehttps://justice.gov.et/en/directives/foreign-currency-intermediation-by-banks-directives-no-191-2021/
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