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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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