Banks to Venture into Real Estate, Capital Markets Under New Directive

The shift in the regulatory environment comes from a new directive issued by Central Bank Governor Mamo Mehiretu, which became effective on July 19, 2024. It is a critical component of the Governor’s broader agenda to reform the financial sector, targeting risk management and capital market development as well as compelling banks to focus on their core banking functions.

The directive limits banks’ investment activities, concentrating on the risks associated with their diversified business activities. By setting boundaries on where and how banks can invest, Governor Mamo seeks to prevent potential overexposure to volatile sectors, including the real estate market, and ensure that banks remain focused on traditional banking operations, such as debt financing and interest-free banking.

However, the directive also imposes strict prohibitions on certain activities. Banks are explicitly barred from engaging directly in insurance businesses, serving as capital market service providers, engaging in non-banking businesses, or holding equity shares in credit rating agencies.

“These restrictions are designed to maintain a clear separation between banking and non-banking financial activities,” said a macroeconomist familiar with the works of the central bank. “Reducing conflicts of interest and ensuring that banks’ primary focus remains on core banking operations.”

The directive caps aggregate equity investment in non-banking businesses, including insurance firms and capital market service providers, at 15pc of a bank’s total capital. Banks are restricted from investing more than 10pc of their total capital in real estate acquisition and development, except for their business premises, without prior approval from the National Bank of Ethiopia (NBE).