Contents
In this edition, we present a concise overview of key legislative developments from May and June 2025 that may be of relevance or may have an impact on your business. Accordingly, the key legislation covered in this issue are:
- Dematerialization of Government and NBE Securities Directive
- Recovery Plan of Banks Directive
- Investment Incentives Implementation Directive
- Foreign Investors' Participation in Restricted Trade Sectors Directive
- Ethiopian Investment Commission Service Fee Rates Directive
- Licensing and Authorization of Payment Instrument Issuer (Amendment) Directive
- Property Tax Proclamation
- Requirements For Licensing and Renewal of Banking Business Directive
- Income Tax Proclamation
- Draft Directive on Risk-Based Capital Adequacy Requirements
Legal Updates
A. Dematerialisation of Government and National Bank of Ethiopia (NBE) Securities
Background
The NBE has issued "Dematerialisation of Government and NBE Securities Directive NO./MFAD/001/2025", effective as of 30 June 2025. The Directive requires dematerialisation- conversion of existing physical securities of government and NBE securities into electronic form-which is essential for enhancing efficiency and integrity of the securities market.
The NBE issues securities as an agent of the Ministry of Finance (hereinafter the Ministry) and on its own behalf. Securities issued by NBE as an agent of the Ministry are referred to as government securities while those issued by NBE on its own behalf are referred to as NBE securities.
Key Features of the Directive
- Scope of Application
This Directive shall apply to all debt securities of Government and NBE, whether traded on a licensed securities exchange or in an over the counter (OTC) market. The Directive complements an earlier Directive issued by Ethiopian Capital Market Authority (ECMA) that requires dematerialisation of all publicly offered securities including securities of state-owned enterprises.
- Stakeholders in the Dematerialisation Process
The stakeholders in the dematerialisation process include issuers, security holders(investors), Central Securities Depository (CSD), and CSD Members. Issuers in this context refers to the NBE that issues securities on its own behalf, and the Ministry on whose behalf securities are issued by the NBE. The NBE also operates the CSD which provides a system for central handling of securities which permits or facilitates the registration, clearing and settlement of securities transactions or dealings in securities without the physical delivery of certificates. CSD Members are intermediary institutions having authorized access to the CSD who shall open and administer securities accounts for themselves and their clients.
- The Dematerialisation Process
The transition of securities represented in physical certificates to electronic record form at the CSD shall follow a structured process of documentation and verification to ensure accurate transfer of ownership records.
The NBE, in coordination with the Ministry, will gather and examine all existing records of securities holders. It will then verify that the total issued securities align with the outstanding debt ledgers to ensure consistency between issued securities and recorded investor holdings, a process termed as reconciliation.
The NBE shall notify all securities holders the initiation of dematerialisation along with instructions for submit-ting relevant documentation to CSD Members. Securities holders shall submit their physical certificates to CSD Members who shall forward the collected forms and certificates to the CSD operator at NBE. A CSD Member shall open and maintain securities accounts for themselves and their clients and keep CSD Member assets dis-tinct from client assets. The accounts would be Segregated Client Accounts (Opened in the name of a Beneficial Owner), Nominee Accounts (Opened in the name CSD Member acting on behalf of one or more Beneficial Owners), and Omnibus Accounts (Opened in the name of a CSD Member, consolidating multiple Beneficial Owners' securities into a single account).
The CSD shall send the collected certificates to the Ministry for verification. Upon verification by the Ministry, the CSD shall credit the investor's securities account with the corresponding NSIN/ISIN and ticker details. The CSD shall notify securities holders and CSD Members of successful dematerialisation.
The NBE stores the dematerialised physical securities for a minimum of two years, after which it shall, in consultation with the Ministry, deface and destroy the physical certificates to prevent misuse.
- Legal Effect of Dematerialised Government and NBE Securities
The NBE shall determine and declare the official date on which dematerialisation takes effect. Dematerialised securities are legally recognised, valid, and enforceable financial instruments. Title transfers shall occur electronically through book-entry transactions within the CSD system. The electronic records maintained by the CSD registry shall serve as definitive proof of ownership and transactions and claims. Securities of the same class, type, and rights issued by the same issuer are interchangeable in the market without affecting their value.
- Effect of Non-Dematerialisation
Five years after the declaration of dematerialisation, all securities represented by physical certificates that have not been tendered for dematerialisation shall be automatically transferred to a special account administered by the Ministry at the CSD registry. All distributions, interest payments, or other benefits accruing to such securities shall be irrevocably transferred to the special fund account and shall not be refunded or paid to the securities holder unless such holder provides both reasonable and legally valid justification for non- compliance.
B. Directive on the Recovery Plan of Banks
Background
The National Bank of Ethiopia (NBE) has introduced a landmark directive titled Recovery Plan of Banks Directive No. SBB/93/2025 ("The Directive"), the first of its kind in Ethiopia, which took effect on 13 May 2025. This Directive marks a significant step in the country's approach to banking sector risk management, requiring all banks to establish robust recovery planning frameworks. The Directive aimed at making banks always ready to respond to and address severe stress without supervisory interventions and restore financial and economic viability by themselves.
Key Provisions:
- General Requirements
Banks must establish the necessary arrangements and processes to enable effective recovery without external intervention. The Directive outlines the key components that must be included in a bank's recovery plan, which include:
- Strategic and Governance Analysis
- Core Recovery Elements (recovery triggers and indicators, scenario analysis, recovery options, operational contingency plan, communication and disclosure plan)
- Implementation Strategies
The level of detail and depth in the plan should be proportionate to the bank's size, interconnectedness, and overall complexity. With regards to interest free banks their recovery plan must adheres to the shariah requirements.
- Strategic and Governance Analysis
The Directive requires bank's recovery plan to include a strategic analysis covering its legal and financial structure, intra-group connections, business model, core business lines, critical functions, and shared services. It must also define a governance framework with clearly assigned roles and responsibilities for operational staff, senior management, and the board of directors.
For foreign bank branches, the recovery plan must describe how local operations are integrated into the parent bank's recovery framework, summarise submissions to the home regulator, and include copies of any written undertakings or guarantees issued by the parent bank.
The recovery plan must be reviewed by the bank's internal audit, risk, and compliance units for data accuracy and consistency with overall strategy. It must be approved by the board of directors or, in the case of foreign branches, endorsed by the regional or global head office.
- Recovery Triggers and Indicators
Recovery indicators are defined as a quantitative and qualitative measures used to detect a bank's financial deterioration, based on early warning and recovery thresholds set by the Directive. On the other hand, recovery triggers may include decline in capital and liquidity ratios, declining profitability, deposit withdrawals, funding pressures, public debt increases, adverse GDP forecasts, and interest rate changes.
The Directive requires banks to establish a recovery framework that outlines indicators, triggers, thresholds, actions, and activation conditions, ensuring timely monitoring, escalation, and implementation. This framework should detect early signs of stress and include less severe early warning indicators. Banks must also calibrate indicators to assess their effectiveness and conduct scenario analysis to test their reliability. Additionally, if a recovery indicator is breached, the bank must notify NBE within five working days, along with details of the breach, escalation process, analysis, and actions taken.
- Recovery Option
The Directive obliges banks to develop and maintain a credible, flexible, and actionable set of recovery options. These should address restoring capital and liquidity, reducing leverage and risk, securing diverse funding sources, preserving business continuity, and minimising contagion risk without relying on policy intervention. Recovery options should be diverse and include preparatory measures and a communication and disclosure plan for both internal and external stakeholders. For foreign bank subsidiaries, support from the parent entity may be considered only if contractually committed or stated in the group recovery plan submitted to the home supervisory authority.
- Reporting Requirement
Banks must submit their initial recovery plan to the NBE within eight months of the Directive's effective date and update it annually within three months after the financial year-end. The NBE will review and assess the plan, and if deficiencies are found, the bank must submit a revised version within two months. Non-compliance with the rules set in the Directive may result in a penalty ranging from 50,000 to 100,000 birr and possible administrative measures.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
