VZCZCXRO0382
RR RUEHROV
DE RUEHDS #1639/01 1681404
ZNR UUUUU ZZH
R 161404Z JUN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0973
INFO RUCNIAD/IGAD COLLECTIVE
RUEHGV/USMISSION GENEVA 4274
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 001639 
 
SIPDIS 
DEPT FOR AF/E AND EEB 
DEPT PLEASE PASS TO USTR BILL JACKSON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ET
 
SUBJECT: NBE- ETHIOPIA'S BANKING BIG BROTHER 
¶1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host 
of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's 
central bank) wide ranging and extensive power over the operations 
 
of private banks and Ethiopians' rights to invest in the financial 
sector. The Proclamation gives NBE the ability to vet and remove 
bank board members and executives; limit shareholders; control the 
timing and agenda of shareholders' meetings and place banks into 
receivership.  While many of these provisions are a part of standard 
bank oversight, the ability for NBE to take action based upon the 
bank or its officers engaging in "actions detrimental, in the 
opinion of the National Bank, to the financial sector stability, 
soundness, the economy and the general public" is disturbingly 
undefined and arbitrary.  Many of these provisions are not new. 
They do, however, point to the GoE's desire to maintain strict 
control over the country's banking and finance sector. END SUMMARY. 
 
NBE CONTROLS BANK BOARDS OF DIRECTORS AND EXECUTIVES 
¶2. The Proclamation requires NBE written approval at the time of 
licensing for the following Directors and Officers: Board members, 
the chief executive officer and senior officers, and "influential 
shareholders."  Influential shareholders are those who hold directly 
or indirectly 1% or more of total subscribed capital.  Any 
subsequent appointment of board members also requires approval by 
NBE, and no board member can leave until their incoming replacement 
is central bank approved. 
¶3. All of these individuals must "meet qualifications or standard 
criteria [set] by the National Bank."  Qualifications are described 
as "required education, experience, fitness and propriety **or any 
other criteria or requirement** prescribed by directives issued by 
NBE," leaving the possibility that NBE could issue directives 
severely limiting who may serve as a board member or officer, or 
even hold significant shares in, Ethiopia's private banks. 
¶4. In contrast, U.S. banking law gives regulators the power to vet 
board members pre-licensing.  According to U.S. banking expert Gary 
Dorminey, the approval is, for the most part, pro-forma.  Persons 
can be denied for felonies, any past misconduct in the financial 
world, or "unsavory" backgrounds in general. In a start up bank they 
are now requiring that at least one or two members have previous 
banking experience at the executive management level or at the Board 
level.  Once a bank is out of "de novo" status, board approvals are 
still required, but less stringent, and denials are generally only 
for a past history of felonies, or financial improprieties either 
personally or having been connected with a firm experiencing 
problems.  A bank must inform regulators of any entity that acquires 
or plans to acquire more than 9.9% of shares, as that may trigger a 
change in control.  Ethiopia's banking law clearly provides NBE with 
broader and more extensive ability to approve and disapprove board 
members and executives than U.S. law. 
¶5. In addition to establishing the "qualifications" test, the 
Proclamation further limits who may serve as a bank executive or 
board member.  An employee of the bank may not be appointed as the 
chairperson of the board.  Moreover, individuals may not serve as 
directors for more than one bank.  According to Mr. Dorminey, U.S. 
banking regulators prefer non-employee board chairs, but do not 
prohibit them.  In fact such "executive chairs" are prevalent in 
U.S. banking. 
¶6. Board members and bank executives "must", per the Proclamation, 
be removed in a number of circumstances.  These include filing for 
or declaring personal bankruptcy; being convicted of any offense 
involving dishonesty or fraud; carrying (individual) non-performing 
loans from any bank; being certified as mentally ill; or failing to 
meet the NBE's nebulous "qualification requirements."  Further, no 
one who has been a director or senior officer of a bank that has 
been wound up (put out of business by a regulatory authority) in any 
country may be involved in the management of an Ethiopian bank. 
Violation of these provisions may result in fines from 
50,000-100,000 Birr and/or imprisonment for up to fifteen years.  In 
contrast, Mr. Dorminey stated that U.S. bank regulators cannot 
remove board members per se.  If, however, there is evidence of 
criminal behavior in the conduct of business, regulators may issue a 
cease and desist order that effectively removes the person in 
question. 
¶7. Perhaps most ominously, the Proclamation states that the NBE may 
"for sufficient cause, remove or suspend a director, chief executive 
officer or a senior officer of a bank."  "Sufficient cause" includes 
the items in paragraph 6 as well as "actions detrimental, in the 
opinion of the National Bank, to the financial sector stability, 
soundness, the economy and the general public carried out by one or 
more directors, the chief executive officer or a senior officer." 
When the number of directors falls, for any reason, below the 
minimum legal threshold, then the NBE "shall immediately assume 
powers of the board of directors."  In short, these provisions allow 
the NBE to assess a bank's board or officers as performing 
detrimental actions, remove them from the board and take control of 
the bank, all without legal proceedings. 
NBE CONTROLS SHAREHOLDERS AND SHAREHOLDERS' MEETINGS 
¶8. The Proclamation allows NBE to call a general shareholders' 
meeting if it "finds it necessary in the interest of depositors, 
 
ADDIS ABAB 00001639  002 OF 002 
 
¶1. SUMMARY: Ethiopia's Banking Business Proclamation contains a host 
of clauses that grant the National Bank of Ethiopia (NBE, Ethiopia's 
central bank) wide ranging and extensive power over the operations 
of private banks and Ethiopians' rights to invest in the financial 
sector. The Proclamation gives NBE the ability to vet and remove 
bank board members and executives; limit shareholders; control the 
timing and agenda of shareholders' meetings and place banks into 
receivership.  While many of these provisions are a part of standard 
bank oversight, the ability for NBE to take action based upon the 
bank or its officers engaging in "actions detrimental, in the 
opinion of the National Bank, to the financial sector stability, 
soundness, the economy and the general public" is disturbingly 
undefined and arbitrary.  Many of these provisions are not new. 
They do, however, point to the GoE's desire to maintain strict 
control over the country's banking and finance sector. END SUMMARY. 
 
shareholders or banking sector stability and soundness."  NBE 
reserves the right to assign an observer at any bank shareholders' 
meeting.  In addition to the well-known prohibition on foreign 
ownership of bank shares, NBE places further limits on share 
ownership.  No one may leverage funds to buy bank shares.  In an 
apparent effort to prevent substantive individual or family control 
of banks, no person may individually, jointly or severally own more 
than 5% of any bank.  An "influential shareholder" (one who owns 
more than 1% of a bank) in one bank may not hold shares in any other 
bank. The GoE, on the other hand, can own more than 5% of any bank, 
and is not limited in the number of banks in which it may hold 
shares. 
¶9. U.S. banking law does not limit a shareholder's stake in any 
bank, nor does it limit the number of banks in which an individual 
may hold shares.  Shareholders' meetings cannot be called by any 
entity other than the shareholders or board of directors of a bank. 
NBE HOLDS DIRECTORS PERSONALLY AND CRIMINALLY LIABLE FOR BANK 
PERFORMANCE 
¶10. If NBE determines that directors or executives did not 
immediately inform the central bank of business difficulties 
(inability to meet obligations to creditors; inadequate capital; 
indications that the bank may not be a going concern), then the 
directors, chief executive and senior officers "shall be guilty of 
an offence and liable to a fine from Birr 50,000 to Birr 100,000 
(approximately US$5,000-10,000) and upon conviction further liable 
to imprisonment of five years."  This is in sharp contrast to U.S. 
law, in which directors and executives are only held liable if it is 
found that they acted negligently in performing their fiduciary 
responsibilities. 
NBE CAN TAKE OVER BANKS 
¶11. If NBE's examination of a bank (which may be made at any time 
and without prior notice) finds that the bank is not in compliance 
with laws, directives, terms and conditions of licensure, "is 
engaged in any manner in practices detrimental to, or not in the 
best interests of, depositors," or has serious weaknesses of 
corporate governance, NBE may take any of several measures.  These 
measures range from calling a shareholders' meeting to discuss the 
issues found and making written instructions to the bank to imposing 
fines on the bank, its directors and officers; dismissing or 
suspending directors or officers; and placing the bank into 
receivership.  An additional reason for placing a bank into 
receivership is "the bank follows policies which would endanger 
Ethiopia's or the Ethiopian peoples' general economic interest 
through inappropriate, illegal or imprudent banking practices."  In 
essence, if NBE feels a bank is acting "inappropriately" or against 
the interests of the Ethiopian people, terms which are undefined, 
then NBE can take over the bank, dismiss its directors and officers 
and run the bank for an indeterminate amount of time. 
¶12. A bank put into receivership does have the right to appeal the 
decision, but the sole question before the Federal High Court in 
such an appeal is "whether the Bank (NBE) acted in an arbitrary and 
capricious manner in establishing the receivership." 
¶13. COMMENT: While many of the above provisions are not new to the 
revised Proclamation, they nonetheless shed light on the GoE's 
absolute control of the banking system in Ethiopia.  Septel 
addresses the pervasive GoE control of NBE through the appointment 
of NBE executives and directors as well as the NBE chain of command. 
 Not only does this law prevent foreign participation in the 
financial sector, it gives NBE extraordinary power to control the 
management of private banks through "qualifying" board members and 
shareholders.  The provision for receivership is new to the revised 
Proclamation, and certainly raises the specter of 
politically-motivated takeovers by NBE for the "Ethiopian Peoples' 
general economic interest."  While the ruling party-controlled NBE 
has not, to date, exercised these abilities, they offer yet another 
avenue for the GoE to consolidate economic power and silence voices 
of dissent.  This draft proclamation re-iterates the GoE's move to 
consolidate economic and political power despite commitments to more 
private sector openness as part of the WTO accession process. END 
COMMENT. 
 
YAMAMOTO