Banking Business Proclamation: A Step Forward, a Stumble Back?

By Kebour Ghenna

Ethiopia’s Banking Business Proclamation is here, heralded as a cornerstone of financial reform. For many economists, who champion economic pragmatism over ideological purity, this proclamation is less a symphony of progress and more a mixed medley of intentions, contradictions, and compromises.

The proclamation makes some promising overtures – acknowledging the unique challenges of a developing economy. Yet, in its drive to modernize, it often stumbles into the traps of rigid orthodoxy or half-hearted liberal gestures. So, does it serve the developmental state, or does it merely echo the chorus of conventional banking rules?

The Pragmatic Wins

Let’s start with the applause-worthy elements – those that speak to an unorthodox economist’s heart, favoring state intervention where markets fail and tailoring policies to local realities.

• Cautious Foreign Integration: Article 10 opens the door to foreign banks but limits their influence through ownership caps and operational restrictions. For a unorthodox economist, this is a prudent approach, protecting nascent domestic players from being swallowed by global giants.

• Consumer Protection: Article 82 ensures trust in the system by safeguarding depositors and borrowers – a necessary safeguard in a country where financial literacy varies widely.

• Crisis Management: Articles 35 – 40 establish robust frameworks for resolving banking distress. The state takes a decisive role, ensuring that systemic stability trumps shareholder profits.

• Regulatory Sandbox: Article 88 offers a safe space for financial innovation – a nod to the need for adaptability in a rapidly evolving global financial landscape.

These provisions reflect an understanding that Ethiopia’s economic challenges are unique, and blanket liberalization isn’t the answer.

Where It Falters

But then, there’s the overreach. The proclamation doesn’t just guide the market; it holds it by the hand, and at times, tightens its grip too much.

• Operational Micromanagement: Articles 3.4 and 9 mandate National Bank approval for basic decisions like branch openings, product launches, or relocations. This bureaucratic tangle stifles innovation and responsiveness—key ingredients for a vibrant financial sector.

• Restrictions on Cross-Border Activities: Article 78 curtails cross-border borrowing, lending, and investment, reinforcing insularity at the cost of potential growth. For a heterodox economist, the key isn’t exclusion but managing foreign participation to complement domestic goals.

• Harsh Penalties: Article 89 imposes severe fines and imprisonment for regulatory breaches. While discipline is essential, such punitive measures risk creating a climate of fear rather than fostering responsible banking.

These heavy-handed approaches threaten to smother the dynamism needed for Ethiopia’s banks to grow and compete.

The Missed Opportunities

Even more frustrating are the areas where the proclamation teeters on the brink of innovation but retreats into half-measures:

• Governance: Articles 16–18 emphasize independent directors and corporate governance but lean too heavily on state approval. Why not empower domestic banks to set their own standards while enforcing accountability?

• Diversification: Article 69 prohibits non-banking activities, even when they could stabilize revenues or address developmental needs. A more flexible stance could have encouraged banks to invest in underserved sectors like infrastructure or agriculture.

These provisions reflect a fear of experimentation – a reluctance to fully embrace the messy, iterative process of development.

Counting the Balance

Here’s how the proclamation stacks up for an unorthodox economist:

• Articles that support developmental goals: About 11 (30%).

• Articles that hinder flexibility or overreach: Roughly 9 (25%).

• Neutral or context-dependent articles: Around 4–5 (15%).

The rest? Administrative housekeeping, less about ideology and more about keeping the banking system running.

The Verdict

The Banking Business Proclamation is a reflection of Ethiopia’s economic crossroads. On one hand, it acknowledges the state’s role in fostering stability and protecting domestic interests. On the other, it clings to an outdated notion of centralized control, often at the expense of innovation and pragmatism.

Is it a victory for the developmental state? Not entirely. Is it a nod to liberalization? Not really. Instead, it’s an awkward compromise, straddling both worlds and fully committing to neither.

For Ethiopia’s financial sector, this proclamation isn’t a final answer—it’s a starting point. The real challenge lies in implementation:

Will policymakers adjust course when markets falter? Will the state loosen its grip when stability allows? Will banks be given the freedom to innovate while staying anchored to national goals?

For now, the proclamation remains a work in progress. Neither here nor there—but with potential, if we’re willing to learn as we go.

Editor’s note : The article appeared first on Kebour’s personal social media page

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