Commercial banks in Ethiopia will now be required to hold capital against potential losses from foreign exchange fluctuations, marking a significant shift in the country’s banking regulation. The National Bank of Ethiopia (NBE) introduced the measure through Directive No. SBB/95/2025, integrating currency risk as a formal component of capital adequacy for the first time.
The move responds to long-standing vulnerabilities in Ethiopia’s banking sector, where previous regulations focused primarily on credit exposures. With the country’s heavy reliance on imports and foreign trade, fluctuations in the birr can significantly affect banks’ balance sheets. Under the new directive, banks must allocate capital proportionate to their net foreign currency positions. The NBE applies a scaling factor of 1.20 to these positions to calculate the corresponding risk-weighted assets.
The directive sets clear minimum thresholds for capital buffers. Common Equity Tier 1 (CET1) must reach at least 7 percent of total risk-weighted assets, Tier 1 capital 9 percent, and total capital adequacy must remain above 11 percent. Banks are required to comply fully by December 31, 2026.
Enforcement is stringent. Boards of directors carry ultimate responsibility for ensuring compliance. Penalties are steep: 450,000 birr per day for failing to maintain minimum capital ratios, 100,000 birr for errors in computing capital requirements or risk-weighted assets, and 50,000 birr per day for late submission of quarterly capital adequacy reports.
