The National Bank of Ethiopia (NBE) has directed commercial banks to disclose to customers all fees and commissions related to trading in foreign currency as part of ongoing efforts to streamline the forex market and align it with international best practices.
The central bank said in a statement on October 15 that banks are expected “to make due reference to international best practices when setting such fees and offer correspondingly competitive fees.”
“Moreover, banks are required to transparently disclose all such fees, commissions, or any other related charges in transactions with their customers. All such fees shall also be reported to the NBE on a regular basis per the usual practice.”
Previously, the regulator only required that banks include forex-related fees and commissions (except those charges set in nominal terms) in their trading spreads between the buying and selling rate.
“However, based on lessons gained from experience and inputs received from the banking sector, it has now become important to review the earlier decision regarding the treatment of FX related spreads and fees,” the bank said.
NBE has also directed that the forex trading spread (the difference between the bank’s buying and selling price for forex) be separately identified in a lender’s forex transactions and in its daily posted rates and should not exceed two percent of the bank’s posted rates in line with international practices.
“Banks are still free to adjust their buying and selling rates in light of market conditions and based on transparent and principle-based negotiations with specific customers,” NBE said.
The central bank started implementing a flexible exchange rate regime policy backed by the International Monetary Fund at the end of July.
Ethiopia is struggling to pull out of macroeconomic headwinds associated with inflation, mounting debt and foreign currency shortage, which are impacting foreign investments in the economy. Prime Minister Abiy Ahmed is working to open up the economy to foreign investments after decades of a state-controlled regime.
On June 14 Ethiopia’s Council of ministers approved a draft banking business Bill and forwarded it to parliament for ratification, in a major development that is expected to open up the country’s banking sector to foreign investments, with regional banks such as Kenya’s KCB and Equity, which already have representative offices in Addis Ababa, waiting in the wings.
The Bill offers foreign lenders the opportunity to expand their operations in Ethiopia by setting up subsidiaries, branches or acquiring local banks.
Under the new regime, commercial banks can now set prices for foreign exchange while non-bank entities can operate forex bureaus.
The Abiy administration had been facing mounting pressure from the World Bank and IMF to float the country’s currency and implement critical reforms in the forex market as a requirement for freeing over $10 billion in fresh funding.
The reforms also include the opening up of the proposed stockmarket to foreign investors, introduction of non-bank forex bureaus to buy and sale foreign currency and the lifting of restrictions on the amount of dollars that travellers may bring in or take out of the country.
The NBE also started implementing an interest rate-based monetary policy regime in July. It says the transition to an interest rate (or price)-based monetary policy framework in managing inflation, interest rate, money supply and exchange rate would help address some longstanding weaknesses in Ethiopia’s macroeconomic and banking environments.
As such, the National Bank Rate (NBR) will be raised or lowered depending on prevailing inflationary and monetary conditions.
