(3 Minutes Read)
Regulators say the measure is intended to guard against “unforeseen liquidity shortages arising from external or internal shocks, which could threaten the banking system’s stability.
A new directive from the Central Bank of Ethiopia sets the terms for a mechanism that would allow it to supply commercial banks with cash in the event of a liquidity crunch.
The ‘Emergency Liquidity Assistance’ directive enables the National Bank of Ethiopia (NBE) to inject cash into solvent banks experiencing temporary liquidity challenges against collateral and with interest. The assistance, which is to be denominated solely in Birr, is available to all 32 banks licensed to operate in the country.
Regulators say the measure is intended to guard against “unforeseen liquidity shortages arising from external or internal shocks, which could threaten the banking system’s stability.
A bank looking to access a cash bailout from the NBE will need to present adequate collateral, which can include financial instruments such as treasury bonds, and reach a bilateral agreement with regulators. It will also need to demonstrate that it has exhausted all other options for solving its liquidity problems, including the recently established interbank market.
The directive does not set a flat ceiling on the amount of cash a bank can access under an Emergency Liquid Assistance (ELA) deal, indicating it will instead be based on “the identified liquidity gap, the applicant’s ability to repay, the adequacy of eligible collateral made available” and the bank’s ability to apply the terms and conditions set by regulators.
Read Also:
https://trendsnafrica.com/legislation-to-regulate-real-estate-in-ethiopia/
However, the directive sets a six-month maximum for repayment for ELA agreements with an option to extend the repayment period by a further six months with prior approval. It also sets the interest rate on par with the overnight standing lending facility rate plus two percentage points.
