Legal Update: Risk Based Capital Adequacy Requirements for Banks-Directive No. SBB/95/2025
The directive is organized into six parts. The first part outlines the general provisions of the directive. The second part deals with definition of capital. The third part discusses the capital requirements for credit risk. The forth and the fifth part extend to the capital requirements of market risks and operational risks. The last part, but not the least, is dedicated to miscellaneous provisions.
The aim of the directive is to establish risk management system, procedure, and strategies in line with international standards and best practices, trough maintaining adequate capital for the sustainability of the economy and specifically to boost public confidence. The directive has been issued by the national bank of Ethiopia (NBE) based on proclamation no 1360/2025, as per article 21(1-3): 32(1(e)): 85 and 91(2).
The directive is applicable to all banks licensed by the national bank of Ethiopia, operating in Ethiopia at both an entity (standalone) level and a consolidated (group) level. All financial institution, including insurance companies within a banking group, is subjects to this directive. The same applies to any other financial institutions and bank groups.
All banks must prepare a capital management strategy covering a period of one up to three years, in adherence to the elements the directive. In addition, the Bord of directors (BOD) has the responsibility to lead, follow up on, and ensure compliance with the directive before submitting it to the NBE. The NBE has the mandate to review the maintenance of capital requirement in accordance with all regulations incorporated in the directive.
The directive operates under the Basel agreements, so that it considers the component of regulatory capital, regulatory adjustments, and the minimum requirement. In this regard, the regulator, through this directive, provides capital adequacy ratio to govern banks’ capital against the risk they faces (see article 6 of the directive). In addition, the directive provides the method for calculating regulatory capital requirements. The calculations take in to account tire 1, tire 2 and total risk weighted Asset.
The directive governs the capital requirements for credit risks under chapter three, from article 12 to 15. The law provides how credit risk is mitigated through the management and measurements of requirements in line with on balance sheets Exposures, off balance sheets exposures, and credit risks managements. The law sets governance strategies for class of assets, applying financial principles that consider the risk to which they are weighted.
The directive also governess risks that banks may face due to change in market price, such as interest rate, foreign exchange rate, stock prices, or commodity prices. Thus, banks are required to have actionable risk management strategies in compliance with the directive. In addition, banks are required by the NBE to calculate these risks and maintain sufficient capital to absorb financial loses, ensuring that they remain stable even in volatile market conditions.
In addition to the credit and market risks, operational risks are vital for the stability of the countries’ financial sectors. Moreover, the directive briefly regulates the risks arising from operational activities such as failed internal process, people, systems, external events, fraud, penalties and other similar issues.
The directive follows the standardized approach under the Basel III to calculate and maintain adequate capital for operational risks. The method and components of calculation use business indicators, business indicator components, and an internal lose multiplier.
Last but not least, the directive imposes reporting requirements on banks. Banks are required to submit quarterly reports containing qualitative and quantitative descriptions of credit, operational, and market risks within 30 days from the end of each quarter to the national bank of Ethiopia. Those who fail to comply with the directive will be subject to administrative penalties as per article 29 of the directive.
Legal disclaimer
This material is provided for general informational purposes only and does not constitute legal or financial advice. Ethio Alliance Law Firm makes no warranty as to its accuracy or completeness and accepts no liability for any reliance placed on it. Readers should consult the official Directive and obtain specific legal advice before acting on any information herein.
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