The National Bank of Ethiopia (NBE) has issued a sweeping new regulation that will fundamentally reshape how Ethiopian banks measure, manage, and report capital adequacy, marking the most significant prudential reform in more than a decade.

The directive “Risk-Based Capital Adequacy Requirement for Banks Directive No. SBB/95/2025” was formally released today, introducing a Basel II/III-aligned capital framework that tightens minimum capital ratios, expands risk-weighting rules, and sets strict governance obligations for boards of directors.

Basel II/III Standards Become Mandatory in Ethiopia

For the first time, Ethiopian banks are required to compute capital adequacy using credit risk, market risk, and operational risk, aligned with global Basel II/III frameworks. The regulation replaces the simpler risk-weight system historically used in Ethiopia and introduces a full, internationally recognized approach for evaluating bank solvency.

Higher Minimum Ratios: CET1 at 7%, Tier 1 at 9%, Total Capital at 11%

Under the new rules, banks must maintain at all times:

Common Equity Tier 1 (CET1): 7%
Tier 1 Capital: 9%
Total Capital Ratio: 11%

These ratios must be calculated using newly introduced risk-weighted asset (RWA) methodologies that include detailed treatments for sovereign, corporate, retail, real-estate, and interbank exposures.

Boards Now Legally Responsible for Capital Strategy

For the first time, NBE places explicit regulatory responsibility on bank boards. Each bank board must produce and submit a 1-3-year capital management strategy, showing how the institution will maintain adequate capital buffers and measure risks across all portfolios. Failure to do so exposes banks to administrative sanctions.

Clear Definitions of CET1, AT1, and Tier 2 Capital

The directive introduces global capital classifications:

CET1: paid-up shares, retained earnings, legal reserves
AT1: perpetual subordinated instruments with loss-absorption triggers
Tier 2: subordinated debt with minimum five-year maturity

Instruments must meet detailed criteria including subordination, loss-absorption features, and strict limitations on callability to qualify as regulatory capital.

Comprehensive Credit-Risk Framework Introduced

The directive provides a detailed risk-weighting system for:

sovereign exposures
state-owned enterprises
banks
corporate borrowers
retail and real-estate portfolios
specialized lending (project, object, commodities finance)

Market Risk and Operational Risk Now Capital-Charged

Banks must now calculate capital charges for:

Interest rate risk
Equity risk
Foreign exchange risk
Commodity risk

Operational risk requirements follow the Business Indicator (BI) and Internal Loss Multiplier (ILM) methodology, replacing older provisioning-based approaches.

What This Means for Ethiopia’s Banking Sector

This directive is part of a broader modernization push as Ethiopia transitions to a liberalizing financial system, prepares for foreign bank entry, and aligns with global prudential norms. Analysts expect:

Higher capital requirements for large project and construction loans
Potential capital raising by banks that fall short of CET1 thresholds
Stronger balance-sheet transparency and risk reporting
Greater scrutiny by the regulator on corporate governance With the introduction of risk-sensitive capital rules, Ethiopian banks will now be required to adopt robust risk-management systems similar to regional peers in Kenya, Rwanda, and Nigeria.