The National Bank of Ethiopia (NBE) will impose additional reserve requirements on individual commercial banks whose loan-to-deposit ratios are judged to threaten price stability, replacing a blanket credit ceiling with a precision instrument that targets specific institutions rather than the entire banking sector.
NBE Governor Eyob Tekalign announced the measure following the seventh meeting of the central bank’s Monetary Policy Committee (MPC), framing it as a more surgical tool for managing inflationary pressure.
“This gives the National Bank a precise instrument to act on individual banks, rather than the economy-wide constraint the credit cap once provided,” Eyob said.
Under the new mechanism, banks identified as expanding credit in a manner that threatens the inflation outlook will be required to hold additional reserves at the central bank — reducing the funds available for further lending and raising the liquidity cost of rapid credit expansion.
The loan-to-deposit ratio, which measures the proportion of customer deposits extended as loans, will serve as the primary indicator triggering intervention.
NBE did not disclose the specific ratio thresholds that would activate the requirement, the size of the additional reserves affected banks would need to hold, or a formal implementation date — leaving commercial banks without precise parameters as they adjust their lending strategies.
Alongside the new mechanism, NBE fully removed the annual credit growth ceiling it introduced in 2024, saying the temporary measure had served its purpose as the central bank developed an interest-rate-based monetary policy framework.
The removal grants commercial banks greater autonomy over the size and allocation of their loan portfolios.
To offset the potential expansionary effect of lifting the cap, NBE raised its central policy rate from 15% to 16%. Eyob said the two moves should be read together — one instrument withdrawn, another strengthened — and maintained that their combined effect left the policy stance “if anything, tighter than before.”
The shift is consistent with NBE’s broader transition away from direct administrative restrictions and towards indirect, market-based monetary policy instruments, a trajectory that mirrors reforms undertaken by several African central banks seeking to align with international monetary policy norms.
The targeted reserve requirement is likely to bear most heavily on banks with relatively high lending compared with their deposit base. Such institutions may face pressure to accelerate deposit mobilisation, tighten liquidity management, and moderate loan book growth.
NBE noted that private banks’ average loan-to-deposit ratio had already declined to 72.7% from 90.3% in the 2022/23 financial year, reflecting improved liquidity discipline across the sector.
Nevertheless, the new framework means that even as the blanket cap is lifted, lending expansion will remain subject to institution-specific monitoring and the possibility of individual reserve obligations where a bank’s behaviour is seen to create wider inflationary risks.
Ethiopia’s banking sector has expanded rapidly in recent years, with new private entrants increasing competition for deposits and loan business. The MPC’s latest decisions signal that growth will be permitted to continue — but not without a closer regulatory eye on the institutions driving it.
