Ethiopia has taken a major step toward aligning its banking sector with international regulatory standards, following the introduction of a new risk-based capital adequacy directive by the National Bank of Ethiopia (NBE), aimed at guiding lenders toward gradual adoption of the Basel II and Basel III frameworks.
Issued in November 2025 under the leadership of NBE Governor Eyob Tekalign, the directive formally known as Directive No. SBB/95/2025 marks a significant shift in the country’s financial regulatory architecture as authorities seek to modernise the sector and strengthen confidence amid gradual liberalisation.
The regulation formally recognises Basel II and Basel III as the international benchmarks for capital adequacy, with the central bank arguing that closer alignment with global best practices will enhance resilience, transparency and long-term stability across Ethiopia’s banking system.
Rather than requiring immediate compliance, the directive introduces a phased transition based on a so-called “mixed approach” that incorporates Basel II’s risk sensitivity alongside Basel III’s stricter capital quality requirements.
Under Article 30 of the directive, Ethiopian banks will be required to begin submitting quarterly capital adequacy reports based on the new framework from the quarter ending March 31, 2026. Full compliance with key prudential requirements including a minimum paid-up capital threshold of five billion birr must be achieved by December 31, 2026.
The NBE says the approach reflects the need to modernise regulation while giving domestic lenders time to adjust operational systems, governance structures and capital buffers.
Basel II and Basel III form the backbone of international banking regulation, developed by the Basel Committee on Banking Supervision following decades of financial crises. Basel II, introduced in 2004, sought to better align capital requirements with actual risk by introducing a three-pillar structure covering minimum capital, supervisory review and market discipline.
However, the global financial crisis of 2008 exposed weaknesses in Basel II, particularly its reliance on internal risk models and insufficient attention to liquidity risks. Basel III, developed in response, tightened capital definitions, raised minimum capital levels and introduced new liquidity standards to ensure banks can withstand short-term funding stress.
Under Basel III, greater emphasis is placed on high-quality capital, especially Common Equity Tier 1 (CET1), which has the highest loss-absorbing capacity. The framework also introduced the Liquidity Coverage Ratio and the Net Stable Funding Ratio to address vulnerabilities that emerged during the crisis.
Ethiopia’s new directive reflects this evolution. Banks are required to maintain a minimum CET1 ratio of seven percent, a Tier 1 capital ratio of nine percent, and a total capital adequacy ratio of 11 percent, after regulatory adjustments such as deductions for intangible assets and deferred tax items.
Policymakers see the move as a signal of maturity at a time when Ethiopia is cautiously opening its financial sector to foreign participation and seeking to attract long-term investment.
Yet the transition has sparked debate among analysts and industry observers, who warn that implementing complex global frameworks in a developing financial system presents significant challenges.
Critics point to constraints in data quality, supervisory capacity and specialised human capital, arguing that the technical demands of Basel-style regulation may strain both banks and regulators. Others note that even in advanced economies, Basel II and III have faced criticism for complexity, pro-cyclicality and limited effectiveness in preventing crises.
Supporters counter that gradual adoption will improve risk management, strengthen governance and prepare Ethiopian banks for deeper regional and global integration.
The NBE has not publicly detailed enforcement mechanisms beyond reporting requirements, but officials say supervisory engagement will be key during the transition period.
As Ethiopia balances financial liberalisation with stability concerns, the success of the Basel transition will depend on how effectively regulators tailor international standards to local realities a challenge that could shape the country’s banking sector for years to come.
