Foreign exchange is one of those things everyone talks about in Ethiopia—sometimes with excitement, sometimes with frustration, and often with a mix of both. Whether you work in banking, run an import-export business, or simply try to understand why the dollar rate keeps changing, you’ve probably felt the ripple effects of how the country manages forex. Accordingly in this blog we will explore about Ethiopia’s New Foreign Exchange Directive. Lets Dive In.
Introduction to Ethiopia’s New Foreign Exchange Directive
In November 2025, the National Bank of Ethiopia (NBE) introduced a major regulatory shift: the Foreign Exchange Exposure Limits of Banks Directive No. SBB/96/2025. It replaces a long-standing 2001 rule and brings updated, stricter, and more modern standards for how banks should measure, manage, and report their foreign exchange exposures. SBB962025-LICENSING-AND-SUPERVI…
Now, that may sound dry on the surface—but trust me, this directive shapes almost everything related to forex in the banking sector. It affects how banks hold foreign currency, how they serve customers, how they price currencies, how they manage risks, and ultimately how stable the entire financial system remains.
What do you get from this article about Ethiopia’s New Foreign Exchange Directive?
In this long-form explainer, we’ll break down the directive in a friendly, story-like way. We’ll cover:
- Why Ethiopia needed a new forex exposure rule
- What “foreign exchange exposure” actually means
- How the limits are calculated
- What banks must do (and must avoid) under this directive
- The reporting and oversight requirements
- Penalties and consequences for non-compliance
- Why this matters for businesses, banks, and the wider economy
So grab a coffee, settle in, and let’s unpack this important piece of Ethiopia’s financial rulebook together.
Why Issue a New Directive in 2025?
Let’s start with the “why.”
The directive begins with several statements of intent—basically a series of “whereas” clauses that tell us why the National Bank felt this directive was necessary.
The Beginning of Ethiopia’s New Foreign Exchange Directive
According to the document:
- It aims to help banks conduct foreign exchange business in a sound and viable manner. SBB962025-LICENSING-AND-SUPERVI…
- It highlights the importance of monitoring banks’ exposure to exchange rate risk, ensuring losses from exchange rate fluctuations remain within acceptable limits.
- It also encourages banks to flexibly meet customer needs and support a functioning foreign exchange market, which has been a challenge in Ethiopia for years.
- Finally, it aims to enhance the availability of foreign exchange at competitive rates, partly by capping how much forex banks can hold. SBB962025-LICENSING-AND-SUPERVI…
In short: it’s all about stability, transparency, flexibility, and discipline.
Let’s be honest—the Ethiopian forex market has been under pressure for a long time. High demand, low supply, parallel market influence, and inconsistent inflows have made forex management a delicate balancing act. Banks often struggle with unpredictable currency movements, and that exposes them to real financial risks.
Why this Ethiopia’s New Foreign Exchange Directive amend The older directive?
The older directive from 2001 (SBB/27/2001) was outdated and did not account for:
- Today’s digital banking environments
- More sophisticated financial products
- Larger volumes of forex transactions
- A more complex and interconnected economy
By issuing the new directive in 2025, NBE is essentially upgrading the rules to fit modern banking realities. And it officially repeals and replaces the older directive. SBB962025-LICENSING-AND-SUPERVI…
Who Does This Directive Apply To?
This part is easy: every bank engaged in foreign exchange business.
That includes:
- Private Ethiopian banks
- State-owned banks
- Subsidiaries of foreign banks
- Branches of foreign banks licensed in Ethiopia
In other words—if you touch forex in any way, this rule is for you.
Key Definitions (Made Simple)
One thing I really appreciate is that the directive includes clear definitions. But let’s translate some of the most important ones into everyday language.
1. Exchange Rate Risk
This is the risk a bank takes when the value of a foreign currency changes unexpectedly.
For example:
If a bank holds €10 million and the euro suddenly drops in value, the bank loses money. That’s exchange rate risk. SBB962025-LICENSING-AND-SUPERVI…
2. Foreign Currency Exposure
This is the total amount of assets and liabilities a bank holds in foreign currencies.
Think of it as:
“How much does the bank stand to win or lose if currency rates change?” SBB962025-LICENSING-AND-SUPERVI…
3. Open Foreign Currency Position
When a bank’s foreign currency assets and liabilities don’t match, its position is “open.”
For example:
- If a bank holds more dollars than it owes → long position
- If it owes more dollars than it holds → short position SBB962025-LICENSING-AND-SUPERVI…
4. Overall Net Open Position
This is the big one.
It’s the combined (net) long or short position across all currencies a bank deals with.
This number is what the NBE cares about most because it indicates the bank’s overall exposure to forex risk. SBB962025-LICENSING-AND-SUPERVI…
5. Shorthand Method
Instead of calculating complicated risk-weighted positions, the directive keeps it simple:
- Add all long positions
- Add all short positions
- Whichever total is larger = the bank’s overall exposure SBB962025-LICENSING-AND-SUPERVI…
Simple. Clean. Easy to monitor.
The Heart of the Directive: Exposure Limits
Here’s where things get interesting—and where the directive becomes much stricter than the older rules.
Daily Overall Exposure Limit: ±18% of Tier 1 Capital
This is the central rule every bank must follow.
At the end of every business day, a bank’s overall open foreign currency position must not exceed +18% or -18% of its Tier 1 capital. SBB962025-LICENSING-AND-SUPERVI…
So if a bank has Tier 1 capital of 10 billion ETB, the maximum allowed exposure is:
- Long exposure: up to 1.8 billion
- Short exposure: down to -1.8 billion
Why Tier 1 capital?
Because this is the most reliable, loss-absorbing form of capital a bank has. It tells NBE:
“Even if the worst happens, can the bank handle its losses without collapsing?”
Single Currency Limit Is Set by Each Bank—But Can't Break the Overall Limit
Interestingly, NBE does not impose per-currency limits.
Instead, it allows each bank to set its own single currency exposure policies internally—as long as they remain within the overall ±18%. SBB962025-LICENSING-AND-SUPERVI…
This gives banks flexibility but still keeps them accountable.
Intra-Day Monitoring Is Mandatory
Banks can’t just behave during closing hours—they must continuously monitor intra-day exposures.
The bank’s Board of Directors must set its own prudent intra-day limits. SBB962025-LICENSING-AND-SUPERVI…
This means banks need good systems, automated tracking, and real-time alerts.
How Banks Must Calculate Their Exposure
This section of the directive gets quite technical, but let’s break it down with an example-driven approach.
Step 1: Compute Single Currency Exposure
A bank must calculate its net position in each currency—USD, EUR, GBP, CNY, and so on.
This involves:
- Net spot position: assets minus liabilities already on the balance sheet
- Net forward position: commitments for future inflows/outflows
- Unsettled spot trades
- Forward contracts
- Documentary credits likely to be called
- Currency swaps and futures
- Irrevocable guarantees
SBB962025-LICENSING-AND-SUPERVI…
Think of it like:
“How much will we eventually receive vs. how much will we eventually pay, after everything settles?”
Step 2: Determine Whether It's a Long or Short Position
- If the result is positive → long
- If negative → short
SBB962025-LICENSING-AND-SUPERVI…
Step 3: Convert to Birr Using Mid-Rate
Each bank must use its own mid exchange rate (average of buying and selling) at end of day. SBB962025-LICENSING-AND-SUPERVI…
This keeps things consistent.
Step 4: Add Up All Longs and All Shorts
Simple addition using the shorthand method.
SBB962025-LICENSING-AND-SUPERVI…
Step 5: Compare With Tier 1 Capital
Finally, divide the larger of total long or total short by Tier 1 capital to see if it exceeds 18%.
Correcting Excess Exposures: Banks Must Move Fast
If a bank exceeds the allowed exposure, there’s zero wiggle room.
Here’s what NBE requires:
- Immediately attempt to correct the excess exposure.
- Square the position the next business day—no excuses.
- If the bank doesn’t fix it by next day’s close of business, sanctions apply automatically. SBB962025-LICENSING-AND-SUPERVI…
This puts pressure on treasury departments to stay alert.
Daily Reporting Requirements (Yes, Daily!)
Banks must send a detailed report to NBE every single business day, before 12:00 noon. SBB962025-LICENSING-AND-SUPERVI…
This report includes:
- All foreign currency assets
- All foreign currency liabilities
- Net positions
- Mid exchange rates
- Net open positions
- Tier 1 capital level
- Ratio compared to the 18% limit
There’s even a long annexed template showing exactly how banks should report line by line. SBB962025-LICENSING-AND-SUPERVI…
Special rule:
- Friday’s report is due Saturday
- Saturday’s report is due on the next business day
SBB962025-LICENSING-AND-SUPERVI…
This means banks must have teams ready on Saturdays too. Not the most popular rule, I imagine.
Internal Controls and Systems: The Directive Gets Serious
NBE requires banks to have:
1. Strong Internal Controls
Boards and senior management must ensure exchange rate risk is managed properly. SBB962025-LICENSING-AND-SUPERVI…
2. Internal Audits
Audits must be performed periodically and reported to the board at least quarterly. SBB962025-LICENSING-AND-SUPERVI…
3. Automated Systems
Banks must automate:
- Exposure computation
- Limit monitoring
- Compliance tracking
- Report generation
SBB962025-LICENSING-AND-SUPERVI…
Gone are the days of Excel sheets and manual tracking.
Special Rules for Development Finance Institutions
Development finance institutions (like the Development Bank of Ethiopia) may have exceptions in cases where foreign exchange inflows come from government or development partners for specific programs. SBB962025-LICENSING-AND-SUPERVI…
This is important—these institutions often receive large foreign currency inflows tied to development projects, so their exposures can temporarily look uneven.
The Sanctions: NBE Isn’t Playing Around
If a bank breaks the rules, NBE has an entire toolbox of penalties ready. And some of them sting.
1. Exceeding Exposure Limits
If a bank doesn’t fix excess exposure by the next day:
- Fine = 10% annual rate applied to the excess amount (prorated daily).
SBB962025-LICENSING-AND-SUPERVI…
2. Reporting Late
- 10,000 ETB per day for each day the report is late.
SBB962025-LICENSING-AND-SUPERVI…
3. Misreporting or Manipulating Figures
- 50,000 ETB for each misdeed (understating/overstating/omitting data).
SBB962025-LICENSING-AND-SUPERVI…
4. Escalated Penalties for Repeated Non-Compliance
This is the heavy stuff.
NBE may prohibit a bank from:
- Doing further forex business
- Paying dividends
- Opening new branches
- Introducing new products
- Accessing NBE facilities
- Lending or investing
- Buying fixed assets
- Accepting new deposits
SBB962025-LICENSING-AND-SUPERVI…
These are serious restrictions—some could cripple a bank’s operations entirely.
5. Additional Administrative Measures
If violations threaten financial stability, further actions may be imposed under the national proclamations. SBB962025-LICENSING-AND-SUPERVI…
Why This Directive Matters for Banks and Businesses
Now that we’ve unpacked the technical parts, let’s answer the real-world question:
What does all this mean for Ethiopia’s economy?
A lot, actually.
1. Less Exchange Rate Risk for Banks
Banks need stability to remain solvent. Controlling forex exposure protects them from large, sudden losses.
2. More Transparent Forex Market
Daily reporting and strict monitoring help stabilize the market and reduce speculative behaviors.
3. Better Customer Service (Potentially)
When banks manage forex risk proactively, they’re more able to:
- Offer reliable forex services
- Support businesses that need currency for imports/exports
- Provide more predictable pricing
4. Support for the Birr’s Stability
The more disciplined banks are with forex, the more stable the currency system becomes.
5. Modernizing Ethiopian Banking
Automated systems, better controls, and updated definitions bring Ethiopia closer to international best practices.
Challenges Banks Might Face
Of course, it’s not all sunshine and roses. Banks may struggle with:
- System upgrades
- More workload for treasury teams
- Liquidity pressures when correcting excess exposures
- Daily reporting deadlines
- Stricter audits and oversight
- Balancing customer needs with compliance
But in the long run, these challenges push the industry toward resilience and modernization.
Final Thoughts: A Step Toward a More Stable Financial Future
Directive No. SBB/96/2025 is more than a set of rules—it’s a roadmap for building a more stable, well-regulated, and disciplined foreign exchange environment in Ethiopia.
Sure, the requirements are demanding. Banks will need better systems, continuous monitoring, stronger internal controls, and a healthy respect for limits. But the payoff is worth it:
- A more resilient banking system
- Better protection against volatile currency movements
- Increased investor confidence
- A more predictable market for businesses
- Improved national financial stability
If Ethiopia is to modernize its financial landscape and support a growing economy, reforms like this are essential.
And for banks, complying with this directive isn’t just about avoiding fines—it’s about embracing better financial management and preparing for a more competitive future.
Reference and Materials in pdf of Ethiopia’s New Foreign Exchange Directive
- Banking Business Proclamation No.-1360/2025
- LICENSING AND-SUPERVISION-OF-BANKING-BUSINESS-FOREIGN-EXCHANGE-EXPOSURE-LIMITS-OF-BANKS-DIRECTIVE No 96 2025 download in pdf hear
- Foreign Exchange Exposure Limits Training on directive SBB_96/2025 download hear
- Lawyer Hasen Mh Firm Ethiopian Laws Archive
