The Prohibition on Regional Governments’ Undertaking of Banking Business
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Date
2016-05
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Addis Ababa University
Abstract
This research is conducted as an investigation into the complexities of the attempts of the
Ethiopian Government to control banking business by applying strict legal framework to ban
the units of the federation from owning and operating banks and its legitimacy given the form
of government the constitution purports to have set up.
To start with, I accept the argument that banks are unique from other business organizations.
This is for they provide the most important contribution to any economy; they uphold the
public trust and confidence; they are key players in the payment and settlement system for the
government, business sector and households; they mobilize deposits for which they are liable
for financial assets are the property of the entire social system which are to be repaid, on
demand or on their due date; they play a major role in the allocation of financial resources,
acting as an intermediary between depositors of surplus funds and borrowers in need of
funds; they are highly leveraged: in comparison to commercial or industrial companies i.e.
cash flow sensitive to meet repayments.
This unique feature makes banking a risky business whose failure may result in systemic risk
and necessitates special and strict regulatory intervention by governments. Among the
various regulatory intervention mechanisms is the limitation put on acquisition of shares by
persons which stands to be the central theme of this work for there is a blanket ban on
regional states as a result of this limitation.
The nature and scope of this limitation is regulated in different countries differently. At the
same time, the performance, inclusiveness and stability of banks, inter alia depends on how
the regulatory regime concerning who owns them and to what extent is fashioned.
The concerns related to protection of infant banking industry against foreign direct
investment (hence forth FDI) and the regulator’s competency issues should not be relegated.
As rapid privatization and liberalization of the economy has been futile elsewhere, the writer
appreciates the policy stand in this respect for a lot should be done at home before guests
come home with no sense of help but profit.
While the shareholding limit put on national investors began during the transitional period,
with the shift in the economic policy, by the law that permitted the private sector operate the
banking sector, the Licensing and Supervision of Banking Business Proclamation No.
84/1994, that law did not put any limitation on the then National and Regional SelfGovernments for they may hold up to 20% of shares of a bank and even more.
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Keywords
Prohibition On Regional Governments,Banking Business