The central bank has clarified that interest-bearing private loans are not permitted, with only banks, microfinance institutions, and Savings and Credit Cooperatives (SACCOs) authorized to provide such loans.
The Document Authentication & Registration Service sought clarification on whether the long-standing practice of private entities offering interest-bearing loans is legally valid.
In a signed letter, central bank Vice Governor Fikadu Digafe provided clarification. According to Fikadu, if any entities besides banks and MFIs can offer interest-bearing loans, they must be SACCOs.
Apart from these exceptions, Fikadu added, no other entities or individuals are allowed to provide interest-bearing loans.
"Financial intermediation is within the scope of financial institutions including banks, microfinance institutions, and SACCOs,” he said.
The practice had been in effect for a long time.
Lawyers opposed the circular letter.
"It criminalizes interest-bearing private loans and makes using debt as a structuring tool even more impractical," said legal advisor and lawyer Tsegamlak Solomon.
The lawyer also noted that the NBE's circular will negatively impact investment in Ethiopia, as private investors often play a key role in providing startup and SME financing.
As Tsegamlak wrote on his website, "If investors are not permitted to structure their investments in any form other than equity, it could discourage investment in these companies due to the high risks associated with such investments."
In the lawyer's view, the NBE seems to be prioritizing the interests of the banking sector over those of the investment community.
"Businesses' access to financing is linked to a functioning regulatory framework that connects them with lenders and investors willing to take risks," Tsegamlak added.
