NBE Circular Declares Personal Interest-Bearing Loan Agreements Illegal

The National Bank of Ethiopia (NBE) issued a circular letter asserting that any interest-bearing loan agreement between individuals or companies other than financial institutions is illegal.

It addressed the October 9 letter to the Federal Documents Authentication and Registration Services (DARS) not to authenticate or register interest-bearing loan agreements. However, there are strong arguments to be made in favor of the legality of such agreements.

The NBE bases its position on the Banking Business Proclamation No. 592/2008, the Banking (Amendment) Proclamation No. 1159/2019, and the Micro-Financing Business Proclamation No. 626/2009. These laws generally prohibit individuals or companies from engaging in banking activities without a license. The NBE argues that lending money with interest is a banking activity and that therefore only banks and other financial institutions are allowed to do so.

However, the Civil Code of Ethiopia (1960) permits and regulates loan contracts under Articles 2471-2489. The Civil Code sets a maximum interest rate of 12% per annum for individuals and companies that desire to lend money. If the interest rate was not fixed in the loan agreement, the law goes on to presume that the loan bears a 9% interest rate per annum. It should be noted that these provisions of the Civil Code were not repealed by the banking proclamations.

The NBE also tried to debunk the argument that may be raised, citing the Income Tax Proclamation, which allows taxpayers to deduct interest as an expenditure from their taxable income. Article 23(2)(a) of the Income Tax Proclamation presumes that the taxpayer may borrow from non-financial organizations. Concerning this provision, the NBE argues the taxpayer may only borrow from cooperatives (“የህብረት ስራ ማህበራት”) permitted to receive savings and lend money.

Moreover, the Federal Supreme Court, by majority, acquitted the accused for the first two counts in the famous criminal case of Ayele Debella vs. Ethiopian Revenue and Customs Authority back in 2012 (File No. 60324). The accused was charged with engaging in a banking activity without a license, but the Court found that the Banking Business Proclamation only prohibits lending money as a business activity and that it does not apply to individuals who lend money on a one-off basis. The Court reasoned for this decision by stating it cannot criminalize the accused’s action by analogy (which is against the principle of legality) because no law outrightly prohibits his actions. The Court also reasoned that the Proclamation doesn’t repeal the Civil Code’s provisions that regulate contracts of loan.

In light of the foregoing, it appears that the NBE’s position on the legality of interest-bearing loan agreements is arguable. The Civil Code and the Federal Supreme Court’s decision suggest that such agreements are legal, provided that the interest rate does not exceed 12% per annum.

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