A directive that central bank regulators hope will reshape how commercial banks manage liquidity is the latest in a series of reforms undertaken by the National Bank of Ethiopia (NBE) over the past nine months.

Governor Mamo Mihretu wants to see the draft directive improve liquidity for commercial banks grappling with a squeeze that has plagued the sector for over two years, made worse by a stringent credit growth cap imposed to tame inflation.

The directive introduces a lagged reserve system to bolster financial stability, scrapping separate reserve and payment accounts and consolidating them into a single payment and settlement account.

This could invigorate interbank lending, regulators say.

A five percent daily minimum reserve will be automatically blocked, with excess funds released for banks’ use, according to the directive.

Observers worry the minimum five percent could strain smaller banks, who are already under pressure to raise paid-up capital to five billion birr before a fast-nearing deadline and struggling with the 18-percent credit growth cap.

The central bank will keep its seven-percent average reserve requirement in place, but will now base its calculations based on monthly deposit averages, not real-time balances. Regulators hope this will offer banks stability.

The directive will also scrap weekly report requirements in a bid to cut compliance costs, replacing them with a bi-monthly schedule.

The overhaul comes at a decisive period for the Ethiopian banking industry, which is grappling with inflation and currency devaluation as part of IMF and World Bank imposed reforms.

The government recently set a minimum capital requirement for foreign banking entrants, and reports indicate banks such as Kenya’s KCB Group and South Africa’s Standard Bank have expressed an interest in Ethiopia’s underserved population.

For banks, the directive is hoped to balance flexibility with discipline.

The NBE is still seeking input from bankers, but regulators say the directive will likely be made effective in the near future.