Key Amendments Introduced by National Payment System (Amendment) Proclamation No. 1282-2023

National Payment System (Amendment) Proclamation No. 1282/2023 brings forth several crucial changes, focusing on definitions, the powers of the National Bank, and the framework for licensing and oversight of payment service providers.

1. Revised Definitions (Article 2)

Several existing definitions within Article 2 of the original Proclamation have been deleted and replaced to reflect current industry realities and regulatory needs.

• Central Security Depository for Government Securities (Sub-Article 4): This definition has been comprehensively revised. It now refers to a system where government securities are either immobilized (held in government custody) or dematerialized (registered in the government’s name), allowing transactions through electronic entries in securities accounts without the physical exchange of certificates. This also includes systems that facilitate the registration, clearing, and settlement of government securities transactions.
• Financial Institution (Sub-Article 12): The scope of “Financial Institution” has been broadened to explicitly include a bank, a microfinance institution, an insurance company, a re-insurer, a payment instrument issuer, a payment system operator, a money transfer institution, a postal saving service, or any other similar institution as determined by the National Bank.
• Payment System Operator (Sub-Article 18): A new definition clarifies “Payment System Operator” as the National Bank, a financial institution, or any other company specifically licensed or authorized by the National Bank to establish and operate a payment system. This encompasses various functions such as routing, matching, clearing, netting, and settlement of payment instructions or government securities transactions.
• Payment Instrument (Sub-Article 20): This term is redefined as any tangible or intangible instrument issued against funds equivalent in Ethiopian Birr, which enables a person to obtain money, goods, or services, or to make payments. This now explicitly includes electronic money and cards, reflecting the evolution of digital payments.

2. Addition of New Definitions (Article 2)

Nine entirely new definitions have been added to Article 2 (Sub-Articles 29 through 37), immediately following the existing Sub-Article (28). The original Sub-Article (29) has been re-numbered as (38). These new terms are crucial for a more precise regulatory framework:

• “Foreign Currency”
• “Company”
• “Electronic Money”
• “Foreign National”
• “Subsidiary”
• “Payment Instrument Issuer”
• “Authorization”
• “Investment Protection Fee”
• “Outsourcing”

3. Amended National Bank Powers (Article 4)

The powers of the National Bank of Ethiopia (NBE) have been refined and expanded to enhance its oversight capabilities.

• Specific Mention of Central Security Depository: Paragraph (b) of Sub-Article (1) of Article 4 has been updated to specifically mention the NBE’s authority over the “central security depository for government securities,” reinforcing its role in this critical area.
• Licensing and Authorization: Paragraph (a) of Sub-Article (2) of Article 4 now explicitly states the National Bank’s power to license or authorize payment system operators and payment instrument issuers, providing a clear legal basis for this regulatory function.
• Directive-Making Authority: Paragraph (d) of Sub-Article (2) of Article 4 empowers the National Bank to prescribe, by Directive, conditions for various aspects of payment systems. This includes rules for participants, payment instrument issuers, and operators concerning investments in system infrastructure, interoperability standards, cost sharing mechanisms, service charges, and maximum limits on electronic account balances, transactions, and cash withdrawals at agents and electronic equipment.

4. Comprehensive Licensing, Authorization, and Prohibition Framework (New Article 5)

Article 5 of the original Proclamation has been completely replaced with a detailed and robust framework for licensing, authorization, and prohibitions within the payment system.

• Mandatory Licensing/Authorization: It strictly prohibits any person, other than the National Bank itself, from operating as a payment system operator or payment instrument issuer without first obtaining a proper license or authorization from the National Bank.
• Oversight of Ethiopian Postal Service Enterprise: The financial services offered by the Ethiopian Postal Service Enterprise are now explicitly made subject to obtaining National Bank authorization and regulatory oversight, bringing them under the NBE’s umbrella.
• Prior Approval for Major Changes: Payment system operators and payment instrument issuers are now mandated to obtain prior written approval from the National Bank before undertaking significant actions. These include introducing new systems or instruments, merging with other operators, taking over another’s system, selling or disposing of their business, effecting major changes in their business operations, redeeming shares, reducing capital (unless due to operating losses), amending their memorandum of association, or altering their business name. This ensures the NBE maintains control over critical changes that could impact the national payment system’s stability.
• Prohibition Power: The National Bank is empowered to prohibit in writing the operation of a system or the issuance of an instrument if it is deemed detrimental to the reliability, safety, efficiency, or smooth operation of the national payment system, or if such a prohibition is in the public interest.
• AML/CFT Compliance: It explicitly requires all payment instrument issuers and payment system operators to comply with national laws on the prevention and suppression of money laundering and the financing of terrorism.

5. Detailed Application Process for License/Authorization (New Article 6)

Article 6 has been entirely replaced to provide a meticulous outline of the application process for obtaining a license or authorization.

• Application Submission: Applications for a license to operate as a payment instrument issuer or payment system operator must be submitted directly to the National Bank. Banks and microfinance institutions, however, apply for authorization specifically to issue payment instruments.
• Subsidiary Requirement: A business organization that is not a financial institution or a government-owned enterprise, but wishes to engage in these activities, must now establish a subsidiary company exclusively for this purpose. The specific conditions for such subsidiaries will be prescribed by a National Bank Directive.
• Government-Owned Enterprises: Government-owned enterprises require a specific Council of Ministers Regulation to engage in payment system businesses.
• Minimum Paid-Up Capital: Applicants must meet a minimum paid-up capital requirement, which will be prescribed by a National Bank Directive.
• Foreign National Participation: Significantly, foreign nationals are now permitted to engage in payment instrument issuance or payment system operation, or to establish a subsidiary for this purpose.
• Foreign Currency Capital Requirement: Foreign nationals and fully foreign-owned Ethiopian organizations are required to pay their capital in foreign currency. Partially foreign-owned Ethiopian organizations must invest in acceptable foreign currency based on their aggregate percentage holding, as prescribed by Directive.
• Directives for Foreign-Owned Entities: The National Bank is authorized to issue directives on the employment of expatriates, outsourcing arrangements, and the relationships between parent and subsidiary companies for foreign-owned entities.
• Fees: Applicants must pay a licensing or authorization fee. Additionally, new foreign entrants may be required to pay an “investment protection fee” in foreign currency for joining a protected sector, as per National Bank Directive.
• NBE’s Inquiry Power: The National Bank can conduct inquiries to verify application details, assess the applicant’s capacity, check participants’ credentials, and inquire into other related matters.
• Decision-Making Criteria: The National Bank grants licenses/authorizations after thorough verification, considering a range of factors. These include the necessity for the proposed system/service, adherence to technical standards, operational terms (especially security), transfer mechanisms (clearing/netting), the applicant’s financial status, management capabilities, integrity, consumer interests, the potential impact on monetary and credit policies, and any other relevant factors.
• Decision Timeline: The National Bank is required to make a decision on complete applications within 60 days.

6. Addition of New Articles (Articles 32-38)

Several new articles have been added after Article 31, significantly expanding the regulatory scope. Existing Articles 32 to 39 are renumbered as 39 to 46.

• Article 32 (Board of Directors and Executive Officers): This article mandates the National Bank’s written approval for the appointment of any Director or Chief Executive Officer of a payment instrument issuer or payment system operator. It generally prohibits a Director or Chief Executive Officer of a financial institution from simultaneously serving as a Director of a payment instrument issuer or payment system operator, though the National Bank may set specific conditions for directors of insurance/re-insurance companies.
• Article 33 (Activities of Payment Instrument Issuer and Payment System Operator): With National Bank approval, payment instrument issuers are now allowed to digitally facilitate various micro-financial services, including micro-credit (such as overdrafts), micro-saving, micro-insurance, and inward international remittances. These services must be offered in partnership with a National Bank-licensed financial institution, and minimum requirements will be determined by Directive.
• Article 34 (Cross-Border Payments): This article authorizes the National Bank to engage in cross-border payment system arrangements (including routing, clearing, settlement, participation, and management). It strictly prohibits any other person from entering into such arrangements without written authorization from the National Bank, which may also issue directives on related matters.
• Article 35 (Cooperation and Collaboration with Regulatory Authorities): The National Bank is empowered to collaborate with local, regional, and international regulatory bodies for information exchange and coordinated oversight. This aims to ensure the safety and efficiency of the national payment system, including the protection of confidential information.
• Article 36 (Adopting International Principles and Standards): This article allows the National Bank to adopt relevant international principles and standards on payment systems through directives. This measure is intended to enhance the safety, efficiency, and reliability of Ethiopia’s payment infrastructure.
• Article 37 (Renewal of License): A licensed payment instrument issuer or payment system operator is now required to renew its license annually. The National Bank will issue directives detailing the conditions for this renewal.
• Article 38 (Applicable Provisions): This article specifies that certain provisions of the original Proclamation (Articles 7, 8, 9, 11, 18, and 26) will continue to apply to licensed or authorized payment instrument issuers, ensuring continuity in regulatory oversight.