NBE Orders Banks to Stop Paying Deposit Interest Upfront

The National Bank of Ethiopia (NBE) has ordered banks to immediately stop paying or recognizing interest on deposits before the deposits have been maintained for their agreed contractual period or reached maturity.

The instruction follows supervisory findings that some banks were advancing interest on time deposits before the underlying balances had been held for the required period.

In a September 9, 2026 letter addressed to all banks, the central bank also prohibited banks from adding such upfront interest to the principal before maturity. The NBE said the practice distorts competition, creates opportunities for misuse of funds, and undermines the sound operation of financial institutions.

What the NBE Has Ordered

Practice	NBE instruction
Paying or crediting deposit interest before maturity	Stop immediately
Recognizing interest before the required holding period	Stop immediately
Adding upfront interest to principal before maturity	Prohibited
Upfront interest practices on deposits, including time deposits	Prohibited
Effective date	Immediate

The instruction does not prohibit time deposits or prevent banks from paying interest on them. Rather, it targets the timing and treatment of interest before the deposit has satisfied the agreed conditions for earning that interest.

How the Practice Worked

The NBE identified cases in which interest on a time deposit was credited on the first day of the deposit contract rather than after the deposit had been maintained for the agreed term.

Under the practice described by the central bank, the upfront interest could then be added to the original principal. Once incorporated into the balance, the additional amount could itself become part of the amount on which further interest was calculated.

The NBE’s concern is therefore not simply the interest rate offered by a bank, but recognizing and crediting interest before the underlying deposit has earned it under the agreed maturity conditions.

Why the Directive Matters

The instruction comes as Ethiopia’s banking industry operates under a market-based interest-rate framework.

Under the NBE’s amended Interest Rates Directive No. NBE/INT/13/2026, demand, savings and time-deposit interest rates are freely determined by individual banks. Banks’ boards are required to set the rates in writing, while rates and the criteria used to determine them must be non-discriminatory among depositors in the same category and based on explicit criteria.

This makes the treatment of deposit interest increasingly important as banks compete for savings and time deposits.

The new instruction does not reverse that market-based rate-setting framework. Instead, it places a regulatory restriction on when interest can be recognized, paid, and incorporated into the principal.

NBE Does Not Name Banks

The NBE has not publicly identified the banks where its supervisory reviews found the practice.

Financial-industry sources cited in local reporting have alleged that some established banks were involved in arrangements involving upfront interest and premature compounding. Those allegations should be distinguished from the NBE’s own statement that supervisory engagements had identified the practice.

Some industry sources have described the effect of adding interest to principal before it has been earned as resembling “printing money.” That characterization comes from the sources and is not terminology used by the NBE.

The central bank instead described the practice as a form of malpractice and linked it to market distortion, unhealthy competition, potential misuse of funds and risks to the sound operation of financial institutions.

Banks Face Immediate Compliance Requirements

The directive requires banks to review their deposit products and interest-calculation procedures to ensure that interest is not paid or recognized before the contractual conditions for earning it have been fulfilled.

It also means banks cannot take interest credited upfront and add it to the deposit principal before maturity in a way that allows the credited amount to generate additional interest.

For depositors, this could change the structure of some deposit products that previously offered interest at the beginning of a deposit term rather than at or after maturity.

The NBE has warned that it will take further supervisory and enforcement measures against banks that fail to implement the instruction.

The directive therefore adds a compliance requirement for banks at a time when deposit mobilization has become increasingly competitive under Ethiopia’s market-based interest-rate regime.

Source: Addis Fortune: