NBE Orders Microfinance Institutions to Halt Upfront Interest Payments
The National Bank of Ethiopia (NBE) has ordered microfinance institutions to immediately stop calculating, recognizing and paying interest on deposits before the agreed deposit period has been completed, extending a similar restriction recently imposed on commercial banks.
In a letter dated September 23, 2026, the central bank said supervisory engagements had identified microfinance institutions paying interest on time deposits on the first day of a contract, before the underlying deposit balance had been maintained for the required period and before maturity.
The NBE said some institutions were then adding the upfront interest to the original deposit and compounding it. According to the regulator, this can artificially increase reported deposit balances before the underlying funds have actually generated the interest.
NBE bans upfront interest and premature compounding
Under the instruction, microfinance institutions must immediately stop:
- calculating interest upfront on deposits;
- recognizing such interest before it is earned;
- paying deposit interest before the agreed period or maturity; and
- adding upfront interest to the principal and compounding it before maturity.
The prohibition applies to deposits generally, including time deposits.
The NBE said the practices identified through its supervisory work could distort market conditions, encourage unhealthy competition and create opportunities for the misuse of public funds.
The regulator warned that institutions that fail to comply could face additional supervisory and enforcement measures, as well as any applicable legal action.
Banks were already subject to the same restriction
The move follows an earlier NBE instruction to commercial banks issued on September 9, 2026.
That instruction similarly prohibited banks from paying or recognizing deposit interest upfront and from adding such interest to the principal before maturity. The central bank cited concerns over artificial increases in deposit balances, market distortion and the potential misuse of funds.
The two instructions establish a consistent regulatory position across the banking and microfinance sectors: interest should not be recognized or paid before the underlying deposit has fulfilled the agreed contractual period.
The NBE’s position is also consistent with the broader framework of its 2026 interest-rate regime, under which banks’ deposit rates are freely determined but must be set by their boards according to clear and non-discriminatory criteria.
Why the practice matters
Upfront interest can make a deposit appear larger before the underlying funds have remained with the institution for the full agreed period.
For example, if an institution credits interest on the first day of a fixed-term deposit and then adds that interest to the principal, the institution can subsequently calculate additional interest on the enlarged balance. The NBE’s concern is that this can produce a deposit balance that does not accurately reflect funds actually maintained and earned over the relevant period.
The central bank has therefore moved to prevent both the initial upfront recognition and the subsequent compounding of that amount before maturity.
The issue also comes as the financial sector operates under increasingly market-based interest rates, making competition for deposits an important part of financial institutions’ funding strategies. The NBE’s January 2026 amended interest-rate directive allows banks to freely determine demand, savings and time-deposit rates, subject to governance and transparency requirements.
Microfinance sector now under the same regulatory line
The extension to microfinance institutions broadens the NBE’s supervisory response beyond commercial banks.
The microfinance sector is a significant part of Ethiopia’s financial system, and the NBE’s latest Financial Stability Report recorded ETB 3.7 billion in sector-wide net income for the year ended June 2025, alongside a return on assets of 5.3% and return on equity of 27.5%. The central bank also noted continuing weaknesses among some institutions.
The latest instruction places additional emphasis on the quality of deposit growth rather than simply the size of reported balances.
For institutions, the immediate requirement is straightforward: deposit interest must not be brought forward and capitalized before the deposit has reached the point at which that interest has been earned.
The NBE said non-compliance will trigger further supervisory and enforcement measures.
Source: National Bank of Ethiopia, letter to microfinance institutions dated September 23, 2026. The development was also reported by Addis Fortune and Ethiopian Business View.