Financial Sector Strengthening Project (FSSP)

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Through a combination of results-based financing and TA, the proposed project will provide critical reform supporting investments and capacity building to the three public sector institutions - the central bank, NBE and two state owned banks, CBE and DBE - and improve the enabling environment for financial sector development. Project funds will be used to support the recapitalization of CBE and DBE and will support capacity building of the three public sector financial institutions. The project has four components. Component 1 focuses on strengthening NBE’s supervisory mandate while the emphasis of Components 2 and 3 focus on targeted institutional reforms of the state-owned banks. Component 4 focuses on implementation support. Component 1: Strengthening the banking sector supervisory and regulatory framework and the institutional capacity of National Bank of Ethiopia (NBE): Support to NBE will include modernizing the banking regulation and supervision framework covering micro and macroprudential pillars, improving crisis preparedness, and strengthening capacity for financial market development. Component 2: Reform, restructuring and recapitalization of the Commercial Bank of Ethiopia (CBE): This component will support the reform and financial strengthening of CBE in line with the vision of a modernized CBE with a sound balance sheet, robust risk management and strengthened governance processes. This will be sequenced to address firstly the reform of governance, secondly, the restructuring of the balance sheet to remove non-performing assets and reduce risk exposures. Thirdly, to recapitalize the CBE to restore it to a positive capital position. No project funds will be used to support a line of credit or other financial intermediation activities. Component 3: Reform, recapitalization, and institutional strengthening of the Development Bank of Ethiopia (DBE): This component will support the transformation and institutional strengthening of DBE in line with the vision of a catalytic and well-governed DFI with a sound balance sheet, strong risk management and governance systems. Additionally, the project will support the increase in capital of DBE to support its transformation and stability. No project funds will be used to support a line of credit or other financial intermediation activities. Component 4: Implementation Support: This component would finance project management expenses and support all implementing agencies in developing institutional capabilities, including fiduciary and safeguards capacity, to ensure sustainability of FSSP achievements beyond the project implementation period.