The National Bank of Ethiopia has scrapped administered interest rates in the interbank lending market, allowing commercial banks to negotiate borrowing costs directly in one of the most far-reaching steps yet toward financial sector liberalisation.

Under Directive No. NBE/INT/13/2026, which took effect on January 9, 2026, the central bank has removed its control over how much banks charge each other for short-term liquidity. Instead, rates will now be set through bilateral negotiations between lending and borrowing banks.

The change ends a system in which interbank rates were guided by regulatory benchmarks rather than demand and supply, and is intended to create a more responsive money market where liquidity flows to institutions facing short-term funding pressures.

The directive states that interbank lending prices must now be “determined by market forces,” with banks free to assess counterparty risk, funding needs and prevailing liquidity conditions when setting rates.

While stepping back from price setting, the central bank is retaining tight oversight of market conduct. Banks are prohibited from engaging in activities that could distort pricing or undermine market integrity, and all transactions must comply with an interbank money market code of conduct issued by the regulator.

The central bank is also keeping control over the rates applied to its own lending facilities. Interest rates on standing facilities and central bank loans to commercial banks will continue to be set by the regulator and adjusted “from time to time,” providing a policy anchor for the wider market.

The directive also imposes new disclosure and governance requirements. Each bank’s board of directors must approve written criteria governing how interbank lending rates are set, and any changes to those rules must be submitted to the central bank within five working days.

Banks must also file monthly reports with the NBE showing their weighted average interbank lending rates, broken down by sector, within seven working days of the end of each month.