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- Category: Humanitarian Law
In dealing with the concept of international humanitarian law, it was stated that it is principally concerned with limiting the effects of armed conflict. From a historical and philosophical perspective also there are many scholars who have dedicated their time and efforts to trace the very incident that gave rise to the idea of controlling war. One of the most notable ones is Clausewitz, who was once a practical soldier and politician and whose works will be considered briefly herein below.
The idea of controlling of war is said to be as old as war itself. Clausewitz, when addressing the very concept of war itself, is said to have spoken with two voices: on the one hand, stigmatizing the notion of controlling war as leading to ‘logical absurdity’; on the other, actually writing about the conduct of war as if it were susceptible to control. All best contemporary commentators on Clausewitz –Aron, Galline, Paret, and Howard himself-find it possible to explain the two voices as echoes of an ambiguous belief that war, although peculiarly difficult to control, was in principle controllable and that in many circumstances it could be controlled. The ancient idea could retain credibility because circumstances continued to support it, and so long as that was the case Clausewitz could justifiably retain his preeminence as the arch-philosopher of war. But, what if circumstances should have changed to an extent that makes the idea, at least in part, incredible? Howard, another notable writer on the control of war, himself goes on to acknowledge that post-1945 circumstances have done precisely that war is not so much the continuation of politics, but their bankruptcy.
Ambiguity and contradiction are not singular to Clausewitz, . They mark in general the whole of Europe-based philosophy of war, which is founded in the reconciliation of the principles of military necessity and humanitarian concern. Its story can be read as the record of a never-ending dialectic between an idea, which is, of course, full of contradictions, and circumstances (cultural, ideological, political, or whatever) which are sometimes conductive to it but sometimes so discouraging. And yet, they all have never despaired altogether any more than believing men have ever, even in darkest times, abandoned the hope of salvation. The idea of controlling and restraining war has survived and is alive and well in the world today. It even goes back time out of mind and is said to be even as old as war itself. Consequently, killing became differentiated, and one kind was called murder; war was perfected though it could bring an uneasy conscience. The will to brotherhood and harmony also existed but was at odds with the will to competitiveness and aggression.
Scholars narrate the historical development of international humanitarian law by dividing it into different stages. The first stage is given a name 'early plan for peaceful order'. Abhorrence of war and with it the making of plans for its abolition, prevention, or limitation is said to be an old-age aspect of man’s confused and ambivalent thinking about war; an aspect which for the most part fitted snugly within those streams of religious and political thoughts classified under the heads of utopias, pacifism, and the perfectibility of man. Indeed, it must be admitted that a particular European sub-set of plans for the establishment of a peaceful international order from Dante and Marsilius of Padua through Dubois, Cruce, Sully, Penn, Saint-Pierre, and Rousseau to Kant have often been and still often are presented as heartening precedents of some particular value, demonstrating that the twentieth century’s endeavors in this direction have more solid foundations than simply utopian aspiration.
From all those earlier centuries of thought and planning about the control of war, there is an important and unbroken stream whose relevance to practicability was never doubted and whose particular and unique idea was rooted in circumstances where it directly made sense: the idea of restraint and self-respect in the conduct of war. These ideas have turned up in most civilizations and societies gradually.
The second period in war controlling endeavor is the one that covers the years from the second half of the 19th and early 20th century. In this period, this optimistic reading of war achieved very wide acceptance. At the same time, the development of international organization and of public international law were being read as elements of that overall progress in condition of mankind which the majority of inhabitants of the imperial powers took for granted. And the realm of war was one of those over which progress was believed to and women active in various branches of the Peace Movement showed progress in the laying of foundations for demilitarization, disarmament, and the non-violent resolution of inter-state conflicts. For men untouched by the peace Movement and wedded still to the cult of war, showed progress in the applications of science and industry which might make wars more intense and lethal but would, they believed, make them decisive and short. This can be easily noticed from the maxim dear to such war saying ‘short and sharp wars are the most humane’. For people in between, to whom the peace people appeared impractical and the War people insensitive, progress showed most persuasively in the development of international law and ‘the public conscience’; a law and an ethic which would work together to impose humanitarian restraints and prohibitions on the conduct of war and to keep it as it is supposed to be relatively better.
So much of a war-controlling kind was proposed to be done in this historical period, and enough actually was said to have been done, for the record of those years to serve as a kind of compendium of ideas and illustrations covering all branches of our subject matter, i.e. humanitarian restraint. Obviously, the ideas for the most part were far from new but they were activated now in circumstances sufficiently like those of our own times to justify our regarding them as a stepping stone for what was to come later.
The next important event in the history of international humanitarian law is disarmament or as defined by the scholars ‘arms control’ movement. This, broadly understood, was said to be one of the principal war controlling endeavors of the 19th century. Among the most significant ones, disarmament proposals of one sort or another were put forward by Russia in 1816, 1859; and 1899; by France in 1863 and 1877; Britain in 1866, 1870, and 1890; Denmark in 1893. It has also been said that nothing like them had been herd of before. But to ones dismay, none of them got anywhere. Each of course has its own particular explanation and is grounded in the political circumstance of the time and the proposers’ sense of occasion. One may, however, dare to offer some general explanations without greatly endangering historical truth.
The spirit of this particular period was receptive to such schemes and not through the medium of public opinion alone. Some of those schemes were floated in the normal confidentiality of top-level diplomatic discourse; whatever interests the proposers had at heart, they did not always include mass popularity or the satisfaction of pressure groups. Something in the spirit of the age was encouraging to the idea of disarmament. Besides the rampant nationalism and imperialism and pure Biblicism which excited the minds of men from the cottage to the throne, there were also certain preferences for peace and revulsions from war.
Disarmament had other attractions of a more prudential and self serving nature too. Armaments and armed forces cost money. Wars that paid for themselves had always been exceptional. By the late nineteenth century, the costs of military preparedness were becoming fearsome, and part of the public mind was interested in reducing them. Except the German government of 1899 which denied that fact and proclaimed saying their people were perfectly happy to pay for all the armaments, every government admitted that they felt the pressures of military expenditure and were aspiring the pleasure of release from them.
Alexander, who was mindful of all the problems of the time relating to disarmament, in 1816 proposed a great idea of ‘a simultaneous reduction in the armed forces of all kinds, which the powers have brought into being to preserve the safety and independence of their peoples’. Though this is said to be a wonderful proposal it was weakened by the reluctance of countries especially Russia that had not, since the return of peace, reduced their forces.
Another principal war-controlling endeavor of the nineteenth century other than disarmament, was arbitration although it was admittedly said to be stretching things a bit to include among ways of controlling war a way of avoiding it. Some elements of the peace movement favored one, some the another, but almost always, i.e. disarmament and arbitration go, hand in hand in that the former strives to reduce the ability to fight wars and to remove the pressures and inducements thereto; and the latter, to resolve international conflict by peaceful and rational means instead of by violent and uncontrollable means. Like disarmament, the idea of arbitration could be traced back ever so far to the years before Christ. Unlike disarmament, it could, however, boast of a respectable history of modest practical achievements through many ages and phases of civilization. As the well-known historian Fried, cited these impressive figures cover from 1844 to 1860, 25 arbitration treaties; 1861 to 1880, 54, 1881 to 1900, 111. In all, 212 arbitral awards made in the course of the century, and all of them, he claimed, ‘carried out in good faith’. After 1900, the rage for arbitration only grew fiercer in the heydays of The Hague and Geneva.
But from our point of view, as from that of any serious historian of international relations, all those figures of treaties, awards and settlements add up to very little because it was either the settlement of disputes between small states, often under the admonitory eye of a regional hegemonies as was especially likely to be the case among Members of the Pan-American Union; or the only few cases which catch a realist’s eye, disputes which great powers could have got heated about but which one or another of the parties decided to cool down.
Disarmament and arbitration were both major preoccupations of The Hague Conferences of 1899 and 1907. It is also equally important and necessary to wheel back fifty years and say few words on the other half of the war-controlling story which also proved to be big at The Hague the laws and customs of war. These had origins as ancient and basic as the ideas of disarmament, arbitration, and so on, and over the ages achieved a firmer foothold than them in the war practices of mankind. This had not been done without sacrifices. In its historic origins, the law of war meant what law had to say about going to war in the first place as well as what it said about how to conduct a war once you were in it.
The other very important events in the history of international humanitarian law are the two Conferences held at The Hague in 1899 and 1907. Both Conferences were known as pace Conferences but it was only the 1899 one that grappled with the roots of the problem, so far as that was one of armaments, armed strengths, and an arms race running beyond control. Disarmament had a much more tenuous place on the agenda for 1907, where it was only briefly touched upon. In 1899, it was the heart of the matter, a strident call on the diplomatic resourcefulness of the participants and source of excitement to the peace movement’s observers, a vocal vanguard of whom moved into the city for the Conference’s duration, rejoicing to regard it as ‘the parliament of peace’. With their relentless lobbying and acclamation as an ever-present reminder of the interest the self-styled civilized world was focusing upon, the delegates in charge of negotiating had to move cautiously.
But for those who watched what they did rather than what they said, the direction of their movement was never in doubt; it was towards rejection of every disarmament proposal that did not promise to leave their own countries in a relatively improved position vis-a- vis the rest; which meant, of course, that since every country hoped that others would be as slow to notice its own self-interest as it was quick to notice the self-interest of others, no progress was made towards disarmament at all. The conference ended with no more than this uncontroversial declaration that ‘the limitation of military expenses, which presently weigh heavy on the world, is much to be desired for the sake of both material and moral development of humankind’ .
Though the entire endeavor to realize the taking of practical steps towards disarmament in the conference couldn’t be successful, the Hague Peace Conferences are not to be sneered at because they made the first steps down many war-controlling roads which are still being traveled on in our own times. Some of the thirteen Conventions instituted in 1907 also remain basic to our contemporary law of war, peace, and neutrality. On the other hand, the Land War Regulations together with their updating of the Geneva Conventions, were a landmark of humanitarian law. But the Conferences’ failure was almost complete in respect of their announced purposes of disarmament and arms control.
The next important event that comes into picture in the history of international humanitarian law is the post-world war II circumstance. The UN is a post-1945 circumstance which makes a big mark. Its predecessor, the League of Nations, also made a mark for a few years but it did not last. The control of war by one means or another was the League’s raison d’etre, and the more that raison d’etre was frustrated, the lower the League sank towards its tragic and humiliating grave. The case of the UN is quite different. Disarmament, not initially one of its main purposes, early becomes one in proportion with the evaporation of optimism as to its peace-keeping capabilities. Because too much was not hoped for too long, failure to achieve much in the war-controlling line has not been too disappointing. But apart from that, the UN just simply is there and is in many ways useful. It is the world’s central mart and exchange for the transaction of much international business. It has sunk roots, as the League never did. Although one might argue that endless talk cannot actually do much good for arms control and other means of controlling war, one can just as well argue that the important issues are better talked about too much than not talked about at all.
Not so much may be new since the World War II, as we supposed. What is unquestionably new since then, however, is the question of nuclear weapons. But there are limits to the newness of the terms of the debate which we conduct about them. What States can do with nuclear weapons is no doubt, new; but deciding whether to do it or not invokes no new ideas, runs into no new difficulty unless it relates to a raising of the alleged primacy of scientific and technical factors to a new height.
The law of war has since then, between 1945 and 1980, gone through a second phase of ‘reaffirmation and development’; and it is much more concerned than it had ever been before with the protection of ‘civilians’.
That, in deed might be thought to have become its main business-reasonably enough, considering how the ration of civilian to military losses has risen in the wars of our century, and how frightful civilian sufferings often are-and that must be its chief attraction to the civilian mind. It offers-within the legal meaning of the technical term, ‘protection’ which is likely to encourage the civilian to think he can be protected from the horrors of war and to feel indignant when he is not.
Generally speaking, in the history of international humanitarian law, powerful lords and religious figures, wise men and warlords from all continents have since time immemorial attempted to limit the consequences of war by means of generally binding rules. But, it would make our discussion of the history of international humanitarian law incomplete if we don’t see what Henry Dunant and Francis Lieber have done for today’s universal and for the most part written international humanitarian law in the 19th century in Europe. Both of whom were marked by a traumatic experience of war and at almost the same time, but apparently without knowing of each other’s existence, made essential contributions to the concept and contents of contemporary international humanitarian law. The important contribution of these two figures is not of course inventing protection for the victims of war, rather they are known for expressing an old idea in the form adapted to the contemporary world.
Dunant and Lieber both built on an idea which is a pillar to the basic rules of humanitarian law based on what is put forward by Jean-Jacques Rousseau in The Social Contract, which appeared in 1762. The idea used as a basis for the rules on humanitarian law is that “War is in no way a relationship of man with man but a relationship between States, in which individuals are only enemies by accident, not as men, but as soldiers…” Rousseau continued, logically, that soldiers may only be fought as long as they themselves are fighting. Once they lay down their weapons , “they again become mere men” and hence their lives must be spared. Rousseau in this statement, thus, summed up the basic principle underlying international humanitarian law, i.e. that the purpose of a bellicose attack may never be to destroy the enemy physically. In so doing he lays the foundations for the distinction to be made between members of a fighting force, the combatants, on the one hand, and the remaining citizens of an enemy State, the civilians not participating in the conflict, on the other.
The use of force is permitted only against the combatants, since the purpose of war is to overcome enemy armed forces, not to destroy an enemy nation. And hence force may be used against individual soldiers only so long as they put up resistance. Any soldier laying down his arms or obliged to do so because of injury is no longer an enemy and may, therefore, no longer be the target of a military operation. It is in any case pointless to take revenge on a simple soldier, as he cannot be held personally responsible for the conflict.
Henry Dunanat, who is said to have built the intellectual foundation for the rebirth of international humanitarian law in the 19th century, has also made a notable contribution through his book ‘A Memory of Solferino’. In this writing, he did not dwell so much on the fact that wounded soldiers were mistreated or defenseless people killed. He was deeply shocked by the absence of any form of help for the wounded and dying. He, therefore, proposed two practical measures calling for direct action: an international agreement on the neutralization of medical personnel in the field, and the creation of a permanent organization for practical assistance to the war wounded. The first led to the adoption in 1864 of the initial Geneva Convention whereas the second saw the founding of the Red Cross.
This material was revised in 1906 on the recommendation of the ICRC and on the basis of the experience of several wars. The First World War was a serious test for the law of Geneva, and resulted in a further revision in a serious test for the law of Geneva, and resulted in a further revision in 1929. Four years after the end of the Second World War, on 12 August 1949, the first Geneva Convention for the Amelioration of the Condition of the Wounded and Sick in Armed Forces in the Field was adopted..
A Convention adopted at the 1899 Hague Peace Conference placed the victims of war at sea under the protection of the law of Geneva. A revised version of the Convention was adopted at the 1907 Hague Peace Conference, and later became the present or the Second Geneva Convention for the Amelioration of the Condition of Wounded, Sick and Shipwrecked Members of armed Forces at Sea
The Hague peace conference also examined another topic on the treatment of the prisoners of war. The 1899 and 1907 Conventions on the Laws and Customs of War on Land contained some provisions on the treatment of prisoners. On the basis of the experience of the First World War, one of the two 1929 Geneva Conventions consisted in fact in a Prisoner-of-War Code, which in turn was also developed after the Second World War. The (Third) Geneva Convention relative to the Treatment of Prisoners of War (of 12 August 1949) remains in force to this day. In addition, there is a fourth Geneva convention and two additional protocols known as protocols additional to the Geneva conventions as the instruments setting down the rules of contemporary international humanitarian law
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War is usually characterized by outbursts of primitive raw violence. When States cannot or will not settle their disagreements or differences by means of peaceful discussion, weapons are suddenly made to speak. War inevitably results in immeasurable suffering among people and in severe damage to objects. War is by definition evil, as the Nuremberg Tribunal set forth in its judgment of the major war criminals of the Second World War. The United Nations Charter has also expressly dealt with the exceptional circumstances under which states are allowed to use force, and it in principle prohibits war and even prohibits the threat to use force against the territorial integrity or political independence of any State.
Yet, States continue to wage wars, and groups still take up weapons when they have lost hope of just treatment at the hands of the government. And it has also been laid down that no one would condemn a war waged, for example, by a small State protecting itself against an attack on its independence, “war of aggression” or people rebelling against a tyrannical regime.
International humanitarian law is mainly concerned with the fate of those who are not taking part in the conflict and sets forth a set of rules which seek, for humanitarian reasons, to limit the effects of armed conflict. It protects persons who are not or no longer participating in the hostilities and restrict the means and methods of warfare.
International humanitarian law is apart of international law, which is the body of rules governing relations between states. However what is special about international humanitarian law is that it applies to armed conflicts. It doesn’t regulate whether a state may actually use force as it is governed by an important but a distinct part of international law set out in the United Nations Charter.
International humanitarian law, also called the law of armed conflict and previously known as the law of war, is a special branch of law governing situations of armed conflict, in a word war. International humanitarian law seeks to mitigate the effects of war, in that it limits the choices of means and methods of conducting military operations. This body of rules also obliges the belligerents to spare persons who do not or no longer participate in hostile actions in the course of conducting armed conflict.
War is, basically, prohibited under existing international law, with the exception of the right of every State to defend itself against attack. The fact that international humanitarian law deals with war does not mean that it lays open to doubt the general prohibition of war. And for this it suffices to see the Preamble to Additional Protocol I to the Geneva Conventions on the relationship between the prohibition of war and international humanitarian law. This document provides:
Proclaiming their earnest wish to see peace prevail among peoples, recalling that every State has the duty, in conformity with the Charter of the United Nations, to refrain in its international relations from the threat or use of force…
Believing it necessary, nevertheless, to reaffirm and develop the provisions protecting the victims of armed conflicts and to supplement measures intended to reinforce their application,
Expressing their conviction that nothing in this Protocol or in the
The above statements in the preamble clearly denote that international humanitarian law quite simply stands mute on whether a state may or may not have recourse to the use of force. It does not itself prohibit war, rather it refers the question of the right to resort to force to the constitution of the international community of states as contained in the United Nations Charter. International humanitarian law acts on another plane. That is, it is applicable whenever an armed conflict actually breaks out, no matter for what reason. Only facts matter; the reasons for the fighting are of no interest to the rules of international humanitarian law to apply. In other words, international humanitarian law is ready to step in, whenever war breaks out, whether or not there is any justification for that war.
International humanitarian law, which is part of universal international law, has the purpose of ensuring peaceful relations between and/or among peoples. It makes a substantial contribution to the maintenance of peace in that it promotes humanity in time of war. It aims to prevent or at least to hinder mankind’s decline to a state of complete barbarity.
From this point of view, respect for international humanitarian law helps lay the foundations on which a peaceful settlement can be built once the conflict is over. The chances for a lasting peace are much better if a feeling of mutual trust can be maintained between the belligerents during the war. By respecting the basic rights and dignity of man, the belligerents help maintain that trust.
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- Category: Insurance, Banking and Negotiable Instrument Law
Book IV Title III of the Commercial Code of Ethiopia which deals with banking transactions fails to provide a definition of a bank and banking transactions though the latter may be gathered from the various sections governing the various types of transactions undertaken by banks. Therefore, we have to refer to other laws to define and determine what banks and banking transactions are under the Ethiopian legal system.
According to Art 2 (12) of the Monetary and Banking Proclamation No 83/1994, banking business means any operation involving receiving money on deposit, lending money, receiving commercial instruments on deposit, accepting, negotiating/ transferring, discounting commercial instruments and other evidences of debt, and buying and selling of gold and silver notes and foreign exchange. Similarly, Art 2 (2) of the Licensing and Supervision of Banking Business Proclamation No 84/1994 defines banking business as:
Any business involving acceptance of money on deposit, using such funds or deposits, in whole or in part, for loans or investments on the account of and at the risk of the person undertaking the business, purchasing, selling and deposit of negotiable instruments (shares, bonds and other securities/ and checks, bills and notes, and buying and selling of gold and silver bullions and foreign exchange).
On the other hand, the term bank is defined, under Art 2(1) and (4) of the same proclamation, as a share company whose capital is wholly owned by Ethiopian nationals and/or business organizations wholly owned by Ethiopian nationals and which is registered under Ethiopian laws and which has its head office in Ethiopia and licensed to undertake banking business by the national bank of Ethiopia.
In addition to this, Art 4(2) of the same proclamation clearly prohibits foreign nationals and business organizations from undertaking banking business in Ethiopia. The definition of a bank and this provision exclusively reserve the banking sector to Ethiopian nationals or business organizations wholly owned by Ethiopian nationals mainly on the ground of protection of domestic banks which are at an early stage of development, at least until they develop their financial and manpower capabilities, to be able to compete with foreign banks which have enormous financial strength, experience, technology and knowhow.
Role of Micro Finance Institutions
According to the preamble of Proclamation No. 40/1996, the monetary and banking laws in force do not provide for micro financing institutions catering for the credit needs of peasant farmers and others engaged in small scale production and service activities. So it has become necessary to legislate on the licensing and supervision of the business of micro financing institutions.
So the development of microfinance in Ethiopia should be viewed as (a) an identification of considerable levels of unrealized demand and potential market growth for financial services and (b) a shift by the NGO sector and government from relief assistance to sustainable development which intersects at the point of institutionalization of microfinance provision (Fiona, 1999).
Although the development of microfinance institutions in Ethiopia started very recently, the industry has shown a remarkable growth in terms of outreach particularly in number of clients. Since the issuance of Proclamation 40/1996, which provides the establishment of microfinance institutions, sixteen microfinance institutions (MFIs) have been legally registered by the National Bank of Ethiopia (NBE) and started delivering services, and two more applications by new MFIs are currently being processed.
According to the Micro start Project document of UNDP (1999), the economically active poor in Ethiopia who can potentially access financial services are about 6 million. Out of this, about 8.3% of the active poor have gained access to the licensed microfinance institutions. Despite the obvious disadvantages of the microfinance industry in Ethiopia such as poor communication and infrastructure, weak legal systems, banking sector and technical capacity when compared with other Sub-Saharan countries, the sector has been growing at a significant rate.
The Regulatory Framework for the Microfinance Industry and Micro and Small Enterprises
The delivery of efficient and effective microfinance services to the poor required conducive macroeconomic policies and the establishment and enforcement of legal and regulatory frameworks of a country. An effective financial system provides the foundation for a successful poverty alleviation program. However, regulations in the microfinance industry do not only mean government regulations; it also involves self-regulations and code of conducts introduced by networks or associations.
Regulatory frameworks governing the microfinance industry should ensure that the MFI has a sound portfolio performance; low delinquency or default rate; high diversification to reduce the risk of specializing in the delivery of one loan product; ensure the safety of deposits through equity capital; ensure lower levels of liquidity risk; provide regular and high quality financial information and reduce the risk arising from dependence on subsidy and influence of donor.
There are numerous policies, laws and directives which affect the development of microfinance industry and micro and small enterprise development in Ethiopia. An attempt is made here to review only the most relevant and recent policies affecting the industry. The Monetary and Banking Proclamation No. 83/1994 empowered the National Bank of Ethiopia (NBE) to license, supervise and regulate financial institutions such as banks, insurance companies, microfinance institutions and savings and credit cooperatives. The Licensing and Supervision of Banking Business Proclamation No. 84/1994 allowed for the first time the establishment of private financial institutions, thus breaking the state monopoly. To date, six private banks and eight private insurance companies have been established.
Since micro-credit delivery and savings mobilization in Ethiopia were performed by NGOs, government departments, cooperatives and others in a fragmented and inconsistent way, the government took the initiative to establish the regulatory framework in order to facilitate sound development of the
Microfinance industry Proclamation No. 40/1996, which aims to provide for the licensing and supervision of the business of micro financing clearly indicates the requirements for licensing microfinance institutions by empowering the National Bank of Ethiopia to license and supervise them. According to article 4 of the Proclamation, any institution that needs to engage in microfinance activity should fulfill the following:
- obtain license from the National Bank of Ethiopia;
- formed as a company governed by the commercial code of 1960 (a share company owned fully by Ethiopian nationals and having its head office in Ethiopia);
- deposit the minimum capital required, i.e., 200,000 Birr in a bank;
- the directors and other officers meet requirements set by the bank.
Furthermore, as to the purpose and duty of macro finance institutions, article 3 of the same proclamation provides:
- the purpose of micro financing institutions is granting credit, in cash or in kind, the maximum amount of which shall be determined by the bank.
- subject to conditions set under this Proclamation, a micro finance institution may carry out some or all of the following activities:
- accepting savings as well as demand and time deposits;
- drawing and accepting drafts payable within Ethiopia;
- borrowing money for its business purpose against the security of its assets or otherwise;
- purchasing such income generating financial instruments as treasury bills;
- acquiring, maintaining and transferring of any moveable and immovable property including premises for carrying out its business;
- providing counseling services to its clients;
- encouraging income generating projects for urban and rural micro-operators;
- rendering managerial, marketing, technical and administrative advice to borrowers and assisting them to obtain services in those fields;
- managing funds for micro financing business; and
- engaging in other activities customarily undertaken by micro financing institutions.
To realize the above purposes and duties, the National Bank of Ethiopia has also issued 12 directives, which have been consistent with Proclamation No. 40/1996. These included setting a loan ceiling of 5,000 Birr and loan duration of one year. The interest rate has been waived and MFIs are now free to set their own interest rates ceiling. There is also a requirement for re-registration once an MFI mobilizes deposits greater than one million Birr.
The regulatory framework has affected the welfare-oriented NGOs in Ethiopia which focus on welfare programs by providing free or subsidized micro-credit services. They tend to provide credit services at very low interest rate (below market interest rate) focusing on the poorest of the poor (based on humanitarian reasons) rather than on sound credit management principles. As a result, many of the NGOs, providing micro-credit services in Ethiopia, are in a transition from highly subsidized credit programs to a finance based system. Although the initial reactions of the NGOs in Ethiopia to the implementation of the regulatory framework (Proclamation No. 40/96) were negative, they have now realized that the regulatory framework has institutionalized and unified microfinance services in the country.
The required minimum paid-up capital payment for MFI in Ethiopia (about 25,000 US Dollars) is low and affordable. The recent full liberalization of lending interest rates is also a positive development towards implementing an operationally sustainable strategy for MFIs. This assists to adequately price small-scale and risky loans and microfinance operations.
The government has recognized the importance of micro-enterprise development to the overall economic growth of the country and poverty alleviation. It has established the Micro and Small Enterprise Development Agency to co-ordinate and support the sector. According to Proclamation No. 33/1998, the Agency shall be involved in designing policies and strategies for the development and expansion of the micro and small enterprise; study the demand for training and conduct training; establish skill up-grading, technical and demonstration centers in different regions of the country; and disseminate information to the entrepreneurs. However, these enterprises require adequate flow of institutional credit to finance both short-term operating expenses and long-term investment needs.
In addition to addressing poverty and food security issues, micro-enterprises teach the poor new skills and help them generate greater savings for investment and promote inter-sectoral linkages.
The main constraints of micro and small enterprises include lack of finance, business information, business premises, skills and managerial expertise, access to appropriate technology, lack of adequate infrastructure and in some instances discriminatory regulatory practices. In the Ethiopian context, and in terms of partially solving the problem of financial resources, the agency has to integrate its activities with the microfinance industry.
The Federal Government of Ethiopia has produced the Micro and Small Enterprises Development Strategy to address the above problems and create an enabling environment for the growth of these enterprises. It has identified criteria and prioritized the target beneficiaries of the support program. The support program will consider those micro and small enterprises using local raw materials and/or labor intensive technologies, having greater inter-and intra-sectoral linkages; potentially competitive and have objective of exporting their products; and those engaged in facilitating and promoting tourism. The support program focuses on creating an enabling legal framework; streamlining existing regulatory conditions; facilitating access to finance; training in entrepreneurship, technical and management skills; facilitating access to market, raw materials and fostering partnership; and facilitating the availability and access to adequate infrastructure.
Proclamation No. 83/1995 provides for the establishment of primary and secondary agricultural cooperatives on voluntary basis and democratic principles. One of the objectives of the new Proclamation 147/1998. (Co-operatives Societies Proclamation) is to develop and promote saving and credit services for members to participate actively in the free market economic system.
Implementing, Monitoring and Evaluating the Regulatory Framework of the Microfinance Industry
The process of policy formulation, implementation, monitoring and evaluation is, by and large, the same whether it refers to the policy formulated at macro or micro levels. It applies equally to policies formulated by the government, a particular private firm or by an NGO. Just as in a project, the formulation, implementation and monitoring process of financial policy, or any development policy, should follow a defined path. The process starts with the identification of financial policy constraints which impede the achievement of the stated objectives. This is then followed by the analysis of the constraints, formulation of alternative financial policy options or remedial measures, appraisal and approval, implementation and finally monitoring and evaluation of the effects and impacts of the financial policies of the regulatory framework of the microfinance industry. We can call this the financial policy cycle instead of the project cycle.
The search for appropriate change in the regulatory framework and identifying the problems starts when the stated government objectives and targets fail or are failing. The need for financial policy reform or change could also start when concerned government departments (such as the National Bank of Ethiopia) or stakeholders realize that existing regulatory frameworks are having unanticipated negative consequences. The identification of a financial policy reform for the microfinance industry and designing appropriate policy options could start when one of the following situations or a combination of these occur.
- When the Ethiopian government itself, the National Bank of Ethiopia or the Prime Minister's Office believes that the envisaged financial policy objectives and targets are not met or realized.
- When the government, with an external pressure e.g., from the IMF or World Bank, considers that current financial policies are not sustainable in the long term.
- When existing regulatory frameworks result in negative consequences that were not envisaged or the effect has been underestimated at the time of their conception.
- When the government realizes that there are better financial policy options to bring about an accelerated development in the microfinance industry.
- When stakeholders such as the practitioners in the microfinance industry demand a change in the current policies or regulatory framework.
Thus, the possible identification of a change in the regulatory framework of the microfinance industry could originate from (a) government line departments; (b) multilateral and bilateral donors; (c) organized and unorganized stakeholders such as the practitioners in the microfinance industry; and (d) research institutes acting as think tanks for policy analysis, financial policy monitoring and evaluation.
In Ethiopia, there is no government department which follows up the overall development of the microfinance industry. Currently, there are no research institutes involved in microfinance development and policy research which recommend a change in the regulatory framework. There are attempts, however, by the Prime Minister's Office and the Ethiopian Economic Association to establish an Economic Policy Research Institute. In the Ethiopian context, multilateral and bilateral organizations do not have the mandate and responsibility of identifying and changing government policies through direct or indirect pressure. The last option to the microfinance industry is to use the network which is established with the objective of creating a forum to discuss policy issues and problems of the industry and share experiences. The Association of Ethiopian Microfinance Institutions (AEMFI) has created a forum to discuss and review the performance of the regulatory framework and monitor its impact.
The entry point for policy analysis in the financial sector in general and microfinance industry in particular is the review of the existing policies with the view to understanding shortfalls and to assess the extent of overhauling or complete changes required. The analysis involves both quantitative and qualitative approaches.
The progress made in the implementation of the various activities related to policy reforms in light of the reform targets and schedule of achievements should be monitored regularly. Once the implementation of the financial policy is launched, the National Bank of Ethiopia, or stakeholder organizations such as AEMFI should review the progress of the implementation.
The impact monitoring aspect involves measuring the qualitative and quantitative changes brought about as a result of the implementation of the regulatory framework of the microfinance industry. This should be compared against the objectives and targets set for the industry. The National Bank of Ethiopia with full participation of the stakeholders should undertake such impact evaluation or policy monitoring regularly. This involves highlighting the progress so far registered, problems encountered, measures taken, recommendations made for remedial measures, resources required etc.
Moreover, as indicated earlier, regulation in the microfinance industry refers to a set of enforceable laws and rules. These rules could be enforced by government departments or associations of practitioners such as AEMFI which, in the later case of the latter, is self-regulation. In the Ethiopian case, there is already an established government regulatory and supervisory department under the National Bank of Ethiopia. What is suggested is to combine implementation of self-regulation by networks and government regulations, as the two approaches to regulate the microfinance industry are not mutually exclusive. Here self-regulation mainly involves drafting the code of conduct for the industry and developing performance indicators or self-rating system.
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- Category: Insurance, Banking and Negotiable Instrument Law
Commercial Banks
Commercial banks are at the centre of most money markets, as both suppliers and users of funds, and in many markets, a few large commercial banks serve also as intermediaries. These banks have a unique place because it is their role to furnish an important part of the money supply. In some countries, they do this by issuing their own notes, which circulate as part of the hand-to-hand currency. More often, however, it is checking accounts at commercial banks that constitute the major part of the country's money supply. In either case, the outstanding supply of bank money is in a continual circulation, and any given bank may at any time have more funds coming in than going out, while at another time the outflow may be the larger. It is through the facilities of the money market that these net excesses and shortages are redistributed, so that the banking system as a whole can at all times provide the means of payment required for carrying on each country's business.
In the course of issuing money, the commercial banks also actually create it by expanding their deposits, but they are not at liberty to create all that they may wish whenever they wish, for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits—a ratio that is set by law, regulation, or custom. The volume of reserves is controlled and varied by the central bank (such as the Bank of England, the Bank of France, or the Federal Reserve System in the U.S.), which is usually a governmental institution, always charged with governmental duties, and almost invariably carries out a major part of its operations in the money market.
Central Banks
The reserves of the commercial banks, which are continually being redistributed through the facilities of the money market, are in fact mainly deposit balances that these commercial banks have on the books of the central bank or notes issued by the central bank, which the commercial banks keep in their own vaults. As the central bank acquires additional assets, it pays for them by crediting depositors' accounts or by issuing its own notes; thus the potential volume of commercial bank reserves is enlarged. With more reserves, the commercial banks can make additional loans or investments, paying for them by entering credits to depositors' accounts on their books. And in that way the money supply is increased. It may be reduced by reversing the sequence. The central bank can sell some of its marketable assets in the money market or in markets closely interrelated with the money market; payment will be made by drawing down some of the commercial bank reserve balances on its books; and with smaller reserves remaining, the commercial banks will have to sell or reduce some of their investments or their loans. That, in turn, results in shrinkage of the outstanding money supply. Central bank operations of this kind are called open-market operations.
The central bank may also increase bank reserves by making loans to the banks or to such intermediaries as bill dealers or dealers in government securities. Reduction of these loans correspondingly reduces bank reserves. Although the mechanics of these lending procedures vary widely among countries, all have one feature in common: the central bank establishes an interest rate for such borrowing—the bank rate or discount rate—pivotally significant in the structure of money market rates.
Money market assets may range from those with the highest form of liquidity—deposits at the central bank—through bank deposits to various forms of short-term paper such as treasury bills, dealers' loans, bankers' acceptances, and commercial paper, and including government securities of longer maturity and other kinds of credit instruments eligible for advances or rediscount at the central bank. Although details vary among countries, the touchstone of any money market asset other than money itself is its closeness—i.e., the degree of its substitutability for money. So long as the institutions making use of a money market regard a particular type of credit instrument as a reasonably close substitute—that is, treat it as “liquid”—and so long as the central bank acquiesces in or approves of this approach, the instrument is in practice a money market asset. Thus, no single definition or list can apply to the money markets of all countries nor will the list remain the same through the years in the money market of any given country.
Responsibilities of Central Banks
The principles of central banking grew up in response to the recurrent British financial crises of the 19th century and were later adopted in other countries. Modern market economies are subject to frequent fluctuations in output and employment. Although the causes of these fluctuations are various, there is general agreement that the ability of banks to create new money may exacerbate them. Although an individual bank may be cautious enough in maintaining its own liquidity position, the expansion or contraction of the money supply to which it contributes may be excessive. This raises the need for a disinterested outside authority able to view economic and financial developments objectively and to exert some measure of control over the activities of the banks. A central bank should also be capable of acting to offset forces originating outside the economy, although this is much more difficult.
The first concern of a central bank is the maintenance of a soundly based commercial banking structure. While this concern has grown to comprehend the operations of all financial institutions, including the several groups of non bank financial intermediaries, the commercial banks remain the core of the banking system. A central bank must also cooperate closely with the national government. Indeed, most governments and central banks have become intimately associated in the formulation of policy.
Relations with Commercial Banks
One source of economic instability is the supply of money. Even in relatively well-controlled banking systems, banks have sometimes expanded credit to such an extent that inflationary pressures developed. Such an overexpansion in bank lending would be followed almost inevitably by a period of undue caution in the making of loans. Frequently the turning point was associated with a financial crisis, and bank failures were not uncommon. Even today, failures occur from time to time. Such crises in the past often threatened the existence of financial institutions that were essentially sound, and the authorities sometimes intervened to prevent complete collapse.
The willingness of a central bank to offer support to the commercial banks and other financial institutions in time of crisis was greatly encouraged by the gradual disappearance of weaker institutions and a general improvement in bank management. The dangers of excessive lending came to be more fully appreciated, and the banks also became more experienced in the evaluation of risks. In some cases, the central bank itself has gone out of its way to educate commercial banks in the canons of sound finance. In the United States, the Federal Reserve System examines the books of the commercial banks and carries on a range of frankly educational activities. In other countries, such as India and Pakistan, central banks have also set up departments to maintain a regular scrutiny of commercial bank operations.
The most obvious danger to the banks is a sudden and overwhelming run on their cash resources in consequence of their liability to depositors to pay on demand. In the ordinary course of business, the demand for cash is constant or subject to seasonal fluctuations that can be foreseen. It has become the responsibility of the central bank to protect banks that have been honestly and competently managed from the consequences of a sudden and unexpected demand for cash. In other words, the central bank came to act as the “lender of last resort.” To do this effectively, it was necessary that the central bank be permitted either to buy the assets of commercial banks or to make advances against them. It was also necessary that the central bank has the power to issue money acceptable to bank depositors. However, if a central bank was to play this role with respect to commercial banks, it was only reasonable that it or some related authority be allowed to exercise a degree of control over the way in which the banks conducted their business.
Most central banks now take a continuing day-to-day part in the operations of the banking system. The Bank of England, for example, has been increasingly in the market to ensure that the banks have a steady supply of cash, even during periods of credit restriction. It also lends regularly to the discount houses, supplementing their resources whenever the commercial banks feel the need to call back money they have on loan to them. In the United States, the Federal Reserve System has operated in a similar way by buying and selling securities on the open market and by lending to dealers in government securities based on repurchase agreements. The Federal Reserve may also discount paper submitted by the commercial banks through the Federal Reserve banks. The various techniques of credit control in use are discussed in greater detail below.
The evolution of those working relations among banks implies a community of outlook that in some countries is relatively recent. The whole concept of a central bank as responsible for the stability of the banking system presupposes mutual confidence and cooperation. For this reason, contact between the central bank and the commercial banks must be close and continuous. The latter must be encouraged to feel that the central bank will give careful consideration to their views on matters of common concern. Once the central bank has formulated its policy after a full consideration of the facts and of the views expressed, however, the commercial banks must be prepared to accept its leadership. Otherwise, the whole basis of central banking would be undermined.
The Central Bank and the National Economy
Relations with Other Countries
Since no modern economy is self-contained, central banks must give considerable attention to trading and financial relationships with other countries. If goods are bought abroad, there is a demand for foreign currency to pay for them. Alternatively, if goods are sold abroad, foreign currency is acquired that the seller ordinarily wishes to convert into the home currency. These two sets of transactions usually pass through the banking system, but there is no necessary reason why, over the short period, they should balance. Sometimes there is a surplus of purchases and sometimes a surplus of sales. Short-period disequilibrium is not likely to matter very much, but it is rather important that there be a tendency to balance over a longer period, since it is difficult for a country to continue indefinitely as a permanent borrower or to continue building up a command over goods and services that it does not exercise.
Short-period disequilibrium can be met very simply by diminishing or building up balances of foreign exchange. If a country has no balances to diminish, it may borrow, but normally it, at least, carries working balances. If the commercial banks find it unprofitable to hold such balances, the central bank is available to carry them; indeed, it may insist on concentrating the bulk of the country's foreign-exchange resources in its hands or in those of an associated agency.
Long-period equilibrium is more difficult to achieve. It may be approached in three different ways: price movements, exchange revaluation (appreciation or depreciation of the currency), or exchange controls.
Price levels may be influenced by expansion or contraction in the supply of bank credit. If the monetary authorities wish to stimulate imports, for example, they can induce a relative rise in home prices by encouraging an expansion of credit. If additional exports are necessary in order to achieve a more balanced position, the authorities can attempt to force down costs at home by operating to restrict credit.
The objective may be achieved more directly by revaluing a country's exchange rate. Depending on the circumstances, the rate may be appreciated or depreciated, or it may be allowed to “float.” Appreciation means that the home currency becomes more valuable in terms of the currencies of other countries and that exports consequently become more expensive for foreigners to buy. Depreciation involves a cheapening of the home currency, thus lowering the prices of export goods in the world's markets. In both cases, however, the effects are likely to be only temporary, and for this reason the authorities often prefer relative stability in exchange rates even at the cost of some fluctuation in internal prices.
Quite often governments have resorted to exchange controls (sometimes combined with import licensing) to allocate foreign exchange more or less directly in payment for specific imports. At times, a considerable apparatus has been assembled for this purpose, and, despite “leakages” of various kinds, the system has proved reasonably efficient in achieving balance on external payments account. Its chief disadvantage is that it interferes with normal market processes, thereby encouraging rigidities in the economy, reinforcing vested interests, and restricting the growth of world trade.
Whatever method is chosen, the process of adjustment is generally supervised by some central authority—the central bank or some institution closely associated with it—that can assemble the information necessary to ensure that the proper responses are made to changing conditions.
Economic Fluctuations
As noted above, monetary influences may be an important contributory factor in economic fluctuations. An expansion in bank credit makes possible, if it does not cause, the relative overexpansion of investment activity characteristic of a boom. Insofar as monetary policy can assist in mitigating the worst excesses of the boom, it is the responsibility of the central bank to regulate the amount of lending by banks and perhaps by other financial institutions as well. The central bank may even wish to influence in some degree the direction of lending as well as the amount.
An even greater responsibility of the central bank is that of taking measures to prevent or overcome a slump. Recessions, when they occur, are often in the nature of adjustments to eliminate the effects of previous overexpansion. Such adjustments are necessary to restore economic health, but at times they have tended to go too far; depressive factors have been reinforced by a general lack of confidence, and, once this has happened, it has proved extremely difficult to stimulate recovery. In these circumstances, prevention is likely to be far easier than cure. It has therefore become a recognized function of the central bank to take steps to preclude, if possible, any such general deterioration in economic activity.
For the central bank to be effective in regulating the volume and distribution of credit so that economic fluctuations may be damped, if not eliminated, it must at least be able to regulate commercial bank liquidity (the supply of cash and “near cash”), because this is the basis of bank lending. Monetary authorities in a number of countries have begun to resort increasingly to the management of monetary aggregates as a basic policy. This does not mean an uncritical acceptance of monetarist philosophy but rather what the U.S. economist and banker Paul A. Volcker has called “practical monetarism.” In addition to the Federal Reserve in the United States, a growing number of western European countries have adopted the practice of setting growth targets for the money supply and sometimes other monetary targets as well (like domestic credit expansion), usually setting some range of allowable variation. Japan has had reservations and has preferred to indicate monetary projections or forecasts, partly because of the difficulty of changing a set target should it become necessary. Nor is there any great degree of consensus as to which target or aggregate to employ. In general terms, the choice of a particular aggregate as a basis for reference would be linked to the theories—more or less explicit—on which the actions of a particular central bank are based and also on the state of the country's economy and its financial environment. Where there are publicly declared targets, these can have an important effect by the very fact of being announced.
There is now little dispute about the broad objectives, though the techniques of control are various and depend to some extent on environmental factors. It would be incorrect to suppose, however, that the actions of the central bank can, unaided, achieve a high degree of stability. It can, by wise guidance, contribute to that end but monetary action is in no sense a panacea; at all times, the degree to which it is likely to be effective depends on the provision of an appropriate fiscal environment.
Supervision and Promotion of Banking Services
Another responsibility of the central bank is to ensure that banking services are adequately supplied to all members of the community that need them. Some areas of a country may be “under-banked” (e.g., the rural areas of India and the northern and more remote parts of Norway), and central banks have attempted, directly or indirectly, to meet such needs. In France, this need underlay the early extension of branches of the Bank of France to the departments. In India, the authorities encouraged the opening of “pioneer” branches by the former Imperial Bank of India and its successor, the State Bank of India, later by all the nationalized banks, and particularly their extension to rural and semi rural areas. In Pakistan, officials of the State Bank of Pakistan played an active part in the foundation of the semipublic National Bank of Pakistan with a similar objective in view.
A different sort of problem arises when the business methods of existing banks are unsatisfactory. In such circumstances, a system of bank inspection and audit organized by the central banking authorities (as in India and Pakistan) or a system of bank “examinations” (as in the United States) may be the appropriate answer. Alternatively, the supervision of bank operations may be handed over to a separate authority, such as France's Banking Control Commission or South Africa's Registrar of Banks.
In developing countries, central banks may encourage the establishment and growth of specialist institutions such as savings institutions and agricultural credit or industrial finance corporations. These serve to improve the mechanism for tapping existing liquid resources and to supplement the flow of funds for investment in specific fields.
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