The Ethiopian government is looking to allow foreign banks to set up local subsidiaries and foreigners to acquire shares in domestic lenders. This is according to a bill recently approved by the cabinet. This move is part of Ethiopia’s plans to liberalise its economy by opening the country to foreign investment in various sectors such as banking, telecom, transportation, and aviation.
The bill subject to approval by lawmakers, is part of Prime Minister Abiy Ahmed’s strategy to overhaul the country’s telecom and financial sectors.
Per the bill, the aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations in a bank will now be limited to 40% of total shares, while direct shareholding by investors will be capped at 30%.
“A foreign bank which is well established, reputable, and financially sound may be allowed to establish a partially or fully owned foreign bank subsidiary, open a foreign bank branch, set up a representative office, or acquire shares of a bank,” the bill states.
According to the Central Bank of Ethiopia, such reforms will promote the growth of Ethiopia’s economy and enhance credibility, accountability, and transparency, in the country’s banking sector.
Effects on foreign investment
Gabriel Negatu, a senior fellow at the Atlantic Council’s Africa Center, shared his thoughts on the move and the long-term economic effects of these reforms.
“This is part of the larger effort by the government to revitalize the economy and create a more market-oriented economic system. The bill allows subsidiaries of foreign banks or shareholding in some domestic banks, consistent with the Homegrown Economic Reform Program,” Negatu said.
He added that the move will attract capital and technical expertise which is essential in building financial reserves and improving the quality of banking services in Ethiopia’s financial sector.
The move represents a major policy change after years of the state-owned Commercial Bank of Ethiopia’s dominance in the country’s banking sector.
Foreign lenders like Kenya’s KCB Group, Equity Bank, and Cooperative Bank are particularly keen on this development. These banks have long eyed Ethiopia’s vast market, given its population of over 120 million. Analysts believe that the entry of these banks could enhance competition and service delivery in Ethiopia.
Negatu also noted that smaller local banks might merge or be acquired by foreign entities. “My guess is that we will end up with about five tier-one and tier-two banks at the end of the day,” he remarked.
PM Abiy’s reforms
This move comes at a time when Ethiopia is preparing to launch its securities exchange in the third quarter of 2024, after years of being the only major African economy without one. Subsequently, these reforms are expected to spur the growth and development of both the securities exchange and Ethiopia’s economy.
The entry of foreign banks will raise the bar in terms of banking products and services, as well as promote innovation and competition among lenders. This competitive environment will complement the securities exchange by providing better financial products and services.
Moreover, a stable and competitive banking sector will enhance investor confidence in the securities market, contributing to mutual success.
“The admission of these international banks will raise the standard for the banking industry,” Negatu said, highlighting Safaricom’s success in the telecom sector.
Borrowing a leaf from Safaricom
Safaricom’s entry into the Ethiopian market is part of Prime Minister Abiy’s push for economic liberalization.
The Kenyan telco is transforming Ethiopia’s telecommunications sector and fostering healthy competition with local telcos while also improving services for Ethiopian citizens. A similar impact is expected with these new banking reforms.
“Customers in Ethiopia are getting excellent telephone service either from Safaricom or from Ethio Telecom. My guess is the same will happen with the banking sector,” Negatu explained.
Ultimately, Ethiopia’s move presents a promising opportunity for foreign investors who have been looking to break into the market, given its economic potential and vast customer base.
