For a long time, the banking sector in Ethiopia now has been dominated by local players and the public sector. But this has not always been the case, the financial services sector has undergone different stages similar to the political situation in the East African nation which was once under Italian occupation.
In the country’s history, the only period where foreign banks dominated its financial sector was during the second war when it was occupied by Italy.
Following the end of Italian occupation, foreign players in the banking sector existed until the 1960s when the National Bank of Ethiopia was established by Proclamation No. 206 of 1963. The rule ensured that Ethiopian nationals had at least 51% of capital before the license was granted to any bank in the country.
However, in 1974, the military took over the government in Ethiopia and nationalised all banks in the country. Banks were re-organised into two specialised banks- the Development Bank of Ethiopia (DBE) and the Construction and Business Bank (CBB).
In 2016, CBB concluded its 40-year journey and merged with the Commercial Bank of Ethiopia (CBE). The CBE has around two-thirds of deposits in the country and is responsible for half of the total bank loans as of 2021.
In recent times, the country has followed a gradual approach towards reforming its banking sector. The reforms were aimed at creating the necessary environment to provide the best financial services for its people.
These efforts culminated in December 2024 when the country’s parliament approved the Banking Business Proclamation No. 1360/2024. The landmark Act allowed foreign banks to re-enter Ethiopia after a fifty-year hiatus.
Key Objectives of the Act
- To attract foreign capital – The Ethiopian government has identified foreign investors as a key source of Foreign Direct Investments (FDIs). This has led prioritisation of the financial sector as a focal point to attract investment.
- Competitiveness, efficiency and innovation– decades of a local monopoly of the banking sector have put Ethiopia on the backfoot in terms of financial services when compared to its peers despite being the fifth biggest economy in Africa.
The absence of competition has enabled countries like Nigeria, Ghana, South Africa, Kenya, Egypt, etc get ahead of Ethiopia. Today, these countries have a robust and thriving financial sector with a lucrative capital market. Ethiopia is still putting structures in place to establish a thriving stock market. All these necessitated the approval to allow foreigners participate in the country’s banking sector
- Lending growth and financial inclusion– the entrance of foreign banks into the Ethiopian banking sector is expected to increase credit access, especially for those under-represented populations and demography of the country. The government expects international banks to improve service standards through innovation.
Important Provisions of the Banking Business Proclamation No. 1360/2024
The most important provision of the Banking Business Proclamation No. 1360/2024 is allowing foreign players in the Ethiopian banking sector. However, the proclamation provides specific modalities for foreign banks to carry out their operations and these include;
- Modes of entry– according to the proclamation, there are four possible modalities for foreign participation in the Ethiopian banking sector. They are; establishing subsidiaries, opening branches, setting up representative offices, or acquiring shares in existing domestic banks.
It noted that investment in the banking sector would be structured as an FDI and be denominated in foreign currency. This would also same for investment in Ethiopian-owned organisations.
Furthermore, the proclamation set the cap for total foreign investment in a domestic bank at 49%. Individual foreigners are allowed to own up to 7% while entities’ ownership stake is set at 10%. Also, a foreign bank or strategic investor can acquire up to 40% shares in a domestic bank. - Employment of Foreign Nationals– The proclamation aligns with Ethiopia’s investment law and permits foreign nationals to hold key positions. Such key positions are- Chief Executive Officer (CEO) and Senior Executive roles in banks.
However, this is in the event of the unavailability of qualified Ethiopian nationals for these positions. Foreign employees also can serve for a maximum of five years. This is with the expectation that their tenure will promote the transfer of knowledge and skills to local employees.
According to the new regulation, dividends and salaries earned by foreign nationals can be easily repatriated. - Foreign bank branches can either take deposits wholesale or operate non-deposit-taking branches. However, they cannot do both.
- For foreign banks to establish a physical presence in Ethiopia, the regulation permits them to own physical properties for operational purposes. However, Ethiopian laws will apply to properties acquired through foreclosure or mortgage.
- Additionally, the National Bank of Ethiopia (NBE) will oversee these banks’ activities. The NBE issues directives to address specific issues of foreign banks’ operations.
This includes the minimum initial capital requirements for establishing foreign banks and their branches in Ethiopia. Also, the composition, fit and proper criteria for the board of directors of foreign banks.
Furthermore, there are specific regulations outlining the permissible activities that foreign banks can engage in while operating in Ethiopia.
Anticipated Challenges
I. Fear of losing market share by domestic players. Foreign banks, with their greater resources, advanced systems, and international networks likely overshadow local banks.
These could stifle domestic financial institutions, leading to market imbalances and reduced competition in the long term. Another concern is that if foreign banks establish too strong a presence, domestic authorities may lose control over the banking system.
II. Multiple regulators– Foreign banks may encounter challenges in navigating a complex regulatory landscape that involves both their host and home regulators. The regulatory institutions in the home country could influence the decisions of foreign banks. This could potentially affect their lending, mergers, or acquisitions in the host country.
Additionally, conflicting regulations or rules from these institutions across different countries could further complicate operations.
Banks already taking positions
While these challenges are anticipated, banks are already planning to take advantage of the new regulation and enter the fifth-largest economy in Africa. During a conference call with staff in January 2025, the CEO of First Bank of Nigeria disclosed plans by the lender to expand operations into Ethiopia in the year.
Nigerian banks are big players in the African banking industry with UBA, Zenith, and Access operating in more than 20 African countries combined. Access Bank has continued its inorganic growth strategy by aggressively acquiring banks in Kenya, Angola and Mauritius.
In September 2024, the Vice President of Liberia stated that Nigerians own 4 out of the 8 commercial banks operating in the country.
Beyond Nigeria, financial institutions from China and the Middle-East are also signalling interest to tap into the country’s potential in terms of financial services.
While commercial banks seem to be foot-dragging, Fintechs have quickly moved into the country and in some transactions- secured the, first-mover advantages.