Ethiopia to allow foreign banks to apply for license

Ethiopia central bank governor landmark announcement at Africa Financial Industry Summit. Photo courtesy: Amit Jain

The parliament of Ethiopia has approved long-awaited legislation permitting foreign banks to operate in the country. It came barely a week after the central bank governor Mamo Mihretu told a gathering of bankers and financial institutions at the Africa Financial Industry Summit in Morocco that Ethiopia was opening its doors to foreign banks. Under the new law, enacted earlier in December, international banks are allowed to establish subsidiaries, open branches and representative offices, as well as acquire stakes in existing Ethiopian banks.

To maintain some local control, the law caps foreign nationals and foreign-owned organisations at a combined ownership of 49% of a local bank’s subscribed shares. In 2023, the government stated its intention to award up to five banking licences to foreign investors over the next five years, aiming to foster competition in the financial services sector.

While the law received broad support in parliament, some legislators voiced concerns about the ability of local lenders to compete against better-capitalised international players. However, National Bank of Ethiopia Governor Mamo Mihretu argued that increased competition would strengthen domestic banks. The CEO of Amhara Bank has already urged Ethiopian lenders to consider mergers to build stronger capital bases and remain competitive in the face of impending foreign competition. Ethiopia’s banking industry comprises more than 30 institutions, with the state-owned Commercial Bank of Ethiopia holding a dominant position.

Since assuming office in 2018, Prime Minister Abiy Ahmed has pushed to liberalise the Ethiopian economy. In 2021, the government awarded a US$850m telecommunications licence to a consortium led by Kenya’s Safaricom, breaking the state monopoly in that sector. More recently, it opened the retail sector to foreign players, and the new Ethiopian Securities Exchange is set to provide a platform for privatising state-owned enterprises, further reducing the country’s reliance on external debt.

The fastest growing large economies in Africa, Ethiopia achieved annual growth rates often exceeding 10% between 2004 and 2019. However, civil war, the Covid-19 pandemic, and the global economic fallout from the war in Ukraine have slowed growth, which averaged 5.9% between 2020 and 2023. Inflation surged from 20.4% to 30.2% during the same period. These challenges have been compounded by a long-standing foreign currency shortage, which has made doing business difficult in Ethiopia.

In July, the Ethiopian central bank reversed its long-standing policy of fixing the exchange rate as part of efforts to secure over US$10bn in funding from the International Monetary Fund, the World Bank, and other creditors. The shift led to an initial depreciation of the birr but the bold decision eventually paid off. The black market for the dollar disappeared and the birr stabilised. Businesses are now able to access foreign exchange, and the central bank says it has no interest in intervening the market. Foreign reserves are once again started to flow into the national treasury.

 

References

‘Ethiopia to launch stock exchange in 2024’, NTU-SBF Centre for African Studies, 11 December 2023

‘Ethiopia opens up retail sector to foreigners in economic liberalization move’, Xinhua, 18 April 2024

‘Ethiopia lifts currency controls’, NTU-SBF Centre for African Studies, 27 August 2024

‘Ethiopia passes law to open banking to foreign competition’, Reuters, 17 December 2024

‘Ethiopia opens doors to foreign banks with new law’, Anadolu Agency, 17 December 2024

‘Ethiopia opens banking sector to foreign investment’, GlobalData, 17 December 2024

‘Ethiopia opens banking sector to foreign investment’, Agence France-Presse, 17 December 2024

‘Ethiopia to allow foreign banks to operate’, Semafor, 19 December 2024

‘Amhara Bank urges local banks to merge amid foreign banks’ entry’, Addis Insight, 20 December 2024

‘Financial Institutions’, National Bank of Ethiopia, Accessed 29 December 2024