Ethiopian lawmakers have passed legislation allowing foreign banks to operate within the country, a crucial step in the government’s efforts to attract foreign investment.
Ethiopia, home to over 120 million people and boasting one of sub-Saharan Africa’s largest economies, has gradually opened its tightly controlled economy since Prime Minister Abiy Ahmed assumed power in 2018.
The new law, enacted by Parliament on Tuesday, grants foreign lenders the authority to:
- Establish subsidiaries
- Open branches or representative offices
- Acquire shares in domestic banks.
However, the law imposes a 40% cap on foreign strategic investors’ ownership in any local bank.
The state-owned Commercial Bank of Ethiopia currently dominates the country’s banking sector.
This legislative move follows assurances from National Bank of Ethiopia Governor Mamo Mihretu at the Africa Financial Summit (AFIS 2024) in Casablanca, Morocco.
He urged foreign banks to capitalize on the opportunity to access a market of 120 million consumers within the region’s largest economy.
Following the government’s June 2023 announcement of plans to issue up to five banking licenses to foreign investors over five years, several foreign banks, including Kenya’s KCB Bank and Standard Bank, expressed interest.
The new law allows:
- Strategic investors hold up to 30% of a bank’s total shares.
- Foreign individuals to hold up to 5%
- Foreign juridical persons to hold up to 10%
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Foreign banks can employ foreign nationals as senior executives, but the law mandates Ethiopian representation on their boards.
Foreign banks must either accept wholesale deposits or operate as non-deposit-taking institutions. Investments from these banks will be denominated in foreign currency to bolster the country’s Foreign Direct Investment (FDI).
With over 30 local banks and a combined capital of US$2.4 billion, Ethiopia’s banking sector, dominated by the state-owned Commercial Bank of Ethiopia (CBE) with 21.5% of the combined capital, is considered less innovative and underdeveloped compared to its economic standing. This lack of competition has hindered service quality.
This new legislation signifies Ethiopia’s commitment to economic liberalization. By attracting foreign capital and fostering innovation in the financial sector, it aims to benefit both investors and the Ethiopian populace.
