Ethiopia is gearing up for a significant transformation in its banking sector as the central bank expedites the introduction of a new legal framework to encourage foreign competition while imposing strict limitations on foreign players.
The move aims to attract foreign investment without compromising the autonomy of smaller local banks.
Liberalization with Constraints
According to Ethiopia’s central bank governor, the new framework is expected to be in place by the end of the government’s fiscal year in July 2024.
To strike a balance, financial authorities are planning to set a cap on the maximum number of shares foreign investors can own in local banks.
In contrast to regional trends, Ethiopia will limit foreign institutions and individuals to acquiring up to 30% of a local bank.
An additional 10% can be sold to another overseas buyer, while the remaining 60% must remain under local shareholder ownership.
Supporting Foreign Investors
Despite these ownership limits, Brooke Taye, a top official at the Ethiopian Capital Market Authority, emphasized that the country remains supportive of foreign investors entering its financial markets.
Ethiopia, Africa’s second most populous country with 120 million inhabitants, currently has only 45% of its population banked.
The government aims to digitize the economy and transition away from a cash-based society, prompting rapid changes in the banking sector.
Challenges and Opportunities
Ethiopia’s banking sector, valued at around 2.4 trillion Birr (almost $43 billion), has attracted interest from foreign banks, including Kenya’s KCB Bank and Standard Bank, along with institutions from Egypt and the United Arab Emirates.
The influx of foreign capital and expertise could benefit local banks struggling with technological advancements and talent shortages.
However, challenges such as ongoing conflicts, high national debt, and macroeconomic uncertainties have led to caution among foreign entrants.
Caution Amidst Opportunities
Local banks acknowledge the potential benefits of foreign investment but raise concerns about international banks possibly neglecting less profitable customers in rural areas.
Mushe Semu, a trade manager at Dashen Bank, emphasized the need for adequate regulation to ensure foreign investment brings overall benefits to the country.
As Ethiopia’s private banking sector is relatively young, at around 30 years, the entry of foreign investors could complement existing limitations, provided effective regulations are in place.
Looking Ahead
In 2022, the Ethiopian government expressed its intention to grant up to five banking licenses to foreign lenders in the next five years.
While some industry insiders caution against potential negative impacts on the local economy, the move signals a significant step toward positioning Ethiopian banks on the global stage.
As the nation navigates through various challenges, the liberalization of the banking sector holds the potential for both growth and increased competitiveness, provided it is managed effectively.
