ADDIS ABABA — Ethiopia’s central bank is fast-tracking the rollout of a new legal framework to spur foreign competition in the local banking sector while simultaneously imposing strict limits on the role of foreign players.
The central bank governor told parliament last week that a framework will be in place by the end of the government’s fiscal year in July 2024.
Financial services authorities are poised to place a ceiling on the maximum number of shares foreign investors could own in local banks. This is in contrast with regional trends within the East Africa region which have enabled full mergers and acquisitions. Ethiopia’s government is keen to benefit from foreign investment but wants to prevent smaller local banks from being swallowed up by larger foreign rivals.
Foreign institutions and individuals will only be allowed to acquire up to 30% of a local bank, which can then sell an additional 10% to another overseas buyer. The remaining 60% must remain under local shareholder ownership.
Ethiopia’s National Bank Governor Mamo Mihretu has said that preparations for proclamations and other legal frameworks to open the sector would be finalized before July 2024.
One of Ethiopia’s top financial regulators, Brooke Taye, of Ethiopian Capital Market Authority, told Semafor Africa that despite the ownership limits the country would still “support the entrance of foreign investors” in the country’s financial markets.
Ethiopia is Africa’s second most populous country, with 120 million inhabitants. Just 45% of the population is currently banked, according to development agency, Financial Sector Deepening Ethiopia (FSD).The government plans to digitize its economy and move from a cash-based society, which has prompted rapid changes in the country’s banking sector. In the last four years, 15 new local banks have entered the market with state-owned Commercial Bank of Ethiopia commanding over a third of the market.
The Ethiopian banking sector is valued at around 2.4 trillion Birr (almost $43 billion), according to Addis Ababa-based investment firm Cepheus Growth Capital. Foreign banks including Kenya’s KCB Bank and Standard Bank, along with banks from Egypt, United Arab Emirates have expressed interest in the Ethiopian market.
Ethiopia’s plan to liberalize its banking sector comes at a time when foreign investors and partners are starting to reconsider what was only recently seen as a huge, underserved commercial market that was full of promise. Last week, French telecom giant Orange pulled out of a bid for a minority share of state-owned Ethio Telecom. This came after the government was also forced to withdraw a third telecoms license offering after no bidder came forward.
Even those who made early moves haven’t had the first mover advantage they might have expected in a market that has been starved of competition before now. Kenya’s Safaricom, which was granted the first telecoms license in 2021, has seen its plan hampered due to a two-year civil war and other internecine conflicts. And last month Ethio Lease, a division of New York-based African Asset Finance Co, the first and only foreign group to receive a financial services license in Ethiopia, shut up shop after four years due to foreign exchange constraints.
Both cases highlight the difficulty of this moment for foreign entrants to Ethiopia’s banking sector. The nation is facing disruption from these conflicts, high national debt, and other macroeconomic challenges.
Local banks would benefit from an injection of foreign cash and expertise into the sector. Most banks continue to struggle with a lack of technological advancement and a paucity of talent. There are also fears that, unless drastic action is taken, Ethiopian banks will never be able to compete favorably on the global stage.
“Size matters and the local banks would need to find ways to stay competitive or merge in order to be a sizable player for the rest of the world to want to invest in them”, said Amaha Bekele, a managing partner at Deloitte East Africa.
And yet there are some reasons for caution, as seen from the regulators’ restrictions on ownership. Mushe Semu, a trade manager at Dashen Bank, told me he was supportive of foreign investment but pointed out that international banks might not feel the need to serve people in rural areas, for example, since they might be less profitable customers. Local banks have traditionally received incentives to serve rural communities.
“Ethiopia’s private banking sector is only about 30 years old and still has limitations that can be complemented by such an opportunity”, Semu told Semafor Africa. But he added: “If regulated adequately, foreign investment brings a host of benefits.”
Room for Disagreement
In 2022, the Ethiopian government announced that it expected to grant up to five banking licenses to foreign lenders in the next five years. Eshetu Fantaye, the then president of one of Ethiopia’s newest private banks, Ahadu Bank, was adamant about the negative consequences of foreign banks to the local economy last year. “We must know what we (as a country) want first,” he told The Reporter Newspaper. “Is it foreign currency or efficiency the government wants from foreign banks? Modalities like subsidiary, branch, offshoring and commercial representative offices negatively affect local banks and will have no use for Ethiopia.”