Parliament approves banking proclamation, allowing foreign banks to enter Ethiopia’s financial sector

December 17, 2024

After years of anticipation, lawmakers have approved the long-awaited banking business proclamation, paving the way for foreign banks to enter Ethiopia’s financial sector.

The proclamation allows foreign banks to enter the Ethiopian market by establishing subsidiaries, opening branches or representative offices, or acquiring shares in existing local banks. However, it sets a limit on foreign strategic investors, capping their ownership at 40% in any local bank, while allowing an additional 7% to 10% stake for non-strategic foreign national investors.

The new law also stipulates that the combined shareholding of foreign nationals and foreign-owned Ethiopian organizations in a local bank shall be limited to 49% of the bank’s total subscribed shares. The remaining shares are required to remain under Ethiopian ownership.

Additionally, the proclamation permits foreign banks to employ foreign nationals as senior executives but requires that resident Ethiopians be included on their boards.

The approval by legislators came six months after the Council of Ministers passed a draft banking business proclamation, which was subsequently forwarded to the House of Peoples’ Representatives for final endorsement.

In June 2023, the government announced its intention to issue up to five banking licenses to foreign investors over a five-year period as part of a strategy to open the financial services sector to foreign competition.

The entry of foreign banks into a country’s banking industry has been a significant topic of discussion since the Council of Ministers adopted a policy presented by the National Bank of Ethiopia to open the sector to foreign investors three years ago.

The opening of the banking industry marks a significant shift following decades of dominance by local financial institutions in Ethiopia’s banking sector.

However, some MPs have emphasized that the liberalization of the sector to foreign competition presents challenges, such as the potential dominance of existing local banks by foreign financial institutions with strong capital bases.

“I don’t think the government is providing enough support for private banks to make them competitive in the market,” noted Desalegn Chane of the National Movement of Amhara (NaMA).

In response, Mamo Mihretu, the governor of the National Bank of Ethiopia (NBE), stressed that Ethiopian banks are currently safe and sound.

“However, this does not mean that some banks do not have problems,” he told legislators. “But we believe these problems are under the control of the central bank.”

Currently, there are 32 banks operating in the country, with a combined capital of 290 billion birr (roughly $2.4 billion).

In Ethiopia, commercial banks are categorized into three groups based on asset size: large, medium, and small.

The state-owned Commercial Bank of Ethiopia (CBE) is the only institution classified as a large bank. Its share of the total capital in the banking system currently stands at 21.5%, amounting to 62.5 billion birr.

Five banks, including Awash, Abyssinia, Dashen, Hibret, and the Cooperative Bank of Oromia, are classified as medium-sized banks. The remaining 25 banks are categorized as small institutions. (src-AS)