(Ecofin Agency) – This reform comes as Ethiopia, which has 120 million consumers, continues its economic transition, notably marked by the recent liberalization of the foreign exchange market. Despite the challenges, authorities hope the arrival of foreign banks will promote investment, innovation and sustainable growth.
After decades of complete protectionism, the Ethiopian Parliament voted on Tuesday, December 17, 2024, for a law that opens its banking market to foreign investors. A decision hailed by some as a major economic turning point, but feared by others who fear local players being brought to their knees in the face of the power of international capital.
This change comes against a backdrop of economic reforms intended to stimulate foreign investment and strengthen the competitiveness of the national financial system. The banking sector, which currently manages assets estimated at 3.3 trillion birr (around $26 billion), struggles to include Ethiopia’s 120 million people. In fact, 50% of Ethiopians have access to financial services according to the World Bank, and 500,000 citizens currently benefit from bank loans.
The text, approved after six months of debate, authorizes foreign banks to penetrate the Ethiopian market by creating subsidiaries, opening representative offices or acquiring shares in local banks. However, safeguards have been introduced to protect national interests: foreigners will not be able to hold more than 49% of the shares of a local bank, while 51% of the shares must remain under Ethiopian control.
The Ethiopian banking sector currently has 32 institutions, with a total capitalization estimated at 290 billion birr. The state-owned Commercial Bank of Ethiopia (CBE) dominates the market with 21.5% of total capital, or 62.5 billion birr. Five other private banks, such as Awash, Abyssinia and Dashen, are among medium-sized institutions, while the remaining 25 are classified as small structures.
The National Bank of Ethiopia has given local banks until 2026 to strengthen their paid-up capital to 5 billion birr. An imperative which, according to the authorities, must prepare the sector for the arrival of foreign behemoths. At the same time, five new directives were adopted to tighten prudential supervision and bring local practices closer to international standards dictated by the Basel framework. An ambitious upgrade, but one that could prove a headache for small, already fragile banks.
The decision to open has also raised concerns among certain parliamentarians, notably Desalegn Chane, MP for the Amhara National Movement, who fear that local banks will outweigh the financial power of foreign institutions.
For the governor of the National Bank, Mamo Mihretu (photo), this opening is necessary to attract foreign investment and modernize the sector. “Our banks are strong and resilient, although some face specific challenges, which are under the control of the Central Bank”he assured before Parliament.
The government announced in June a plan to issue up to five banking licenses to foreign investors over a period of five years, one of the signs of the desire to liberalize the economy and strengthen the competitiveness of the country, in line with the process of economic reforms initiated in 2021.
Fiacre E. Kakpo
Edited by Mahoudjro F. Vahid Codjia
