Ethiopia’s parliament has enacted a law permitting foreign banks to operate within its borders, marking a significant shift in the nation’s economic landscape. This legislation, passed on December 17, 2024, is a cornerstone of Prime Minister Abiy Ahmed’s broader strategy to liberalise Ethiopia’s economy and attract foreign investment.
Key Provisions of the New Law
The legislation outlines several avenues for foreign banks to enter the Ethiopian market:
- Establishing Subsidiaries: Foreign banks can set up fully or partially owned subsidiaries.
- Opening Branches or Representative Offices: This allows for direct banking operations within the country.
- Acquiring Stakes in Local Banks: Foreign entities can purchase shares in existing Ethiopian banks, with foreign ownership capped at 40%.
Additionally, the law mandates that foreign nationals and foreign-owned Ethiopian organisations cannot collectively own more than 49% of a local bank’s subscribed shares, ensuring that a minimum of 51% remains under Ethiopian ownership.
Implications for the Ethiopian Banking Sector
Historically, Ethiopia’s banking industry has been dominated by the state-owned Commercial Bank of Ethiopia, with limited competition from private local banks. The introduction of foreign banks is anticipated to enhance competition, improve service quality, and foster innovation within the sector. Central Bank Governor Mamo Mihretu has expressed confidence that this increased competition will strengthen local lenders.
However, concerns have been raised about the readiness of domestic banks to compete with well-established international institutions. Some opposition legislators fear that local banks may struggle to maintain market share against foreign entrants. To address these concerns, the law includes provisions to protect local interests, such as the aforementioned ownership caps and requirements for Ethiopian representation on the boards of foreign-owned subsidiaries.
Context and Future Outlook
This legislative development is part of Ethiopia’s ongoing efforts to integrate more fully into the global economy. In recent months, the country has implemented several economic reforms, including floating its currency to establish a market-based exchange rate. These measures aim to alleviate chronic foreign currency shortages and attract international investment.
The entry of foreign banks is expected to bring capital inflows, advanced banking technologies, and international best practices, potentially transforming Ethiopia’s financial landscape. Nevertheless, the success of this initiative will depend on the effective implementation of regulatory frameworks and the ability of local banks to adapt to a more competitive environment.
As Ethiopia embarks on this new chapter, stakeholders will be closely monitoring the impact of foreign bank participation on the economy, financial inclusion, and the overall development of the banking sector.
