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Ethiopia to Open Up the Banking Sector for Foreign Investors: Here's What We Know
By Tsegamlak Solomon | Thu Oct 13 2022
For a long time, Ethiopia’s banking sector had a reputation of being traditional and out of reach to most citizens, including many entrepreneurs who needed credit to run or set up their businesses. The credit provision system was believed to favor the large corporations and affluent people with enough collateral and longtime relationships with the banks.
One of the biggest problems was the lack of market competition. The banking sector had been off limits to foreign investors since 1974, and as a result, the market was only served by domestic service providers, which have been criticized for being static. But that dynamic is about to change. On September 3, the Council of Ministers adopted a policy presented by the National Bank of Ethiopia to open the banking sector to foreign investors.
What Do We Know About the Policy?
The move affirmed rumors that had been circulating for several years, and even though the full policy details have not been made public, some information about it was disseminated through a Council of Ministers press release.
The government expects this policy to improve the quality of the service provision in the sector with knowledge and technology, establish links with the global market, increase the competitiveness, effectiveness and efficiency of the financial sector, ensure a sufficient supply of finance and foreign currency, increase the number of job opportunities created and improve economic efficiency.
During a state television interview held the same day as the decision, NBE Banking Supervision Director Frezer Ayalew said foreign banks will be allowed to enter into the Ethiopian market in four modalities: a subsidiary model, branch model, joint venture with existing banks or through a commercial representative office. And according to a news story by The Reporter Ethiopia, an NBE official speaking on the basis of anonymity told the publication that this policy allows foreign investors to buy up to a 40% equity stake in existing Ethiopian banks, with a maximum of 5% allowed for individual foreign investors, 5% for non-bank investors and 30% for foreign banks.
What’s in It for the Private Sector?
Small and medium enterprises are expected to reap some of the biggest benefits of this decision since foreign banks will likely offer innovative credit facilities that promote greater competition among commercial banks and thus attract an influx of foreign currency.
What Needs to be Done?
The arrival of foreign banks is no guarantee of anticipated benefits. A dramatic forex inflow will largely hinge on the liberalization of the country’s capital accounts and floating the currency.
What is Next?
Following the policy’s full approval, the government will pass different legislation to carry it out. This includes amending the country’s banking and investment laws which currently prohibit foreign investors from participating in the financial sector. Multiple stakeholder consultations are anticipated to occur in the interim, which could alter some of our perceptions of the mechanics. Whatever the case, we will soon see foreign banks operating in Ethiopia.
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