Ethiopia Opens Financial Sector to Foreign Banks

Nearly fifty years after the last batch of foreign banks in Ethiopia terminated operations after the rise of the Socialist regime, Parliament has ratified a bill opening the sector back to foreign investors. The House of People’s Representatives ratified a pair of consequential bills Tuesday morning aimed at evolving the financial sector into a state at par with international best practices.

The opening up of the banking sector has been marked by significant anticipation. Prime Minister Abiy Ahmed (PhD) has noted the pending entry of foreign banks since the first iteration of the Home-Grown Economic Agenda was unveiled nearly four years ago.

Parliament’s Standing Committee for Planning, Budget & Finance received the draft bill at the end of the last fiscal year and has conducted a series of stakeholder sessions to sift through contentions. 

Ethiopia’s banking sector which manages assets of nearly 3.3 trillion birr has been largely limited in expanding financial inclusivity reaching just around 50%, according to an index by the World Bank. Banks have also lagged in expanding credit access compared to sub-Saharan countries with foreign participants, with around half a million Ethiopians having access to bank loans.

Aiming to correct these and the other handicaps hindering financial sector growth and deepening, the banking law amendment was voted into law with three objections. 

Foreign banks are now allowed to enter Ethiopia under four modalities: setting up a subsidiary, opening a branch, establishing a limited-function representative office, or buying shares in local banks.

Ethiopia’s banks were given a 2026-year deadline to increase their paid-up capital to five billion birr, partly in anticipation of the sector's pending open-up. NBE also approved a set of five directives six months back that seeks to improve prudential oversight in a manner at par with international bank practices.

However, some members of parliament raised concerns over the feasibility of opening the banking sector to foreign banks amid prevailing constraints.

MPs like Halimo Mohammed questioned how the amended banking law will treat interest-free banks which he felt have been left out even under the landmark bill. He suggested that opening the banking sector to foreign banks should be accompanied by similar adjustments in opening up the space to Sharia-compliant financial institutions. 

Opposition MP Abebaw Desalew (PhD), questioned whether allowing foreign banks into the country takes into account Ethiopia's prevailing economic and political constraints. He also enquired if any measures were in place to prevent capital flight when the foreign banks enter.

"Why is it being hurried," Abebaw questioned.

Desalegn Chane (PhD), another opposition MP, raised concerns over the preferential treatment being given to the state-owned Commercial Bank of Ethiopia (CBE) under the new bill. He implied that the opening of the banking sector had to do with the appeasement of international lenders much more than it had to do with an economic shake-up.

"The smaller banks will struggle," Desalegn noted.

The MP also questioned NBE's regulatory capacity by citing the rise of cryptocurrency and Ethiopia's timidity in greenlighting its legality. He suggested that some of the local banks should have been merged before allowing the foreigners to enter.

"May God be with you is all I can say," Desalegn stated.

Other MPs recalled that Ethiopia's banks experienced a marked slowdown after decades of growth due to a 14% credit cap imposed by the central bank and an overall slowdown in economic growth. 

NBE's governor thoroughly responded to the MP's inquiries highlighting several economic and monetary fronts.

Mamo Mihretu, the tenth governor of the NBE, recalled that the banking law was being revised after 16 years of implementation to ensure the stability of the financial sector in addition to opening it up to foreign participation. He highlighted how three years of rigorous consultation and discussions informed the crafting of the bill.

"This is a historic bill," the Governor underscored.

Mamo also pointed out that nearly half of the amendment to the banking law had to do with establishing methods of resolving incidences of crisis at banks. The Governor implored MPs to understand that opening up the banking sector does not mean deregulation.

"This does not mean that foreign banks can come and do whatever they want," Mamo noted. 

Fears of local banks being trampled by the entry of their foreign counterparts lack a nuanced understanding of the overall landscape according to the Governor. Mamo acknowledged the need to increase the Central Bank's supervisory capacity as it transitions into an institution that embodies professionalism.

The Governor also assured parliamentarians that Ethiopia's local banks were liquid and well-capitalized while the overall financial sector is stable.

"Ethiopian banks are safe and sound," Mamo stated. 

The other bill ratified today, which MPs unanimously voted into law, grants the National Bank of Ethiopia (NBE) significant autonomy as it extricates its lending priorities from the central government while also increasing its capital base. Mamo has emphasized the need to reestablish the central bank to enhance its regulatory power and overall competence. 

The bill strips key powers from the executive and places the Central Bank as a primary power dictating monetary policy.  It asserts NBE’s authority in issuing foreign exchange directives, mandates staff independence from conflicts of interest, and grants new tools for the protection of depositors. 

Some of NBE’s new powers include the ability to conduct statutory mergers and temporarily freeze banking operations of financial institutions on the brink of failure.

A nearly forty-fold increase in NBE’s capital has also been stipulated under the bill while stringent conditions have been laid out for direct lending to the government. The central government is granted a grace period to settle some of its existing upon the ratification of the bill

NBE’s three-year strategic plan unveiled last year prioritizes price stability while foreshadowing the shift to an interest-based monetary policy and an overall shift toward market-based dynamics.

Mamo emphasized the need to equip the central bank with the powers necessary to bring about price stability, economic growth, and financial sector stability in his address to parliamentarians.

“These objectives might conflict with one another on occasion,” he noted. 

The Governor revealed how the draft bill took two years to craft as part of an effort to bring about international central banking practices laid out in the Basel framework. Mamo also pointed out the importance of keeping up with global trends as he signaled potential changes to Ethiopia’s current crypto asset laws.

“We will keep weighing out things and respond with timely interventions,” he said.