The Central Bank Governor announced plans to implement a new legal framework by July 2024, allowing foreign entities to acquire a maximum stake of 40% in local banks, with Ethiopian nationals retaining the majority ownership. This policy reflects Ethiopia’s dual goals: attracting foreign investment and expertise while safeguarding its domestic banking institutions from potential takeovers by larger international banks.
This strategy marks a significant deviation from the trend in East Africa, where foreign banks have often gained control of local entities through mergers and acquisitions. Ethiopia aims to balance the infusion of foreign capital and expertise with the protection of its smaller banks from international dominance. Under the new rules, foreign investors and institutions can purchase up to 30% of a local bank, with an option for an additional 10% to be sold to another foreign buyer.
Ethiopia presents a promising market for banking services with a population of 120 million, less than half of whom currently have bank accounts. The Ethiopian banking sector, valued at approximately 2.4 trillion Birr (around $43 billion), is poised for growth. The government’s push to move away from a cash-based economy has attracted companies like Safaricom, and in the past four years, 15 new local banks have emerged. Despite this, the state-owned Commercial Bank of Ethiopia maintains a significant market share.
However, Ethiopia’s plan faces challenges amidst uncertainties from foreign investors about the country’s future prospects. Recent developments, such as the French telecom giant Orange withdrawing from a deal to acquire a stake in Ethio Telecom and the closure of Ethio Lease, the first foreign financial services company in Ethiopia, highlight these concerns. Furthermore, internal conflicts have impacted businesses like Safaricom, which acquired its first telecom license in 2021.
Local banks, in need of foreign investment and expertise, also grapple with their own challenges, including technological and talent deficiencies. This has sparked fears among local banks about their global competitiveness. The Ethiopian government’s intention to issue up to five banking licenses to foreign lenders in the next five years has been met with mixed reactions. Last year, Eshetu Fantaye, the then-president of Ahadu Bank, expressed concerns about the impact of foreign banks on the local economy, emphasizing the need for clarity on the government’s priorities, whether it be foreign currency acquisition or efficiency gains from foreign banks. He warned of the potential adverse effects on local banks and the overall economy from different operational modalities adopted by foreign banks.
As Ethiopia navigates this complex terrain, the balance between inviting foreign participation and protecting local interests remains a key focus.
