Ethiopia opens doors to foreign banks with new law

ADDIS ABABA, Ethiopia

Ethiopian lawmakers on Tuesday approved a "Banking Proclamation" - a transformative shift in the financial sector by allowing foreign banks to establish a presence in the country.

The legislation permits foreign banks to enter the market through several avenues, including establishing subsidiaries, opening branches or representative offices, or acquiring shares in local banks.

​​​​​​​Strict regulations, however, have been introduced to safeguard local interests. The law mandates that the total shareholding of foreign nationals and foreign-owned Ethiopian organizations in a local bank shall not exceed 49% of the bank’s subscribed shares.

The remaining 51% must be retained under Ethiopian ownership to ensure local control of financial institutions.

Parliament also indicated the proclamation allows foreign banks to hire foreign nationals as senior executives in governance.

It also requires the inclusion of Ethiopians on the boards of the banks to maintain local representation and oversight.

The landmark approval follows six months of deliberation after the Council of Ministers passed a draft version of the proclamation and forwarded it to the House of Peoples’ Representatives for final endorsement.

As part of its strategy to open the financial sector, the Ethiopian government had announced in June 2023 its plan to issue up to five banking licenses to foreign investors over a five-year period marking a critical step in its policy to integrate the banking industry into the global financial market, according to a statement.

Discussions around the entry of foreign banks have been ongoing since the Council of Ministers adopted a policy presented by the National Bank of Ethiopia three years ago to liberalize the financial sector.

The move signals the end of decades of exclusivity for local financial institutions, paving the way for foreign competition and innovation.

Despite its potential benefits, the liberalization of Ethiopia’s banking industry has raised concerns among some MPs, who warn that the robust financial resources of foreign banks could overshadow local institutions, creating challenges in maintaining a level playing field.

Ethiopia recently floated its foreign exchange, marking another significant shift from the central bank’s strictly regulated interventions.