Ethiopia Fast-Tracks Banking Sector Liberalization with Foreign Investment Restrictions

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Ethiopia’s central bank is accelerating the rollout of a new legal framework aimed at fostering foreign competition in the local banking sector. However, the initiative also imposes stringent limits on the involvement of foreign players in a bid to safeguard the interests of local banks.

Governor Mamo Mihretu revealed to parliament last week that the framework, set to be finalized by July 2024, seeks to strike a balance between inviting foreign investment and preserving the autonomy of domestic financial institutions.

Under the new regulations, foreign investors will face caps on ownership shares in local banks. While foreign entities can acquire up to 30% of a local bank’s shares, an additional 10% may be sold to another overseas buyer. The remaining 60% must remain under local shareholder ownership, ensuring continued local control over the banking sector.

This move deviates from regional norms within East Africa, where full mergers and acquisitions are common. The Ethiopian government’s cautious approach aims to harness foreign investment while preventing the dominance of larger foreign banks over smaller local counterparts.

The initiative aligns with Ethiopia’s broader economic vision, particularly its goal to digitize the economy and transition from a cash-based society. With only 45% of the population currently banked, there is significant potential for growth and development in the banking sector.

However, the government’s strategy faces challenges, including ongoing conflicts and macroeconomic issues. Recent setbacks, such as the withdrawal of bids by foreign entities for stakes in state-owned companies, underscore the complexities of operating in Ethiopia’s evolving market.

Local banks stand to benefit from foreign investment, which can inject capital and expertise into the sector. Nonetheless, there are concerns about the potential impact on rural communities, as international banks may prioritize more profitable urban markets.

While the government aims to foster a competitive banking landscape, it must tread carefully to ensure that local institutions remain viable and responsive to the needs of all segments of society. With adequate regulation, foreign investment can complement the growth of Ethiopia’s private banking sector and contribute to its long-term economic prosperity. However, striking a balance between attracting foreign capital and safeguarding local interests remains a delicate endeavor in Ethiopia’s evolving financial landscape.