Ethiopia opens up its banking sector to foreign investors

The Ethiopian economy is now open to the international banking sector. On December 17, 2024, the Ethiopian Parliament approved a reform aimed at partially liberalizing the country’s banking system, thereby allowing foreign players to establish themselves in this East African country, where the economy remains largely state-controlled. The reform authorizes foreign banks to enter the Ethiopian market in three main ways: by setting up subsidiaries, opening representative offices and acquiring shares in local banks.

To protect national interests, strict limits have been set: foreign investors may not hold more than a 49% stake in a local bank, leaving the majority (51%) under Ethiopian control. However, some opposition MPs are voicing their concerns, believing that local banks may not be able to compete with foreign establishments. 

I’m sure you’ll agree that, with a population of almost 120 million, Ethiopia is one of the largest economies in sub-Saharan Africa. This market, which had remained closed for decades, was attracting a great deal of interest from foreign investors. So, when the Governor of the Central Bank announced the granting of five licenses to international banks, there was great enthusiasm,

explains Gabriel Negatu, Senior Researcher on Ethiopia.

The main aim of this reform is to introduce new financing, bring in modern technologies, strengthen the financial inclusion strategy, and enable the population to benefit from improved products and services. At present, banking services in the country are obsolete and well below international standards. This project therefore aims to raise the level of the local banking industry, adds Gabriel Negatu.

Restructuring to strengthen local banks

Ethiopia’s banking sector, currently made up of 32 institutions, is dominated by the Commercial Bank of Ethiopia (CBE), which holds 21.5% of the total capital 489 billion USD (62.5 billion birr). However, private banks such as Awash, Abyssinia and Dashen account for a significant share of medium-sized institutions. The remaining 25 banks, considered small, are likely to be particularly weakened by foreign competition. Faced with these challenges, the National Bank of Ethiopia has required local banks to strengthen their paid-up capital to the tune of 39 billion dollar (5 billion birr) by 2026. In addition, five new directives have been adopted to bring local practices into line with international standards, notably those of the Basel framework. However, this ambitious reform could represent a major challenge for smaller structures.

The opening up of the Ethiopian banking market has prompted mixed reactions. Some parliamentarians, such as Desalegn Chane of the Amhara National Movement, feared that local banks, especially the smaller ones, would be unable to compete with the financial might of foreign institutions. However, the governor of the National Bank, Mamo Mihretu, has reassured us that Ethiopian banks are resilient. According to him, this reform is necessary to modernize the sector and attract foreign capital. He said,

Our banks are strong and resilient, even if some face specific challenges, which are under the control of the Central Bank.

This reform is part of an overall economic liberalization plan initiated in 2021. The Ethiopian government announced in June 2024 that it would issue up to five banking licenses to foreign investors over a five-year period. This project reflects a desire to strengthen the country’s competitiveness and attract more foreign investment against a backdrop of major economic reforms.