The entry of foreign banks into Ethiopia is expected to impose fierce competition on local banks, pushing them to develop new products, adopt advanced technologies, and strengthen their operations, according to experts.
As Ethiopia opens its financial sector to foreign competitors, local banks will need to innovate and adapt to the new competitive landscape, which poses a significant challenge to the country’s banking industry. Getachew Beshahwred, Founder and CEO of Bruh Finance, told The Ethiopian Herald that while the participation of foreign banks can be advantageous, it must be managed properly within Ethiopia’s financial sector.
Getachew noted that this development could present opportunities for local banks if they collaborate with international counterparts. He emphasized that the Ethiopian financial sector, including both banks and insurance companies, remains relatively small but has immense potential for growth. Over the past twenty years, the sector has seen significant expansion, yet there is still much room for improvement.
Having worked as an accountant in London for the past 30 years, Getachew highlighted that the impending entry of foreign banks will bring intense and beneficial competition, ultimately benefiting consumers and the economy. He pointed out that Ethiopia currently has 31 operating banks, which are quite small compared to banks in other countries. To compete effectively, these banks must increase their capital base, either through new capital infusions or mergers, as the government has recently suggested.
Moreover, Getachew stressed that foreign banks could introduce new technologies and skilled labor, which would enhance competition and significantly improve the banking and insurance sectors-provided if it is managed properly. He also pointed out that most local bank activities are currently limited to cities and major towns, and they must expand their reach to rural areas where a significant number of people live. Without such changes, local banks will struggle to compete once foreign banks enter the market.
The Ethiopian government has allowed foreign banks to acquire shares in local banks and establish subsidiaries, and in some cases, they may be permitted to take over local banks. While this scenario could have advantages if managed well, it will also introduce a considerable level of competition, which Getachew believes will benefit consumers and the economy as a whole.
He emphasized that finance is the engine of growth, and equitable access to financial services is critical for the development of the country. Additionally, the expert noted that banks and insurance companies employ many people and contribute significantly to tax revenues, making the maintenance of peace crucial for sustained growth.
Public policy expert Costantinos Berhtesfa (PhD) added that the entry of foreign banks into Ethiopia’s financial sector would help address the scarcity of foreign capital flow. While the participation of foreign banks could alleviate some financial challenges, Costantinos cautioned that policies must be carefully implemented in line with the country’s economic interests.
He emphasized that Ethiopia has previously prohibited foreign banks from participating in the sector, allowing only domestic investors to purchase bank shares. As a result, the country missed the opportunity to benefit from the contributions of potential foreign banks, which have facilitated development in nations such as the UAE, Singapore, China, and Vietnam.
According to Costantinos, foreign capital is essential for development; without it, governments may become reliant on aid, remittances, or export income to obtain the foreign currency needed for importing goods and implementing projects.
BY MISGANAW ASNAKE
THE ETHIOPIAN HERALD TUESDAY 13 AUGUST 2024
