The long awaited advent of foreign banks in Ethiopia’s finance industry

Recently, Ethiopian lawmakers 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 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.

According to the National Bank of Ethiopia, the banking sector remains the backbone of Ethiopia’s financial system, holding 96% of the sector’s total assets. By June 2024, 32 banks, including private, interest-free, and microfinance-transformed commercial banks, operated in the country.

The homegrown reform program introduced five years ago requires launching a comprehensive and well-coordinated economic reform agenda, encompassing macro-financial measures to stabilize the macro-economy and arrest financial sector vulnerabilities; structural reforms to alleviate business constraints to create an enabling environment for private sector investment; and sectorial policies to address sector-specific institutional and market failures and enhance productivity in key economic sectors.

Economists underscored the entry of foreign banks into Ethiopia will increase investment and enhance technological capabilities vital to efficient service delivery to the finance sector. In addition, it shores up the shortage of hard currency, raises the nation’s currency reserve and reduces illegal trade because exporters can obtain fair prices for their products when they export through the formal channel.

The economists also warn that local banks need to improve their financial and technological capabilities in order to compete with their foreign counterparts. They should employ competent staff and occasionally provide training to create a world-class and professionally excellent employee.

The National Bank of Ethiopia is preparing to grant licenses to at least five foreign banks to enter the country in the next five years. This is part of a broader move being carried out by the government of Ethiopia to open up the economy to foreign investment, it was indicated.

Economists agree on the positive impact of the incoming foreign Banks here. They argue that foreign banks will help improve the overall efficiency of the Ethiopian financial system and make it more accessible to businesses and customers.

It also enables them to strengthen their link with international financial institutions and to do their business cooperatively. In addition to these, it paves the way for creating the chance to secure loans in hard currency. When they start operating in Ethiopia, they bring foreign wealth, skills and experience with them. That money will avail financial provisions to be used for various investments. They will bring the money that they have accumulated overseas and that is useful for boosting financial transactions. The other thing is they have better international experiences; therefore they will assist in facilitating international trade in the country.

However, the economists also warned that local banks need to be prepared to compete with foreign banks by improving their financial and technological capabilities in order to offer the same level of services. Others also suggest that it is to their benefit and enhance their competitiveness that various banks merge themselves.

Currently, in an unprofessional manner, banks go around every street to make you open bank accounts in their branches. As to the long-serving bankers, if you don’t bring your book they don’t even serve you. That indicates how backwards they are. Therefore, as a regulation, these banks need to be forced to invest in research to help themselves with modern technologies and working systems.

Appointing members of the boards of directors of the banks must take into consideration their academic background, professional integrity and the trust of the shareholders. Nepotism and favouritism witnessed in some private banks only accelerate their demise. Because competing and winning the market without strong institutional commitment is unrealistic.

The economists also advised the government to put a certain mechanism with a view to protecting Ethiopian financial institutions from the domination of foreign banks.

In this regard, they urged the government to ensure that foreign banks are subject to the same regulations as the local ones and that creating job opportunities for local professionals should be obligatory.

Therefore, apart from creating a conducive working environment for banks coming to Ethiopia, strict monitoring and control should be put in place so that they do not go out of line and create undue economic pressure on local banks.

Overall, the economists pointed out that the entry of foreign banks into Ethiopia is a positive development. Allowing foreign banks into Ethiopia’s financial sector will be instrumental to sustaining the economic growth and competitiveness of the country by ensuring a stable financial system.

Over the past five years, the government of Ethiopia has undertaken significant economic reforms to open up the nation’s economy. Opening up the financial sector is part of the comprehensive reform.

In his briefing to questions raised by members of the House of Peoples Representatives during the approval of the new bill, National Bank of Ethiopia Governor Mamo Mihretu noted that having a stable financial system is crucial to the sustainability of the country’s economy. Allowing foreign banks into Ethiopia’s financial sector will be instrumental to sustaining the economic growth of the country by ensuring a stable financial system, he said.

This move is beneficial to ensure competitiveness and stability, he said, adding approving the proclamation is part of the implementation process of the government’s policy decision made recently as part of the financial sector reform.

Stating that the preparation to reach the approval stage took three years, he said all necessary preparations have been done with much detail to allow foreign banks in the Ethiopian market by taking other countries’ best experiences.

For the governor, the main target of allowing foreign banks in Ethiopia’s financial sector is to enhance the competitiveness and productivity of Ethiopia’s banking sector and enhance its role in the sustainable economic growth of the country.

Allowing foreign banks entry into Ethiopia is believed to ensure a competitive, stable banking system, bringing new capital, advanced technology and innovative products to Ethiopia’s financial sector, it was learned.

Similarly, the house also approved the revised proclamation of the National Bank of Ethiopia with the target of playing a crucial role to sustain the economic growth of the country and to support the homegrown economic reform.

Presenting the final bill to the HPR, Planning, Budget and Financial Affairs Standing Committee, Chair Desalegn Wodaje said the revised bill would be instrumental to enhancing productivity, supporting the country’s economic growth, investment and saving, and supporting the homegrown economic reform in a meaningful manner.

The revised proclamation of NBE is said to be creating market stability, a healthy financial system and supporting the comprehensive economic growth of the country.

Over the past six years, various sectors and sub-sectors have been opened up for domestic and foreign investment to make Ethiopia a business-friendly nation alongside implementing plenty of legal and administrative reforms during the stated period.

In its recent study paper, the Ethiopian Economic Association indicated that foreign banks will bring much-needed capital and technology to the Ethiopian financial sector in addition to the efficient services they provide to customers.

“When these banks enter our country, they will bring better service as they arrive in Ethiopia after lots of study and analysis on what kind of strategies to follow to maximize their profit. So they are expected to improve service delivery. They also bring capital and technology to our country, therefore, competition increases in the market which in turn brings better financial services.”

BY ABEBE WOLDEGIORGIS

THE ETHIOPIAN HERALD SATURDAY 21 DECEMBER 2024

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