In recent years, the banking and financial sector has emerged as a key priority for the Ethiopian government as it seeks to drive economic growth and development across the country. As the second most populous nation in Africa, with a burgeoning middle class and ambitious plans for industrialization, Ethiopia recognizes the crucial importance of a robust, well-functioning financial system.
Over the past decade, the government has implemented a series of reforms and initiatives aimed at strengthening the banking and finance industry. This includes measures to enhance access to financial services, improve regulatory oversight, and encourage the entry of new domestic and foreign players into the market.
According to financial empirics in Ethiopia, one of the cornerstone achievements has been the expansion of branch networks and service offerings by state-owned banks. These larger public financial institutions have made concerted efforts to reach underserved rural and urban populations, providing basic banking, credit and savings products to communities that were previously cut off from the formal financial system.
Complementing this, the government has also actively promoted the growth of private commercial banks, microfinance institutions and other non-bank financial entities. This diversification of the financial landscape has increased competition, driving innovation and better service delivery for consumers.
Moreover, the National Bank of Ethiopia has strengthened its regulatory and supervisory capacities. It has introduced measures to maintain the stability of the financial system, manage foreign exchange risks and protect the interests of depositors and borrowers.
Looking ahead, the government has outlined ambitious plans to transform Ethiopia into a regional financial hub. This includes proposals to establish an international financial center in the capital Addis Ababa, attract more foreign direct investment into the banking and insurance sectors, and leverage financial technology (fintech) solutions to drive financial inclusion.
Crucially, the prioritization of the financial sector aligns with Ethiopia’s broader economic development strategies. Access to affordable credit, secure savings mechanisms and efficient payment systems are seen as essential for stimulating private enterprise, boosting agricultural productivity, and funding critical infrastructure projects.
Further documents in the financial reform tell that as Ethiopia continues its march towards middle-income status, the banking and finance industry will undoubtedly play an integral role in unleashing the country’s full economic potential. The government’s unwavering commitment to strengthen this vital sector signals its recognition of finance as a key enabler of sustainable and inclusive growth.
In recent years, after the breakneck reform about six years before, the Ethiopian government has been taking steps to open up its financial sector to foreign banks. This is part of a broader economic reform agenda aimed at modernizing the country’s financial system and attracting more foreign investment.
In 2020, Ethiopia passed a new banking law that lifted the previous restrictions on foreign bank participation. Under the new law, foreign banks are now allowed to establish subsidiaries or joint ventures with local banks in Ethiopia. This represents a significant change, as previously only domestic banks were permitted to operate in the country’s banking industry.
Since the new law was enacted, several major international banks have expressed interest in entering the Ethiopian market. Some of the banks that have announced plans to set up operations in Ethiopia include Kenya’s Equity Bank, Nigeria’s United Bank for Africa, and South Africa’s Standard Bank. These banks see Ethiopia as an attractive market given its large, growing population and the under-penetration of formal financial services.
National Bank of Ethiopia has been actively working with these foreign banks to facilitate their market entry. This includes providing guidance on licensing requirements, capital adequacy rules, and other regulatory procedures. The bank is aiming to create a more level playing field and promote competition in the banking sector.
At the same time, the government is also taking steps to strengthen the capacity of local Ethiopian banks. This includes measures to improve their technological capabilities, risk management practices, and ability to offer a wider range of financial products and services.
At this stage, the process of foreign banks establishing operations in Ethiopia is still underway. It will likely take some time for them to fully set up their local presences and begin competing with the incumbent domestic banks. However, the overall direction of policy is clearly towards greater openness and integration with the global financial system.
The activities being underway to allow foreign banks engage in the finance sector in Ethiopia will help to further promote foreign direct investment (FDI) and international trade, a Senior Economic Researcher at the Policy Research Institute, Berhanu Alemu (PhD) remarked.
In his response to the questions raised by the members of the House of Peoples Representatives on the 36th Regular Session, Prime Minister Abiy Ahmed (PhD) said that the number of banks which were only 17 over the past years have now grown to 32.
Compared to the previous years, the profit generated by local banks has grown by 24% and the government is making preliminary preparations to facilitate the entry of foreign banks into the economic system of the country, the Premier added.
The Prime Minister also called upon local banks in the country to strengthen and modernize their operation systems by utilizing new technologies and deploying skilled professionals to enhance their competitiveness and expand their services accordingly.
Brehanu, on his part told ENA that areas of operations that were disallowed for foreign investors in the past have now been opened for them during the last several reformative years.
Foreign and local investors are now encouraged to promote foreign direct investments in line with the Ten Years Perspective Plan of the country which has focused on strengthening the role of the private sector in the economic development of the country, the researched noted.
Legal and operational measures taken to allow foreign banks to operate in the country will enhance competition among the banks allowing them to grow and expand their services, he added.
He further remarked that the engagement of foreign banks in Ethiopia will help to promote quality and efficient payment services and for attracting more FDI into the country.
The engagement of foreign banks in Ethiopia will also play instrumental role in developing highly skilled manpower and modern technology as well as sustained flow of capital into the country.
The move will also help to advance the sector and further enhance foreign trade transactions, the researcher added.
Brehanu recommended that local banks need to introduce new technologies and systems to help them provide efficient and quality services for their customers.
He stressed the need to provide all the necessary support for local banks and be able to effectively control the operations of prospective foreign banks that will operate in the country.
Restrictions made on the level of loans extended to the government will also be useful to implement monitory and fiscal policies and thereby strengthen the capacity of the National Bank to enable it to conduct monitoring and evaluation services in a more effective manner, he further noted.
The fact that the government was allowed to borrow with no restrictions has resulted in siphoning more money into the economic which in turn exacerbates inflation in the country.
He further remarked that the promised pledge and will of the government for enhancing the economy help the country to stabilize the level of inflation and is equally important to collect public revenue in a more meaningful manner.
BY LAKACHEW ATINAFU
THE ETHIOPIAN HERALD FRIDAY 19 JULY 2024
