Major changes are coming to the Ethiopian banking sector as the Council of Ministers approved a draft banking proclamation in its 35th ordinary meeting on June 14, 2024. This draft legislation, prompted by advancements in technology and the national economic landscape, paves the way for significant foreign participation in Ethiopian banking. As such, deliberations were made on the draft legislation and the bill on banking business was forwarded to the Ethiopian parliament with input from the Council of Ministers.
Observations of the draft bill indicate foreign participation in the banking business in Ethiopia can be of a direct establishment, a subsidiary of a foreign parent bank with a minimum controlling interest of fifty percent and beyond or part of a banking group, or a foreign bank branch with a separate legal liability. Foreign banks can also operate through representative offices in Ethiopia but such engagement is only limited to representational functions such as liaison, marketing, research, and other similar activities It should be noted that all foreign participations are to be made in foreign currency.
Another key introduction under the draft bill is that of strategic investors. These may take the form of a foreign bank with a good reputation in the country of origin or banking group formed in its country of formation or owned by the government of that country or international development finance institutions, private equity funds, and other similar forms.
Note that a ceiling is set for direct shareholding of strategic investors in an existing or new domestic bank at thirty percent of the total subscribed share of a bank where a non-strategic foreign national and juridical person is limited to own five and ten percent of subscribed shares of banks respectively. The aggregate shareholding cap limit by a foreign national or foreign-owned Ethiopian business entity in a bank is set at forty percent of the total subscribed shares of the bank.
The merger of banks is also addressed under the draft legislation for the fusion of two more banks moving towards the creation of a new entity where the former banks lose their legal existence. The draft bill indicates that voluntary merger is an option considering such a move is predicated upon prior written approval from the central bank. A statutory merger is also envisioned where the central bank intends to save a problem bank from risks exposed and/or intends to establish a more viable and stronger bank.
The regulatory sandbox is one of the unique features introduced by the draft bill giving the green light for live and time-bound testing of innovative banking services with the central bank’s control and oversight prior to a full-fledged rollout following the consequent approval of the central bank.
Wholesale deposit is also recognized in the draft bill where such deposit is made to a foreign bank located in Ethiopia by a legal entity embodied by the likes of organizations, associations, and corporations as per relevant legislation.
All in all, the draft bill holds key features significantly impacting the money market in Ethiopia along with the highly anticipated foreign participation in the Ethiopian banking industry. The approval of the Ethiopian parliament will be highly sought after considering the impact of the draft legislation.
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