In recent years, Ethiopia has undertaken a significant policy shift in its approach to foreign direct investment by opening sectors that were previously exclusively reserved for domestic investors. As part of the government’s Second Home Grown Economic Reform (HGER 2.0), it has introduced key reforms in its policy approach such as: allowing foreign investment in the telecom sector, opening the export, import, wholesale, and retail trade to foreigners, establishing capital markets, launching of a public-private partnership (PPP) framework, enabling foreign investors to collaborate with the government on strategic projects. Furthermore, the foreign exchange regime has witnessed a major overhaul as it was shifted from a managed exchange regime to a float exchange rate regime. These reforms mark a decisive move towards liberalizing the economy and attracting greater foreign direct investment. Among the new policy shifts, arguably one of the biggest would be the opening of the financial sector for foreign investment. A new Banking Business Proclamation (the draft proclamation) is in the process of being enacted, as it has already been approved by the Council of Ministers and is expected to be ratified once the parliament reconvenes in the new Ethiopian year.
The idea of foreign banks operating in Ethiopia is not new. In fact, the country’s first bank, the Bank of Abyssinia, was established in 1905 and was foreign-owned, with shares subscribed internationally. Following the brief Italian occupation of the country during the Second World War, Italian banks enter the market, later to be followed by British banks. However, all foreign banks were nationalized in 1975 following the fall of the Imperial Regime. The subsequent rise of the Derg, a military junta that adopted socialist ideology, led to a significant shift in Ethiopia’s economic policies, including the closure of the banking sector to foreign entities that lasted for nearly half a century. Despite the ideological shift after the Derg regime’s fall in 1991, the banking sector remained closed to foreign investmentalthough private domestic banks were allowed to operate since 1994.
The outlook for the operation of foreign banks is once again promising. As part of the HGER 2.0, the opening of the banking sector to foreigners has been in discussion for years. Recently the government has taken some concrete steps bringing the country closer to realizing this long-anticipated reform.
The Council of Ministers has approved a draft bill that repeals the existing Banking Business Proclamation No. 592/2009 thereby allowing foreign banks and individuals to invest in the banking industry. DABLO has reviewed the contents of the new draft proclamation.
According to the draft proclamation, one of the key reasons for the amendment of the Banking Business Proclamation is to improve the competitiveness and efficiency of the banking industry by opening the sector for foreign investment. The draft proclamation has expanded the definition of “Bank” to include foreign banks along with their subsidiaries and branches licensed by the National Bank of Ethiopia (NBE), marking a significant step towards integrating foreign investors into the financial industry.
The draft proclamation outlines several modalities through which foreign banks can enter the Ethiopian market. Primarily, foreign banks have four options: establishing either partially or fully owned subsidiaries, opening branches, representative offices, or acquiring shares in existing domestic banks.[1] In addition to foreign banks, the draft proclamation also permits foreign nationals, to acquire shares in Ethiopian banks.[2]
One of the modalities through which a foreign bank could join the industry is by acquiring a share in a new or existing domestic bank. In such case, the maximum amount of shares a strategic investor could acquire is 30 percent of the total subscribed share of the domestic bank. Foreign individuals could hold up to 5 percent of the total share of the bank while foreign juridical persons are permitted to own up to 10 percent of the total subscribed shares of the domestic bank.[3] In any case, the draft proclamation limits the aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations to 40 percent of the subscribed shares of domestic banks.[4]
In exceptional circumstances, foreign banks could be permitted by the National Bank of Ethiopia to partially or fully acquire existing domestic banks through acquisition, upon asserting that the bank is well established, reputable, and financially sound.[5]
Should a foreign bank choose to establish a branch in Ethiopia, it has the option of opening either a wholesale deposit-taking branch or a non-deposit-taking branch, but it is prohibited from operating both simultaneously.[6]
The investment modality for foreign banks entering the Ethiopian banking industry is structured as foreign direct investment (FDI) using foreign currency,[7] with the bank’s capital required to be fully paid in cash up front. Additionally, if an Ethiopian organization is partially owned by foreign nationals, it must invest through FDI based on the aggregate percentage of foreign ownership, and this investment must also be made in foreign currency.[8]
The draft proclamation allows repatriation of dividends earned by foreign nationals from investment in bank and salaries of foreign national employees in line with the Foreign Exchange Directive FXD 01/2024 of the National Bank.[9] The draft proclamation also allows the foreign bank to own property in the country for the purpose of its banking business while the issue related with properties foreclosed and acquired mortgages is left to be governed under the existing legal regime.[10]
Once the draft proclamation is approved by the legislature, the national bank will enact further directives, among others, on issues related to minimum initial capital, composition and fit and proper criteria for board of directors of foreign banks, permissible activities and minimum capitals to open branches of foreign banks.[11]
In line with the provision of the Investment law of the country, the draft proclamation allows employment of foreign nationals as Chief Executive Officer and Senior Executive positions in a bank for a maximum of twelve years. Foreign employees may serve two five-year terms, with an additional two years allowed in exceptional circumstances. However, this is subject to non-availability of Ethiopian nationals that have the necessary qualification and experience to hold the post.[12]
Ethiopia, with a rapidly growing population of 120 million and an expanding middle class, is the fifth-largest economy in Africa by GDP, making it an attractive destination for foreign banks investment. Despite this, its banking sector remains relatively small, even by African standards. Among the top 100 banks on the continent, only three Ethiopian banks—one state-owned and two private—made the list. This ranking is expected to decline further following the recent currency flotation, which resulted in the devaluation of the local currency by more than 100%.
The entry of foreign banks in to the Ethiopia is expected to benefit both the investors and the country. Foreign banks will be able to inject new capital, advanced technology, higher standards and innovative products to the Ethiopian banking sector. On the other hand, Ethiopia’s the expanding middle class coupled with a growing economy- previously isolated from international transaction- offers a substantial, underserved market market for foreign investors.
[1] Article 10(1)(a)), of the Draft Proclamation.
[2] Article 10(1)(b), Id.
[3] Article 10(1)(c), Id
[4] Article 10(1)(d), Id
[5] Article 10(1)(e) and Article 32(3), Id
[6] Article 10(3)(a), Id.
[7] Article 10(1)(f), Id.
[8] Article 10(1)(g), Id.
[9] Article 16.2, The Foreign Exchange Directive FXD 01/2024 and Article 8, Annex III of the Foreign Exchange Directive FXD 01/2024
[10] Article 10(1)(k), of the Draft Proclamation.
[11] Article 10(2)& (3), Id.
[12] Article 15, Id.
