I.          Introduction

In recent years, Ethiopia has undertaken a significant policy shift in its approach to foreign direct investment (FDI) by opening sectors that were previously reserved exclusively for domestic investors.

As part of the government’s Homegrown Economic Reform (HGER) agenda, key reforms have been introduced, including allowing foreign investment in the telecom sector, opening export, import, wholesale, and retail trade to foreigners, establishing capital markets, launching a public-private partnership (PPP) framework, and enabling foreign investors to collaborate with the government on strategic projects. Furthermore, the foreign exchange regime has undergone a major overhaul, shifting from a managed exchange rate regime to a floating exchange rate regime. These reforms mark a decisive move towards liberalizing the economy and attracting greater foreign direct investment. Among these policy shifts, arguably the most significant is the opening of the financial sector to foreign investment.

On December 17, 2024, the Ethiopian Parliament approved the new Banking Business Proclamation No. 1360/2024, marking a historic milestone as it allows foreign banks to re-enter the Ethiopian market after a 50-year absence. This landmark legislation opens the door for foreign banks to participate in Ethiopia’s financial sector through various modalities, including establishing subsidiaries, opening branches, or acquiring shares in domestic banks. The move represents a significant step in liberalizing one of the last remaining closed sectors in the country, signaling a decisive shift from the government’s long-standing protectionist policies toward a more open and market-oriented approach. This reform is expected to enhance competition, attract foreign direct investment, and modernize Ethiopia’s banking industry, aligning with the broader goals of the nation’s economic reform agenda. This article explores the key features of the new Banking Business Proclamation and highlights the opportunities it creates for foreign investors.

   II.         Historical Context

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 World War II, Italian banks entered the market, later 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. This closure lasted for nearly half a century, despite the fact that the Derg regime only lasted for 17 years. Even after the fall of the Derg regime in 1991, the banking sector remained closed to foreign investment, with a slight shift in policy allowing private domestic banks to operate starting from 1994.

 III.         Key Changes and Objectives

The prospects for foreign banks operating in Ethiopia have become increasingly promising. As part of the Homegrown Economic Reform Agenda (HGER), discussions on opening the banking sector to foreign investors have been ongoing for years. This effort has now culminated in the enactment of Proclamation No. 1360/2024, which repeals and replaces the previous Banking Business Proclamation No. 592/2008. The new legal framework formally permits foreign banks and investors to participate in Ethiopia’s banking industry, marking a significant shift in the country’s financial sector.

Key Objectives

1. 1. Improving Competitiveness and Efficiency: One of the primary reasons for the amendment of the Banking Business Proclamation is to improve the competitiveness and efficiency of the banking industry by opening the sector to foreign investment. The proclamation expands the definition of “Bank” to include foreign banks, along with their subsidiaries and branches, marking a significant step towards integrating foreign investors into the financial industry.
   2. Attracting Foreign Direct Investment (FDI): The proclamation is designed to attract foreign direct investment into the banking sector, which is expected to bring in new capital, advanced technology, and innovative financial products. This is particularly important given Ethiopia’s rapidly growing population of 120 million and an expanding middle class, making it an attractive destination for foreign banks.
   3. Enhancing Financial Inclusion: By allowing foreign banks to operate in Ethiopia, the government aims to enhance financial inclusion, particularly in underserved areas. Foreign banks are expected to bring higher standards of service and a wider range of financial products, which could help bridge the gap in financial access for many Ethiopians.

 IV.         Modalities for Foreign Banks Entering the Ethiopian Market

The proclamation establishes multiple avenues for foreign banks to enter the Ethiopian market. Beyond allowing foreign banks to operate, it also permits foreign nationals to acquire shares in Ethiopian banks. The available entry options include:

1. 1. Establishing Subsidiaries: Foreign banks can establish either partially or fully owned subsidiaries in Ethiopia. This allows them to operate as independent entities while adhering to Ethiopian banking regulations.
   2. Opening Branches or Representative Offices: Foreign banks can open branches or representative offices in Ethiopia. However, they are prohibited from operating both deposit-taking and non-deposit-taking branches simultaneously.
   3. Acquiring Shares in Existing Domestic Banks: Foreign banks can acquire shares in new or existing domestic banks. The proclamation sets limits on the amount of shares that foreign investor can acquire. In such case, the maximum amount of shares a strategic investor could acquire is 40 percent of the total subscribed share of the bank. Foreign individuals could hold up to seven to ten percent of the total share of the bank while foreign juridical persons are permitted to own up to ten percent of the total subscribed shares of the bank.  In any case, the proclamation limits the aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations to 49 percent of the subscribed shares of domestic banks.
   4. Exceptional Circumstances for Acquisition: In exceptional circumstances, foreign banks may be permitted by the National Bank of Ethiopia (NBE) to partially or fully acquire existing domestic banks. This is allowed only if the bank being acquired is well-established, reputable, and financially sound.

   V.         Framework for Investment, Operations, and Regulations

The Proclamation establishes a framework for foreign banks entering Ethiopia’s financial sector, covering investment requirements, profit repatriation, property ownership, and employment of foreign nationals.  Key provisions on investment, property ownership, and employment, as well as the National Bank of Ethiopia’s role in issuing further directives, are discussed below.

1. 1. Investment Requirements and Repatriation of Profits: Foreign banks entering the Ethiopian banking sector are required to structure their investments as foreign direct investment (FDI) using foreign currency. The bank’s capital must 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. The proclamation allows for the repatriation of dividends earned by foreign nationals from investments in banks and the salaries of foreign national employees, in line with the Foreign Exchange Directive FXD 01/2024 of the National Bank of Ethiopia.

1. 2. Property Ownership and Foreclosure: Foreign banks are permitted to own property in Ethiopia for the purpose of conducting their banking business. This will enable foreign banks to establish a physical presence and operate effectively within the country. However, issues related to properties acquired through foreclosure or mortgages will continue to be governed under Ethiopia’s existing legal regime.
   3. Employment of Foreign Nationals: In line with Ethiopia’s Investment Law, the proclamation allows foreign nationals to hold key positions such as Chief Executive Officer (CEO) and Senior Executive roles in banks. However, this is contingent on the non-availability of qualified Ethiopian nationals for these positions. Foreign employees may serve for a maximum of five years, with the expectation that their tenure will facilitate the transfer of knowledge and skills to local employees.
   4. Regulatory Oversight: The National Bank of Ethiopia (NBE) will play a pivotal role in regulating foreign bank operations. The NBE is tasked with issuing additional directives to address several key aspects of foreign bank activities, including:

• • Minimum initial capital requirements for establishing foreign banks and their branches.
  • Composition and fit-and-proper criteria for the board of directors of foreign banks.
  • Permissible activities for foreign banks operating in Ethiopia.
  • Minimum capital requirements for opening branches of foreign banks.

 VI.         Potential Benefits and Challenges

Following the enactment of the proclamation and subsequently opening the door to foreign investment in to the financial sector is expected to have both its benefits and challenges for the Ethiopian economy as well as the potential investor seeking to invest in the country. The new development would have the following benefit:

1. 1. Enhanced Competition and Efficiency: The entry of foreign banks into Ethiopia’s financial sector can stimulate healthy competition, compelling local banks to improve their efficiency, service delivery, and technological adoption.
   2. Diverse Financial Products: Foreign banks bring advanced financial expertise and a wider range of products, such as derivatives, trade finance, and specialized credit facilities.
   3. Knowledge and Skill Transfer: With foreign banks come experienced professionals and innovative practices. Local financial institutions and regulators can benefit from exposure to international banking standards, risk management frameworks, and digital technologies, strengthening the overall financial ecosystem.
   4. Global Integration and Investment: Foreign banks can facilitate the inflow of foreign direct investment (FDI) by linking Ethiopia to global financial markets.

The entry of foreign banks to the Ethiopian financial sector, among others would pose the following challenges

1. 1. Market Domination Risks: Foreign banks often possess greater resources, advanced systems, and international networks, potentially overshadowing local banks. This dominance could stifle domestic financial institutions, leading to market imbalances and reduced competition in the long term.
   2. Economic Risks: Increased foreign bank participation exposes Ethiopia’s economy to external risks such as exchange rate volatility and potential capital flight.
   3. Resource Disparity: Foreign banks’ access to sophisticated technologies and funding could widen the gap between them and local banks. This disparity might restrict domestic banks’ ability to compete effectively and exacerbate inequalities in financial service access.
   4. Regulatory Challenges: Integrating foreign banks requires robust regulatory frameworks and institutional capacity to monitor and mitigate risks.

Conclusion

The new Banking Business Proclamation represents a significant step forward in Ethiopia’s economic liberalization efforts. By opening the banking sector to foreign investment, the government aims to improve the competitiveness and efficiency of the financial industry, attract foreign direct investment, and enhance financial inclusion. The proclamation provides clear modalities for foreign banks to enter the Ethiopian market, ensuring that their operations are aligned with the country’s economic goals and regulatory framework. As Ethiopia continues to implement its Homegrown Economic Reform Agenda, the entry of foreign banks is expected to play a crucial role in driving economic growth and development.