Big win for Kenyan banks as Ethiopia removes last hurdle for foreign lenders

Ethiopia's capital Addis Ababa. The country's population of over 120 million offers a huge market for Kenyan banks looking to expand regionally. [Courtesy]

Ethiopia has proposed new banking laws that would finally liberalise ownership rules and allow foreign lenders like KCB Group and Equity Bank to establish full operations in the country for the first time.

The move is in a push to attract overseas capital into the sector. The draft proclamations announced by the National Bank of Ethiopia (NBE) on Friday and seen by Financial Standard would permit foreign banks to set up subsidiaries or branches locally or take up to 30 per cent stakes in existing Ethiopian banks. 

All foreign banking operations would fall under the regulatory purview of NBE, according to the proposals by the regulator. The changes mark a significant shift after decades of State dominance over Ethiopia’s banking industry.

Attracting international players is seen as crucial for building capital buffers and technical expertise.

Analysts said opening direct access to Ethiopia’s banking market could draw strong interest from regional heavyweights like Kenya’s KCB Group, Equity Group and Co-operative Bank of Kenya (Co-op Bank).

Giant telco Safaricom already operates in the populous country following the opening up of Ethiopia’s telecoms market a few years ago. 

The new draft banking laws also outline measures to strengthen banking supervision through corrective actions against troubled lenders and a regulatory sandbox to support fintech innovation.

A regulatory sandbox is a framework set up by a financial sector regulator to allow small-scale, live testing of innovations by private firms in a controlled environment under the regulator’s supervision. Regulators and investors will be watching closely for any conditions on foreign ownership caps or other entry guidelines when the Ethiopian Parliament reviews the bills.

A liberal framework could accelerate banking sector expansion in the populous country of more than 110 million people, experts say.

Global markets

The proposals are part of wide-ranging economic and governance reforms underway in Ethiopia to bolster competitiveness and integration into global markets.

“The Council of Ministers today has approved the draft NBE Proclamation and Banking Business Proclamation. The draft proclamations will shortly be referred to the House of Peoples Representatives for review, comment and final ratification,” said NBE in a statement published on June 14. 

Their release represents a major step in opening the door for Kenyan lenders such as KCB Group to set up operations in the populous nation.

If ratified, the laws would permit foreign banks to establish subsidiaries and branches or take minority stakes in Ethiopian lenders. They would fall under NBE’s ambit. 

Kenyan lenders like KCB Group and Equity Group have been eyeing Ethiopia as their next growth market and scouting targets as Addis Ababa seeks to attract international players.

“Opening up to foreign ownership in banking has major implications,” said one analyst, pointing to Kenya’s success in integrating Ethiopia into its trade corridors.

NBE says the proposed changes align with reforms to develop Ethiopia’s financial markets and policy goals around competition and digital transformation.

Regulators hope to safeguard stability while promoting innovation through measures like a regulatory sandbox and enhanced crisis management tools.

Analysts expect intensifying competition as Kenyan banks leverage their regional expertise if allowed full entry by final laws, with millions of customers in their home base.

The Ethiopian government has introduced reforms allowing foreign companies to participate in previously restricted sectors, including export, import, wholesale, and retail trade.

This move marks a departure from the past, where these sectors were reserved solely for Ethiopian businesses.

The latest development looks set to excite top Kenyan retailers such as Naivas and Quickmart, which have been executing ambitious expansion plans.

Its population of over 120 million people –the second-largest in Africa after Nigeria— offers significant business opportunities, say analysts.

With this population and boasting impressive economic growth, Ethiopia presents a vast, previously untapped market for Kenyan businesses to expand their reach and tap into new customer bases, add analysts.

In a major policy change, the Ethiopian government, led by Prime Minister Abiy Ahmed, will now allow foreign investment in sectors previously closed to outsiders, according to local reports and documents seen by Financial Standard.

This strategic move aims to boost the country’s productivity and competitiveness in the global market, the government said.

The significant policy shift will see Ethiopia shake up its investment landscape to attract critical resources.

East Africa’s most populous country, already struggling with high inflation, became the third African state in as many years to default on its debt in December.

In recent years, Mr Abiy’s government has been opening up parts of the tightly controlled economy such as telecoms and banking to foreign investment as part of a plan to boost inflows of foreign capital to drive growth and create jobs for the country of more than 100 million people.

World brands

The move allowed Kenya’s Safaricom to expand into the populous country.

“This opens up endless possibilities for both African and rest of the world brands to set up,” said Retail Trade Association of Kenya Chief Executive Wambui Mbarire in an interview.

“Kenya’s position as Africa’s second largest formal retail market may just be up for grabs. The competition for new markets by international brands intensifies However a lot depends on whether this will open the locks that have previously kept many out.”

Ms Mbarire said this is also an opportunity for local brands to strengthen their internal structures and when ready venture into these new markets.

“This will open doors for exporting Kenya-made FMCG (Fast-Moving Consumer Goods) products pushing up our manufacturing numbers,” she said.

Under the new directive by the Ethiopian Investment Board, the populous Horn of Africa country has opened doors to foreign involvement in various areas.

Ethiopia also aims to pass legislation to let foreigners own real estate as part of the country’s broader plan to open up the economy and attract investors, Prime Minister Abiy Ahmed said on state TV late in March.

Currently, foreigners are barred from owning houses in Ethiopia, either residential or commercial buildings, which is seen as a hurdle to ongoing efforts to attract foreign investment to the Horn of Africa country.