Ethiopia Opens Doors to Foreign Banks with Landmark Legislation

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Ethiopia’s parliament has approved a historic law allowing foreign banks to operate in the country, signaling a major shift in the nation’s tightly regulated financial sector. The decision, passed overwhelmingly on Tuesday, is part of broader government efforts to attract foreign investment and modernize Ethiopia’s economy, one of the largest in Sub-Saharan Africa.

The legislation permits foreign banks to establish subsidiaries, open branches or representative offices, and invest in local banks, with ownership capped at 40% for foreign strategic investors. This marks a significant departure from decades of a closed banking system dominated by the state-owned Commercial Bank of Ethiopia.

Ethiopia’s central bank governor, Mamo Mihretu, expressed optimism about the move, emphasizing that competition from foreign institutions would strengthen local banks rather than weaken them. However, some opposition lawmakers voiced concerns that local banks might struggle to compete with well-established international players.

The law is part of a gradual economic liberalization process initiated by Prime Minister Abiy Ahmed since he took office in 2018. While the reforms aim to position Ethiopia as a more attractive destination for international investment, progress has been slowed by a two-year civil war and persistent challenges, including a foreign exchange shortage.

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In June, the Ethiopian cabinet approved the draft law, and its passage in parliament is seen as a critical milestone. The move aligns with recommendations from international financial institutions, including the International Monetary Fund (IMF), which in July provided Ethiopia with a support program hours after the government floated its currency, the birr.

With a population exceeding 120 million, Ethiopia is Africa’s second-most populous country, making it an appealing market for global financial institutions. For decades, the country’s banking sector has been off-limits to foreign players, but this latest move signals a readiness to integrate into the global financial system.

The reforms extend beyond banking, with Ethiopia adopting an interest rate-based monetary policy regime as part of its IMF negotiations. These changes are expected to enhance economic stability and boost investor confidence.

While the new law presents opportunities for foreign banks, it also emphasizes protecting local institutions. By capping foreign ownership and allowing local banks to adapt to international competition, the government aims to strike a balance between modernization and safeguarding domestic interests.

Ethiopia’s decision to open its banking sector marks a pivotal moment in its economic transformation. As foreign banks begin to enter the market, the focus will be on how local institutions adapt and how the changes impact the broader economy.

For a nation emerging from conflict and economic challenges, this bold step underscores Ethiopia’s commitment to fostering growth and engaging with the global financial community.

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