Foreign investment now permitted in Ethiopia's banking sector for the first time in several decades
Ethiopia, the largest economy in East Africa, has taken a significant step towards modernizing its banking sector by allowing foreign financial institutions to operate within its borders for the first time since 1974. The National Bank of Ethiopia (NBE) has introduced a directive that paves the way for foreign banks and investors to establish a presence in the country's financial sector.
The historic move is expected to bring much-needed capital injection and boost competition, leading to improved service delivery, efficiency, and financial inclusivity in Ethiopia's banking system. Foreign banks and investors can now establish subsidiaries, open branches, set up representative offices, or acquire shares of local banks, subject to a cap on foreign ownership at 40% for any local bank.
The directive is part of a broader government reform agenda aimed at expanding financial inclusion and attracting international institutions. It aligns with Ethiopia's broader reform agenda, which includes debt restructuring efforts and a $3.4 billion agreement with the International Monetary Fund.
The NBE did not detail any timeline for the actual issuance of the foreign banking licenses, but plans to grant up to five licenses over the next five years. The licensing and oversight of representative offices in Ethiopia's banking sector will now be directly supervised by the NBE for the first time.
Despite the liberalization, Ethiopia is maintaining significant regulatory oversight and has set clear conditions to regulate foreign participation. This strategic approach ensures foreign involvement happens on Ethiopia’s terms, balancing openness with domestic financial stability and influence.
The policy shift is expected to attract fresh capital, increase competition, and help modernize a sector still largely controlled by the state-run Commercial Bank of Ethiopia. However, it also presents challenges and opportunities for international banks, as they navigate a transitioning regulatory and economic environment in a fast-growing, underbanked market.
Senior officials, including central bank governor Mamo Mihretu, have publicly signaled that foreign banks might begin operations in Ethiopia before the end of 2025. Kenya's KCB Group and South Africa's Standard Bank, among other foreign lenders, have shown interest in entering Ethiopia's banking sector once regulations allow.
The new directive marks a major milestone expected to enhance capital flow, competition, and financial sector development, while the government carefully manages the pace and nature of foreign participation to safeguard national interests. The phased approach to issuing foreign banking licenses is intended to accommodate the country's ongoing reforms.
The new directive by the National Bank of Ethiopia is expected to boost the financial inclusion of the industry within Ethiopia, attracting foreign capital and increasing competition among the finance sector and businesses. Additionally, this policy shift aligns with Ethiopia's broader reform agenda, aiming to expand financial inclusion and attract international institutions to contribute to the modernization of the sector still largely controlled by the state-run Commercial Bank of Ethiopia.
