Ethiopia has taken a historic step towards liberalizing its financial sector with the approval of a new Banking Business Proclamation by parliament, signaling a transformative shift for one of Africa’s largest yet most insular economies. For the first time, Ethiopia’s banking sector will formally welcome foreign bank investments, a move aimed at enhancing competitiveness, fostering innovation, and driving economic growth.

The proclamation, which comes after years of debate, introduces a carefully controlled approach to opening the banking market, balancing the need for foreign capital and expertise with measures to protect local ownership and stability. The decision aligns with the government’s broader economic reform agenda under Prime Minister Abiy Ahmed, as Ethiopia seeks to modernize its financial systems, attract foreign investment, and position itself for membership in the World Trade Organization (WTO).

Key Provisions of the New Banking Proclamation

The new law provides clear guidelines on the extent of foreign participation in Ethiopia’s banking sector:

1. Foreign Shareholding Limits

• Strategic Foreign Investors: Foreign individuals or organizations deemed as strategic investors can acquire up to 40% of the total subscribed shares in an Ethiopian bank.
• Non-Strategic Investors: Individual foreign nationals are restricted to a 7% shareholding cap, while foreign juridical persons can hold up to 10%.
• Aggregate Foreign Ownership: The combined ownership by all foreign investors and foreign-owned Ethiopian entities cannot exceed 49% of a single bank’s total subscribed shares.

2. Entry of Foreign Banks
Foreign banks will now be able to establish a presence in Ethiopia, but with specific limitations. They are allowed to open either deposit-taking or non-deposit-taking branches, but not both simultaneously. Representative offices of foreign banks are also permitted under the new framework.

3. Investment Conditions
To ensure economic stability and transparency:

• Foreign investments must be conducted through foreign direct investment (FDI) in foreign currency.
• Foreign shareholders can repatriate dividends, salaries, and proceeds from share sales, subject to directives from the National Bank of Ethiopia (NBE).
• Dividends earned by foreign investors may also be reinvested in Ethiopian Birr, provided the stipulated ownership limits are respected.

The measured opening of Ethiopia’s banking sector represents a significant departure from decades of protectionist policies, reflecting the government’s determination to modernize the economy and attract external capital.

The proclamation for foreign bank entry comes at a critical moment for Ethiopia’s growing fintech sector, which has long grappled with challenges in accessing foreign currency and capital. Under the 2023 National Payment System (Amendment) Proclamation, foreign nationals were first allowed to invest in Ethiopian payment system operators. This opened pathways for innovation and partnerships within the financial technology ecosystem.

The new banking law expands on this momentum by enabling international banks with local operations to facilitate capital flows, resolving long-standing foreign currency shortages that have hampered fintech growth. Startups will benefit from greater access to international capital, particularly as they strive to meet the National Bank’s minimum capital requirements of 50 million birr (approximately $869,000).

Industry experts anticipate that the arrival of foreign investors will drive innovation, improve banking services, and enhance competition within Ethiopia’s financial sector. Fintech companies are expected to play a pivotal role by partnering with established banks, leveraging their technological solutions to improve financial inclusion and cater to underserved markets such as small and medium-sized enterprises (SMEs), agriculture, and cooperatives.

“Following the amendment of the proclamation, the ecosystem will be opened, which means highly experienced foreign companies will enter into the Ethiopian [financial] system,” said Solomon Damtew, the former acting director of Ethiopia’s payments and settlement systems directorate.

Such partnerships could mirror trends seen in markets like South Africa and Egypt, where banks have launched subsidiaries dedicated to digital innovation and fintech collaboration. Ethiopian banks, under the new law, will also be permitted to form subsidiaries, including specialized banks tailored to sectors like export/import, mortgage financing, and micro-enterprises.

Ethiopia’s decision to liberalize its banking sector is closely tied to its ambitions to join the World Trade Organization. Negotiations for membership, which have dragged on for over two decades, have seen demands from key member nations, including the United States and Canada, for the country to open its financial markets.

By partially lifting restrictions on foreign participation, Ethiopia aims to address one of the core issues raised during WTO accession discussions. The move is expected to accelerate negotiations while signaling to international investors that Ethiopia is ready to integrate into the global economic system.

While the proclamation opens the door to foreign capital, the government has implemented safeguards to ensure that local ownership remains significant. The 49% aggregate cap on foreign shareholding reflects Ethiopia’s cautious approach, balancing the benefits of foreign expertise and competition with the imperative to maintain domestic control.

The Ethiopian government’s strategy echoes a broader trend across African markets, where countries are cautiously liberalizing their banking sectors to attract investment while retaining regulatory oversight and protecting local players.

Ethiopia’s decision to open its banking sector to foreign investors marks a pivotal moment in the country’s economic reform agenda. By welcoming international banks and investors while maintaining local safeguards, the government aims to modernize its financial sector, foster innovation, and drive sustainable growth. For Ethiopia’s fintech ecosystem, the reform represents an opportunity to access capital, forge new partnerships, and expand their technological capabilities.

As the government moves forward with implementation, all eyes will be on how foreign bank players navigate Ethiopia’s emerging financial landscape and contribute to the country’s economic ambitions.