In 2021, ArifPay, a fintech company based in Bole, Addis Ababa, raised $3.5 million in funding. Remarkably, none of this funding came from foreign investors. This was not due to a lack of interest but rather because the National Bank of Ethiopia (NBE) did not permit non-Ethiopian foreign citizens to invest in Ethiopia’s financial sector. Thus, all of ArifPay’s investors were Ethiopians or Ethiopian-born foreign nationals. However, the landscape dramatically shifted in 2023 when the National Payment System (Amendment) Proclamation of 2023 came into effect. This amendment, particularly Article 7, opened the door for foreign nationals to operate subsidiaries licensed as payment instrument issuers or payment system operators, significantly altering the investment dynamics in Ethiopia’s financial sector.

Now, Ethiopia is on the brink of another significant transformation with proposed changes to its banking laws for the first time since its establishment. The draft bill introduces several pivotal shifts, including permitting foreign players to invest in Ethiopia’s banking industry. This new legislation would allow for the establishment of partially or fully foreign-owned bank subsidiaries, the opening of foreign bank branches, and the establishment of representative offices. Furthermore, it permits foreign nationals to acquire shares in local banks under specific conditions.

Key Provisions of the New Banking Proclamation

The draft bill sets clear limits on foreign ownership. Strategic investors can hold up to 40% of the total subscribed shares in a bank, while non-strategic foreign national investors and foreign juridical persons are limited to 7% and 10%, respectively. However, the aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations is capped at 49%. This controlled approach aims to attract foreign investment while maintaining significant local ownership and control.

Another significant element of the draft proclamation is the provision allowing banks to form subsidiaries. Article 66.1 specifies that the NBE may permit a bank to establish a subsidiary, with further details to be outlined in subsequent directives. This move is anticipated to stimulate the forthcoming Ethiopian Securities Exchange by involving existing deposit-taking banks through separate entities.

The draft also allows for the creation of specialized banks, which are defined as banks other than investment banks that provide tailored services to specific sectors such as export/import, mortgage, agriculture, cooperatives, and small and micro enterprises. This flexibility is seen as a critical step in addressing sector-specific financial needs and boosting economic growth in targeted areas.

What Do Fintechs Stand to Gain?

• Access to Foreign Currency and Capital Investment: The National Bank of Ethiopia’s 2023 proclamation mandates that foreign investments in fintech companies in Ethiopia must be paid in foreign currency. The revised banking regulation will assist to resolve challenges related to accessing foreign currency for investments in the fintech sector. With the ability to channel investments through international banks with local operations, such as those newly allowed to operate in Ethiopia, fintech companies can more easily meet the minimum capital requirements of 50 million birr ($869K). This provision is expected to streamline capital inflows and facilitate smoother transactions for foreign investors looking to participate in Ethiopia’s fintech landscape.
• Partnerships and Market Expansion: The updated banking regulations now permit foreign investors to engage in Ethiopia ’s banking sector, presenting opportunities for fintech companies to forge strategic partnerships and joint ventures. This collaboration can enhance technological capabilities and service offerings of local fintech firms. Ethiopia’s central bank allows fintechs to partner with established banks provided there is a minimum approval from the central bank. Additionally, the allowance for banks to establish subsidiaries could lead to the creation of fintech or digital banking subsidiaries. This opens avenues for fintech companies to collaborate closely with these entities, offering technological solutions that can improve banking operations and customer experiences across various sectors like SMEs, agriculture, and cooperatives. As we have seen in more established markets like South Africa and Egypt, banks may launch subsidiaries exclusively dedicated to backing innovation.
• Enhanced Innovation and Regulatory Environment: The influx of foreign banks and investors is expected to foster a more competitive environment within Ethiopia’s banking sector. This heightened competition can drive innovation among fintech companies, pushing them to develop advanced and customer-centric solutions such as mobile banking, digital wallets, and payment gateways. We have already seen one example of how new regulatory environment could breed innovation. Ezra, a micro-lending fintech, recently collaborated with Kacha Digital Financial Services S.C. and Global Bank of Ethiopia to develop an Ethiopian digital lending service on the heels of NBE’s recent directives. Moreover, the interaction with foreign entities could lead to knowledge transfer in critical areas like risk management, cybersecurity, and regulatory compliance. A more robust regulatory framework, influenced by international standards, could provide stability and predictability, thereby supporting the operational growth of fintech firms in Ethiopia.
  
  “Following the amendment of the proclamation, the ecosystem will be opened which means that highly experienced foreign companies will enter into the Ethiopian [financial] system,” Solomon Damtew, then acting director of the directorate overseeing Ethiopia’s payments and settlement systems, said.

Ethiopian government’s decision to open up its banking sector is partly driven by its aspirations to join the World Trade Organization (WTO). This move is expected to accelerate the negotiation process, which has been ongoing for over two decades. By allowing foreign businesses into the market, the administration of Prime Minister Abiy Ahmed aims to address one of the primary demands of WTO member nations, particularly the US and Canada.