End of Ethiopia's Banking Sector Protectionism in Sight
Ethiopia is poised to enact a Banking Business Proclamation (Draft Proclamation), which will repeal and replace the existing Banking Business Proclamation No. 592/2008. The enactment of the Draft Proclamation will be significant in major respects, including the liberalization of what can be described as the last frontier market, Ethiopia's banking sector.
This legal update discusses some of the changes anticipated to be introduced focusing on liberalization of the sector to foreign investment and bank mergers.
Foreign Investment in the Banking Sector
While the country's financial sector has partly been liberalized recently to foreign investment (with the opening of digital payment services to foreign investors), the Draft Proclamation will mark a significant development in the liberalization of the country's financial sector.
In a significant departure from the existing laws, the Draft Proclamation contemplates that foreign investors may engage in the banking business through various forms: establishment of a subsidiary, opening a branch, or acquiring shares from domestic banks.
According to the Draft Proclamation, a subsidiary may be wholly or partially owned by a foreign bank. As such, a foreign bank intending to establish a subsidiary does not have to own all the shares but can allocate some of the shares to other persons if it wishes.
Foreign entities and/or individuals are also permitted to acquire shares from domestic banks. Foreign banks and other strategic investors such as international development finance institution and private equity funds can own up to 40 percent shares in domestic banks.
Bank Mergers
The Draft Proclamation has included regulatory framework for bank mergers with a view to fostering a more resilient and competitive banking sector. It specifies two types of bank mergers: Statutory and voluntary.
A statutory merger is an amalgamation of two or more banks by the decision/instruction of the NBE. Such merger is imposed by the NBE to rescue banks exhibiting significant financial, operational, or managerial weaknesses and/or to create a more viable and stronger bank.
A voluntary merger, on the other hand, is amalgamation of banks by the decision of the respective banks. Such decision needs to be passed by the extraordinary meeting of shareholders. That said, a prior written approval from the NBE is required to carry out a voluntary merger.
Concluding Remarks
The anticipated regulatory changes coupled with other economic and technological challenges will add strain on domestic banks' current operations. This suggests that business as usual will not continue for domestic banks and as such the traditional banking model in Ethiopia needs to transform to address such challenges.
Domestic banks should brace for a very competitive environment as foreign banks enter the Ethiopian market. It is high time for domestic banks to explore various options, including bank mergers, joint investment with foreign banks and enhancing their operational and technological efficiency, to remain competitive and solvent in the future.