Opportunities for Africa’s bankers as Ethiopia opens up the sector

In December Ethiopia’s parliament passed legislation opening up the East African country’s banking sector to competition from foreign companies, ending the decades-long domination of state-run entities as Addis Ababa continues to pursue a policy of market liberalisation. Ethiopia’s banking sector is dominated by the state-owned Commercial Bank of Ethiopia, which in 2021 held two thirds of the total bank deposits in the country and accounted for over half of all bank loans. Furthermore, all 29 banks which currently operate in Ethiopia are locally owned, with many under the direct control of the government or state bodies.

This is because Ethiopia has long considered banking, along with other sectors such as telecommunications, a strategic industry to be protected from foreign influence or competition.

However, since coming to power in 2018, Prime Minister Abiy Ahmed has sought to open up these strategic sectors with the hope of attracting greater levels of foreign direct investment into Ethiopia and boosting growth in what remains one of the region’s poorest countries.

Indeed, the World Bank has noted that “Ethiopia’s state-led growth model – reflecting deep policy and regulatory distortions – [has] contributed to slower growth, declining external competitiveness, rising inflation, and growing macroeconomic and debt vulnerabilities.” Abiy has started to move Ethiopia away from this “state-led growth model”, partly because of the need to comply with conditions imposed by the World Bank and International Monetary Fund (IMF) in return for financial assistance.

Since defaulting on a $33m Eurobond payment in 2023, Addis Ababa has been forced into negotiations with these institutions for an external financing package of around $10.7bn to stabilise the Ethiopian economy – but they have required Ethiopia to take demonstrable steps towards liberalisation in return.

As a result, in July last year the Ethiopia central bank agreed to stop intervening in markets to protect the value of the Ethiopian birr, which depreciated by around 60% against the dollar within the first few months of trading. Furthermore, on 10 January the Ethiopian Securities Exchange resumed trading after a fifty-year hiatus, with many of the country’s state-owned enterprises set to be privatised and floated on the stock market.

Now, the government has taken a further step towards liberalisation by allowing foreign companies to enter the Ethiopian financial services market for the first time, though it is expected that foreign ownership of banks will still be capped at 40%.

IMF welcomes privatisation

The IMF publicly welcomed the move, with its deputy managing director Nigel Clarke commenting that “continued implementation of financial sector reforms, including modernising the bank regulation framework… will support financial sector stability.”

Hilina Resom, founding partner at the Kazana Fund in Addis Ababa, is also optimistic that this liberalisation will “open up a whole lot of opportunity” for both domestic and foreign financial services firms.

On the domestic front, Resom notes that the recent legislation removes restrictions on foreign companies or individuals investing in Ethiopian financial services companies. “We have spoken to venture capital [VC] investors across the Middle East and Africa that have been interested in Ethiopian companies within the finance space for some time but could not invest in them because they are foreigners,” she says.

“Local start-ups need financing, but money has so far been limited because they had to just raise from angel investors,” Resom adds. “Even when raising from angel investors, they had to make sure that the investors were Ethiopians; if they were living abroad those investors would need to have ‘yellow cards’ allowing them to invest in protected industries.”

“Given this, the recent legislation is game-changing in terms of mobilising more capital into the country and catalysing investment into the fintech space in particular. We are very excited about the opportunity.”

Banks and fintechs operating in other parts of East Africa, and across the continent, are also likely to see this move as an opportunity for expansion. Despite a difficult macroeconomic situation for the last few years, Ethiopia’s fundamentals remain attractive.

Ethiopia is Africa’s second largest country by population size, offering a market of over 125m people – a population that is likely to continue rapidly growing given that the average Ethiopian is aged just 19. With the IMF projecting GDP growth of 6.5% this year, Ethiopia is also one of Africa’s fastest-growing economies. Resom tells African Business that “this is an opportunity that most players in the region’s finance space are excited about – this is the second largest market in Africa, and there is obviously a huge opportunity for them to increase their revenues. I would expect that banks in Kenya and other parts of East Africa will see this as an opportunity they cannot ignore.”

While it is still too early for foreign banks to have made firm plans to enter the Ethiopian market – the legislation was only passed in late December – there have already been signs that some major players are taking the opportunity seriously. FirstBank of Nigeria, which is based in Lagos and has over 40m retail banking clients across West Africa, has suggested that it will be looking to expand into Ethiopia. FirstBank’s deputy managing director Ini Ebong has said that “there are a number of large economies with large banking pools that are of interest to us because their financial markets are opening up.”

Chinese interest

Mirkarim Yakubov, an asset manager based in Addis Ababa, previously told African Business that regional African banks, including multinationals from Kenya and South Africa, could be among the first foreign banks to enter the Ethiopian market but also predicted strong interest from Chinese institutions. There have also been reports of banks in Morocco and the United Arab Emirates considering their options in Ethiopia.

While Resom hopes that the move to liberalise Ethiopia’s financial services sector will be successful in attracting greater amounts of foreign capital, she also hopes that the move will lead to much higher levels of competition within the domestic banking space and therefore drive up outcomes for consumers.

“We have seen it before in other markets – whenever players become comfortable in maintaining a certain amount of market share, it is positive to see disruption so that consumers can be the beneficiaries in terms of improved services,” she says. “Ethiopians will soon have more options to shift to new banks if existing institutions do not offer better services – I am sure the local banks are well aware of this.”

Mamo Mihretu, the governor of the National Bank of Ethiopia, the central bank, has similarly suggested that competition will help local lenders by encouraging them to improve their services and standards.

While this recent legislation is a significant step towards liberalising the Ethiopian economy, Resom expects to see similarly large strides this year in other sectors which have traditionally been protected by the government, for example retail and logistics. “The retail sector is currently closed in Ethiopia, but I expect that it will be opened up soon – indeed the government has indicated it is interesting in doing that,” Resom says. “This gives us as VCs a huge opportunity to not only invest in the retail and the fintech space individually, but to invest in companies that provide the infrastructure for other companies in those sectors to build on. “If we see both the financial sector and the retail space open – as I think we will – we are going to see a huge number of start-ups emerge in these sectors. That will be a huge opportunity to tap into.”