In December 2024, Ethiopia’s parlia- ment passed legislation opening up the country’s banking sector to com- petition from foreign companies, end- ing the decades-long domination of state-run entities.

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 con- trol of the government or state bodies.

This is because Ethiopia has long con- sidered 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.

Abiy has started to move Ethiopia away from the “state-led growth model”, partly because of the need to comply with con- ditions 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 negotiating 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 liberalisa- tion in return.

As a result, in July last year, the Ethio- pia central bank agreed to stop interven- ing 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. Fur- thermore, in January, the Ethiopian Securities Exchange resumed trading after a 50-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 fur- ther step towards liberalisation by al- lowing 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%.

The IMF publicly welcomed the move, with its deputy managing director Ni- gel Clarke commenting that “continued implementation of financial sector re- forms, 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 opportu- nity” 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 fi- nancial services companies. “We have spoken to venture capital investors across the Middle East and Africa that have been interested in Ethiopian com- panies within the finance space for some time but could not invest in them because they are foreigners,” she told African Banker.

“Local start-ups need financing, but money has so far been limited be- cause 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.”

Attractive fundamentals

Banks and fintechs operating in other parts of East Africa, and across the con- tinent are also likely to see this move as an opportunity for expansion. After all, despite facing a difficult macroeco- nomic situation for the last few years, Ethiopia’s fundamentals remain at-tractive in many ways.

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 told African Banker 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 opportu- nity 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 already 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 open- ing up. You look at countries like Ethiopia and Angola... the market opportunity is there, and we seek to exploit it.”

Chinese interest

Mirkarim Yakubov, an asset manager based in Addis Ababa, previously told Af- rican Banker 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 rumours of banks in Morocco and the United Arab Emirates considering their options in Ethiopia, although this will become clearer in the coming months.

While it is hoped that the move to lib- eralise Ethiopia’s financial services sector will be successful in attracting greater amounts of foreign capital, Resom 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. “Ethio- pians will soon have more options to shift to new banks if existing institu- tions 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 (NBE), has similarly suggested that increased 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 ex- pects that we will see similarly large strides this year – including in the re- tail and logistics industries, which have also traditionally been protected by the government.

“The retail sector is currently closed in Ethiopia, but I expect that it will be opened up soon – indeed the govern- ment has indicated it is interested 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.” n

Mamo Mihretu, the central bank governor (above), has suggested that increased competition in the finance sector will help local lenders by encouraging them to improve their services and standards.

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