Banks look to the Ethiopian market to partner with local lenders

Foreign banks seeking to enter Ethiopia may be required to have a local partner to set up business in the country with an unbanked population of 75 percent. This is according to the proposed new rules drafted by Addis Ababa.

This means that Kenyan banks that have had their sights on the Ethiopian market for years may be required to make acquisitions or form joint ventures with local partners in order to operate in the country.

An Ethiopian newspaper quoted a consultant leading the liberalization process as saying: “The openness may only be limited to regional banks…in a joint venture with local banks.” correspondent during the Weekend.

This will be easily accessible to the central bank. The first objective is to enhance the inflow of foreign exchange. Several revisions to the legal framework are underway and many are in the draft stage.”

Ethiopia in March of this year formed a committee to liberalize the banking sector, and took a major step in opening the door for Kenyan lenders to start operations in the populous country.

Read: Ethiopia moves to allow entry to Kenyan banks

The commission has already begun work to amend the half-century-old Ethiopian financial law that has banned foreign investment, which means the long-awaited easing of restrictions on foreign banks investing in Ethiopia is nearing.

The local central bank said last week that the new law guiding the country’s banking sector would allow the financial sector to open up.

“We are creating the right environment for that. Last week, Central Bank of Ethiopia Governor Yeniger Dese was quoted as saying that once the review of legal procedures is completed, the banking sector will be opened.

“Opening up will take place in a win-win situation, without affecting local banks. Opening up will greatly benefit the economy, local banks and other businesses.”

The new Financial Services Act will define the modalities for foreign banks’ participation in Ethiopia’s financial industry.

Kenyan banks led by KCB and Equity Group initially preferred to start operations from scratch in regional markets, but have since taken acquisitions, spending billions of shillings on the expansion and diversification scheme.

KCB said earlier that if the Ethiopian economy is liberalized and foreign banks are allowed to invest, the institution will consider partnering with a local bank.

Alternatively, the bank can set up a standalone business.

KCB opened a representative office in Addis Ababa in 2015 to be ready in the market when opportunities arise.

Equity opened a representative office in Addis Ababa in 2019. Co-op previously said it preferred to enter the Ethiopian market through a joint venture with the Ethiopian Cooperative Movement in a deal similar to its business in South Sudan in which the government has a stake.

Read: Equity Bank’s entry into the Ethiopia market

With a population of 110 million, Ethiopia – the second largest region in Africa after Nigeria – offers significant business opportunities. Less than 15 percent of Ethiopians have access to a bank account, highlighting the opportunity for foreign lenders.

Ethiopia at present has 18 commercial banks, two of which are state-owned, according to the central bank.

Kenyan banks have had their sights set on the Ethiopian market for years due to the huge population in the country.

While representative offices open up trade or export financing opportunities for local banks, the transaction is seen as less profitable compared to normal banking operations that a subsidiary might perform.

This is due to the fact that trade between the two countries is still limited, with Kenya’s exports to its northern neighbor amounting to about Sh9.4 billion annually compared to Sh Sh 72.2 billion in Uganda and Sh Sh 31.8 billion in Tanzania.

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