The National Bank of Ethiopia (NBE) has dispatched a circular to bank managers and industry experts requesting them to forward recommendations on the banking open-up process.
Since last week, the central bank has been sending drafts of the amended Banking Business Proclamation to selected bankers and industry experts.
In the circular, the NBE asked bankers to forward written recommendations and inputs on the draft proclamation until October 12, 2022.
The central bank is also preparing to hold a consultation meeting with local bankers on October 17, 2022, on the new legal framework prepared to allow foreign banks into Ethiopia’s banking industry, which has been shielded from foreign competition for decades.
“The draft bills are sent only to bank managers and only selected industry experts. The draft amended banking business proclamation states four alternatives for how foreign banks can enter Ethiopia. So the NBE circular asks our opinion on which alternative is best suited for local banks. Of course, they gave us a very tight deadline to submit the written recommendations. But we are ready to forward our comments during the consultation meeting on October 17,” said an official at a financial institution who received the central bank’s circular and draft amendment.
A new policy approved by the Council of Ministers a month ago and a draft amendment to the 2008 Banking Business Proclamation, which is currently being finalized by the NBE, stipulate four modalities for foreign banks’ entry. Foreign banks can establish subsidiary firms locally, open branches, open commercial representative offices, and/or acquire stakes in local banks. However, according to the draft proclamation, foreign bankers can only acquire a maximum of 30 percent of local banks.
Licensing of foreign banks is also expected to resume in a year’s time, as soon as the draft proclamation is ratified and implementation directives are introduced by the NBE.
“The government decided to open up the sector finally to generate foreign currency and improve the poor financial efficiency in the country. But the central bank wants to do the open-up without destroying the local banks,” the official said.
The official, however, does not think just allowing foreign banks is enough to achieve those objectives. “The foreign banks we talked to, especially from South Africa and others, are not interested unless the foreign currency regime in Ethiopia is changed to a floating system and the accounts are liberalized. Secondly, none of the local banks are willing to sell equity to foreign banks or merge, unless forced,” opined the official with decades of service in the industry.
All local banks prefer to continue as they are. So the probability is high that the foreign banks will come on their own, opening subsidiaries or branches, according to the official.
“Foreign banks have their own plans, objectives, and missions, likewise the local banks. How can two different plans, visions, and objectives be implemented by one banking institution,” asked the official. “Foreign banks are cost-conscious and data-driven. So it is less likely that foreign banks willconcentrate in Ethiopia and crowd out local banks, as the NBE fears. That will not happen.”
Expectations are also high that foreign banks will take their time studying the Ethiopian market before setting foot there. The valuation of local banks, conducting feasibility studies, and making decisions will take years, according to experts. International consulting firms are also ready to conduct the legwork and pave the way before foreign banks realize Ethiopia’s aspirations.
However, the official believes that many foreign investors in Ethiopia are eagerly awaiting the arrival of foreign banks because existing local banks are not adequately serving FDI.