Ethiopia is poised to revolutionize its financial landscape with the enactment of the Banking Business Proclamation No. 1360/2024, signaling a historic shift from its traditionally closed banking sector. For decades, Ethiopia’s banking system was exclusively reserved for domestic investors, limiting opportunities for growth and modernization. This cautious approach aimed to shield domestic banks from external competition, allowing them to develop in a protected environment. 

However, the limited exposure to international banking standards also slowed the adoption of global best practices and restricted access to foreign capital. With this new legislation, Ethiopia is now welcoming foreign banks into its financial ecosystem, laying the groundwork for broader economic reforms and global integration.

The Proclamation enables reputable foreign banks that are well-established, financially sound, and regulated by their home countries’ authorities to invest and operate in Ethiopia. It provides three primary avenues for foreign banks to enter the market,

1. Establishing wholly or partially owned subsidiaries,
2. Setting up branches, and
3. Acquiring shares in existing or new domestic banks.

This comprehensive framework ensures a structured entry process while safeguarding Ethiopia’s financial sovereignty.

The law also redefines the role of representative offices for foreign banks. Trade representative offices were previously required to register with the Ministry of Trade and Regional Integration. However, under the new regulations, these offices must now register—or re-register, if already registered—with the National Bank of Ethiopia (NBE). These offices are restricted to liaison and promotional activities and are prohibited from engaging in core banking services. This ensures that only fully licensed subsidiaries or branches can provide financial services, maintaining regulatory oversight and consumer protection.

To ensure clarity and governance, the Proclamation categorizes investors into two groups: “strategic” and “non-strategic.”

Strategic investors include government-owned banks, reputable banking groups, and international development finance institutions. These entities are permitted to establish subsidiaries or branches, offering them significant operational flexibility.

Non-strategic investors, on the other hand, are limited to acquiring shares in domestic banks, with stricter ownership caps.

This classification system delineates investment roles and responsibilities, fostering a balanced financial ecosystem.

Foreign banks entering Ethiopia have the option to establish subsidiaries under various corporate forms, including share companies or private limited companies. These subsidiaries must be locally incorporated and controlled by strategic investors. Control is defined as the ability to influence voting rights, financial and operational policies, or appoint a majority of board members.

To ensure balanced governance, a subsidiary’s board must include representatives from the foreign parent bank, local shareholders, and Ethiopian non-shareholders. This governance structure not only promotes accountability but also integrates local expertise into decision-making processes.

Foreign banks may also establish branches in Ethiopia. These branches can operate as either deposit-taking or non-deposit-taking entities but are prohibited from performing both functions simultaneously.

Deposit-taking branches operate similarly to traditional banks, offering savings and loan services to customers.

Non-deposit-taking branches focus on lending, repayment collections, and managing borrower accounts.

Another avenue for market entry is the acquisition of shares in domestic banks. Strategic investors can hold up to 40% of the total subscribed shares in a domestic bank, while aggregate foreign ownership is capped at 49%. Non-strategic investors, including foreign nationals and foreign-owned Ethiopian entities, face stricter limits of 7% and 10%, respectively.

All foreign investments must be made in foreign currency, and the Proclamation allows for dividend repatriation. Dividends may also be reinvested in Ethiopian Birr, provided the 49% ownership cap is not exceeded. These provisions strike a balance between attracting foreign capital and protecting local economic interests.

While the Proclamation promotes openness in traditional banking, it takes a cautious approach to emerging financial technologies. Governor Mamo Mihretu has emphasized that while crypto mining is permitted, the use of crypto assets like Bitcoin for payments or transactions is strictly prohibited. This policy reflects the NBE’s commitment to maintaining financial stability while adapting to global monetary trends.

The Governor also highlighted the evolving nature of global monetary policies. Central banks worldwide are exploring digital currencies, such as Central Bank Digital Currencies (CBDCs), as part of the transition from physical cash to digital money. Ethiopia is no exception; the NBE is expected to issue directives to adapt to these changes. These measures underscore Ethiopia’s readiness to modernize its financial system while ensuring fiscal sustainability and stability.

The entry of foreign banks is expected to transform Ethiopia’s financial ecosystem. Increased competition will likely drive innovation, improve customer service, and expand access to financial products, particularly in underserved regions. Local banks stand to benefit by adopting global best practices, potentially elevating their operational standards to align with international benchmarks.

These reforms are part of Ethiopia’s broader economic strategy to attract investment and integrate into the global economy. By welcoming foreign banks under clearly defined conditions, Ethiopia positions itself as an attractive destination for international investors. This move is expected to catalyze growth across various economic sectors, from manufacturing to infrastructure development.