Last Hurdle Blocking Kenyan Banks From Operating in Ethiopia Removed in New Law

The Kenyan banking sector has been given the green light to tap into the Ethiopian market after Ethiopian lawmakers approved the banking business proclamation, paving the way for foreign banks to enter Ethiopia’s financial sector.

After a long wait, the new banking law was passed by a majority in the Ethiopian Parliament effectively allowing foreign banks to open subsidiaries in Ethiopia.

The foreign banks that will tap into the Ethiopian market will be allowed to employ foreign nationals as senior executives but Ethiopian citizens have to be included on their boards.

There is a catch, however, because according to the new law, foreign nationals and foreign-owned Ethiopian organizations will have a combined shareholding limited to 49% of the bank’s total subscribed shares. The remaining shares are required to remain under Ethiopian ownership.

Lawmakers approved the proclamation six months after the Council of Ministers passed a draft banking business proclamation, which was subject to a final endorsement from the House of Peoples’ Representatives.

According to Ethiopian media, 32 banks are operating in Ethiopia with a combined capital of Ksh310 billion ($2.4 billion).

The proclamation is set to usher in a new era of economic transformation in Ethiopia, which has opened doors for Kenyan banks to tap into their market.

Kenya, which boasts an advanced banking sector is expected to leverage its expertise to tap into Ethiopia’s enormous population of more than 110 million people.

One Kenyan bank already dipped its toes in the Ethiopian market three years ago after setting up an office in Addis Ababa – the capital of the second most populous nation in Africa. However, restrictions barring foreign banks from investing were a major hindrance.

For Ethiopia, opening doors to foreign banks to set up shops will work in the nation’s favour as it will end decades of dominance by Ethiopian banking institutions.

The reforms will be welcome in the Ethiopian economy as they align with the government’s plans to develop the country’s financial markets and policy goals around competition and digital transformation. 

Also, foreign investments in the Ethiopian banking sector could help the Ethiopian currency (the birr), which suffered a sensational decline in July 2024 after the government made the risky decision to allow their currency to float freely against the US dollar.