Ethiopia Opens Banking Sector to Foreign Investment for the First Time in Decades

In a landmark decision poised to reshape its economic landscape, Ethiopia’s central bank has introduced a long-anticipated directive permitting foreign banks and investors to operate within its financial sector. This milestone signals a significant advance in the nation’s ongoing economic liberalization efforts and follows the parliamentary approval of a revised banking law in December 2024. The move marks the first time Ethiopia is opening its banking sector to foreign financial institutions since its nationalization under the Derg regime in 1974, ending nearly five decades of stringent protectionism.

Despite having a rapidly growing population of over 128 million people and being East Africa’s largest economy by GDP (though recent IMF projections suggest Kenya might slightly surpass it in 2025), Ethiopia has historically kept its banking industry tightly closed to outsiders. Experts believe this pivotal policy shift could attract fresh capital, significantly increase competition, and help modernize a sector still largely controlled by the state-run Commercial Bank of Ethiopia (CBE), which has historically commanded over 60% of total banking assets and deposits.

On Wednesday, June 25, the National Bank of Ethiopia (NBE), the country’s central bank, released new licensing regulations under “Directive No. SBB/94/2025: Requirements for Licensing and Renewal of Banking Business and Representative Office Directive.” This comprehensive framework establishes clear guidelines for foreign banks seeking to operate in the country. Under the new rules, international banks can now set up subsidiaries, open branches, or establish representative offices. Additionally, foreign strategic investors are permitted to acquire shares in existing Ethiopian banks, with individual ownership limited to 30% and total foreign ownership restricted to 40%. These limits are designed to balance foreign investment benefits with the government’s desire to maintain significant local control over the financial system.

The NBE positioned the new regulations as a strategic step in its broader reform agenda aimed at expanding financial inclusion, enhancing the efficiency of the financial sector, and drawing international institutions to a high-potential, fast-growing market. “The Ethiopian banking sector is now officially open to foreign participation, and the National Bank of Ethiopia will begin accepting applications from foreign banks and investors effective immediately,” the directive boldly stated.

This directive also marks a notable regulatory shift by bringing the licensing and oversight of representative offices under the direct supervision of the National Bank of Ethiopia for the first time. This move signifies increased control and accountability from the central bank over all forms of foreign banking presence. The development comes after months of public signals from senior officials, including central bank governor Mamo Mihretu, who had recently indicated that foreign banks might commence operations in Ethiopia before the close of 2025, building anticipation for this momentous announcement.

A Look Back: The Legacy of Nationalization

To truly appreciate the significance of this policy reversal, it is crucial to understand Ethiopia’s banking history. For decades, the financial sector remained a tightly guarded bastion of state control, a direct consequence of the political shifts of the mid-20th century.

Prior to 1974, Ethiopia had a nascent but relatively diverse financial system, with some foreign bank presence. However, the rise of the Provisional Military Administrative Council, commonly known as the Derg regime, ushered in a radical shift towards a socialist economic ideology. In 1974, the Derg nationalized all private banks, including foreign-owned ones, placing the entire financial system under stringent state ownership and control. The Commercial Bank of Ethiopia (CBE) was made the sole commercial banking service provider, effectively eliminating competition and innovation. Other development banks and financial institutions also came under direct government policy.

This period of “financial repression” severely restricted private sector participation and limited access to financial services for the vast majority of the population. Even after the fall of the Derg regime in 1991 and the subsequent economic reforms initiated by the Ethiopian People’s Revolutionary Democratic Front (EPRDF) government, which allowed for the establishment of private domestic banks starting in 1994, the ban on foreign bank entry remained. This long-standing protectionist policy was justified by concerns about safeguarding nascent local banks, maintaining monetary policy control, and preserving scarce foreign exchange reserves. While it protected local institutions from global competition, it also insulated them from international best practices, technological advancements, and the influx of foreign capital crucial for modern financial sector development.

Ethiopia’s Ambitious Homegrown Economic Reform Agenda

The decision to open the banking sector is not an isolated event but a critical pillar of Ethiopia’s comprehensive Homegrown Economic Reform Agenda (HERA). Launched in 2019, HERA represents a profound shift towards a more market-oriented economy, designed to address long-standing macroeconomic imbalances and foster sustainable, private sector-led growth.

Under the leadership of Prime Minister Abiy Ahmed and NBE Governor Mamo Mihretu, these reforms have included several significant initiatives:

• Privatization of State-Owned Enterprises: The government has embarked on a strategic program to partially or fully privatize key state-owned enterprises, including Ethio Telecom, Ethiopian Airlines, and sugar factories. This aims to improve efficiency, attract foreign investment, and generate much-needed revenue.
• Monetary and Exchange Rate Reforms: For the first time in five decades, Ethiopia has liberalized its foreign exchange regime, adopting a more flexible exchange rate. The NBE has moved towards an interest rate-based monetary policy and ceased direct central bank financing of government deficits. These measures are designed to address acute foreign exchange shortages, curb inflation, and create a more stable macroeconomic environment. Governor Mamo Mihretu has noted promising early results, with expectations for exports to double and foreign reserves to triple.
• Legal Framework Updates: The revision of the Central Bank Act to prioritize price stability and the ongoing update of the NBE’s internal organization are crucial steps in strengthening the regulatory and institutional capacity.

Governor Mihretu has emphasized that the objective of these reforms is to “address fundamentally, boldly, and conclusively the sources of macroeconomic instability in Ethiopia and create a much more open, investment-friendly, and private-sector-friendly environment.” The opening of the banking sector is a testament to this commitment, signaling to international investors that Ethiopia is serious about its economic transformation.

Why Now? The Compelling Rationale for Opening the Banking Sector

The timing of this liberalization is strategic, driven by a confluence of economic imperatives and opportunities.

1. Attracting Fresh Capital and Foreign Direct Investment (FDI): Ethiopia’s ambitious development agenda, including significant infrastructure projects and industrialization plans, requires substantial capital. Domestic banks, while growing, have limited capacity to meet these demands. Foreign banks bring not only direct capital investment into the financial sector but also serve as conduits for channeling international capital into other sectors of the economy, boosting overall FDI. This inflow of capital can alleviate liquidity constraints and support large-scale ventures crucial for economic growth.

2. Increasing Competition and Efficiency: The Ethiopian banking sector has long been dominated by the CBE, which, as of December 2024, still held 47.9% of total banking assets and 47.1% of deposits, despite the presence of over 30 private domestic banks. This state dominance, while providing stability, has also been associated with limited competition, higher lending rates, and potentially less innovative service delivery. The entry of foreign banks is expected to foster healthy competition, compelling local banks to improve their efficiency, service quality, risk management practices, and technological adoption. This competitive pressure can lead to better products and services for consumers and businesses alike.

3. Modernization and Technology Transfer: Foreign banks operate with advanced banking technologies, sophisticated digital solutions, and robust risk management frameworks gleaned from international markets. Their entry can accelerate the modernization of Ethiopia’s financial infrastructure, introducing innovations in mobile banking, online platforms, payment systems, and data analytics. This technology transfer can enhance the overall efficiency of the financial system, reduce transaction costs, and improve the speed and reliability of financial services. Local banks will be incentivized to adopt these technologies to remain competitive, ultimately benefiting the entire sector.

4. Expanding Financial Inclusion: Despite being a populous nation, Ethiopia’s financial inclusion rates remain relatively low. As of December 2024, only about 15% of its population used banking services. Foreign banks, with their global expertise and digital capabilities, can play a crucial role in expanding access to affordable and useful financial products and services, particularly for underserved populations in rural areas and small and medium-sized enterprises (SMEs). They can introduce innovative products tailored to local needs, leveraging mobile technology to reach previously unbanked segments.

5. Generating Foreign Exchange: Ethiopia has historically faced challenges with foreign exchange shortages. Foreign banks can facilitate cross-border transactions, remittances from the diaspora, and foreign direct investment, helping to inject much-needed hard currency into the economy. Their global networks can streamline international trade finance and provide easier access to foreign currency for businesses engaged in imports and exports, supporting overall economic stability.

6. Enhancing Global Integration: Opening the banking sector is a significant step towards integrating Ethiopia’s economy more deeply into global financial systems. This aligns with Ethiopia’s aspirations to join the World Trade Organization (WTO) and fully participate in regional economic blocs like the African Continental Free Trade Area (AfCFTA). Increased financial integration can boost investor confidence, attract more diverse foreign investments across sectors, and facilitate the flow of goods, services, and capital.

The New Regulatory Landscape: Details of the Directive

The National Bank of Ethiopia’s Directive No. SBB/94/2025 provides a granular look at how foreign banks can now enter and operate in Ethiopia. The directive outlines three primary avenues for entry:

1. Establishing Subsidiaries: Foreign banks can establish either partially or fully owned subsidiaries incorporated within Ethiopia. These subsidiaries will operate as independent legal entities, subject to Ethiopian banking regulations and capital requirements. The directive mandates a minimum paid-up capital requirement of ETB 5 billion (Ethiopian Birr), which must be fully remitted in acceptable foreign currency. This substantial capital requirement aims to ensure that only financially robust institutions enter the market.
2. Opening Branches: International banks are now permitted to open direct branches, operating as extensions of their existing global corporate structures. This option might be preferred by banks looking for a more direct operational model.
3. Establishing Representative Offices: These offices, which do not conduct banking business but serve as liaison points for market research and client relations, will now be under the direct licensing and supervision of the NBE for the first time. This ensures a centralized oversight of all foreign banking presence.

Crucially, the directive also addresses foreign ownership in existing Ethiopian banks. Foreign strategic investors are permitted to acquire shares, but individual foreign ownership is limited to 30%, and total foreign ownership in any existing Ethiopian bank is restricted to 40%. This cap aims to safeguard local control while allowing for the injection of foreign capital and expertise. The NBE will conduct “fit and proper” assessments for shareholders, directors, and chief executive officers of foreign-participating banks, emphasizing sound governance. The NBE is committed to reviewing completed applications within 90 calendar days, and licensed entities must commence operations within 12 months, subject to meeting robust operational readiness standards.

Regional Giants Eyeing the Ethiopian Market

The news of Ethiopia’s banking liberalization has been met with enthusiasm from regional financial powerhouses that have long expressed interest in this untapped market.

Kenya’s KCB Group, one of East Africa’s largest financial services organizations with a significant regional presence in Uganda, Tanzania, Rwanda, Burundi, South Sudan, and the Democratic Republic of Congo, has been particularly vocal about its Ethiopian ambitions. KCB had expressed interest as early as 2019 but was constrained by the closed regulatory environment. It has maintained a representative office in Ethiopia since 2015, signaling its persistent strategic intent. Following the new law, KCB officially opened negotiations with the National Bank of Ethiopia in June 2025 to explore direct entry, potentially through establishing a subsidiary or acquiring equity in a local bank. KCB’s interest underscores the attractiveness of Ethiopia’s large, underbanked population and its significant economic potential.

Similarly, South Africa’s Standard Bank, Africa’s largest bank by assets, has consistently shown interest in expanding its footprint into Ethiopia. As a major player with extensive experience across the continent, Standard Bank’s potential entry would bring significant capital, international banking standards, and a vast network to the Ethiopian financial landscape. The entry of such prominent regional and continental banks will undoubtedly intensify competition and raise the bar for service delivery within the sector.

Phased Approach and Alignment with Broader Economic Reforms

The National Bank of Ethiopia plans to grant up to five foreign banking licenses over the next five years. This phased approach is a prudent strategy, designed to manage the transition, allow domestic banks time to adapt to increased competition, and ensure that the NBE’s regulatory capacity can keep pace with the evolving financial landscape. It reflects a cautious but determined liberalization.

This phased opening is also deeply intertwined with Ethiopia’s broader macroeconomic reform agenda, particularly its debt restructuring efforts and its ongoing partnership with the International Monetary Fund (IMF). Ethiopia secured a four-year, $3.4 billion Extended Credit Facility (ECF) arrangement with the IMF in July 2024. The purpose of this agreement is to support Ethiopia’s efforts to address macroeconomic imbalances, restore external debt sustainability, and lay the foundations for sustainable, private sector-led growth. In May 2025, IMF staff reached a staff-level agreement on the third review of the ECF, which, once approved by the IMF Executive Board, will unlock approximately $260 million in financing. This approval is contingent upon Ethiopia’s agreement on a memorandum of understanding on debt restructuring with its official creditors.

Opening the banking sector to foreign participation is a key structural reform often advocated by international financial institutions like the IMF. It signals Ethiopia’s commitment to market-oriented policies, which can bolster creditor confidence and facilitate ongoing debt negotiations. The IMF program provides a critical framework for these reforms, and the progress made in the first year has reportedly exceeded expectations, particularly in areas like inflation management, export growth, and international reserves. The move is expected to further stabilize the local currency, the Birr, which has faced challenges including a significant devaluation in 2024.

Ethiopia’s Economic Potential: A Giant Awakening

Ethiopia’s ambition to liberalize its financial sector stems from its immense, yet largely untapped, economic potential. As East Africa’s second most populous country (after Nigeria) and a nation with sustained GDP growth, it presents a compelling case for investors. While some IMF projections suggest Kenya might slightly edge out Ethiopia as East Africa’s largest economy by GDP in 2025 due to Kenya’s currency appreciation and diversified revenue streams, Ethiopia’s sheer market size and long-term growth prospects remain undeniable. Ethiopia’s economy grew by 7.1% in 2022/23, up from 6.4% in 2021/22, primarily driven by strong performance in the services, industry, and agriculture sectors.

Key economic drivers include:

• Agriculture: This sector remains the backbone of the economy, employing the majority of the population and contributing significantly to GDP. Coffee, tea, and horticultural products are major exports.
• Growing Manufacturing Sector: Ethiopia has invested heavily in industrial parks, attracting foreign manufacturers in textiles, garments, and other light industries, aiming to become a manufacturing hub.
• Services Sector: Financial services, trade, transport, and tourism are expanding rapidly, contributing to economic diversification. Addis Ababa serves as a key financial hub in East Africa, complementing Nairobi.
• Demographic Dividend: With a large and youthful population, Ethiopia has the potential for a significant “demographic dividend” if investments in education, health, and job creation keep pace.
• Infrastructure Development: Significant investments in roads, railways (like the Addis Ababa-Djibouti railway), and hydropower projects (such as the Grand Ethiopian Renaissance Dam) are improving connectivity and energy supply, supporting industrial and agricultural development.

The opening of the banking sector is expected to accelerate growth in these areas by providing better access to finance, both for large-scale projects and for small businesses that are the engine of job creation.

Challenges and the Path Forward

While the opening of Ethiopia’s banking sector is a cause for optimism, the path ahead is not without challenges.

1. Impact on Domestic Banks: Increased competition from well-capitalized, technologically advanced foreign banks could put significant pressure on smaller, less efficient domestic banks. This might necessitate consolidation, mergers, or a renewed focus on niche markets for local players to survive and thrive. The NBE will need to closely monitor the market to ensure a smooth transition and maintain financial stability without stifling local growth.

2. Regulatory Capacity: The NBE faces the immense task of strengthening its regulatory and supervisory capacity to effectively oversee a more complex, internationalized banking sector. This includes developing expertise in international banking standards, cross-border supervision, and managing systemic risks that might arise from foreign bank operations.

3. Risk of Market Domination: While foreign investment is desirable, there’s a risk that foreign banks, with their vast resources and global networks, could quickly dominate the market, potentially marginalizing local institutions. The ownership caps (30% individual, 40% total foreign) are designed to mitigate this, but careful calibration and monitoring will be essential.

4. Economic Risks: Increased foreign participation also exposes Ethiopia’s economy to external risks such as exchange rate volatility and potential capital flight during periods of economic uncertainty. The ongoing management of the Birr’s exchange rate and foreign reserves will be crucial to mitigate these risks.

5. Data Protection and Cybersecurity: As the financial sector becomes more digitized and integrated with global systems, ensuring robust data protection laws and cybersecurity frameworks becomes paramount. Some experts have already highlighted the need for strict regulations to protect national and personal financial data from breaches and unauthorized access, applying equally to foreign and domestic entities.

6. Balancing Inclusivity with Profitability: While a stated goal of the reforms is to expand financial inclusion, commercial foreign banks are primarily driven by profit motives. The NBE will need to ensure that the liberalization also translates into meaningful expansion of services to underserved populations, beyond just catering to large corporations or urban centers.

Despite these hurdles, Ethiopia’s bold decision signifies a profound commitment to economic reform and global integration. By opening its banking sector, the nation is not merely inviting foreign capital; it is embracing a new era of competition, innovation, and modernization that promises to unlock its vast economic potential and redefine its financial future on the African continent. The world will be watching closely as Ethiopia embarks on this transformative journey.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

27th June, 2025