On December 18, 2024, Ethiopia’s parliament ratified a landmark banking proclamation allowing foreign banks to operate within the country. This move represents a pivotal step in Ethiopia’s ongoing economic reforms, enabling foreign banks to establish subsidiaries, open branches, and acquire up to 40% ownership in local banks.
The decision to open the banking sector to foreign investment brings both opportunities and challenges. On the one hand, it can enhance competition, improve efficiency, and introduce advanced technologies. On the other hand, it poses challenges for local banks regarding competitiveness, capital strength, and management systems.
Dr. Yohannes Ayalew, Chief Executive Officer of Amhara Bank, emphasized that most private banks in Ethiopia operate with limited capital. While capital is not inherently a barrier, its efficient allocation is critical for success. Foreign banks, with their substantial capital reserves, benefit from economies of scale, allowing them to lower costs per unit and offer more competitive pricing. To stay competitive, Dr. Yohannes advised local banks to consider mergers as a strategy to bolster their capital base. Furthermore, he highlighted the importance of improving asset quality, stating that clearing non-performing loans (NPLs) is vital to reducing costs and maintaining competitiveness.
Dr. Yohannes also pointed out that the technological advancements of foreign banks present both opportunities and challenges for local institutions. Their extensive experience in competitive global markets gives them an advantage in management and operational efficiency. In contrast, Ethiopian banks have operated exclusively in domestic markets with policy support, creating a significant disparity. This gap poses a considerable challenge for local banks as they prepare to compete with foreign counterparts.
Industry experts have noted that the higher borrowing interest rates of local banks may attract investors as foreign banks enter the market. Dr. Yohannes explained, “The primary reason for the high borrowing interest rate among local banks is policy-driven. Currently, the deposit interest rate is set at 7%. Borrowing rates are calculated starting from this base, adding operational costs and profit margins, which leads to the high rates.”
He further suggested that if borrowing interest rates were liberalized, similar to foreign currency exchange, these rates could potentially decrease. However, foreign banks operating within the same market and policy environment are likely to offer comparable borrowing rates, potentially narrowing the gap between saving and borrowing interest rates.
Dr. Yohannes stressed that the impact of foreign banks will largely depend on how well local banks prepare and respond to competition. He advised local banks to improve their management systems and conduct thorough research to identify gaps. With foreign currency exchange now liberalized, it is crucial for banks to strengthen their risk management through better research and forecasting. Since foreign currency rates are market-driven, they will affect all banks, and mitigating risks will be essential to avoid financial distress.
“The entry of foreign banks into Ethiopia’s financial sector is vital, especially as we integrate into the global economy,” Dr. Yohannes remarked. He added that collaborating with these banks is key to expanding Ethiopia’s reach abroad, learning from their expertise, and competing on the international stage. The competition they bring will not only strengthen the banking sector but also benefit depositors and borrowers through more balanced pricing.
Dr. Yohannes also noted that government restrictions on the number of foreign banks entering the market—either through establishing subsidiaries or purchasing shares in local banks—may help mitigate potential challenges.
The CEO made these remarks during the launch of Aba QR, a new digital payment system aimed at transforming transactions in Ethiopia. The Aba QR app allows customers to scan a merchant’s QR code to view detailed payment information, such as product descriptions, quantities, and prices, before making quick, secure payments directly from their mobile phones. This eliminates the need for cash while ensuring accuracy and convenience. Merchants benefit from features like real-time updates of product details, prices, and service lists, daily sales report generation, cashier permission management, and instant digital receipts.
Additionally, the CEO announced plans to introduce a system that would enable shareholders to participate remotely via digital platforms, eliminating the need for in-person attendance at meetings. He highlighted that other countries have already adopted such approaches and expressed optimism that Amhara Bank would follow suit. Dr. Yohannes explained that challenges encountered during this year’s 3rd Annual General Meeting of Shareholders had provided valuable lessons. As a result, efforts are underway to transition to digital solutions to prevent similar issues in the future.
