Ethiopia has locked out Kenyan banks from its market after inking an agreement paving the way for other local companies to start operations in the country.
Ethiopia restricts foreign investors from venturing into the telecommunication, banking, media, retailing, insurance, and electricity sectors, but allows foreign participation on a selective basis.
President Kibaki on Wednesday signed a special status agreement with Ethiopia Prime Minister Hailemariam Desalegn that exempts Kenyan companies, excluding banks, from the restrictions.
“We will not allow in foreign banks,” said Mr Desalegn at a press briefing on Thursday.
“We will continue with this policy in coming years. By having government control in the banking sector we are able to ensure there is more lending to our productive sectors unlike private banks that are only motivated by profits.”
The declaration is set to upset the expansion agenda of Kenyan banks which have penned subsidiaries in South Sudan, Uganda, Tanzania, Rwanda, and Burundi to cut their reliance on the Kenyan market.
Lenders like Equity Bank, who hosted Mr Desalegn Thursday on his two-day visit to Kenya, had harboured ambitions of setting up shop in Addis Ababa in the hope that Ethiopia would open its financial services sector to foreign investors.
‘‘Ethiopia would be an attractive country for us because our business model is high volume low margin,” James Mwangi, the CEO of Equity Bank, was quoted by Business Ethiopian last month.
“Ethiopia is very appropriate for such a model because of its high population. So, it will allow us to do huge volumes at very low margin.”
Regulator National Bank of Ethiopia said the country had 970 branches in December serving about 90 million people compared to Kenya’s 1,161 for 40 million people.
The 18 Ethiopian banks had a loan book worth Sh200 billion in June last year and borrowing was 16 per cent of the value of credit held by Kenya’s 43 banks.
Kenya’s largest banks have slowed down local expansion in the past two years, turning focus on the regional market where financial services are largely underdeveloped. They had opened 269 foreign branches by September.
The 10 banks with foreign subsidiaries had a combined profit of Sh3.8 billion in the nine months to September, which is higher than the Sh2.3 billion they posted last year.
They made Sh2.5 billion in the six months to June. Earnings from South Sudan accounted for about 40 per cent of the profits generated by the subsidiaries.
Ethiopia has in the past 20 years resisted pressure from the International Monetary Fund (IMF) to open up its banking sector to foreign private investors, Mr Desalegn said.
But it remains to be seen whether the country will back the trend given that it will join the World Trade Organisation in six years. WTO advocates against trade restrictions.
Mr Desalegn was appointed prime minister in September after Meles Zenawi’s death in August.
The 47-year-old former university dean is keen to forge closer business ties and create more jobs for Ethiopians.
According to Reuters, three-quarters of Ethiopians live on less than $2 (Sh170) a day. Trade between Kenya and Ethiopia is small and the government does not capture the traffic in official documents.
State officials reckon that exports to Ethiopia stand at about Sh5 billion compared to Uganda’s Sh76 billion and Tanzania’s Sh41.7 billion.
Price controls and non-tariff barriers by Ethiopia are other challenges local firms have had to contend with.
Addis Ababa and Nairobi have been holding talks over the past six months on lifting trade restrictions which is set to widen the reach of Kenyan companies.
Ethiopia’s huge population and its double digit growth have whetted the appetite of local firms looking to establish regional subsidiaries.
East African Breweries Limited (EABL), Equity Bank, and G4S are some of the companies that have expressed interest to tap the market. Mr Desalegn said that Ethiopia was keen to have Kenyan companies invest in its hospitality and agro-based sector, which account for 41 per cent of GDP.