Industry

Banks eyeing Ethiopian market to partner with local lenders

Abiy

Ethiopia's Prime Minister Abiy Ahmed. AFP PHOTO

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Summary

  • This means Kenyan banks which have had their sights on the Ethiopian market for years may be required to make acquisitions or form joint ventures with local partners in order to operate in the country.
  • Ethiopia in March this year constituted a committee to liberalise the banking sector, taking a major step in opening the door for Kenyan lenders to set up operations in the populous nation.
  • The committee has already started work to amend Ethiopia’s half-a-century old financial code which locked foreign investment.

Foreign banks seeking to enter Ethiopia could be required to have a local partner to set up business in the country whose unbanked population stands at 75 percent. This is according to the new proposed rules being crafted by Addis Ababa.

This means Kenyan banks which have had their sights on the Ethiopian market for years may be required to make acquisitions or form joint ventures with local partners in order to operate in the country.

“The opening up might only be limited to regional banks … in a joint venture basis with local banks,” a consultant spearheading the liberalisation process was quoted saying by Ethiopian publication The Reporter over the weekend.

“That will be easily manageable for the central bank. The first target is to boost the foreign currency inflow. There are many legal framework revisions underway and many are in a draft stage.”

Ethiopia in March this year constituted a committee to liberalise the banking sector, taking a major step in opening the door for Kenyan lenders to set up operations in the populous nation.

The committee has already started work to amend Ethiopia’s half-a-century old financial code which locked foreign investment, meaning the long-awaited easing of restrictions on foreign banks making investments in Ethiopia has inched closer.

The new code guiding the country’s banking sector will allow the opening up of the financial sector, the local Central bank said last week.

“We are creating the right environment for that. Once we finalize the legal procedures revision, the banking sector will be opened,” Ethiopia central bank governor Yinager Dessie was quoted saying by the local press last week.

“The opening up will be done in a win-win situation, without affecting local banks. Opening up will highly benefit the economy, local banks and also other businesses.”

The new Financial Service Code will determine engagement modalities of foreign banks in Ethiopia’s financial industry.

Kenyan banks led by KCB and Equity Group initially preferred starting operations from scratch in the regional markets but have since taken to making acquisitions, spending billions of shillings in the expansion and diversification plan.

KCB earlier said that if Ethiopia’s economy were liberalised and foreign banks allowed to invest, the institution would consider partnering with a local bank.

Alternatively, the bank could establish a standalone business.

KCB opened a representative office in Addis Ababa in 2015 to have it ready in the market when opportunities arise.

Equity opened a representative office in Addis Ababa in 2019. Co-op Bank said earlier it would prefer to enter the Ethiopian market through a joint venture with Ethiopia’s cooperative movement in a deal similar to its South Sudan business in which the government has a stake.

Ethiopia’s population of 110 million people –the second-largest in Africa after Nigeria— offers significant business opportunities. Less than 15 percent of Ethiopians have access to a bank account, highlighting the opportunity for foreign lenders.

At present Ethiopia has 18 commercial lenders, two of which are state-owned, according to the central bank.

Kenyan banks have had their sights on the Ethiopian market for years due to the country’s huge population.

While the representative offices open opportunities for trade or export finance for local banks, the deal is seen as less lucrative compared to normal banking operations that a subsidiary would perform.

This is due to the fact that trade between the two countries is still limited, with Kenya’s exports to the northern neighbour standing at about Sh9.4 billion annually compared to Uganda’s Sh72.2 billion and Tanzania’s Sh31.8 billion.

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