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Kampala, Uganda
Co-authored with Jenna Matovu Hayra.
Ethiopia has embarked a broad economic reform agenda, aimed at stimulating investment, enhancing financial inclusion, and integrating into the global financial system. As we highlighted in this article, a key policy decision in this reform agenda is the liberalization of the financial services, marked by the opening up of the banking sector for foreign investment and enabling foreign banks to set up operations in Ethiopia.
Following the ratification of the Banking Business Proclamation – No.1360/2017 (the Proclamation), which provided the legal framework for the establishment of foreign banks and foreign investment in domestic Ethiopian banks, the National Bank of Ethiopia (NBE) has issued licensing requirements for licensing and renewal of banking business & representative office licenses under Directive No. SBB/94/2025 (the Requirements).
In this brief note, we highlight salient aspects of the requirements, with a focus on market entry requirements for foreign banking players.
Key Highlights in the Banking Business Requirements
- Capital Requirements
It will be recalled that the Proclamation prohibits any person from transacting banking business in Ethiopia without obtaining a banking business license from the NBE. The Requirements provide for the licensing requirements that must be fulfilled prior to the grant of a license from the NBE, including capital requirements.
The Requirements provide for a minimum paid-up capital of Birr 5 billion (approximately USD 36 million) for foreign banks seeking to establish local subsidiaries. This capital must be fully paid in cash in an acceptable foreign currency.
For foreign bank branches, the Requirements provide for a minimum branch capital requirement of Birr 5 billion (approximately USD 36 million), permanently assigned and inwardly remitted in acceptable foreign currency. It must be highlighted that the Requirements permit a foreign bank with an existing foreign branch to open additional branches, without the need for the additional branches to be subject to the capital requirements.
On the other hand, the Requirements do not provide for a minimum capital requirement for representative offices. However, representative offices are required to furnish evidence of an inward remitted sum of USD 100,000 for purposes of covering the annual expenditure of the representative.
- Shareholding Structures
As provided for in the Proclamation, the Requirements reiterate the permissible shareholding structures applicable generally. The key restrictions include:
- Direct shareholding of a strategic investor (foreign banking group or foreign bank) in a new domestic bank is capped at 40%.
- The aggregate shareholding of foreign nationals (including foreign banks) and foreign-owned Ethiopian organizations, other than foreign bank subsidiaries, in a bank is capped at 49%.
It may be argued that the exceptions to the aforementioned shareholding structure are where a foreign bank establishes a local subsidiary. The Requirements do not bar a shareholding structure higher than 49% and as such, a local subsidiary may be wholly owned.
It is also imperative to highlight that while the acquisition of stakes in domestic banks must generally be subject to the shareholding limits provided for, exceptional approval may be sought from the NBE for the shareholding to exceed the 49% shareholding cap.
- Permissible Activities
The Requirements limit the permissible activities of a representative office to marketing & liaison services, market research, facilitating correspondent banking relationships, export promotion as well as trade support for businesses.
On the other hand, a foreign bank branch can only establish a deposit-taking branch or a non-deposit-taking branch. A deposit-taking or non-deposit-taking foreign branch may engage in all banking business activities except that non-deposit-taking branches are precluded from receiving funds from the public through deposit mobilization.
Conclusion
The enactment of the Banking Business regulations will go a long way in boosting investor confidence and spurring foreign investment in the Ethiopian banking sector. The extent of the liberalization remains to be seen – especially given the existing restrictions on the inward movement of capital and labour in the Proclamation.
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