Ethiopia’s New Banking Business Proclamation: Key Insights for Dealmakers.

On 17 December 2024, the House of People’s Representatives of Ethiopia ratified the Banking Business Proclamation – No.1360/2017. The primary objective of the proclamation is to provide for a legal framework that would allow for the opening up of the banking sector for foreign investment and enable foreign banks to set up operations in Ethiopia. The Proclamation notes that opening up the banking sector in Ethiopia to foreign investment is intended to improve the effectiveness and efficiency of the sector and to drive sustainable economic growth.

In this brief note, we provide key insights for dealmakers, who may be keen on setting up banking subsidiaries in Ethiopia through mergers & acquisitions.

Key Insights for Deal Makers

1. Requirements for obtaining a banking business license.

The Proclamation prohibits any person from transacting banking business in Ethiopia without obtaining a banking business license from the National Bank of Ethiopia (NBE). Other matters requiring NBE approval include the introduction of new products & services, effecting major changes in the line of business of a bank, corporate actions such as reduction of share capital, and the disposal of the property of the bank within and outside Ethiopia that is not in the normal course of business.

It is important to note that while the Ethiopian banking sector has been closed to foreign banks, two foreign banking groups – KCB Group and Standard Bank Group had previously obtained approval to open representative offices. The Proclamation however requires that such representative offices re-apply for fresh licenses from the NBE, in the event the present license was obtained from another government body.

2. Establishment of Foreign Banks.

The Proclamation provides that a foreign bank that is well established, reputable, and financially sound may establish a partially or wholly owned subsidiary; open a representative office; open a foreign bank branch; or acquire shares of a bank in Ethiopia.

The following are the key considerations with respect to foreign banks / foreign shareholders:

• Foreign nationals – other than foreign banks and foreign-owned Ethiopian organizations – may acquire shares in banks.
• Direct shareholding of a strategic investor in an existing or new domestic bank is capped at 40%.

A strategic investor is defined as a foreign banking group with a good reputation in its country of incorporation or a foreign bank that is owned by the government of its country of incorporation or an international development finance bank or private equity firm.

• The shareholding of a non-strategic foreign investor is capped at 7% while the shareholding of a foreign juridical person is capped at 10% – in existing or new domestic banks.
• The aggregate shareholding of foreign nationals (which includes foreign banks) and foreign-owned Ethiopian organizations in a bank is capped at 49%.
• Key to note: In exceptional circumstances, the NBE may allow a well-established and financially sound foreign bank to acquire an existing domestic bank partially or fully through an acquisition process.
• Foreign banks and foreign-owned Ethiopian organizations are required to invest in a bank through foreign direct investment in foreign currency only.
• Dividend earnings at the end of the financial year may be re-invested in Ethiopian Birr by foreign banks – provided the shareholding caps are observed. Further dividends earned from investment by foreign banks in a bank, the salaries of foreign employees, and the proceeds from the sale of shares or liquidation processes may be repatriated in line with the existing laws.
• The minimum capital requirements are subject to the directives of the NBE.
• The Board composition of a foreign bank is required to have the following: foreign parent bank representative; representatives of other shareholders if any; and local resident non-shareholder Ethiopian directors.

3.  Mergers & Acquisitions

The Proclamation provides for the following matters with respect to M&A transactions:

• All M&A transactions are subject to the approval of the NBE.
• M&A transactions must be subject to the shareholding limits provided for within the proclamation i.e. the aggregate shareholding for foreign shareholders must remain capped at 49% except where exceptional approval is granted by the NBE.
• Any transfer of shares that significantly alters the ownership of a bank is subject to NBE approval.
• The Proclamation prohibits the acquisition of shares in a bank using bank loans.
• The Proclamation also prohibits a significant shareholder in one bank from acquiring shares in another bank.
• The shares of a bank are required to be of one class, registered as ordinary shares, and of the same par value.

4. Employment Matters

The Proclamation also provides for key provisions with respect to the employment of foreign nationals in foreign banks. The Proclamation provides that foreign nationals may be hired for the Chief Executive, Senior Executives, and positions requiring specialized knowledge for a period of 5 years and subject to the approval of the NBE. The 5-year contract term may be extended for a further 5-year period, provided there is justification for the extension and subject to the approval of the NBE. The NBE may also prescribe the percentage of foreign nationals employed by a bank.

Following the expiry of the 5-year period, the positions are required to be filled by Ethiopian nationals. Accordingly, banks are required to put in place knowledge transfer programs to prepare Ethiopian nationals to assume key roles within the sector.

Conclusion

The enactment of the Banking Business Proclamation will by no means spur investment in the Ethiopian banking sector. It will catalyze competition, innovation, efficiency, and effectiveness of the sector. It is imperative to note, however, that the Proclamation contains certain restrictions on the in-ward movement of capital and labor as stipulated herein, which may be interpreted as an attempt to balance the need for foreign investment with the need to protect domestic economic interests.

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