Ethiopia sets stage for entry of Kenyan banks

This photo taken on January 28, 2018, shows the African Union (AU) headquarters in Addis Ababa during the opening of the Ordinary Session of the Assembly of Heads of State and Government for the 30th annual African Union summit. [File]

Ethiopia has inched a step closer to liberalising its banking sector, after setting the stage for Kenyan lenders such as Equity, KCB and Cooperative Bank to set up operations in the Horn of Africa's most populous nation.

On Saturday, the Ethiopian government adopted a new code that will allow the opening up of its financial sector to foreign entities.

The Ethiopian Council of Ministers - the country's cabinet said that the move "is a decision targeted at solving the forex shortage in Ethiopia, create more job opportunities and make the sector competitive and also take the sector one step forward."

The newly adopted policy must, however, be supported by a legal proclamation to take effect, said, local experts. Ethiopia's Central Bank will now be required to draft the legal framework to be approved by its Parliament, they added.

Ethiopia's population of 110 million people - the second-largest in Africa after Nigeria - offers significant business opportunities for Kenyan banks, the largest of which have embarked on a massive regional expansion in recent years.

Less than 30 per cent of Ethiopians have access to a bank account, highlighting the opportunity for foreign lenders.

At present, Ethiopia has over 30 commercial lenders, two of which are State-owned, according to its Central Bank.

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

The latest development will excite Kenyan lenders such as Equity Group and KCB Group which have for decades expressed ambitions to run fully-fledged operations in the neighbouring country.

KCB opened a representative office in Addis Ababa in 2015. This was to have it ready in the market when the opportunity to run fully-fledged banking operations arises.

This followed the 2012 deal that allowed Kenyan banks to open representative offices but barred full banking operations in Ethiopia including direct lending and deposit-taking. Local lenders cannot generate deposits or lend directly to Ethiopian companies and households as such, but they can conduct research and credit assessments to allow lending from their headquarters in Kenya.

Foreign competition

Ethiopian Prime Minister Abiy Ahmed promised earlier that the country would open up its banking industry to foreign competition as soon as parliament passes policies permitting it.

When he took office in 2018, he pledged to overhaul sectors like telecoms and financial services.

"We will bring foreign banks because we need additional wealth and hard currency," Prime Minister Ahmed is quoted as saying earlier.

Measures to open up the telecoms sector are underway, with a consortium comprising Kenya's Safaricom, South Africa's Vodacom, Britain's Vodafone and Japan's Sumitomo building a network after obtaining an operating licence last year.

Kenyan banks have in the past decade aggressively opened subsidiaries in South Sudan, Uganda, Tanzania, Rwanda, and Burundi to cut their reliance on the local market.

Former KCB Group Chief Executive Joshua Oigara had earlier said that if Ethiopia's economy were liberalised and foreign banks allowed to invest, KCB would consider partnering with a local bank.

Alternatively, he said, the bank could establish a standalone business.

A subsidiary is authorised to accept deposits from local individuals and businesses and advance loans to the same clientele.

A direct local presence, therefore, allows banks to acquire more customers and expand their loan book in the foreign market. Equity opened a representative office in Addis Ababa in 2019.

Co-op Bank said earlier that 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.

The bank said then the entry would enable it to capitalise on Ethiopia's fast-growing unbanked population.