Kenyan banks planning to enter Ethiopia through local joint ventures will be able buy only up to 30 per cent stake in Ethiopian banks.
This is after the Ethiopian government set the foreign holding cap in local banks for banking entities at 30 per cent, according to new details of the laws guiding the opening up of the local banking sector.
The cap is applicable for foreign lenders that want to acquire stakes in existing banks, according to an official spearheading the liberalisation process who was quoted by Ethiopian publication The Reporter on Saturday.
An additional five per cent stake will be allowed for foreign individuals and foreign non-bank investors each, taking the maximum stake a local bank can sell to foreigners at 40 per cent.
Kenyan banks are expected to line up to take advantage of an under-penetrated banking market in the horn of Africa country, buoyed by its huge population once the market fully opens.
A law intended to accelerate foreign investment in the local banking sector is being finalised, though its implementation timelines are not clear yet.
Clear the way
The much awaited foreign investment law is expected to clear the way for Kenyan banks such as Equity, KCB and Co-operative Bank to set up operations in the Horn of Africa's most populous nation.
Co-operative 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 the entry would enable it to capitalise on Ethiopia's fast-growing unbanked population.
Former KCB Group Chief Executive Joshua Oigara had earlier said that KCB would consider partnering with a local bank if Ethiopia's economy were to be liberalised and foreign banks allowed to invest.
Alternatively, he said, the bank could establish a standalone business.
Under the new investment law that is being firmed up, banks will have four options for Ethiopia entry.
They include opening local subsidiaries, buying stakes from local partners capped at 30 per cent, opening a branch or opening a representative office.
If foreign banks want to open a subsidiary on their own, there will be no cap, according to the new guidelines.
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.
KCB opened a representative office in Addis Ababa in 2015 as it readied to run full-fledged banking operations when the opportunity 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.
The 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.
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.
The local commercial banks are looking beyond Kenya's borders for acquisitions, seeking to tap opportunities in East Africa which are driven by rapid economic growth and trade integration.
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.
KCB Group recently entered an agreement to acquire 85 per cent stake in Trust Merchant Bank (TMB) in the Democratic Republic of Congo (DRC).
Its entry into DRC take bring competition to the doorstep of its rival Equity Group, which in 2020 purchased a 66.5 per cent stake in Banque Commerciale Du Congo, entrenching its foothold in the hugely unbanked mineral-rich country.