In a historic move, the Ethiopian Parliament has officially approved Proclamation 1359/2024, paving the way for foreign banks to operate within the country. The decision, made on Tuesday, marks a significant shift in Ethiopia’s banking sector and is seen as a bold step towards modernization and integration into the global financial system.
The National Bank of Ethiopia hailed the legislation, calling it “groundbreaking,” as it not only allows foreign financial institutions to establish a presence in the country but also realigns the central bank’s focus towards maintaining long-term price stability. This move is viewed as part of broader economic reforms under Prime Minister Abiy Ahmed’s administration, which aims to diversify the Ethiopian economy and enhance the financial sector’s competitiveness.
The ruling Prosperity Party, which holds over 95 percent of the seats in the Ethiopian Parliament, led the push for the new law. The law’s approval comes as part of a series of macroeconomic reforms designed to liberalize the Ethiopian economy, which has been historically characterized by state control and protectionism.
However, the legislation has sparked debate. Despite the overwhelming support from the ruling party, three opposition members expressed reservations about the potential negative impacts of allowing foreign banks to operate in Ethiopia. They argue that local private banks, many of which are less than five years old, lack the financial and technical capacity to compete on equal footing with their foreign counterparts.
Desalegn Chanie, a member of the National Movement of Amhara (NaMA), a party that has been weakened by internal divisions, strongly criticized the law. He questioned whether the country had thoroughly assessed the readiness of its financial sector to handle foreign competition. “The approval of this law is tantamount to declaring the demise of private banks,” Desalegn warned. He expressed concern over the capacity of these newer institutions to compete with foreign giants and highlighted the risk that foreign banks could siphon capital out of the country, exacerbating economic vulnerabilities.
Desalegn also raised alarm over the potential impact on Ethiopians who have invested in these nascent banks, suggesting that a merger of smaller institutions might have been a more prudent strategy before opening the sector to international players. His colleague, Abebaw Desalegn, also voiced concerns, calling the law’s approval “untimely” given the current state of Ethiopia’s financial institutions.
Ethiopian economists, including the prominent Kebour Ghenna, have voiced similar apprehensions, warning that the rush towards privatization could have harmful consequences for the nation’s economy. They argue that the opening of the banking sector could destabilize local financial institutions and undermine Ethiopia’s economic sovereignty.
In response to these concerns, the National Bank of Ethiopia has defended the legislation, asserting that the new law strengthens the country’s regulatory framework. The bank stated that the proclamation provides a legal foundation that will help ensure macroeconomic stability, promote growth, and safeguard the country’s financial sector while improving the efficiency of the payment system.
Mamo Mihretu, the Governor of the National Bank of Ethiopia, addressed the Parliament during the discussion of the bill, countering critics by emphasizing that the opening of the banking sector would not lead to deregulation. “Rather, it strengthens our regulatory capacity,” he said. Mihretu, a former World Bank official, assured lawmakers that foreign banks would be required to adhere to the same regulatory standards as local institutions. He added that foreign banks would be permitted to either establish branches, partner with local banks, or open representative offices, depending on their business model.
The approval of this law is part of broader economic reforms under Prime Minister Abiy Ahmed’s “homegrown economic growth program,” which seeks to foster private sector growth and foreign investment while also addressing critical macroeconomic challenges. These reforms have already included measures such as the introduction of a market-based foreign exchange regime, which led to the devaluation of the Ethiopian Birr by more than 100 percent. When the new exchange rate system was implemented in July, one US dollar was valued at approximately 58 Ethiopian Birr. As of now, the exchange rate has surpassed 124 Birr per dollar, reflecting the economic challenges facing the country.
The move to open Ethiopia’s banking sector to foreign banks aligns with the government’s broader strategy of economic liberalization. While critics remain cautious about the potential risks, the government argues that the changes are essential to modernizing the economy and fostering long-term growth. The inclusion of foreign banks in the market is expected to introduce increased competition, improved financial products, and better access to international financing.
As Ethiopia takes this significant step towards integrating its financial sector into the global economy, the impact of these reforms will likely unfold over the coming months and years. The debate over the law’s implications is likely to continue, as both supporters and critics weigh the potential consequences for the country’s banking landscape and overall economic stability.
