Jun 1 , 2024

Regulators at the National Bank of Ethiopia (NBE) are shaking things up in the banking industry, as the country prepares to welcome foreign banks. During a recent meeting with bank executives, they discussed proposed reforms concerning entry modalities, mergers and acquisitions, and corporate governance. The rules outline how foreign banks can buy into local banks, join forces, open new branches, or potentially dissolve.

Led by Solomon Desta, vice governor, and Frezer Ayalew, head of banking supervision, the regulators presented draft legislation aimed at enhancing the sector's competitiveness and stability.

"It's to provide a way out in times of crisis," he told Fortune.

A key aspect is allowing local banks to sell equity to foreign banks or merge with them, particularly during financial crises. The draft proclamation details how foreign banks can operate in Ethiopia, offering four entry options: setting up a subsidiary, opening a branch, establishing a limited-function representative office, or buying shares in Ethiopian banks. Foreign ownership in any one bank is capped at 40pc. While the draft covers broad aspects, finer details like profit repatriation are left to be addressed in separate directives.

"Representative offices cannot conduct banking business," Frezer clarified, indicating the legal framework is still incomplete.

While some analysts question the interest of foreign banks given the current economic and political climate, officials see opportunities. Local banks could benefit from foreign expertise through partnerships or increased share sales. However, there are concerns about whether foreign banks will focus on serving corporate clients over individual services.

Frezer noted that several African and global financial institutions have shown interest in entering the banking sector. However, financial analyst Abdulmenan Mohammed (PhD) doubts whether foreign banks will engage fully due to the country's instability, predicting they might limit their operations to a small corporate clientele.

"They likely won't engage in retail banking," he told Fortune.

According to Abdulmenan, the draft proclamation's detailed merger modalities reveal the regulator's lack of confidence in the financial soundness of domestic banks. He highlighted the increase in individual ownership stakes by juridical persons to 10pc as a major development.

"Foreign bankers look for bilateral relationships between the countries," he said.

To advance competitiveness, the central bank has set a 2026 deadline for local banks to meet a minimum capital threshold of five billion Birr, with a higher threshold of seven billion Birr for recent entrants. With less than two years remaining, less than a handful out of 31 banks have met the requirement so far.

Tadesse Hatiya, president of the two-year-old Sidama Bank (with a paid-up capital of 573 million Br), is optimistic. He sees the central bank's proposal to allow juridical persons and institutions to own up to 10pc of a bank as a way to raise capital through increased share sales. However, uncertainties remain about foreign profit repatriation.

"The modalities need to be clarified," Tadesse told Fortune.

Last week, the Ethiopian Bankers Association submitted a compilation of ideas and insights to the central bank, representing 21 banks.

Dagmawi Kassahun, vice president of Berhan Bank, noted that experts within their bank have been exploring ways to collaborate with foreign bankers. He raised concerns about how foreign bank branches with main offices elsewhere would be regulated and a proposed directive requiring a board of directors to have one-third membership from non-bank staff or shareholders.

"Questions linger on how much power these members may attain," he said.

Frezer clarified that the proposal is based on an existing provision under the country's revised commercial code.

Other bankers are also keenly anticipating the changes. According to Teferi Mekonen, president of Oromia Bank, foreign banks have already approached their institution with equity investment offers. While confident in his bank's competitiveness with 5.3 billion Br paid-up capital, Teferi aspires to see foreign banks serving rural areas and providing retail banking services.

"They should not be allowed to crowd around corporate clients only," he told Fortune.

Discussions about opening Ethiopia's banking sector to foreigners have been ongoing since 2018, but little legislation has been forwarded until now. A notable development was the previous amendment allowing the establishment of full-fledged interest-free banks, paving the way for a Sharia-compliant financial subsector.

Dawit Keno, president of Hijra Bank, is eager to see details on how interest-free products like Mudarabah will be provided in the emerging space. He views the sector's opening as a crucial milestone for the banking industry.

"It's better late than never," Dawit told Fortune.

Ethiopia's banking sector has exhibited growth in recent years, accounting for 96.1pc of the country’s total financial assets as of June 2023, with total deposits reaching 2.2 trillion Br.

Eshetu Fantaye, a veteran in the financial industry, expects the central bank to further raise the minimum capital threshold for commercial banks, considering the draft's emphasis on mergers. He suspects that the central bank recognises the financial struggles of some local commercial banks.

"Mergers are generally good for banking business," Eshetu told Fortune, "statutory or not."

He recommends diversifying services from an urban-centric to a national perspective.

From the banks which have already met the capital requirement, Dereje Zenebe, president of Zemen Bank, supports the proposed changes. He cautions that the complexity of the reform, from establishing new banks to dissolving existing ones, requires careful consideration of the timeline for entry.

"The order of opening up the sector needs careful consideration," Dereje advises.

Dereje believes mergers and acquisitions are crucial, advancing towards stronger competition than 30 smaller commercial banks. He sees foreign equity investments as a gentle introduction, allowing domestic banks to benefit from foreign expertise while maintaining their independence. However, Dereje argues against an overall cap on foreign ownership if the sector opens fully.

"Banks with low capital may struggle to compete even with foreign subsidiaries," he warns.

PUBLISHED ON Jun 01,2024 [ VOL 25 , NO 1257]

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