Ethiopia: Investment bank law may herald creation of stock exchange

By Loza Seleshie

Posted on Wednesday, 28 April 2021 10:02
A client uses an automated teller machine (ATM) at the Commercial Bank of Ethiopia in Addis Ababa
A client uses an ATM at the Commercial Bank of Ethiopia in Addis Ababa, Ethiopia, July 31, 2019. REUTERS/Maheder Haileselassie Tadese

Ethiopia has been progressively opening its banking sector since 2016. As the country moves ahead with its liberalisation process under Abiy Ahmed’s leadership, the pace of reform has picked up. But with the recent flop of telecom privatisation; partly because of fears around security, will financial sector opening fare differently? The fate of investment banks will be closely linked to moves to open an Ethiopian Stock exchange, and the wider privatisation process.

Since 2018, the list of sectors open to foreign investment has expanded, including logistics and telecoms.

In February, the Ethiopian Parliament completed a draft law to allow partial foreign entry into the banking sector – a stark contrast to the government’s more hostile position a year ago

What are the provisions of the draft law? How will it impact the banking sector? And what are its wider ramifications?

Slow to bloom

Ethiopia showed signs of opening its banking sector to foreigners in 2016 after adhering to the African Trade Insurance Agency (ATIA)

Backed by regional and international institutions, COMESA and the World Bank, the ATIA aims to attract foreign direct investment (FDI) by offering “ insurance against political upheaval, expropriation and problems with exchange controls on trade” as noted in The Economist. 

Following this, nine foreign banks have opened liaison offices:

  • the European Investment Bank,
  • Standard Bank (South Africa),
  • Commerz Bank (Germany),
  • KCB bank (Kenya),
  • Equity Group (Kenya)
  • Bank of Africa (Morocco)
  • Ziraat Bank (Turkey)
  • Export-import Bank of India

Despite such enthusiasm, the banking regulations have not evolved. Liaison offices therefore only serve “to facilitate credit to companies from their countries of origins” according to the US Department of Commerce.

The new draft law can be considered a significant step forward. But it remains partial.

“Investment banks are not going to be given permission to collect deposits and provide loans. They would rather act as an entity that gives advisory services and connect buyers and sellers of stocks […] They will also facilitate mergers and acquisitions”, Melesse Minale, advisor to the Prime Minister and the National Bank of Ethiopia (NBE) told the Ethiopian paper The Reporter.

Ethiopia is therefore preserving a local monopoly over its retail banking system while planning to open the investment banking sector to foreigners.

This is particularly interesting when it comes to the ongoing privatisation process and establishment of local stock exchanges. The latter “will be open for everyone — first banks, insurance, and big state-owned enterprises. We think and believe that these big companies will be the primary actors for the capital market” Yinager Dessier, governor of the National Bank of Ethiopia (NBE) told The Financial Times.

Privatising and beyond

Privatisation and the establishment of local stock markets are closely related, with the shares of the companies to be privatised then listed and traded on the stock market. Investment banks will play a crucial part for Ethiopia as an intermediary between the company and the capital markets.

And while that knowhow is currently lacking in Ethiopia, the law could “attract Ethiopians from the diaspora to bring their expertise” Alexander Demissie, executive director of Africa Rising tells The Africa Report. While he agrees foreign banks could bring much needed liquidity to Ethiopia, “the regulatory framework must, however, be carefully worked out as it affects other new sectors such as venture capital and private equity”.

As the draft law has cross-sector implications, Ethiopia continues to strictly regulate local banking.

Protecting local banking

Ethiopia’s banking system has a central bank (NBE), state-owned development bank and state-owned commercial bank. The latter represents more than 60 % of the market share in assets and deposit. Additionally, there are sixteen private banks.

“The sector faces tight regulations in relation to deposits (minimum interest rates), lending (mandatory purchase of NBE Bills equal to 27% of gross lending), and foreign exchange (a strict waiting list system to allocate foreign exchange based on NBE Directives of priority items)” according to a 2019 report on Ethiopia’s banking sector by Cepheus Research and Analytics.

While preserving retail banking from foreign competition, the government has also started giving more room to local private players. As per the new directives issued by the NBE in 2020, these measures include “encouraging the private sector to [buy into] digital fintech operators. [..] we are trying to expand this mobile banking, internet banking” Dessier was quoted in The Financial Times.

Financial literacy

With a population of 112 million people, Ethiopia represents an attractive market. However, in an economic context marked by Covid -19, the initial interest is turning into caution for some. Amongst them, the Kenyan bank KCB is currently “pausing” its entry into the Ethiopian market, after having to cut staff by 45% amidst the pandemic.

Other offers may arise. “I believe Kenyan and South African banks are most excited to enter the market. Sovereign funds, such as Qatar’s might also join in”, says Demissie. “They would be the ones most interested in Ethiopia’s potential and its proximity to other markets.”

Bottom line

As Ethiopia slowly opens up its economic system, including through the African Continental Free Trade Area (AfCFTA) ratified in 2019, many questions arise. How much are Ethiopian citizens  equipped to invest in stock markets? Will regulatory mechanisms limit foreign ownership?

As multiple and simultaneous changes take place, elections are also expected in June. An accumulation of decisive moments for Ethiopia are still awaiting clear frameworks.

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