The Ethiopian government has announced plans to allow foreign banks to set up local subsidiaries and foreigners to acquire shares in domestic lenders, as Addis Ababa continues to pursue its agenda of financial liberalisation.

The bill, approved by the Ethiopian cabinet but which still needs to be approved by the country’s parliament, says that “a foreign bank which is well established, reputable, and financially sound may be allowed to establish a partially or fully owned foreign bank subsidiary, or open a foreign bank branch, or a representative office, or acquire shares of a bank.”

The bill notes, however, that the board of directors of foreign banks operating in the country must include resident Ethiopians.

Ethiopia has been making efforts to liberalise its banking sector – as well as other critical industries such as telecommunications – in the hope of generating increased competition in a sector that has long been dominated by state-owned entities. All 29 banks currently operating in Ethiopia are locally owned and many under the direct control of the state.

In May last year, the National Bank of Ethiopia, the country’s central bank, granted a licence to Kenyan telecommunications giant M-Pesa to operate mobile money services, the first time it had approved such a licence for a foreign entity. The same month, the vice governor of Ethiopia’s National Bank, Solomon Desta, pledged to issue between three and five licences to foreign banks within five years.

Mirkarim Yakubov, an asset manager based in Addis Ababa, tells African Business that “the liberalisation or opening up of the financial sector has been talked about for many years, but we are now seeing concrete steps put in place […] this is a major step and I think it’s going to be a very big development.”

Yakubov predicts that the first foreign banks to enter the Ethiopian market will be regional African banks, including multinationals from Kenya and South Africa, but also suggests there could be strong interest from Chinese institutions.

He is optimistic that the entry of such players will increase the quality of service offered by the Ethiopian banking sector across the board.

“The foreign banks will bring new technologies and new services in both corporate and retail banking,” Yakubov says. “This will force the existing players to significantly upgrade what they are offering to businesses and consumers.

Yakubov adds that increased competition will “introduce supply and demand dynamics that could drive prices down” but cautions against excessive optimism that the liberalisation of the economy is the answer to all of Ethiopia’s economic problems.

“Foreign banks coming into the country will improve the economy of course, but this alone will not be able to dramatically shift the outlook for the overall economy,” he says.

“But there definitely will be a positive impact. Hopefully with foreign banks coming in, this will encourage more foreign direct investment in important industries such as agriculture and manufacturing. There is certainly a lot of positivity in Ethiopia about this development.”