Bill Allowing Foreign Banks in Ethiopia Passes First Reading in Parliament

The House of Peoples Representatives passed the first reading of a draft Banking Business proclamation as Ethiopia moves closer to open up the banking sector for foreign investors after more than half a century.

The draft proclamation is prepared in response to the recent policy reforms that have recently been undertaken, stated government’s whip Tesfaye Beljige while presenting the bill to members of the parliament on Tuesday.

These reforms involve allowing foreign citizens of Ethiopian origin to invest in the banking sector, digital financial companies to provide full-fledged banking service, and interest-free banks to join the industry, according to Tesfaye.

And most recently,  he noted, the council of ministers also decided to allow foreign banks to operate in Ethiopia in the context of an economic reform agenda framework.

Opening the banking sector for foreign investment would improve the competitiveness, efficiency of the sector and contribute to sustainable economic growth, the bill states in its preamble.

MPs, while welcoming the bill and the advantage the liberalized banking sector brings into the economy, raised their concerns over readiness of domestic banks to compete and NBE’s regulatory capacity.

“Foreign banks will come here with high technological and financial advantages to do business, not for charity,” an MP said.

This requires, he says, establishing a strict regulatory and monitoring system, along with enhanced  technological capability, to anchor their work here in a win-win approach.

The MP stressed that the proclamation needs to take such issues into consideration.

The house eventually voted in favor of referring the bill to the Plan, Budget and Finance Standing Committee for scrutiny. The committee will come up with a report and resolution for the house to ratify the bill and enact it into law.

Investment options

Under its current form, different investment options will be offered for foreign investors seeking to engage in the banking business.

A foreign bank can 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 proposes.

Foreign nationals other than foreign banks and foreign owned Ethiopian organizations would also be able to acquire shares in banks.

The bill, however, limits a total shareholding by “a strategic investor” in an existing or a new domestic bank to 40%.

Such holding by a “non-strategic foreign national investor and a foreign juridical person” is also limited to 7% and 10% of subscribed shares of a bank, respectively.

The aggregate shareholding foreign foreign nationals and foreign-owned Ethiopian organizations in a bank would be limited to 49% of the total subscribed shares of a bank.

Full acquisitions still possible

The Bill states the central bank can approve a full or partial acquisition of an existing domestic bank by a Foreign bank on exceptional basis.

Such acquisition may be allowed “for the purpose of attracting strategic investments that would benefit the economy and/or as a way of resolving a distressed bank and preserve financial stability,” it says.

The bill states that foreign investment in the sector can only be in foreign currency but dividend earnings at the end of every financial year may be re-invested in Ethiopian Birr.

It also allows dividend earnings, salaries of foreign national employees, and proceeds from sales of shares or liquidation of a bank may be repatriated as per the NBE directive and other pertinent laws.

A share transfer or purchase that causes significant ownership in a bank in general will be a subject of a National Bank’s approval.

Banks to Employ Foreign Nationals

Banks can also employ foreign nationals for Chief Executive Officer, Senior Executive Officer or other positions requiring specialized knowledge or expertise through recruitment or staff transfer.

Their employment would, however, be on contract basis with a maximum term of five years. Upon expiry of the five year term, the bill states the position shall be replaced and filled with Ethiopian National.

The contract can only be extended for another term upon request of a bank supported with adequate justification and approval of the National Bank.

The national bank would also issue a directive to determine a maximum number and/or percentage share of foreign employees in a bank.

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