Business Foreign bank entry could import economic crises, weaken local banks: NBE regulators
By Elias Tegegn
December 28, 2024
Regulators at the central bank concede the impending entry of foreign banks could negatively impact their domestic counterparts as well as the Ethiopian economy.
Although higher-ups at the National Bank of Ethiopia (NBE) have a mostly positive outlook for the amended Banking Business Proclamation ratified by Parliament last week, allowing the entry of foreign banks for the first time in five decades, concerns about the move were echoed during a roundtable discussion on Friday.
“Since foreign banks are connected to their respective home economies, they might import [their] economic crises into Ethiopia. Local banks could also fail to compete with foreign banks and be forced out of the market,” said Frezer Ayalew, director of banking supervision at the NBE.
The new bill permits banks to enter in one of four ways. They can incorporate a subsidiary in Ethiopia, buy stakes in a domestic bank, establish a local branch office, or open a representative or liaison office. The law caps foreign investment in a bank at 40 percent ownership, while a domestic bank cannot sell more than 49 percent of its authorized shares to foreign investors.
Frezer worries that foreign banks could display “cherry-picking tendencies” in the Ethiopian market, though he says that is expected.
“Foreign banks usually focus on lending to large corporate companies and investors. They prefer lending to clients who have a low-risk profile. Or they might focus on selected geographical areas,” he said.
Still, he hopes to see the entry of foreign banks push local banks to compete at a higher level.
“Foreign banks’ entry will induce a shockwave; an elevated level of efficiency and competition in the banking sector. They will inject new capital denominated in forex. They will bring new technology and skills. Therefore, local banks might step up to improve efficiency and stay competitive. Foreign banks will also diversify Ethiopia’s forex revenue sources,” said Frezer.
Mesfin Getachew, director of legal services at the NBE, says the amended NBE establishment proclamation will enable it to better regulate the financial sector. Key among the changes in the bill are provisions clarifying the central bank’s relationship with the government, according to the Director.
He cited an article limiting the direct advances to the government at 15 percent of average tax revenue calculated over three years. The previous proclamation allowed the government to take a direct advance from the central bank based on negotiation.
However, the 15 percent cap can be overruled in the case of economic shocks brought on by natural disasters, states of emergency, or other forms of pressure.