Ethiopia says it’s ready for foreign firms but investors seem reluctant

ADDIS ABABA — The Ethiopian parliament is widely expected to approve a new bill in coming months that would pave the way for increased foreign ownership of its banking sector, allowing international players to take a more significant stake in Africa’s second-most populous country.

Once approved, the National Bank of Ethiopia would raise the maximum permitted direct stake in a local bank to 40% — from 30% — for “strategic” foreign investors like large global banks, and an aggregated foreign ownership capped at 49%.

But it’s unclear if there is a strong appetite for these investments at this time.

When the Ethiopian government tried to partially privatize Ethio Telecom earlier this month, the interest from international investors was lukewarm. A stake in the former mobile monopoly should have been an attractive investment: The former mobile monopoly has more than 64 million users, and more than 40 million mobile money users, making it one of the largest telecom operators on the continent.

Investors have been deterred by everything from ongoing regional conflicts in different parts of the country to a chronic shortage of foreign currency, say local analysts.

That reality has forced the government to sell up to 10% of Ethio Telecom’s shares to locals, in a desperate bid to generate revenue. It hopes the liberalization of its banking sector will have a different outcome.

Given Ethiopia’s desire to raise foreign currency, this is a major setback. The nation’s forex reserves have depleted, with the International Monetary Fund demanding economic reforms — including the devaluation of its local currency that the government opposes — as a condition to extend a loan that the government desperately wants.

Abdulmenan M Hamza, a financial and economic analyst, said that opening Ethio Telecom to local investors is a fair move given the lack of foreign interest. “A huge portion of the shares is still reserved for foreign investors although they show little interest so far due to the security situation in the country; however selling shares to locals ensures the local population can have a stake in such a giant enterprise,” he told Semafor Africa.

The previous ​​Ethiopian People’s Revolutionary Democratic Front (EPRDF) government positioned Ethiopia as a hub for foreign investment with special economic zones and other projects. It soon made Ethiopia one of the fastest growing economies in the region. Prime Minister Abiy Ahmed, who came to office in 2018, has made the liberalization of Ethiopia’s state protections a priority and the central goal of his administration.

The bill proposes that the National Bank should also be flexible and allow foreign investors to take full control of local banks provided they meet certain “exceptional” conditions, including financial capabilities as determined by the central bank.

Currently, Ethiopia’s banking sector consists of 32 domestic players with total outstanding credit of slightly over two trillion birr ($35 billion) for a population of approximately 130 million people.

Abiy’s government believes the liberalization of its economy and allowing foreign ownership in banking will boost much-needed foreign currency inflows. The administration views introducing foreign competition as key to addressing Ethiopia’s longstanding supply-side challenges in key industries.

“As the country critically needs foreign currency, it cannot afford to lose foreign investors and that is why the new draft proclamation opened up the possibility of full acquisition,” said Samson Berhane, an Addis Ababa-based business analyst.

The new approach, in addition to opening the nation’s retail sector to foreign investment, is key to addressing Ethiopia’s longstanding supply-side challenges in key industries. Acquisitions have been a focus for many regional and international banks and lifting the cap on foreign investor ownership could be key to attracting prospective foreign investors.

A major challenge for Ethiopian banks has been the lack of diversified product offerings, with access to finance also constrained as banks are criticized for relying on traditional deposit mobilization approaches.

A recent central bank report found that Ethiopia’s top 10 borrowers alone accounted for approximately 23.5% of all bank loans.

A number of Kenyan banks, including Equity Bank and KCB Group, have shown interest in entering the Ethiopian market, but are likely to exercise a lot of caution, according to Julians Amboko, a Nairobi-based financial markets analyst.

“There’s a view in Kenya that the Safaricom precedent suggest that, whereas Ethiopia may be liberalizing, the state is still keen to give preferential treatment to the local entities and therefore the playing field will not necessarily be even and may prescribe local ownership quotas,” Amboko said.