The National Bank of Ethiopia (NBE) has issued a new directive, “Requirements for Licensing and Renewal of Banking Business and Representative Office Directive No. SBB/94/2025,” at the end of last week, signaling a significant step towards opening the nation’s financial sector to foreign banks. This move is principally aimed at fostering a robust and sustainable banking sector essential for macro-economic stability and growth. In a press release last Friday (June 25), the NBE stated that the new Directive marks the final regulatory milestone in opening up the Ethiopian financial sector to foreign participation. It is the result of extensive consultations conducted over the past year with a wide range of stakeholders, whose inputs have been given due consideration, the release added.
The directive underscores the importance of proper licensing and supervision of banking businesses and representative offices of foreign banks to ensure the safety and soundness of the financial system. It also establishes the necessary legal framework for licensing banks owned by foreign investors, including foreign banks, and brings the supervision of foreign bank representative offices under the National Bank’s regulatory purview. Furthermore, the directive emphasizes the need for effective coordination mechanisms with the home supervisory authorities of foreign banks operating in Ethiopia.
Under this new directive, foreign banks can establish their presence in Ethiopia through various forms:
· Foreign Bank Subsidiaries: Defined as subsidiaries controlled by a foreign bank strategic investor, incorporated under Ethiopian laws, and having their head office in Ethiopia.
· Foreign Bank Branches: These are deposit or non-deposit-taking branches of a foreign bank that do not have a separate legal existence.
· Representative Offices: These offices of foreign banks will engage in representational functions such as liaison, marketing, and research.
The Licensing Directive allows for the first time the participation of foreign investors, including banks or other strategic investors in the Ethiopian banking system. The Directive also provides for several modalities through which foreign entrants join the banking sector, including among others by setting up subsidiaries, foreign bank branches, or Representative Offices.
General Principles and Licensing Requirements
Prospective foreign banks and representative offices are required to submit a written application to the National Bank. The NBE’s assessment of a strategic investor will consider several key criteria, including:
- Governance and Financial Soundness: Evaluating the applicant’s overall financial health and operational governance.
- Compliance with Home Regulator Requirements: Ensuring the foreign bank adheres to the regulations of its home country.
- Approval and Cooperation by Home Regulator: Assessing the approval from the home regulator, including arrangements for cross-border supervision and the degree of cooperation provided.
- Strategic Value: Determining the extent to which the foreign bank can contribute strategically to the Ethiopian financial system.
The licensing process will proceed through three phases: a pre-application phase, an application phase, and a commencement of operation phase. Foreign bank subsidiaries and branches are mandated to comply with all relevant prudential requirements, on par with domestic banks. The National Bank reserves the authority to grant or deny a license based on its assessment and may impose a moratorium on new business licenses if deemed necessary.
This directive marks a pivotal moment for Ethiopia’s financial landscape, inviting foreign expertise and capital to enhance the banking sector’s competitiveness and efficiency. The NBE, as stipulated in the Press Release, expects that the opening up of the sector to foreign entrants will help bring increased capital, competition, service delivery, efficiency, and inclusivity to the sector, all of which should deepen Ethiopia’s financial sector and contribute to improved growth.