Policy Caps Foreigners’ Acquisition In Local Banks To 40 Percent | The Reporter

Local banks have less than one year to prepare

Foreign banks are allowed to acquire up to a 30 percent stake in local banks, according to a policy document approved by the Council of Ministers last month and obtained by The Reporter.

With an additional five percent stake allowed each for foreign individuals and foreign non-bank investors, the maximum stake local bank can sell to foreigners is capped at 40 percent.

Licensing foreign banks and implementation of the policy is slated to kick off in one year’s time from the ratification of the Banking Business Proclamation, whose amendment is already underway.

The highly confidential policy document has been off limits. The policy also excludes insurance and microfinance from the open-up initiative. It allows foreign banks to open a subsidiary firm and open branches in Ethiopia, besides giving an option to buy shares in local banks.

Foreign banks are also authorized to open a commercial representative branch in Ethiopia, a permit that was already given to some multinational lenders like Standard Bank, Egypt’s Commercial International Bank (CIB) and KCB Group.   

An NBE official that spoke to The Reporter confidentially stated that the window period for local banks until the liberalization takes off might not necessarily be one year.

“The Amendment to the Banking Business Proclamation is finalized and ready to be sent to the Council of Ministers. Most certainly, the proclamation will be approved in the current 2022/23 Ethiopian fiscal year. The licensing of foreign banks will start after the amendment of the banking business proclamation is finalized,” the official said.

The official believes that once the proclamation is amended, regulations and directives will follow, which can take six months or a year.

“We cannot say definitely that a bank will be opened up one year after the proclamation is finalized. It depends on our pace of finalizing the proclamation and the regulations and directives required to implement it,” the official added.

The opening-up policy document was not revised after the Council ratified it. Comments forwarded by the Council are also not included, according to The Reporter’s sources.

The NBE will decide on the majority of the details regarding the implementation of the opening-up policy with the details to be stated in the upcoming proclamation, regulations, and directives, according to the NBE official.

“The policy is more of a broad perspective. Foreign banks, individuals, and strategic investors are allowed, but the exact ratio will be determined. Changes to investment regulations are not always necessary. The banking proclamation is sufficient by itself,” added the official.

Local banks are already in hot water since the Council of Ministers disclosed the approval of the open-up policy last month. Presidents of local banks The Reporter talked to, who did not have access to the policy documents so far, argued most of the decisions stated in the policy document.

“Of the four modalities, subsidiary and branch will have no benefit for Ethiopia. They are the biggest lunacy of Ethiopian government decisions. They will neither bring foreign currency nor improve the efficiency of Ethiopia’s banking industry. The government is wrong to assume local banks lack corporate culture and skills. I am sure if academicians and banking practitioners see the policy document, they will not approve it,” said a private bank president with two decades of experience.

He says the government committed two major breaches. “First, the government did not identify what it was really seeking to do to open the banking industry. Is it foreign exchange revenue, access to finance, efficiency, technology, or others? Then the government should have done intensive studies to determine which venue is suitable for that objective,” the bank president said.

“Secondly, the government did not discuss it with local banks and other stakeholders. The NBE did not discuss anything with us. The policy document is still kept a secret even after the Council approved it. It must be posted on the council’s website as soon as possible,” the president added.

Another bank president appreciated the decision to cap foreign bankers’ acquisitions. “Capping maximum equity local banks can sell to foreigners to minority shareholding ratios is very good. It will protect local shareholders and maintain the rights of local bankers. The issue with this equity acquisition is that there is no system in place to assess the value of local bank shares.”

“Since there is no stock market in Ethiopia, valuation of local banks is done traditionally. None of the local banks are listed on any stock market. The existing share market valuation system is traditional. Currently, shares of each of the local banks do not reflect the exact values. So there must be a new valuation system,” said the bank president.

On the other hand, he contends that valuing local banks at a time of peak birr depreciation will be detrimental to Ethiopia but beneficial to foreign banks and investors.

“The valuation will be high in terms of birr attributable to the devaluation. But in terms of dollars, the value is not large. Therefore, foreign banks and investors can acquire the stakes at a cheaper price in dollars. The injection of foreign banks into local banks will escalate inflation in Ethiopia because foreign investors will buy the shares with forex. But that forex is injected into the economy in birr, which is high in number. So the immediate impact of the banking opening-up will be higher inflation. I do not understand why Ethiopia keeps devaluing Birr,” he added.

The bank president also appreciated the one-year window period for preparation but questioned why private local banks have to work with the NBE to devise their competition strategy.

However, all the bank presidents rejected the government’s decision to ratify the open-up policy document without consulting them.

“The NBE did not even discuss with us the Banking Business Proclamation amendment underway, let alone the new policy. Many laws were introduced without consultation with bankers and have proved harmful to us. I understand the political and diplomatic benefits of this policy, which is why the Council hurried to ratify it without consulting us,” added the banker with two decades of experience.

For him, the policy is made to appease western countries, which are pressuring the government.

“Banking opening up is not as simple as opening up telecom, aviation, or any other sector. Ghana and Kenya sold their banks and became poor, overtaken by India, Pakistan, the UK and other countries’ banks. Many other countries, including in Africa, opened their banks after intensively deliberating on it and preparing a detailed catalogue of the modalities,” said the banker. “Nigeria, Ghana, Kenya, South Africa, Morocco, and Egypt all opened their banking sectors after much deliberation. Not all of these countries were successful after opening their banks. Unless wisely managed, this opening up will also make Ethiopia poor,” he added.

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