Co-authored by Shega Media & Technology, this analysis traces the long arc of foreign bank participation in Ethiopia, from early 20th-century entry to post-1974 nationalization and ongoing gradual re-opening. It situates current policy debates within this historical context, examining regulatory shifts, market structure, and the potential implications of renewed foreign participation for competition, capital flows, digital finance and financial sector development.
- Introduction
The history of foreign banks operating in Ethiopia is over a century old. The country’s first bank, the Bank of Abyssinia, was incorporated in 1905 during the reign of Emperor Menelik II and was foreign-owned. However, Emperor Haile Selassie dissolved the Bank of Abyssinia and established the Bank of Ethiopia, the first nationally owned bank, in 1931.
During the Italian occupation from 1936 to 1941, Italian banks, including Banco di Roma, were active. Following Ethiopia’s liberation from Italian occupation, Barclays Bank established a presence and remained operational between 1941 and 1943. In 1943 the State Bank of Ethiopia (acting both as central bank and provider of commercial banking service) was also established and subsequently split into the National Bank of Ethiopia and Commercial Bank of Ethiopia in 1963. In 1963, Addis Ababa Bank, which was jointly owned by Ethiopian and foreign investors, was also established. Fully foreign owned banks, such as Banco di Roma, continued to operate (primarily serving expats) by restructuring the ownership stake to comply with minimum local ownership law enacted in 1963. This relatively pluralist landscape was brought to an abrupt close in 1974, when the Derg nationalized all private banks, including foreign-owned ones, placing the entire financial system under stringent state ownership and control. The Commercial Bank of Ethiopia was made the sole commercial banking service provider, effectively eliminating competition and innovation. This period of what economists later termed “financial repression” concentrated credit in state hands, constrained private sector participation, and left the majority of Ethiopians without meaningful access to formal financial services.
Following the downfall of the Derg and the rise to power of the Ethiopian People’s Revolutionary Democratic Front (EPRDF), private domestic banks were permitted to operate since 1994. Even when private banks were allowed to operate they were mandated to be 100% locally owned, cementing what was a “strong aversion to foreign-owned banks.” For roughly three decades, this logic remained the de facto policy position of Ethiopia until the sector was opened to foreign participation in 2025.
- Liberalization of the Banking Business Sector
Ethiopia began to relax its historical aversion to foreign financial sector players in 2023 when Parliament promulgated the National Payment System Amendment Proclamation No. 1282/2023, which opened to foreign investment the digital payment services, including mobile money and payment system operator services. As a result, Safaricom M-Pesa Mobile Financial Service Plc became the first foreign investor to engage in mobile financial services. The National Payment System Amendment Proclamation opened only the digital financial services to foreign investment, leaving the broader banking sector closed to foreign investors. In 2025, however, the banking business sector has been fully liberalized to foreign investment following the enactment of the Banking Business Proclamation No. 1360/2025 (“Banking Business Proclamation”).
Foreign investors can enter the banking business through various forms, including the establishment of a subsidiary, opening a branch, or acquiring shares in domestic banks.2 A subsidiary of a foreign bank has a separate legal personality from that of its parent company, while a foreign bank branch does not have separate legal existence from its parent company.
Any bank, apart from a foreign bank subsidiary and government-owned bank, should be established as a share company, which is required to have a minimum of five shareholders under Ethiopian law. A foreign bank subsidiary can be established in other forms of business organizations recognized under Ethiopian law, including a private limited company, which is required to have a minimum of two shareholders. A subsidiary of a foreign bank can be entirely owned by a single foreign bank. In contrast, ownership of shares in domestic banks by foreign investors is capped as described below.
Foreign individuals and entities may purchase shares in a local bank, albeit subject to a certain limit. Foreign banks and other strategic investors, such as international development finance institutions and private equity funds, can own up to 40 percent of shares in a domestic bank. A natural foreign person and a foreign juridical person, i.e., non-strategic foreign investors, can also acquire shares in domestic banks, subject to a 7 percent and 10 percent shareholding limit, respectively. Nonetheless, the aggregate shareholding in domestic banks by foreign nationals and foreign-owned Ethiopian companies is capped at 49 percent. Despite these shareholding limits, the National Bank of Ethiopia (NBE) may allow, in exceptional circumstances, a “well-established, reputable, and financially sound” foreign bank to fully acquire an existing domestic bank. The purpose of this exceptional authorization is to attract strategic investments and/or to offer solutions to safeguard a distressed bank and maintain financial stability.
- Entry Requirements
The Requirements for Licensing and Renewal of Banking Business and Representative Office Directive No. SBB/94/2025 (“Banking Business Licensing Directive”), issued pursuant to the Banking Business Proclamation, sets out the procedural and substantive requirements for licensing banks in Ethiopia. In the case of foreign banks seeking to establish a subsidiary or branch, the licensing process is structured into three sequential phases: the pre-application phase, the application phase, and the commencement of operations phase. The Directive also establishes the criteria upon which the NBE evaluates applications.
At the pre-application phase, the applicant is required to submit preliminary corporate, financial, and regulatory information, including incorporation documents, ownership structure, shareholder resolutions authorizing entry into Ethiopia, and confirmation from the home regulator regarding the bank’s legal status, financial soundness, and compliance with applicable risk management standards. This phase also requires submission of audited financial statements for the preceding three years and payment of an investigation fee. The NBE may engage directly with the applicant’s representatives, and progression to the next phase is contingent upon a favorable preliminary assessment.
During the application phase, the applicant must provide comprehensive documentation demonstrating financial capacity, governance readiness, and operational viability. This includes a completed application form, payment of a non-refundable licensing fee of USD 150,000, and proof that the foreign currency equivalent of the minimum capital requirement of ETB (Ethiopian Birr) 5 billion has been deposited. Applicants must also submit constitutive documents, detailed fit and proper information for key stakeholders and management, and a robust business plan covering organizational structure and financial projections. Besides, operational readiness needs to be evidenced through documentation such as lease agreements, insurance coverage, and regulatory registrations. A key regulatory criterion at this stage is the requirement for a formal cooperation agreement between the NBE and the home regulator, particularly concerning supervisory coordination, information sharing, and crisis management. The NBE is required to render a decision within 90 days of receiving a complete application.
Following approval of application by the NBE, licensed banks must start operating within 12 months, subject to fulfilling additional prudential and operational conditions. These include the establishment of governance and accountability frameworks, adoption of comprehensive internal policies and procedures, recruitment of adequate and qualified personnel, implementation of security and risk management systems, and maintenance of sufficient insurance coverage. Banks are also required to establish a disaster recovery site located at least 40 kilometers from their head office, reflecting an emphasis on operational resilience and business continuity.
It should also be noted that the NBE retains the discretion to impose a moratorium on the issuance of new banking licenses in order to manage market entry and maintain financial sector stability.
- Current Challenges in Digital Finance
Ethiopia’s banking sector is structurally concentrated in ways that significantly constrain the quality and reach of digital financial services (DFS). The two dominant state-owned enterprises, the Commercial Bank of Ethiopia (CBE) and Ethio telecom, together account for more than half of the country’s digital accounts, a near-duopoly that has historically insulated the sector from competitive pressures. This concentration means that citizens often have little in the form of viable alternatives when confronted with subpar digital services. In most other African economies, including neighboring Kenya, DFS adoption has been primarily spearheaded by the private sector, a trajectory that Ethiopia is now beginning to follow.
Furthermore, Ethiopia’s DFS landscape remains affected by problems of accessibility, interoperability, and high costs, which in turn weaken public trust and limit the extent to which digital accounts translate into meaningful financial inclusion. Consumers have also few credible alternatives, and service providers face weaker pressure to simplify fees, resolve disputes efficiently, widen rural access, or design products around the needs of small merchants, farmers, women, youth, and small and medium enterprises.
- DFS Prospects and Opportunities for Foreign Banks
Foreign banks entering Ethiopia will not be competing primarily on branch footprint or deposit mobilization, the traditional metrics of banking performance. Their market niche is likely to lie in the quality and scope of digital financial services they introduce. The shortfall in quality, type and extent of digital services that the banks currently operating in Ethiopia provide presents a promising business opportunity.
That said, whether the entry of foreign banks will drive growth in digital finance will depend on a range of factors, including the quality of the foreign investments to enter the Ethiopian market, the strength of the legal and institutional frameworks necessary to support such developments, the readiness of local infrastructure, and the level of collaboration between regulators and market players.
The regional record on foreign bank expansion is instructive. A wave of African bank expansions in the 1980s and 1990s produced mixed outcomes at best, with gains in DFS adoption largely accelerating only in the wake of the COVID-19 pandemic, driven by necessity rather than proactive institutional strategy. The benefits of foreign entry, where they materialized, tended to concentrate in urban, commercially active segments, leaving rural and low-income populations largely unaffected. Ethiopia’s foreign bank entrants will face structural challenges that point in similar directions unless deliberate inclusion-oriented strategies, in partnership with the NBE, are embedded into their operating models from the outset.
- Conclusion
The liberalization of Ethiopia’s banking sector to foreign investment marks the most significant reorientation of the country’s financial sector since the nationalization era. Seen against Ethiopia’s long history of financial-sector insulation from foreign competition, uneven service quality, and substantial exclusion of some segment of society, the liberalization is anticipated to create a pathway for new capital, cross-border expertise, competitive environment, and improved digital financial services.
However, the liberalization of the banking sector to foreign investment is not a panacea. The impact of this reform will depend on several factors, including the entry strategies adopted by foreign investors, the market segments they target, the partnerships they establish, and the extent to which their products and services reach beyond urban centers and formally employed customers. The nature and behavior of the first foreign entrants will be particularly important, as they are likely to signal whether liberalization results merely in a shift in market structure or serves as a catalyst for broader financial inclusion, increased competition, and innovation across the banking industry.
