One year after opening banking sector, Ethiopia boosts local banks before foreign entry

One year after Ethiopia opened its banking sector to foreign investors, the anticipated influx of international lenders has yet to materialise in Africa’s second most populous nation.

Instead, the government and the National Bank of Ethiopia (NBE) have spent much of the past year strengthening domestic banks, deepening capital markets, and addressing structural weaknesses in the financial system. The approach shows that the East African nation’s first phase of liberalisation is less about immediate foreign-bank entry than building local institutions capable of competing when it happens.

When the NBE issued its landmark directive in June 2025, it ended more than five decades of protection for one of Africa’s last major closed banking markets. The rules allow foreign banks to establish subsidiaries, open branches and acquire minority stakes in Ethiopian lenders, subject to regulatory approval.

The reform forms part of Prime Minister Abiy Ahmed’s wider economic liberalisation programme, which aims to attract foreign capital, modernise financial services and integrate the country more closely into the global economy.

At the time, policymakers argued that foreign participation would improve competition, increase access to capital, expand financial inclusion and bring new technology and expertise into the country’s underdeveloped banking sector.

A year later, that ambition remains intact, but its execution is proving gradual.

Several regional banking groups, including Nigeria’s Zenith Bank and FirstBank, Kenya’s KCB Group and Equity Group, and South Africa’s Standard Bank Group, have expressed interest in Ethiopia. Djibouti’s Banque pour le Commerce et l’Industrie Mer Rouge has also been linked to potential entry.

While Ethiopia’s reforms allow foreign institutions to establish branches, subsidiaries and strategic investments, the apex bank rules cap foreign ownership in local banks at 49 percent, requiring Ethiopian investors to retain majority control.

For multinational banking groups accustomed to majority-owned subsidiaries across the continent, the restriction complicates an acquisition-led entry strategy. Minority stakes can limit influence over governance, strategy and capital allocation, making investments in existing local banks less attractive than in other markets.

The ownership framework is therefore pushing some lenders to consider greenfield operations, strategic partnerships or minority investments rather than outright acquisitions.

Joshua Oigara, regional chief executive for East Africa at Standard Bank said the group’s expansion strategy combines organic growth, acquisitions and strategic partnerships, although any transaction must meet its long-term objectives, culture and valuation expectations.

Against that backdrop, Stanbic Bank is considering a wholly owned operation in Ethiopia, according to reports, as foreign lenders reassess how to enter one of Africa’s largest and most underpenetrated banking markets.

However, no major foreign-bank acquisition, sizeable capital injection or full-scale foreign banking operation has yet been announced.

Rather than representing a setback, analysts say the slower pace reflects a deliberate regulatory strategy.

Consolidation becomes Ethiopia’s first line of defence

“There are progresses but not as expected,” said Girum Yitagesu, senior operations manager at Abay Bank. “There is relentless pressure by the National Bank of Ethiopia on banks, especially the smaller-sized banks, to merge. There is discussion among policymakers that this will save most banks before the entry of foreign banks.”

That pressure for consolidation has become one of the defining features of Ethiopia’s first year of banking liberalisation.

Ethiopia has 32 commercial banks, including 31 privately owned lenders and the state-owned Commercial Bank of Ethiopia. While the number of banks has risen rapidly in recent years, many smaller institutions have limited capital, narrow product offerings and weaker governance structures compared with the regional banking groups expected to enter the market.

The NBE has responded by raising minimum paid-up capital requirements to 5 billion birr by July 2026. The new threshold is forcing banks to raise fresh equity, improve earnings, seek mergers or face potential regulatory sanctions.

No major merger has yet been completed, but discussions among smaller lenders have intensified as they prepare for the higher capital requirement and the eventual arrival of foreign competitors.

The strategy reflects a wider African regulatory playbook. Across the continent, policymakers have often encouraged consolidation before opening domestic financial systems to deeper competition, arguing that larger and better-capitalised banks are more capable of absorbing shocks, investing in technology and competing with international lenders.

Ethiopia’s banking sector is growing rapidly, but it remains highly concentrated. The Commercial Bank of Ethiopia controls more than half of industry assets, while private banks are competing for deposits, lending opportunities and foreign-exchange access in an economy where financial intermediation remains shallow.

The sector’s latest results show both its potential and its vulnerabilities.

According to the NBE’s Financial Stability Report, total assets across Ethiopia’s commercial banks rose 44.5 percent to 4.7 trillion birr in the year to June 2025. Total income increased by 78.8 percent to 646.3 billion birr, while net profit after tax rose 61.3 percent to 93.4 billion birr, the highest annual profit recorded by the industry.

Return on assets improved to 2.5 percent from 2 percent a year earlier, while return on equity increased to 27.4 percent from 24.6 percent.

But the central bank also warned of rising concentration risks in lending, deposits, liquidity and geographic exposure. Credit concentration in the trade sector remains a concern, while access to foreign currency and the capacity of banks to support private-sector investment remain limited.

The challenge for regulators is therefore not simply to attract foreign banks, but to ensure that domestic lenders can withstand the competition they will bring.

Capital markets reforms widen banks’ funding options

Beyond bank consolidation, Ethiopia has accelerated reforms intended to modernise the wider financial system.

The NBE has introduced licensing guidelines for foreign entrants, strengthened prudential and governance standards, rolled out regular foreign-exchange auctions and continued its transition towards a more market-based exchange-rate regime. These reforms are intended to improve foreign-currency allocation, reduce distortions and give investors greater confidence in the operating environment.

The government has also moved to deepen capital markets.

The Ethiopian Securities Exchange, launched in last year January, has become a key part of the country’s financial-sector reform agenda. Abay Bank recently became the fifth company to list on the exchange and the fourth private commercial bank to join the market.

Wegagen Bank, Gadaa Bank and Awash Bank had previously listed, while state-owned Ethio Telecom became the first non-bank company to join the exchange after attracting more than 47,000 investors through a public share offer.

More bank listings are expected. The Ethiopian Capital Market Authority in June registered Bunna Bank’s securities, including nearly 2.6 million new shares to be offered to existing shareholders. Dashen Bank, Bank of Abyssinia, Anbesa Bank and Amhara Bank are also reported to be considering listings.

The expansion of the exchange is significant because it could provide banks with an alternative route to raise capital, improve disclosure standards and reduce their dependence on retained earnings and shareholder contributions.

Investment banking is also beginning to emerge. In March 2025, the Ethiopian Capital Market Authority issued the country’s first investment-banking licences to CBE Capital and Wegagen Capital, opening the way for underwriting, advisory services and corporate capital raising.

For decades, Ethiopia’s financial system operated largely on a deposit-and-loan model, with limited access to securities markets, corporate finance and investment banking services. The new framework could help mobilise financing for infrastructure, industrial expansion and larger private-sector projects.

Foreign lenders see long-term opportunity, not immediate entry

The opportunity is substantial.

Ethiopia with more than 130 million people, and remains one of the continent’s most underbanked major economies. World Bank data show that only 46 percent of Ethiopian adults had a bank or mobile money account in 2022, compared with nearly 80 percent in Kenya.

That gap points to the scale of the challenge, but also the potential prize for lenders able to expand digital banking, mobile money, SME finance and branch networks.

The International Monetary Fund expects Ethiopia to be among the world’s fastest-growing economies in 2026, with real GDP projected to expand by 9.2 percent. Strong coffee and gold exports, infrastructure investment and ongoing macroeconomic reforms are supporting the outlook.

Foreign direct investment is also rising. Data from the Ethiopian Investment Commission show that FDI increased by 5.6 percent to $4 billion in the fiscal year ending July 2025, supported by investment in manufacturing, agriculture, ICT and newly liberalised import-export trade.

Yet foreign investors still face important risks.

Exchange-rate volatility, limited foreign-currency availability, profit repatriation concerns and uncertainty around regulatory implementation remain major considerations for international banks. Ethiopia is also still implementing reforms under its IMF-supported programme, meaning the financial system remains in transition.

For many foreign lenders, Ethiopia is likely to be a long-term strategic market rather than an immediate expansion opportunity.

That caution has given Ethiopian regulators time to focus on the domestic foundations of liberalisation.

The success of the second year will not be measured only by the number of foreign banks that obtain licences. It will depend on whether local lenders become better capitalised, more efficient and more transparent; whether the securities exchange gains depth and liquidity; and whether reforms make it easier for investors to move capital into and out of the country.

Ethiopia has opened the door to foreign banking competition. Its more urgent task now is ensuring that its domestic banks are strong enough to benefit from it rather than be overwhelmed by it.