Kenyan banks planning to enter Ethiopia through local joint ventures will only be able to buy up to 30% of the capital of Ethiopian banks.
This is after the Ethiopian government set the foreign ownership cap in local banks for banking entities at 30%, according to new details of the laws governing the opening up of the local banking sector.
The cap applies to foreign lenders who wish to acquire stakes in existing banks, according to an official responsible for the liberalization process, quoted by the Ethiopian publication The Reporter on Saturday.
An additional 5% stake will be allowed for foreign individuals and foreign non-bank investors, taking the maximum stake a local bank can sell to foreigners at 40%.
Kenyan banks are expected to queue to take advantage of an underpenetrated banking market in the Horn of Africa country, buoyed by its huge population once the market fully opens.
A law aimed at accelerating foreign investment in the local banking sector is being finalized, but its implementation deadlines are not yet clear.
clear the way
The long-awaited foreign investment law is expected to pave the way for Kenyan banks like Equity, KCB and Co-operative Bank to set up shop in the most populous country in the Horn of Africa.
Co-operative Bank said earlier that it would prefer to enter the Ethiopian market through a joint venture with the Ethiopian Cooperative Movement under a deal similar to its business in South Sudan in which the government holds a stake.
The bank said the entry would allow it to capitalize on Ethiopia’s rapidly growing unbanked population.
Former KCB Group Managing Director Joshua Oigara previously said that KCB would consider partnering with a local bank if the Ethiopian economy was to be liberalized and foreign banks allowed to invest.
Alternatively, he said, the bank could set up a standalone business.
Under the new investment law which is being strengthened, banks will have four options to enter Ethiopia.
These include opening local subsidiaries, taking stakes in local partners capped at 30%, opening a branch or opening a representative office.
If foreign banks want to open a branch on their own, there will be no cap, according to the new guidelines.
Ethiopia’s population of 110 million – the second largest in Africa after Nigeria – offers significant business opportunities for Kenyan banks, the largest of which have embarked on massive regional expansion in recent years.
Less than 30% of Ethiopians have access to a bank account, highlighting the opportunity for foreign lenders.
Currently, Ethiopia has more than 30 commercial lenders, two of which are state-owned, according to its Central Bank.
Kenyan banks have had their sights set on the Ethiopian market for years due to the country’s huge population.
KCB opened a representative office in Addis Ababa in 2015 as it prepared to handle full-fledged banking operations when the opportunity arose.
This followed the 2012 agreement which allowed Kenyan banks to open representative offices, but banned all banking operations in Ethiopia, including direct lending and taking deposits.
Lenders cannot generate deposits or lend directly to Ethiopian businesses and households as such, but they can conduct credit research and assessments to enable loans from their headquarters in Kenya.
Over the past decade, Kenyan banks have aggressively opened branches in South Sudan, Uganda, Tanzania, Rwanda and Burundi to reduce their dependence on the local market.
Local commercial banks are looking beyond Kenya’s borders for acquisitions, seeking to exploit opportunities in East Africa that are being driven by rapid economic growth and trade integration.
A subsidiary is authorized to receive deposits from individuals and local businesses and to grant loans to the same clientele.
A direct local presence therefore allows banks to acquire more customers and expand their loan portfolio in the foreign market. Equity opened a representative office in Addis Ababa in 2019.
The KCB group has recently reached an agreement to acquire 85% of the capital of Trust Merchant Bank (TMB) in the Democratic Republic of Congo (DRC).
Its entry into the DRC brings competition to the doorstep of its rival Equity Group, which in 2020 bought a 66.5% stake in Banque Commerciale Du Congo, thus consolidating its presence in this extremely unbanked mineral-rich country.