The history of the modern banking system of Ethiopia dated back to Emperor Minilik II when the agreement is reached between the emperor and Mr. MacGillivray, representative of the British-owned National Bank of Egypt, on the establishment of the Bank of Abyssinia in 1906.
Then after Emperor Haileselassie came to power and Bank of Abyssinia is legally replaced by the Bank of Ethiopia and became the first indigenous bank for Ethiopia as well as Africa.
During the time, the Bank of Ethiopia had a dual role, acting as a commercial bank and central bank until it split into the National Bank of Ethiopia (as a central bank) and Commercial Bank of Ethiopia in 1963. During the Haile Selassie era, the banking sector was open to foreign banks with a requirement of at least 51 percent domestically owned until nationalized by the communist government in 1974. The sector is still closed for foreign banks.
The banking and finance sector in Ethiopia is one of Africa’s most tightly state-controlled systems. Due to the long-standing strict, firm, and close supervision by the National Bank of Ethiopia (NBE), there is no bankrupted bank in Ethiopian banking history. This paved the way for the trust between the banks and the people. Most actors in the industry thought that it will take some time before foreign banks are permitted to fully operate in Ethiopia. But now the time seems to be coming.
As per the Prime Minister’s speech at the inauguration ceremony of the Head Quarter building of the Commercial Bank of Ethiopia (CBE), the government plans to open up its banking industry to foreign competition. As per his word, the banking industry has been protected for decades. But it will not continue to be so. Therefore, commercial banks need to be prepared to keep pace with the growth of our world and to compete with the banks of other countries as well.
In an attempt to facilitate this strategy and in order to eliminate macroeconomic imbalances so as to create a stable macro-economy, strict management has been put in place over the past two years and key focusing areas have been identified by the government in the macroeconomic reform plan. The ultimate objective is ensuring financial stability, financial inclusion, promoting productivity and competitiveness of the private sector. These measures will solve structural financing constraints of the economy by encouraging domestic savings and facilitating credit supply for the private sector investments. As the 10yrs plan document stated, in order to achieve this goal, it was found necessary to undertake market-oriented financial sector reform, through which the financial sector will eventually promote market-based interest rate and foreign currency exchange rate determination, establishing and expanding capital markets, and strengthening the monitoring and regulatory capacity of the National Bank of Ethiopia (NBE).
The move is the most radical step in a reform plan that the government hopes will deliver a boost to much-needed foreign investment in the banking & finance sector and in other parts of the economy. But critics say reform should consider local financial sectors much further and it has to be transparent. This lets the existing banking & finance firms to be ready on how to go ahead and to include in their strategy.
Now it is important to carefully weigh the protection of domestic banks in relation to the benefits of foreign investments. Instead of introducing foreign banks directly to the Ethiopian banking sector, priority should be given to let them buy some shares from the existing local banks, in which the share may grow eventually. This lets the foreign banking firms to experience the macro environment of the country while sharing technology and knowledge of their own to the sector.