Foreign investment in Ethiopia is growing and the banking industry is opening up after decades of prohibitive regulations which locked out foreign investors.
Equity Bank is the newest and the second financial institution after KCB to open a representative office in Kenya’s northern neighbour.
The Bank has set up a Commercial Representative Office in Addis Ababa, Ethiopia as it prepares to commence operations.
Kenya Commercial Bank (KCB) opened its Ethiopian representative office in 2015.
Reports indicate that KCB is looking to open a fully-fledged subsidiary or partner with an Ethiopian bank once the market is opened to foreign lenders.
“Our main area of focus is to have a business and presence in Ethiopia. We hope that by the end of 2020 we can be allowed to go further whether by opening a branch or through our mobile lending platform,” KCB chief executive Joshua Oigara was quoted by Kenya’s Business Daily in March.
Equity Bank’s presence in 10 African countries
Equity Bank’s Commercial Representative Office which will be based at Kazanchis-Addis Ababa. It is expected to be fully operational in July this year.
“Having completed Phase One of our expansion, the entry into Ethiopia is part of our Phase Two expansion in pursuit of our aspiration of being a Pan African Bank with presence in 10 African countries by the end of the year,” says Equity Group CEO and MD, Dr James Mwangi.
He added that this will enable the Bank to continue scaling up and unlock economies of scale especially in this era of digitization and virtualization of banking.
Ethiopia’s government has appointed a privatization commission in ongoing reforms which are aimed at promoting a growing private sector.
The entry of Equity Bank into Ethiopia with a population of nearly 100 million people is in the bank’s plans to bank a cumulative half a billion people.
With the addition of Ethiopia, the Bank will now have operations in a regional market with a combined population of nearly 500 million people, including Kenya, Uganda, Tanzania, Rwanda, South Sudan and DRC.
Kenya and Ethiopia have been working together on various projects, with the most notable being the LAPSET project.
Under LAPSET, massive transport and infrastructure plans to link Addis Ababa to Kenya’s port town of Lamu have been initiated. This makes it timely for Equity bank to work with both governments in offering banking services for these projects.
LAPSET also incorporates South Sudan and comprises the construction of ports, pipelines, new roads, airports and standard gauge railways.
The two countries have completed and operationalized the Ethiopia-Moyale asphalt road and the power transmission line that would further boost intra-trade is nearing completion.
The entry into Ethiopia comes soon after Equity Group announced the Bank’s entry into Zambia and Mozambique.
This is after striking a preliminary agreement with Atlas Mara Limited to exchange ordinary shares in the Group for controlling equity stakes in four banks operating in Rwanda, Tanzania, Zambia and Mozambique.
Ethiopia to join most developed countries in Africa
Ethiopia is now ranked as Africa’s fastest growing economy according to data from the IMF. This places it in an advantageous position to joining Africa’s most developed countries.
As of 2017, Ethiopia was ranked 8th among the top 10 wealthiest African countries by GDP.
With a 2017 GDP of USD 80.874 billion, the 105-million-people nation has one of the fastest-growing economies in the world.
The IMF World Economic Outlook for the country’s growth in 2018 predicted growth at 8.5 per cent.
This accelerated economic growth was driven largely by industrial activity and investments in infrastructure and manufacturing.
Ethiopia exports coffee, leather, spices, textiles, natural gum and mineral products with agriculture being the country’s largest industry.
On June 11, 2019, Ethiopia finance minister Ahmed Shide told lawmakers that the economy is projected to grow by 9 per cent in the 2019/2020 fiscal year.
Shide is proposing to raise government spending to 386.9 billion birr (USD13.48 billion) for 2019/2020.
This proposal is 12 per cent higher than that of 2018/19 at 346.9 billion birr.
Parliamentarians from the ruling coalition are expected to approve the plans in a few weeks.
In April, the IMF projected that the country’s growth for 2019 would be 7.7 per cent. It seems like PM Abiy Ahmed’s ambitious reforms are paying off.
Competing with ekub, Idir in Ethiopia
In 1994, Ethiopia allowed the establishment of private banks and insurance companies.
As of mid-2018, the financial market was closed to foreign retail banks. Foreign banks were not permitted to provide financial services in Ethiopia but this may change with broad economic reforms.
Currently, Ethiopia allows some foreign banks to open liaison offices to facilitate credit to companies from their countries of origins.
Among these are Kenyan, South African German, Turkish, and Chinese banks.
The Ethiopian banking sector is comprised of the National Bank of Ethiopia (NBE), two government-owned banks and sixteen private banks.
Under the Growth and Transformation Plan II (GTP II), NBE increased the minimum capital for banks to operate to 2 billion Birr (USD90 million).
NBE requires all the sixteen private banks to increase their paid-up capital to that amount by 2020.
The entrance of foreign banks does not mean overnight success for the sector since many Ethiopians are used to informal Ekub, a rotating savings-and-credit association (ROSCA) and Idir which is group life insurance.
Ekub (Iquib) enables families and individuals to get funding for activities such as starting a micro-business, building a house or any other need.
The ROSCA enables people to make investments which would otherwise be impossible due to lack of money.
Ekub is more flexible and accessible than banks. It also requires minimal paperwork.
These rotating schemes are found across the developing world often assumed to serve the poor.
However, roscas in Ethiopia cut across the income scale with some having hundreds of members. Despite the informality, the Ekubs have officers who vet applicants and analyse risks.
On the other hand, Idirs have a large membership with a weekly or monthly membership.
The insurance is minimal and affordable for many guaranteeing members assistance in emergencies.
An Idir can be established at the workplace, by a community or village or friends and family. Members are required to always be ready to help.