Ethiopia’s prime minister Abiy Ahmed has said that plans are underway to liberalise Ethiopia’s banking sector to allow foreign players to set up operations. This comes shortly after the country liberalised its telecommunications sector, with Safaricom winning a license.
The new plans for the banking sector represent an upgrade from 2012, when Ethiopia allowed Kenyan, Nigerian, South African and Egyptian banks to open representative offices in the country. We expect to see banks from those same four countries that have pan-African plans to pursue full banking operations in Ethiopia. Thus far, though, none have committed to an entry strategy – therefore, greenfield entries and acquisitions are still options.
Ethiopia’s market potential is largely untapped
According to the World Bank, the number of bank branches per capita in Ethiopia stands at 0.8 per 1,000 people compared with Africa’s average of 5.2. As of 2019, the country had a mere 13,000 mobile money agents compared with Kenya’s 206,000 and Rwanda’s 110,000. The country of 109mn people is served by just 18 commercial banks. With over 70% of the population being unbanked, the market represents a huge opportunity for new entrants.
Of the banks we cover, KCB Group, Equity Group and Co-operative Bank have highlighted an interest in the market. All have already set up representative offices or have at least been in contact with the Ethiopian government to explore their options.
Having previously highlighted that Kenya is overbanked relative to its peers, we view entry into Ethiopia as a good strategy for Kenyan banks. They will need to seek additional growth through regional subsidiaries and Ethiopia presents a ripe opportunity given its low rate of financial inclusion. We specifically expect KCB Group and Equity Group to leverage their mobile and agency banking capabilities to gain access to Ethiopia’s huge unbanked population.
None of the Kenyan banks we cover have been clear about whether they will pursue greenfield operations in Ethiopia or will consider acquisitions.
According to the National Bank of Ethiopia, the minimum paid-up capital required to obtain a banking licence is ETB5bn (cKES11.2bn or US$98.4mn).
Of the Nigerian banks we cover, two have shown interest thus far: Access Bank and Ecobank. Access Bank, Nigeria’s biggest bank by total assets, at NGN10.4tn, has kicked off a very aggressive Pan-African expansion to diversify away from the troubles of the Nigerian market. It is looking to be an aggregator in Africa, offering services that facilitate global payments, trade finance support and correspondent banking. Access plans to operate across 22 countries (it currently operates in 13) and is targeting eight new African markets of interest, with Ethiopia being one of them. However, the bank has made no announcements about its plans for Ethiopia, or about any possible acquisition target in the country.
Ecobank, one of Africa’s geographically diverse banks (it operates in 33 African countries), already has a presence in Ethiopia, with the bank having opened a representative office there in 2013. It has made minimal progress in expanding its operations in the country, partly due to the ongoing conflict. However, there is still a possibility that Ecobank will increase its presence, as the Central, Eastern and Southern Africa region is its second-most profitable area of operation. Its subsidiaries there have an average ROE of 22.2%, higher than that of Francophone West Africa (21.4%), Nigeria (6.9%) and Outside Africa (5.3%), but lower than that of the Anglophone West Africa region (24.9%).
Commercial International Bank (CIB) opened representative offices in Ethiopia in 2019, in line with the bank’s regional expansion strategy.
CIB recently entered Kenya’s banking sector via the acquisition of Mayfair Bank. However, This was however due to the moratorium on bank licenses in Kenya and may not necessarily be a pointer on how the group intends to expand going forward.
South African banks
Standard Group, through its Kenyan subsidiary, Stanbic Bank, entered Ethiopia by opening a representative office back in 2015. Regionally, Standard Group’s subsidiaries are mainly corporate banks that leverage the group’s large capital base and wide network to land corporate deals in various countries. With Ethiopia just now opening up, we believe Stanbic Kenya will pursue the corporate market rather than the retail market, leaving the latter to Kenya's KCB Group, Equity Group and Co-operative Bank.
Rabobank from its representative office in Nairobi, has been currently serving Sub-Saharan Africa with corporate banking products and solutions for food and agri businesses. It has not pursued an aggressive expansion strategy like that of Standard Group, but the nascent Ethiopian market may be attractive enough for the group to consider a fully fledged banking subsidiary there.
16 private banks in Ethiopia could be acquisition targets
Acquisition remains an option for pan-African banks. The sector has 16 private banks, with the two government-owned entities controlling 59.5% of total outstanding loans in the market. Although none of the banks have expressed interest in being acquired, we expect some pan-African banks to consider acquisitions in the market.
Details and timelines are scant on how and when the banking sector will be liberalised, but we expect pan-African banks to firm up their Ethiopia entry strategies now that there is light at the end of the tunnel. Given the experience of the telecommunications sector's liberalisation, we are confident that the banking market will open up in the medium term and do not see this as an empty political promise.