Is M&A a way out for Ethiopia’s banking industry?

Ethiopia is on the cusp of a significant transformation in its banking sector as the government prepares to liberalize the industry, allowing foreign banks to enter the market. The move is part of a broader set of reforms aimed at strengthening domestic banks and enhancing their competitiveness on both local and international fronts. Zemedeneh Negatu, Global Chairman at Fairfax Africa Fund, spoke to CNBC Africa about the impending changes and the potential impact on Ethiopia's banking landscape. The reforms in the financial sector of Ethiopia encompass not only traditional banks but also FinTech companies, with recent directives allowing for mobile money services by non-financial institutions, particularly telecom companies. This move is set to open doors for players like Safaricom's M-PESA to operate in Ethiopia in the near future. One of the most significant shifts is the official decision to permit foreign banks to establish a presence in Ethiopia after a three-decade-long restriction. This liberalization is expected to foster competition and spur growth among local banks. The reforms aim to equip domestic banks, both private and state-owned, with the strength to not only compete within Ethiopia but also expand abroad, potentially venturing into markets like Kenya, Tanzania, and Rwanda. Additionally, the establishment of the Ethiopian Stock Exchange (ESX) is on the horizon, slated for the first quarter of 2024. While delays may be anticipated due to rigorous preparations, the ESX is poised to further bolster the financial sector in Ethiopia. Despite the banking industry generating around 4 billion birr in the 2021 financial year, a considerable portion of the capital is controlled by just two state-owned banks. This concentration underscores the need for consolidation within the private banking sector to enhance competitiveness. Zemedeneh advocates for mergers and acquisitions to create larger, more robust banks capable of thriving in a dynamic market. With only one private bank currently ranking in the top 100 largest banks in Africa, there is a pressing need for smaller banks to join forces and bolster their standing. Zemedeneh reveals ongoing discussions with a major private bank in Ethiopia to potentially acquire three to four smaller banks in the coming months. The impending entry of foreign banks into the Ethiopian market adds another layer to the consolidation narrative. The proposed amendment policy stipulates that foreign banks must partner with local banks to operate in Ethiopia, sparking discussions on potential mergers and acquisitions. This requirement is expected to hasten the pace of consolidation in the local banking sector as institutions weigh the benefits of combining forces before the influx of foreign players. Zemedeneh highlights that irrespective of foreign bank entry, the need for consolidation remains a critical imperative for the Ethiopian banking industry. The convergence of domestic mergers and foreign partnerships has the potential to elevate the sector's capital base and institutional capacity, paving the way for enhanced services and regional competitiveness. As Ethiopia positions itself as a key player in the African banking landscape, strategic alliances and consolidation efforts are set to reshape the industry's landscape in the near future.