Liberalizing Banking Sector for Foreign Investors: In Ethiopian Case

Abstract

The Ethiopian government recently adopted a new policy that liberalizes the banking sector to foreign investors. Concerning the policy, there are both pessimists and optimists views. There are people who suspect the opening of foreign banks entry in Ethiopian. There are also those who tend to see with passion.The entry of foreign banks to invest in banking business (FBE) has positive and negative consequences. The main theme of this article is to examine the admission of foreign bank and its repercussion on the national economy and domestic banks. The article employed a desk review and qualitative analytical research method. The major findings are FBE will help domestic banks for knowledge and technology transfer, modernize banking sector, transferring new capital from foreign, and foreign currency supply that ultimately facilitate the economic development of the country and create job opportunities for citizens. Contrary to this, FBE will have some negative effects. Some of these are foreign banks can easily smash domestic banks, and domestic banks can be out of the market, they can shift their funds to more attractive and peaceful markets during a crisis. Ethiopia banks face several challenges among them lack of skilled manpower, organization transformation, leadership commitment, efficient and effective data management system, and lack of digital transformation in Ethiopia. It is suggested that the reasonable choice is striking the balance between the two extremes to restrict the potential risks of accepting foreign banks. The Ethiopian government should enact prudent laws and implement them in a more stringent manner. It is important to develop legal and regulatory framework which meet the international standards, implementation of modern technologies, capacity building of domestic banks and improvement of financial system infrastructure.