A new directive in the making at the National Bank of Ethiopia (NBE) seeks to introduce stringent credit rating requirements for foreign banks looking to operate in the country.
The draft ‘Requirements for Licensing and Renewal of Banking Business’ directive dictates that banks looking to do business in Ethiopia must hold an international investment-grade rating (at least BBB- or Baa or the equivalent) from global agencies such as Standard & Poor’s, Fitch, or Moody’s. The move marks one of the clearest signals yet that Ethiopia intends to open its financial sector cautiously and on its own terms.
Dakito Alemu (PhD), an associate professor of accounting and finance at Addis Ababa University, describes the measure as “a more conservative approach” that can help to safeguard the domestic financial system.
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He argues that the grading standard offers an added layer of protection, preventing what he calls “hit and run” entrants—banks that join without adequate capital, governance, or long-term commitment and exit just as quickly when conditions shift. With the new threshold, he says, foreign banks will enter “only if they believe the market is profitable, stable, and worth the long-term engagement,” thereby anchoring greater confidence in the system.
Banks with the highest ratings, such as AAA institutions, project superior creditworthiness, and Dakito notes that the new criteria ensure that only institutions with solid international standing can qualify. He sees this particularly relevant now, given that the nature of global capital flow has changed dramatically since the early waves of Western companies entering Africa during the 1990s liberalization era.
“The previous scenario of market opening in African countries is completely different from today,” he said. “Without a standard, you cannot restrict any foreign institution, including those from African countries. But with clear grading thresholds, you can protect the system from non-creditworthy players.”
Ethiopia’s Banking Business Proclamation already outlines the modalities for foreign bank entry: branch openings, subsidiary formation, share acquisition, and representative offices. Foreign non-bank entities can buy up to seven percent ownership in a local bank, while the figure climbs to 40 percent for government-approved strategic investors. Foreign banks themselves can acquire up to a 49 percent aggregate stake, while foreign individuals and foreign-owned domestic firms are capped at 10 percent each.
Although interest has risen—notably from KCB Bank of Kenya and First Bank of Nigeria—Dakito stresses that interest alone is not entry.
“The only law currently in place is the proclamation. The directive that actually implements it’s not yet finalized,” he said.
He points to Ethiopia’s long-standing gap between proclamations and implementing directives. As an example, the law allowing foreign nationals to own residential property remains dormant for lack of a directive. Until clarity emerges on capital requirements, permissible bank types, and operational obligations, Dakito believes foreign banks will continue to watch from the sidelines.
Beyond the legal architecture, Ethiopia’s investment environment weighs heavily in the decision-making of multinational financial institutions. Dakito notes that foreign banks evaluate political stability, inflation trends, security conditions, and, critically, the ability to repatriate earnings.
The new 2024 foreign exchange directive allows foreign participation in capital markets but does not clearly outline how profits may be repatriated or how capital markets assets can be liquidated and transferred abroad. This uncertainty, he argues, remains a major deterrent.
Companies like BGI Ethiopia illustrate the challenge: even with large investments, extracting dividends has been difficult due to prolonged foreign currency shortages.
“They invest expecting that someday things will ease, but uncertainty affects decision-making,” says Dakito.
Yohannes Ayalew (PhD), president of Amhara Bank, echoes the view that investment-grade requirements can strengthen the sector. He expects foreign banks that meet such standards to bring enhanced efficiency, modern systems, and new financial technologies—all of which can accelerate sectoral transformation and invigorate local competition.
Eyasu Theodros, a US-licensed financial advisor serving global diaspora clients, frames the directive as foundational rather than restrictive.
“Requiring foreign banks to hold an investment-grade rating is more than a regulatory checkbox; it’s a foundation for trust in Ethiopia’s banking system,” he said.
Eyasu believes the criteria will ensure that new entrants are financially sound, well-governed, and capable of operating under international standards, which protects depositors and reinforces market confidence.
Several African countries have applied similar approaches and Eyasu notes that Ethiopia is not alone in experimenting with rating-aligned entry filters.
In Kenya, banks such as Citibank and Standard Chartered maintain high operational and governance standards, helping stabilize the financial sector. In Ghana, following the 2017 banking sector reforms, regulators tightened capital and governance requirements, forcing weaker banks to restructure or exit, which restored confidence and reduced systemic risk.
“For Ethiopia, this requirement presents a significant opportunity for the domestic financial services industry,” said Eyasu. “By setting high standards for foreign entrants, local banks are encouraged to improve governance, risk management, and operational quality, which can drive innovation and strengthen competitiveness.”
He argues that high entry standards could push domestic banks to raise their operational quality, strengthen governance, and innovate, ultimately increasing competitiveness. The standards are also important for diaspora investors, who are accustomed to transparent, rules-based banking systems, Eyasu observes.
In essence, investment-grade thresholds are a tool not only for building credibility and trust, but also for creating a more dynamic, resilient, and globally respected financial sector. Eyasu notes that Ethiopia can learn from its African peers while shaping a modern and trustworthy banking environment.
Kenya’s experience demonstrates that foreign banks with strong ratings have long contributed to sectoral stability. Ghana’s 2017 banking reforms, while not tied exclusively to international ratings, introduced stringent capital and governance tests that forced non-viable banks to restructure or exit, restoring confidence and reducing system risk.
In Nigeria, research by the African Center for Economic Transformation in 2022 found that rating-linked supervisory benchmarks, though not formal entry conditions, improved banks’ funding costs and strengthened risk culture across the sector.
Recent studies strengthen this pattern.
A 2023 African Development Bank review covering 12 African markets found that foreign bank entry rules aligned with international rating standards—including in South Africa, Mauritius, and Morocco—helped reduce regulatory arbitrage, improved cross-border supervisory cooperation, and attracted institutions with stronger liquidity and compliance stories.
However, some researchers warn that strict investment-grade thresholds can limit the participation of strong but unrated regional banks, slightly reducing competition and slowing the expansion of Small and Medium Enterprise (SME)-focused financial products. These findings highlight the double-edged nature of rating-based entry filters: they enhance stability but must be balanced against competition and financial inclusion goals.
Investment analyst Jesse Ludenyo also supports NBE’s reasoning.
The draft directive, he says, will help regulators assess foreign banks’ reliability and operational strength. A high credit rating signals sustainable operations, a crucial going-concern indicator, and gives confidence to depositors, investors, and the broader economy.
“Credit ratings directly influence the flow of capital into any market,” Ludenyo explains. “Strong ratings attract investors, strengthen partnerships, and support more predictable financial conditions.”
He views the draft as consistent with global norms and believes it aligns Ethiopia with prudent international practice.
Where the directive becomes particularly consequential is in its long-term implications. By setting a minimum investment-grade requirement, Ethiopia effectively narrows the pool of eligible entrants to those with strong international backing, well-established risk management structures, and proven financial resilience, which reduces the chance of destabilizing entrants but simultaneously excludes many mid-sized African and regional banks, most of which are unrated or rated below investment grade.
Experts note that this trade-off requires careful calibration, cautioning that protection must not become over-protection and ensuring stability should not inadvertently limit competition or innovation.
A unique perspective shared by several financial regulatory scholars is that Ethiopia’s decision may serve as an inflection point not only for its own financial sector but also for East Africa. By setting a high regulatory threshold at the moment of opening, Ethiopia can reverse the historical sequence observed in many African countries, which liberalized first and tightened standards only after crises or misaligned entrants had already exposed vulnerabilities.
If executed carefully, observers believe this method could allow the country to capture the benefits of foreign participation without absorbing the systemic shocks that followed early liberalization waves elsewhere on the continent.
