The banking sector in Ethiopia stands at a point of change – we expect to see new players, enhanced products, mergers & acquisitions, and competition all in the next two years. The changes are the result of the policy change by the government that opened the sector for foreign players and the anticipated introduction of the capital market to Ethiopia.

The sector has seen its fair share of changes over the years, an introduction of Islamic banking, the addition of new players, and the introduction of tech-supported products are the few that stand out. Yet, many argue the sector is not fit for purpose. 

The current administration designed the Homegrown Economic Reform Agenda in 2019, it held the financial sector at its core. It envisioned increasing access to finance, opening the sector for foreign players, creating competition, and developing a vibrant financial sector. With the entrance of foreign players, various changes will likely materialize in the market. Enhanced risk management, sophisticated product offerings, and technology will shape the future of banking in Ethiopia. 

To put this into perspective, the current risk management practice in the banking sector is nascent and focuses mainly on post-transaction reviews and reporting. Risk management has been indicated by many to be very traditional and is characterized by inconsistency. The lag behind international practice is hard to ignore, for instance, no bank has adopted Basel III Accords for its risk management. Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee that established capital requirements and risk measurements for global banks. These Accords aim to create an international regulatory framework and manage credit, market, and operational risks. For a country opting to introduce capital markets, having such a regulatory framework is paramount and not doing so is a red flag. 

Product offerings are no different, shackled by policy restrictions and the Central Bank’s appetite to allow and encourage new offerings, commercial banks have focused on limited offerings over the years. Limited competition and a closed financial sector have aggravated these developments. Hence, the reform aims to create an enabling environment where financial service providers will offer various products and services. 

In light of these expected changes, what steps should commercial banks take to stay relevant and compete? Ethiopian Banks will now have three possible options to build, buy, or partner. Shareholders and senior management should focus and allocate resources to answer this critical question and start preparations to take one of the available routes. Few banks have started this journey but all should follow! Banks do not have the luxury of operating the old way, they all should start to build internal capacity and work towards integrating their human capital, knowledge, and technology if not, it will be hard to position themselves in the new environment.