Prospects and Challenges of Foreign Bank Entry in Ethiopia

Abstract

This paper examines the prospects and challenges of foreign bank entry in Ethiopia using a descriptive statistic for the analysis of data collected through interview and questionnaires by deploying a purposive sampling technique. The finding of the study shows that foreign bank entry in Ethiopia could introduce new banking technologies, financial innovation and promote financial development. In addition, it enhances access to international capital and may precipitate the overseas expansion of domestic banks and greater integration of Ethiopian banks into international financial systems, which may enable them to provide a broader range of services, particularly to larger local firms with international operations. On the other hand, the stiff competition with foreign banks may threaten the survival of domestic banks that may lead them to incur high cost in the short run and decline in profit. In addition, it may; bring shocks from other country, destabilize domestic credit and may serve more productive sectors only. Policy recommendations are that allowing foreign bank entry in Ethiopia step by step is advantageous with extensive capacity building to all stakeholders and implementation of modern banking technologies. Merger and acquisition form of entry may be essential for knowledge transfer and entry via subsidiary may be preferable to resource mobilization and enhancing access to finance for the majority.