Since the coming into power of Prime Minister Abiy Ahmed, Ethiopia has undertaken a number of significant reforms, changes and amendments to existing laws.

25 May 22

This article highlights some of the major changes that have taken place that may be of interest to Private Equity firms that intend to invest in Ethiopia.

Among the many new reforms, the most notable ones include:
• Amendment of the Commercial Code of Ethiopia that has been in effect since 1960; • Amendment of Ethiopia’s investment laws;
• Various directives issued by the National Bank of Ethiopia with regards to regulation of foreign currency and payment systems; and
• A proclamation to introduce a capital market in Ethiopia.

Amendment of the Commercial Code of Ethiopia
Ethiopia has been using a commercial code that was originally issued in 1952. The previous Code contained provisions that were quite outdated and so an amendment was long overdue. A brand-new commercial code (New Code) was enacted by the House of People’s Representatives in March 2021. The work of reviewing the previous Code has been going on for over three decades and this testifies to the enormity of the challenge associated with the changes required from the previous regime.

The first new introduction is an expansion of regulated economic activities from 21 to 37. The expansion of the economic activities is in consideration of any new economic activities that may be introduced, among other things, due to advancement in technology, new discoveries in science or advancement of civilisation will be treated as a commercial activity.

The New Code also introduced new forms of business organisations. This included the introduction of a oneperson company and a limited liability partnership (LLPs) as new forms of business organisations, as well as regulation on the structure of Holding companies, LLPs and one person companies. It also includes detailed provisions related to foreign investment in Ethiopia through a branch office. Moreover, the New Code has a new chapter that regulates wholly owned subsidiaries and group companies.

For firms that are incorporated abroad and have their head office or principal place of business in Ethiopia and for firms that are incorporated pursuant to Ethiopian laws and are operating abroad, the provisions of the New Code will apply. However, in the event that a company incorporated abroad has a business form that is not recognised by the New Code, the provisions regulating share companies will apply as appropriate.

The New Code introduces various options and procedures for bankruptcy, including preventive restructuring proceedings, reorganisation proceedings and a simplified reorganisation proceeding. It also includes a simplified special bankruptcy proceeding for small and medium enterprises.
The reforms included in the New Commercial Code bring various benefits to investors. As indicated above, this code includes a clear definition of how group companies and branches are to be regulated. In terms of the management structure of companies, the New Commercial Code permits a portion of the directors in the board to be non-shareholders. The New Code also allows for companies to utilise modern accounting technologies, making book-keeping easier. In terms of bringing clarity to some pre-existing grey areas as well as recognising new business forms, the New Code is to bring more stability and predictability as well as make doing business in Ethiopia easier. Amendment of Ethiopia’s investment laws

A new legal regime for investment in Ethiopia was introduced through the enactment of Investment Proclamation No. 1180/2020 (the Investment Law). The primary change introduced by the Investment Law is a shift from the positive list approach to a negative listing approach of investment sectors that are permitted for foreign investment. The Investment Law provides an exhaustive list of business sectors that are reserved for domestic investors (mainly in small and medium businesses), leaving others open for foreign investment.

The Investment Law has not, however, introduced any changes in opening up traditionally restricted sectors such as financial services, retail, import trade and legal services. A new investment regulation has now been introduced and partially replaced the previous regulation enacted in 2012. This new regulation mainly deals with the sectors that are open to foreign investors, sectors that are reserved for domestic investment and sectors that are open to joint investment either with the government or local investors. The incentives provided to foreign investors are still governed by the previous Investment Regulation. However, an amendment to the incentives is also expected to be enacted in the near future.

1. Directive Amending the Previous Directive on Retention and Utilisation of Export Earnings and Inward Remittances (Directive No. FXD/70/2021): This directive authorises banks to open foreign exchange retention accounts for eligible exporters of goods, services and inward remittances. Customers who are eligible are regular recipients of foreign exchange remittances from abroad or exporters of goods or services who have not been labelled as Ethiopian origin, and
• A minimum of ten shareholders are required.

The directive, effective on 1 April 2020, allows maximum account balances to users of ETB 30,000 delinquent. Customers become delinquent when they do not settle their for-ex commitments with the NBE. This directive will apply to foreign investors who are interested in export business or those engaged in businesses that allow them to receive foreign exchange transfers from abroad.
Customers who are eligible can retain 45% of their account balances for an indefinite period after the deduction of 30% surrender requirement from the total earnings they made. The remaining 55% must be surrendered to the bank at the prevailing exchange rate immediately on the day of the receipt. Account holders can use the retained foreign currency to import goods and make payments for services without restriction provided that the account holder has the required business licence to undertake those activities.

2. NBE Issues New Payment System Directive (Directive No. ONPS/01/2020): Before this legislation came into effect, financial institutions (more specifically banks) were the only entities allowed to offer mobile money services. Cooperatives have only been providing financial services. The way they used to participate in the mobile-money services was through partnering with local private companies that provided a platform for mobile money services.
The Licence requirements for operating in this sector include:
• A minimum capital of 50 million ETB (USD 1.5 million),
• Ownership by Ethiopian nationals or people of Customers who are eligible are regular recipients of foreign exchange remittances from abroad or exporters of goods or services who have not been labelled as delinquent.
Customers become delinquent when they do not settle their for-ex commitments with the NBE.
Ethiopian origin, and
• A minimum of ten shareholders are required.
The directive, effective on 1 April 2020, allows maximum account balances to users of ETB 30,000 (approx. USD 634) and transaction limits of ETB 8,000 (approx. USD 1269) daily and ETB 60,000 monthly. Companies that receive the mobile-money permits can also provide saving, credit, insurance and pension products.

3. NBE Issues New Payment System Directive (Directive No. ONPS/02/2020: This allows nonfinancial institutions, i.e. fintech companies, to start offering payment processing and related services in the Ethiopian market by acquiring a payment system operator licence issued by the NBE.

This effectively brings new opportunities for new players in the market to start offering Payment Switch, ATM Operators, POS Operators and Online payment gateway operators’ services. The directive allows companies that had been partnering with banks or microfinance institutions to provide retail services themselves. Minimum capital requirements have been introduced for each of these categories.

Recent trends of the market indicate that this sector may be liberalised to foreign investors as well. Should the sector be liberalised, it brings an untapped opportunity for foreign investors in the sector. The financial sector is one of the sectors that are still not fully liberalised for foreign participation.

A Bill to introduce a Capital Market in Ethiopia
The Parliament approved the Capital Market Proclamation No. 1248/2021 establishing capital markets in July 2021.

This law establishes the Ethiopian Capital Market Authority (ECMA) as a Federal Government Regulatory Authority to protect investors, reduce systemic risk by ensuring the integrity of the capital market, promote the development of the capital market and generally oversee the objectives of the legislation.

The Capital Markets Proclamation aims to modernise the monetary policy of the country with alternative models. It also aims to establish a securities exchange in partnership between the Government and the private sector, including foreign investors. This provides that the total ownership of the Government may not exceed 25% of the capital of the securities exchange. However, if there is not sufficient interest from the private sector, the securities exchange may be established as a fully Government-owned enterprise that is to be regulated by the Council of Ministers. The ECMA may grant licenses to other securities exchanges or derivatives exchanges or over-the-counter trading platforms. However, detailed regulations on the requirements of acquiring such licenses are yet to be issued by the ECMA.

The Capital Markets Proclamation also has ambitions to support the national economy through capital mobilisation and financial innovation. Moreover, it contains provisions to ensure the integrity, fairness and efficiency of the capital market, as well as provisions on insider trading. It regulates investors who seek capital from the public, as well as prevents and/or mitigates systemic risks to the financial market of the country through effective monitoring and surveillance.

Some of the mechanisms introduced by the Capital Markets Proclamation in relation to the protection of the rights of parties who participate in the capital market is the establishment of the Capital Market Tribunal and the Compensation Fund. The tribunal is established to hear and determine appeals to the decisions of the ECMA. The compensation fund is established for the purpose of granting compensation to investors who suffer pecuniary loss resulting from the failure of a capital market service provider or securities exchange to meet his contractual obligations and paying beneficiaries from collected unclaimed dividends when they resurface.

The opening of a capital market brings with it opportunities for private equity investors to have an assessment of the Ethiopian market. Moreover, private equity firms will have the possibility of trading equity in an open market. The current trends of liberalisation are indicators that sectors like finance and telecom will be open to foreign investment. These trends coupled with the establishment of a capital market will bring many opportunities that may attract foreign investors.

Should you have any questions regarding the information in this article, please do not hesitate to contact Principal Attorney Mesfin Tafesse



Deborah Haddis – Associate

Natnael Aklong – Associate


This article was first published by AVCA Legal & Regulatory Bulletin March edition.