Towards a Level Playing Field: Legal Mechanisms for Managing Foreign Bank Entry and State-Owned Bank Influence in Ethiopia

A Domestic Private Bank Perspective

Abstract

Ethiopia's decision to open the banking sector to foreign banks is a significant restructuring with extensive consequences on market efficiency and competition. However, as a result of state aid, the dominance of state-owned banks (SOBs) risks distorting the market, possibly undermining the potential gains of liberalization. This article explores alignment of key Ethiopian economic laws with the doctrine of competition neutrality, particularly in light of the prospective entry of foreign banks. Adopting a doctrinal legal research methodology, this study is based on relevant laws, policy documents, and academic literature including the OECD Guidelines on Competitive Neutrality. Thus, it finds that basic legal regimes like the Business Income Tax Law, Value Added Tax (VAT) Law, Excise Tax Law, Customs Proclamation, Bankruptcy, and Procurement Laws which have generally been revised or interpreted in ways aligned with competition neutrality and thus do not pose major legal entry and operational barriers. However, it continues to face legal and practical challenges. The continued imposition of VAT withholding directives and the existence of implicit or de facto support such as preferential access to services undermine competition neutrality. These are considered against the backdrop of recent experiences of domestic private banks, which reflect significant handicaps arising from structural and regulatory favors accorded to SOBs. This paper finally recommends the continued application of pro-competitive laws and the gradual removal of anti-competitive rules and practices. A level playing field has to be established in order to achieve the full benefits of foreign bank entry and render financial sector reforms.