When Ethiopia’s prime minister, Abiy Ahmed, came into power in 2018, his administration’s move to liberalize sectors which had remained closed for over a century, was initially met with optimism.
One of the biggest moves was in ending the monopoly of the telecom sector, which saw the Kenyan telcom giant, Safaricom, awarded Ethiopia’s first ever private telecom license for a whopping $850 million last year.
Now the focus has shifted to the next agenda—the liberalization of the financial sector, particularly for fintechs. While the liberalization of the telecom sector was mostly welcomed and lauded as the right move, the opening up of the fintech scene for global superpowers has some concerned, especially about aggressive timelines despite bureaucratic delays affecting local fintechs that ideally had a headstart.
The country’s financial regulator, The National Bank of Ethiopia, is amending a decade-old Payment System law, allowing foreign investors, for the first time, to set up business in Ethiopia as digital financial services providers.
History of fintech in Ethiopia
Ethiopia’s fintech sector was not only closed for foreign firms but local ones too. Until recently, fintechs were barred from providing digital financial services (DFS) on their own and had to partner with financial institutions as system suppliers, constraining their growth.
This ban ended in 2020 with the introduction of two laws that opened up the sector. This meant fintechs could now operate independently and many startups were quick to try and take up the opportunity.
Much hope was placed on this development to rejuvenate Ethiopia’s crawling digital economy. From the lack of adequate interoperability, to e-commerce platforms relying on cash transactions due to the complexity of digital payment gateways, and limited fintech product offerings. Local fintechs had their work cut out for them.
Few months into the development some startups were raising millions of dollars in funding and applying for permits to start operations. High ranking government officials visited the offices of these startups while their founders were given a front seat in the country’s tech journey.
Bereket Tadesse, general manager of Asbeza, a grocery delivery business understands the reason behind the hype.
“It’s hard to say there is a fully online payment [platform] in Ethiopia,” Bereket tells Quartz.
E-commerce platforms in Ethiopia confront two key payment issues. Although there are many more payment options, almost none processes digital payments end-to-end and require tedious back and forth between platforms. The inability to handle refunds is the other issue. Refunds are currently being handled manually.
Meanwhile, the restriction on foreign fintechs remained the same even though the pioneers of mobile money products in Ethiopia were developed by foreign firms like Moss ICT (owner of M-birr) and Belcash (owner of Hellocash).
These firms, despite their great role, remained as technology providers and were forced to play a waiting game.
Change of direction for mobile money in Ethiopia
Over a year ago, Ethio Telecom’s mobile money platform, telebirr, became the first fintech platform in Ethiopia that’s not owned by a financial institution. However, during the launch of Telebirr, came a surprise where prime minister Abiy pledged to open the fintech sector for global players within a year.
The government had held off awarding mobile money licenses to foreign telcos during the bid but later had a change of heart.
Though this seemed like a decision majorly intended for Safaricom’s M-Pesa to enter Ethiopia, it will open possibilities for many other behemoths too.
A few months back, experts under the National Bank of Ethiopia began amending laws in line with the promised timeline. Officials of Safaricom are already working on bringing in their mobile money product. Others have also shown interest ahead of time.
End of a short-lived era for local startups
Although the proclamation is yet to take effect, it has sent shockwaves through local startups which say the entrance of foreign investment will kill local potential. Foreign investors and experts in the sector, however, believe it presents a huge opportunity for the digitization of the country.
Though local fintechs were free to attain fintech license for two years now, only four have been awarded permits owing to the National Bank of Ethiopia’s slow review process, according to industry observers. Additionally, all of them are at trial stage and haven’t fully launched their services. Their supposed headstart hasn’t given them a huge advantage.
Local fintech owners and founders argue they haven’t been given enough time to test and scale products. Managers of some local fintechs raised their concerns arguing the liberalization process should be delayed by at least three years. Until then only the mobile money market, which they presume has matured, should be opened.
“The issue of protecting local firms is always a concern, however, the point of liberalization is to create competition, and the point of competition is that stronger firms survive because they create better value for consumers as a result of better products and services and operations etc. Not all local firms will survive but neither will all foreign entrants,” says Richard Ketley, managing partner and director of Financial Services Strategy at Genesis Analytics, a consulting firm.
According to Fikresillassie Zewdu, vice president of branch and digital banking at Commercial bank of Ethiopia, the challenge for local companies will come in the form of technology and skilled manpower.
“We need to train our people and invest in technology quickly,” he says.
Battle of the telco giants
Ethiotelecom, a state-owned telecom operator, launched Telebirr—Ethiopia’s first telecom mobile money service in May last year. Its launch was seen as a strategic move for the telco giant which knew it would have to compete with Safaricom’s M-Pesa sooner or later.
Within a year, the platform has 19 million customers (about a third of its telecom customers) and has integrated many utility and e-commerce payment options.
Although the country’s sole telecom operator has first-mover advantage, the competition that will come from M-Pesa will not be something to overlook as, in its own right, M-Pesa is a force to be reckoned with.
M-Pesa has over 51 million customers in 7 countries of which 30 million are in Kenya. Over $300 billion in transactions are facilitated annually through its wide range of financial products to individuals as well as businesses.
Seeing its key role in revolutionizing mobile payments in Africa, local companies too can’t help but worry. Not only its mega presence but the strong financial muscle behind it is cause for concern.
The battle is also open for regional giants. Many pan-African service providers are believed to have set an eye on the Ethiopian market. Big African giants such as Flutterwave, Opay, and Paga are among those expected to show interest.
Paga has already opened an Ethiopian branch and will seek a license once the laws are approved. Speaking to local media, the CEO of Paga Ethiopia said it will move forward to attain a license.
Paga, Flutterwave, and many other big fintechs provide payment systems.
The battle will be in the area of payment systems instead of mobile money. The mobile money space is already taken up, says an expert knowledgeable of the liberalization process.
Some however are hopeful the market will accommodate many players.
“We are expecting more actors in the market where fintech and telecom operators play a vital role in addressing the unbanked and underbanked through solutions of credit scoring, micro-credit, micro finance, grant operation,” says Abebe Mulu, Chief Operations Officer of E-birr, one of the popular mobile money platforms that majorly works with Cooperative Bank of Oromia.
Although fintechs are still testing the waters, financial institutions had the opportunity to scale all along.
The biggest mobile money product by a financial institution is yet again owned by a state-owned company, the Commercial Bank of Ethiopia with over six million users.
“In all markets that have been fully open to competition you continue to find a combination of domestic and international firms that find different strengths and opportunities. The biggest problem in Ethiopia is not foreign competition but the dominant position of state-owned banks and their ability to distort the market,” says Ketley.
Challenges up ahead for Ethiopia’s fintechs
Despite the perceived and visible advantages foreign investors have over local fintech, the market also presents peculiar challenges on top of shared ones.
The infancy of the Ethiopian market is a double-edged sword. For one it seems a fruitful market where there’s a lot of room for innovation. On the other hand, fintechs will have the challenge of convincing customers to go digital.
Over the past year, almost all of the technological problems have been solved by local players. The problem as it stands now is its adoption, says Dawit Abraham, CEO of Qene Games, a game development company.