Has Ethiopia's Digital Finance Moment Finally Come?

May has marked some exciting milestones for Ethiopia and its digital ecosystem, which has piqued the interest of local, regional and international fintech players. Earlier this month, Ethio Telecom, the country’s only mobile operator, launched its mobile money service, TeleBirr. And just days ago, the Ministry of Finance and the country’s telecoms regulator, the Ethiopian Communications Authority (ECA), awarded a new telecom license to the Global Partnership for Ethiopia (GPE), a private consortium made up of Safaricom, Vodafone Group, Vodacom Group, CDC Group and Sumitomo Corporation. Both events align with the current administration’s vision for digital transformation, economic prosperity and growth.

TeleBirr’s roll-out was likely timed in an effort to maintain market dominance in the digital finance sphere before new operators enter the country and increase the value of the 45 percent stake of Ethio Telecom that will be available for bidding later this year. Further cementing an opportunity for sector dominance, the forthcoming telecom license (controversially) does not include a mobile money license, with plans to “block” any foreign mobile money competitors to Telebirr for at least a year, according to Ethiopia’s Prime Minister Abiy Ahmed.

As discussed in a 2019 Mondato Insight, the country’s population of over 110 million and its low levels of financial inclusion, coupled with the current regime’s desire to liberalize the sector, attracted much interest and excitement. Almost two years later, the sector appears to finally be taking evolutionary steps forward, which begs the question of how and when foreign fintech firms will be allowed to enter the market — and to what extent the fintech ecosystem will be ripe for partnerships and robust digital financial services.

A New Hope

At this juncture,Ethiopia’s financial services sector consists of 19 commercial banks, around 18,000 savings and credit cooperative groups (typically referred to as SACCOs), and more than 12 mobile money services. While the country’s banks are reported to be quite profitable, with an average shareholder return of 35 percent, traditional players have not yet met the needs of the population due to a combination of regulatory and technical barriers. There are currently around 14 million debit cards in Ethiopia and less than 3,000 ATMs, which are primarily located in Addis Ababa; credit cards do not currently exist, leaving a massive need for digital financial services to close the gap.

“So far, the existing products have reached 10 to 12 million users, but with limited use cases. Bank-led digital financial services were not meeting market demand, and Ethio Telecom can leverage its dominant position and existing distribution network to deliver digital products. The launch of TeleBirr will dramatically change the DFS ecosystem in Ethiopia – it has the potential to be as big or bigger than M-PESA in Kenya.”
Tewedros Tassew, DFS Consultant

TeleBirr’s mobile money service enables users to send, receive and store money on their phones, mainly for the purpose of cash-in-cash-out (CICO), paying for goods and services like utility bills, and receiving money from abroad. The TeleBirr wallet can also link bank accounts and reportedly offer savings and loans services as well. Ethio Telecom intends to secure 21 million users within the first year and target 33 million in 5 years, with 40 to 50 percent of the country’s annual economic output transacted on the platform in five years, according to the company’s ambitious CEO Frehiwot Tamiru. And she may be able to meet her goals; over a million people signed up for TeleBirr in less than a week after its launch, demonstrating its potential to disrupt the Ethiopian DFS ecosystem. The company currently has 1,600 agents deployed across the country with the intention of augmenting that number to 15,000 by next year.

The platform, which was built by Chinese conglomerate Huawei in only 5 months, can make up to 100 transactions per second, which the company claims will reach 1,000 transactions per second in the near future, preparing for anticipated growth.

Source: Ethio Telecom Twitter, 2021

The Regulators Strike Back

In a country where more than 75 percent of the population is unbanked and the MNO-driven TeleBirr mobile money service signifies the “first of its kind” in Ethiopia, firms bidding on the telecom license had intended mobile money services to be included.Their inability to do so — for at least a year — comes at a “high cost” to the country, according to Prime Minister Abiy Ahmed. He estimated that it cost the government US$500 million in bid levels. The GPE consortium has an impressive mobile money track record and paid a whopping US$850 million for the license, significantly more than MTN's bid of US$600 million, with plans to invest an additional US$8 billion in infrastructure over the next decade, which will surely improve the landscape for additional market entry, but perhaps not for some time. Investment in the country’s ICT infrastructure like broadband networks will lay the groundwork for additional digitization of sectors, like digital finance. A 10 percent increase in broadband penetration can yield a 1.38 percent increase in overall GDP, but these figures take into account more open regulatory policies, like encouraging foreign competition and investment.

Restrictions on mobile money extends to the entire banking sector, which continues to be closed off to foreign investment, though this regulation is likely to change in the coming years. The World Bank, which plans to invest US$200 million in Ethiopia’s telecoms industry, warned that preventing competition in the digital finance sector is not good practice and will be a detriment to market development; best practice would be to encourage competition locally as well as internationally, instead of the current approach of implementing foreign ownership restrictions. Considering the 16 million Ethiopians without a bank account, mobile phone or form of identification, there is a major financial inclusion gap to address. While TeleBirr marks the entry of a novel type of product, there is still a need for foreign firms to enter, invest and innovate.

In 2020, the National Bank of Ethiopia (NBE) replaced the 2012 mobile money legislation that forced fintechs to partner with banks of MFIs, which opened up the DFS market to Ethio Telecom. This regulation blocked foreign players unless they entered into a minority-stake partnership with a local player, even though the new telecom licenses were initially intended to include mobile money. Since then, the government reversed the decision to include mobile money in order to give Ethio Telecom time to build expertise ahead of new licensee market entry. Balcha Reba, Director General of the ECA, assured media outlets that “there will be a financial reform program after 3 years, and [he hopes the opening of the mobile money market] will be addressed by then.” The Prime Minister set a date of May 2022 to allow for the new telecom operators to begin their mobile money services, but this may be a moving target.

While the opportunity for digital finance and fintech is potent in Ethiopia, it is yet to be seen how quickly the sector can evolve with limited participation and investment from foreign entrants.

Ethio Telecom’s Market Monopoly

In addition to preferential regulatory mandates, Ethio Telecom also benefits from its already-established distribution network. Ethiopia is a largely rural country, with its population spread widely across the large country. Ethio Telecom already has an established customer base of over 53 million mobile voice subscribers and 24.3 million internet and data subscribers. In addition, there are over 1,000 partners that sell their value-added services (VAS) and 250,000 partners that sell Ethio’s SIM cards and vouchers across the country, making it far easier for them to build out their mobile money distribution networks compared to future competitors starting from scratch. This compares to the M-Birr, the country's first mobile money service, with has 1.2 million subscribers.

Onboarding millions of new mobile money users will require a significant investment on the part of Ethio Telecom. Educating the population on the benefits of its mobile money service as well as training agents to use and sell the product should lead to improvements in financial and digital literacy, and potentially ease the deployment of current offerings like M-Birr as well as future, more advanced services and use cases. Ethiopians reportedly have a tendency to save in fixed amounts and rely on cash, habits that present barriers for mobile money. Perhaps the monopoly mobile money launch will have a similar onboarding effect to that of M-PESA in Kenya, giving Ethio Telecom market dominance but also allowing second movers to leapfrog, or at least ease, certain logistical challenges inherent in introducing new technologies to an immense and diverse population.

All Boats Rise

It appears that the launch of TeleBirr may increase participation from other more traditional financial services players, and generate a positive ripple effect of energy and innovation. Coupled with the imminent entry of GPE, TeleBirr’s launch has created excitement among domestic players like traditional banks that are keen to follow suit. Melaku Kebede, Chief Executive Officer of one of Ethiopia’s commercial banks, Hibret Bank, expressed excitement over potential collaboration.

When asked if banks will be swallowed in the new, evolving landscape, Mr. Kebede responded, “It is rather better to see how banks, fintechs, and telcos in Ethiopia can collaborate and establish a better ecosystem. The initial M-PESA case was different; all veteran bankers in Kenya were sitting in their boardrooms when M-PESA began in 2007, and it was only much later when they woke up and came to their senses.” He looks forward to partnering with Ethio Telecom to build additional use cases when the application is interfaced with banks, and many domestic financial service providers have echoed a similar sentiment.

If the new activity can incentivize the further liberalization and digitization of the domestic banking sector, it will lay an essential foundation for additional digital finance growth. Currently, transferring funds between banks is a complicated process, and there is no means to transfer funds internationally. The country’s national switch, EthSwith, will soon be introducing a national payment gateway that aims to follow the national digital payments and financial inclusion strategies laid out by the government’s 2020 legislation. EthSwith announced this week a peer-to-peer (P2P) pilot that will enable financial firms to transfer or pay money to one another, building on its current services encompassing only ATM and Point-of-Sale (POS) transactions. EthSwitch CEO Yilebes Addis explained that as the national switch, it operates with specific mandates and would not directly compete with the likes of TeleBirr.

“As the National Digital Payment Switch of Ethiopia, EthSwitch is mandated to facilitate interoperability between digital financial services providers (DFSP). EthSwitch is owned by both public and private financial institutions, including the Central Bank and TeleBirr, and thus, TeleBirr shall soon join EthSwitch to enjoy the benefits of interoperability with other DFS providers.”
Yilebes Addis - CEO, EthSwitch

These developments and collaborations are important steps towards further financial sector flexibility, and once they receive the “green light” from the NBE, they are expected to launch an international payment gateway, which could finally create an avenue for international payments.

Foreign Fintechs: To Enter or Wait?

Though GPE will not be launching its version of M-PESA for at least another year and foreign firms cannot enter without local partnerships, some fintechs are moving forward. Last week, Flutterwave announced a partnership with Ethiopia’s largest mobile digital wallet platform, Amole, owned by Moneta Technologies, and Dashen Bank. The collaboration will facilitate money transfer for the 8 million Ethiopians living abroad to send money home via Amole’s wallet and 2,500 agent locations across the country, potentially lowering the cost of remittances and digitizing a process that previously required copious amounts of manual paperwork. In addition to improving financial inclusion, the remittance potential in Ethiopia will prove to be quite lucrative, with the diaspora sending an estimated US$5 billion annually.

Nigeria’s digital payment behemoth Paga acquired Apposit, an Ethiopian software development company, in January 2020 to support its expansion into the country. More than a year later, in March 2021, they are now concluding arrangements to commence operations.

“Sensing an opening up of the Ethiopian market, and driven by our purpose of reaching a billion people, Paga moved to enter the Ethiopian market through the acquisition of Apposit in 2020. We are working on implementing our market entry strategy within the regulatory structure of the country.”
Tayo Oviosu - Founder & CEO, Paga Group

Though entry into the Ethiopian digital finance ecosystem may require patience and partnerships, regional fintechs like Paga and Flutterwave will likely see a first-mover advantage as the sector develops. And albeit delayed, GPE will certainly launch its M-PESA platform across the country as soon as possible, which is likely to attract significant consumer demand and open up opportunities for expanded use cases and partnerships for a sleuth of fintech players.

While the regulatory terrain remains complex, foreign firms willing to navigate hurdles to entry will certainly boost Ethiopia’s fintech ecosystem and engender more innovation and investment. Last year, there was a 9,160 percent increase in Ethiopian startup funding, up to US$2.3 million from the previous year —the largest percent increase on the continent. Because the country’s fintech sector is quite small compared to other similarly sized African countries, some aspects of protectionism may allow domestic industry to organically mature, which may only make the opportunity more potent as it slowly opens up for foreign participation.