In June, the cabinet approved the draft law, which allows foreign banks to establish subsidiaries, open branches or representative offices, and buy shares in local banks.
Ownership of local banks by foreign strategic investors will be capped at 40%, a copy of the law seen by Reuters showed.
Ethiopia’s banking sector is currently dominated by state-owned Commercial Bank of Ethiopia.
Parliament overwhelmingly backed the banking law, although a handful of opposition lawmakers expressed concern that local banks would not be able to compete with foreign competitors.
Ethiopia’s parliament passed long-planned legislation on Tuesday allowing foreign banks to operate in the Horn of Africa country, part of government efforts to attract more overseas investment.