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.

The country has been gradually opening up its tightly controlled economy, which is one of Sub-Saharan Africa's biggest, since Prime Minister Abiy Ahmed took over in 2018. 

However, a two-year civil war, slow progress with reforms and a foreign exchange crunch have deterred investors.

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.

The governor of Ethiopia's central bank, Mamo Mihretu, said competition would instead strengthen local lenders.

Ethiopia, with more than 120-million people, is one of the most populous on the African continent and has long been in the sights of foreign investors after being shut off for decades.

It secured an International Monetary Fund (IMF) support programme in July, hours after it followed one of the Fund's key recommendations and floated its birr currency. 

Other reforms linked to the negotiations for an IMF programme included the adoption of an interest rate-based monetary policy regime.