ADDIS ABABA (Reuters) - Ethiopia will allow foreign banks to set up local subsidiaries and foreigners to acquire shares in domestic lenders, according to a bill approved by the cabinet on Friday, as part of the government's broader plan to liberalise the economy.

The country of more than 100 million people is one of the biggest economies in Sub-Saharan Africa and has market long eyed by foreign investors after being closed off for decades.

Authorities are opening up the country to foreign investment in sectors including banking, telecoms, transportation and aviation.

"A foreign bank which is well established, reputable and financially sound may be allowed to establish (a) partially or fully owned foreign bank subsidiary, or open a foreign bank

branch, or a representative office, or acquire shares of a bank," the bill states.

The draft law, which lawmakers must first pass, says that foreign bank subsidiaries include local resident non-shareholder Ethiopians on the board of directors.

The aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations in a bank will be limited to a 40% of total shares, the bill said. Direct shareholding by strategic investors will be limited to a 30% stake.

"These legislations represent a significant step in laying a strong foundation for growth and enhancing the credibility, accountability, transparency and governance of the National Bank of Ethiopia," central bank said in a statement.

Ethiopia's banking industry is dominated by state-owned Commercial Bank of Ethiopia, and the sector has 29 players, all of them locally owned.

In May last year the central bank announced it would offer five banking licences to foreign investors within five years.

(Writing by Hereward Holland; Editing by Alistair Bell)

By Dawit Endeshaw