THE CURRENT CAPITAL MARKET SITUATION IN ETHIOPIA

In the present Ethiopia has no Capital Market to transact stocks and bonds (debt instruments) in the
secondary markets. The stock market facilitate the purchase of shares while the bond market provides a
means by which to sell and trade bonds in the secondary market to enable participating governments,
institutions and companies raise long term capital. As it stands today, Ethiopia has fallen behind in
creating or implementing such a resourceful financial mechanism. According to information gathered
from Birritu magazine (2017, p.27), which published by the National Bank of Ethiopia, currently there is
no regulatory authority and other related institutions to establish capital market in Ethiopian. Instead of
this Ethiopia government treasury bills are 29 issued in the primary market on weekly basis. These bills
are short–term with a maximum maturity period of one year. In addition, there is a long term bond
issued by the development bank of Ethiopia for the financing of the grand renaissance dam. The two
securities are the only ones being traded in the primary market however; there is no secondary market
for both acquainted of the benefit of financial market development. In these regard ECX is the only close
institution that have similarity with stock market in Ethiopia. According to senior Directorate officer at
ECX authority they believe the institution play a vital role in the introducing modern marketing plat
form. The authority established by the low to be responsible of ensuring the development of an efficient
modern trading system controlling the secure transportation and stable functioning of a commodity
exchange protecting the interest of the variance actors of the system and public at large. According to
the ECX Authority senior official the main constrain for ECX and future capital marketing are the
producers and traders (merchants) has still lack awareness or knowhow in modern market system show
resistance to adopt new ways. From those vast and different motives the main reason that can take a
lion share is the question of strength in the financial sector when it is compared with other countries
accumulation of experience and power. Most respondents believed that there is no strong financial
institution that can handle capital market.

4.3. THE ROLES OF FINICAL INSTITUTIONS IN ESTABLISHING CAPITAL MARKET IN ETHIOPIA

According to National bank of Ethiopia, in contemporarily financial sphere there are government and
private owned financial institutions like banks, insurances and micro finance institutions operating in the
country. State owned banks were established through initial capital raised by government whereas
private banks were through sell of shares to the public by Initial Public Offering without stock market. In
the present banking industry state banks accounted to 46percent and private banks 54 percent of the
paid capital. This showed private banks accounted higher amount due to sell of shares from the day of
establishment up to the fiscal period ended June 2016. Insurance companies which comprises state-
owned and private are operating in the economy. Out of all insurance companies the highest amount of
capital is registered by private companies which accounted to 78.7 percent. Whereas state owned
insurance company accounted 30 to 21.3 percent. The implication of this are the availability of the
financial industry including banking and insurance company have greater advantage on the
establishment of capital market in Ethiopia this means the strength banking system and the whole
financial system contribute significantly to the development of the capital market. On the hand, a weak
banking system can limit the development of the capital market. They proved issues related to the role
of financial institutions of for establishing capital market related to the current Ethiopian economic
growth and investment activity. Any investor around the world to invest their capital in different sector,
they directly see the country financial system related to availability of capital market and the financial
strength, if the bank loan capacity is rise at the same time they have a capacity to survive such
difficulties related to in capability of financial capital. All respondent substantiated that banks can collect
money from different ways on the other hand government banks like National bank and Development
bank of Ethiopia also take an advantage and play pivotal role by formulating rule and regulation for
establishment of capital market on the country. Whereas, respondent from private banks suggested that
the political leaders especially, those found in the area of Ministry of Finance and Economic
Development, Central Bank, and National Bank should have to take vital step and takes the
responsibility to clearly forecast for effective implementations of this market by strongly integrating it
with financial systems. But Some respondent rise different assumptions related the our financial
strength and capital market situation, these means the financial industry has its own problem on
financial strength, loan, IT infrastructure, skilled man power, banks and insurance branch expansion, the
competition environment etc. this all are challenges for the financial sector to fulfill their great role on
establishment of capital market in Ethiopia. According to them, one of major cause raises the issue
which related to the government responsibility working on building strength and capacity of financial
industry especially private financial industry to compute with foreign banks. There is a pressure from
IMF and the World Bank to liberalize the financial sector of Ethiopia. Ethiopia is also queued for
membership in the World Trade Organization (WTO). These organizations may consider liberalizing the
financial sector (banking and insurance) and establishment of capital market as a precondition for the
country to get further development 31 assistance and co-operation. High quality financial institutions
and infrastructures have a positive influence on the depth and development of financial markets /capital
markets. The research result clearly reflected developing the financial institutions can promote stock
market development; Support services from the financial sector (particularly the banking system)
contribute significantly to the development of the capital/stock market. Conversely a weak banking
system can constrain the development of the stock market. Without financial institutions, financial
markets would not be able to move funds from initial deposit to productive investment opportunities;
and thus hinders important effects on the performance of the economy as a whole. All respondent
proposed that before establishing capital market in Ethiopia first the availability and capacity of financial
institutions must be taken in to consideration. The Central bank of the country; National Bank of
Ethiopia (NBE), Commercial Banks (state and private), insurance companies and MFIs, Credit Unions and
co-operative banks should be strengthened before embarking on the establishment of capital markets.
According to (Amare W., 2008) we can find this aspect similarly in his conclusion Specialized banks (such
as investment) and mutual and pension funds need to be in place and their capacity strengthened by
creating favorable working environment and finance specialists and brokers needs to in place as well .

THE PROGRESS, TIMING AND PROMISING FACTORS TO LAUNCH CAPITAL MARKET IN ETHIOPIA
According to the informants from Awash International Bank, stated that the government had positive
interest towards establishing stock market. Recently, National Bank of Ethiopia is on preparation to
launch Secondary Market for government bonds to the public and issued Sovereign Eurobond to foreign
investors after securing credit ratings by foreign credit rating agencies. The government had also issued
a proclamation to establish a regulatory board to direct certify and control public accountants‟ and
auditors‟ work and further started to revise the commercial code of Ethiopia. Further to note, recently
the government by its initiative has started to study the feasibility of establishing stock market in
Ethiopia. The document is at a draft level for subsequent approval. Parallel to the study, National Bank
of Ethiopia is prepared to issue corporate governance directive to all financial institutions.The officials
and managers of private banks believe it‟s time toestablishment of capital market including bond
market, stock exchange, strengthening the money market and so on. There is also a promising indication
like the previous study done by National Banks of Ethiopia and the governments notified all private
banks to increase minimal initial deposit from 500,000,000 million birr now to two Billion birr at the end
of the second GTP. For this purpose the bank formulate a committee composed of foreign and its 33
own experts to conduct study on this area. In adverse National Banks stand on these regard stay
controversial according to sources “still now we don‟t have anything to publicize but the work is in
progress and additionally the government is not hundred percent ready to institutionalize the capital
market in general and the stock exchange in particular like that of commodity exchange and the
government‟s commitment to establish the stock exchange is not clear” ,continually in Ahforem,
(2011 )study other hand show that academicians believe that this is the time for the establishment of
stock exchange. Here they add that even though they agree on establishing stock exchange at this time,
this doesn‟t mean that the pre-conditions for the establishing stock exchange are not fully available but
this is the time for starting institutionalizing the stock exchange. There are different directives and
indication for promising the launch of capital market in Ethiopia. It is collected from investment
commission of Ethiopia and National Bank of Ethiopia that the following are promising areas.  In the
current scenario Ethiopia is accepting and applying Foreign Direct Investment this means the investors
wants to loan from capital market.  The government strong request to be grant membership in World
Trade Organization, if it is happened and Ethiopia member in WTO everything goes on rule and
regulation of the organization so there must be capital market in the country.  The rise of educated
Man Power In the financial Sector Another strong indication for the establishment of stock market in
Ethiopia is the recent privatization of public enterprises, where the government‟s Privatization Agency
declared the privatization of 394 companies in manufacturing, construction, agro-industries, transport,
exportimport and mining. This year alone, the agency has identified 20 more companies in its pipeline
slated for privatization and marketed the firms as direct sale (auction). Unfortunately none of these
firms were privatized as equity or share companies to the public (Ezana, 2015).

In May 2022, Ethiopia established EIH (Ethiopia Investment Holdings), a sovereign and dedicated wealth
fund. The idea was to attract more international investments within the program and move forward
with economic privatization. Since the development of EIH, the country is set to launch the Ethiopian
Securities Exchange.

ADVERTISEMENT

RECOMMENDED ARTICLES

Launching Ethiopian Stock Market: Challenges and Opportunities

EIH expects the Ethiopian stock exchange to launch with 50 listed companies, and it has the potential to
attract fresh capital into the country over the next decade.

ADVERTISEMENT

Prioritizing Physical Infrastructure

Tesfaye Hailemichael, a founding member of ECMA or Ethiopian Capital Markets Authority, makes
investment decisions for Ethiopia's physical infrastructure.

One of Hailemichael's priorities is to launch the Ethiopian security exchange successfully. And before
heavily investing in the country's physical infrastructure, Hailemichael wants to ensure Ethiopia gets a
stock market and runs active securities exchange operations.

But to launch a flourishing Ethiopian stock market, the country needs infrastructure support and
significant investments beforehand.

For starters, Ethiopia needs to upgrade its internet and cell phone capabilities. It is a digital and tech-
driven age, and Ethiopia needs to set foot in and ensure fast and accurate trading.

ADVERTISEMENT

Launching Ethiopian Stock Market: Expected Benefits

Before Ethiopia launches its stock market, it must run informative campaigns to raise public awareness
about the stock market. For instance, the stock market can help Ethiopia drive consistent economic
growth. Let's touch on some essential benefits Ethiopia can expect after establishing and running
successful stock market operations:

1) Stock liquidity: "Investors and financial institutions love stocks because they are the second most
liquid asset, next to cash," says Robel Getaneh, founder and operator of a private investment firm based
in the United States. "Ethiopia's stock exchange will need some time to develop, but once the daily
volume begins to pick up, we will see more and more citizens looking to participate."

2) Increased transparency: A regulated body controls and mandates compliance in a country's stock
exchange markets. As a result, it increases market transparency and protects investors' rights.
Regulatory bodies create a roadmap for stock markets to function.

When there's little to no risk of fraudulent activities, it leads to heightened transparency, which instills
more confidence among investors to continue investing in the stock market. It also creates investment
flexibility within the stock market and makes it easier for regulators to address potential risks.

ADVERTISEMENT
3) Grow the economy: The stock market allows companies to list their shares on a public exchange. In
doing so, it will become easier for them to raise funds for current and future business expenditures.
Consequently, these expenditures will boost employment, output, and growth—all of this will help
increase each business's value and share price.

4) Dividend benefits: A dividend is a portion of a company's profits paid quarterly or yearly to

Diverse Investment

One of Ethiopia's main objectives is to launch a transparent and regulated stock market, which can
attract outside investments. The country's goal is to make financial products like derivatives, mutual
funds, bonds, and shares available in the stock market. With added flexibility, investors can diversify
their entire investments and simultaneously reduce the risk of stock investing.

Opportunities in Launching the Ethiopian Stock Market

ADVERTISEMENT

Ethiopian national bank sees emerging markets as a step forward in establishing a thriving securities
exchange market. The country is following the lead of Kenya's framework to ensure success. Global
experiences are essential and support open economies when launching the stock market.

Ethiopia understands it can attract direct and consistent foreign investments through its stock exchange
market. Market experts hope that new proposals, regulations, corporate governance, and financial
disclosures assure global investors that their funds will remain safe and secure in Ethiopia.

As long as Ethiopia's central bank, the federal government, and the international wealth fund play an
active role in launching the stock market, the country will enjoy economic benefits for decades. In any
case, laying the foundation of the Ethiopian stock market is a step in the right direction for the country.

Final Thoughts

With the right tactics and initiatives, Ethiopia can become the hub of African capital markets. Getaneh
believes that once more startups and companies can drive growth and receive financial support,
Ethiopia will have the opportunity to make its economic system more innovative and drive
unprecedented change.

Stakeholders came together to discuss and provide feedback on the proposed draft directives and
proposal that underpin the Capital Market Roadmap leading to the establishment of full-fledged Capital
Markets in Ethiopia.

The consultation was organised in June 2022 by the National Bank of Ethiopia's Capital Market Project
Implementation Team (CMPIT). 
 
The Roadmap has four pillars: market development, infrastructure development, capacity development
and policy reviews. A ten-year implementation action plan accompanies the roadmap. 

The CMPIT is currently working on several protocols and other instruments that are critical for the
operationalization of the capital markets. 
 A well-developed and vibrant capital market can promote economic growth. It can also play a key role
in the efficient allocation of financial resources to areas where they are needed most, generating the
highest return for firms, enabling risk sharing and facilitating the flow of finance to more risky but high-
return projects. 
A robust capital market has several beneficial features for different participants in the economy.
Domestic capital markets provide an alternative source of funding that can complement bank financing
for a company or entity in need of funding. 

Capital markets can offer better pricing, longer maturities, and access to a wider investor base. They can
also offer to fund riskier activities that would traditionally not be served by the banking sector and so
contribute significantly to innovation in an economy. While some governments can access international
capital markets, the development of local capital markets can increase access to local currency financing
and help better manage foreign exchange risk and inflation. 
A vibrant capital market would also allow governments to finance fiscal deficits without resorting to
financial repression or foreign borrowing. In addition, the capital market supports the conduct of
monetary policy through an enhanced monetary transmission mechanism. Moreover, capital markets
also promote national savings, serving as alternative saving and financial investment vehicles for the
public.
Cognizant of the role of capital markets, the NBE issued the Capital Markets Proclamation No.
1248/2021 in 2021 and established the CMPIT to steer the operationalization of the Proclamation. A
well-developed capital market could help to provide a more reliable supply of long-term funding to the
private sector. The Government's effort in this respect, could strengthen the economy’s resilience to
shocks, mitigate the risk posed by an overreliance on the bank-dominated financial sector, and impose
the allocation of resources.
The Capital Market Authority would supervise related activities of the market. The Authority would set
the minimum admission criteria and conditions for enlisting in the exchange such as preparing the
prospectus upon enlisting.
Similarly, the issues of liquidity and transparency are very important to take note of and establish as the
market Roadmap is implemented. According to Ms Martha Ibrahim, one of the presenters, capital
markets are based on trust. 
UNDP is supporting the development of the capital market. This included the provision of technical
advisory support, facilitating experience exchange visits to Kenya and Turkey, setting up the CMPIT
office, developing the regulatory frameworks and directives and eventually setting up and
operationalizing the Capital Market Authority. 
UNDP continues its partnership with the National Bank of Ethiopia to promote access to innovative and
inclusive finance through establishing an innovative finance lab that would test, pilot, and scale up
innovative financial instruments. Various innovative financial instruments are developed to ensure the
inclusion of MSMEs and other key players in the capital market ecosystem.

Ethiopia prepares to launch its own stock market exchange within two years time.
On Wednesday May 18, 2022 Ethiopian Investment Holdings /EIH/, Ministry of Finance and Financial
Sector Deepening Africa /FSD Africa/ signed an agreement to establish the Ethiopian Security
Exchange /ESX/, stock exchange in Ethiopia.
Through the corporation FSD Africa will fund technical support legal advice, and the costs associated
with getting the exchange operational.
As Mark Napier, CEO of FSD Africa informs Capital, it will take 18 months to two years to launch the
stock exchange. “We are now in the process and preparations for the launching, and the government
wants an intermediary but there are things and steps we need to go through in order to launch the
exchange,” explained Mark highlighting that the process will take about two years for the exchange to
come to fruition.
The exchange is designed to provide a fundraising platform for small and medium-size enterprises.
Furthermore, the exchange will also offer a platform for the privatization of Ethiopia’s state-owned
enterprises.
It is indicated that ESX will serve as a key market institution that will provide Ethiopian entrepreneurs
and businesses with access to long term finance.
As the owner and manager of state-owned companies, EIH is said to serve as the wind underneath ESX’s
wings by floating minority shares of selected companies under its management.
At least fifty companies, including banks and insurance companies, are expected to list at the launch of
the exchange.
“This will bring about opportunity for young entrepreneurs skilled professionals and most importantly to
drive our citizens in developing a robust business with access to capital and source of funds and national
digital payments strategy,” said Ahmed Shide, Minister of Finance.
Following the agreement signed between the two government bodies and FSD Africa on Thursday May
19, 2022, FSD Africa has launched its representative FSD Ethiopia.
FSD Ethiopia is now launched as a development agency that aims to support the development of
accessible, inclusive, and sustainable financial markets for economic growth and development. FSD
Ethiopia takes a market systems approach to promoting systemic change in Ethiopia’s financial sector.
Funded by FCDO and the Bill & Melinda Gates Foundation, FSD Ethiopia is a market facilitator, providing
technical assistance, grants, networks, research, and insights to market actors in both public and private
sector domains.
The organization’s role is to identify the underlying causes of financial system failures and provide
technical and financial resources to market actors to address these constraints to help build a functional
and effective sector that generates economic gains for a wide cross-section of Ethiopian individuals and
businesses. The body’s vision is to contribute to a thriving financial system that delivers real value to the
economy and the people of Ethiopia.
Financial Sector Deepening Africa (FSD Africa) was created in 2012 and is a 35 million pound financial
sector development program based in Nairobi and funded by the UK Government’s Department for
International Development.
FSD Africa is a market facilitator that applies a combination of resources, expertise, and research to
address financial market failures. It has the mandate to work across sub-Saharan Africa on issues that
relate to both ‘financial inclusion’ and ‘finance for growth.’
FSD Africa is also a regional platform. It fosters collaboration, best practice transfer, economies of scale,
and coherence between development agencies, donors, financial institutions,
Ethiopia began the process in 2020 by introducing a proclamation through the parliament where the
national bank was a regulatory body. Apart from the Addis Ababa Share Dealing Group which was
operating during the Derg regime, Ethiopia has not managed to establish a capital market till now.