A Stock Market Will Be A Big Leap Forward For The Financial Sector In Ethiopia

The Council of Ministers, on December 22nd, approved a draft law prepared by the National Bank of Ethiopia that allows Ethiopia to introduce a capital market. The bill is now under review by the House of People’s Representatives for approval. This milestone paves the way for the formation of an Ethiopian stock exchange and conveys promise that the country’s financial sector keeps upholding positive changes.

Given the government’s effort to foster a private sector-led economy, accentuated in the Homegrown Economic Reform Agenda, the 10-Year National Perspective Plan, and large privatization initiatives, the need for a capital market has become unquestionable. With the introduction of a stock exchange, there is high probability for sizable share companies to emerge and for established enterprises to be listed for new capital sourcing opportunities. Iterated by the renowned entrepreneur, Ermias Amelga, the formation of a stock market enables the pooling of new funds from the Diaspora community, creates opportunities for portfolio investors (rather than only for foreign direct investors), and reduces information asymmetries as listing requirements are usually stringent where transparency is a permanent obligation.

In a modern economy, publicly shared enterprises are at the heart of national development as they empower robust and forward-looking organizations with strong prospects for much needed employment creation. For shared companies to flourish, a stock exchange platform plays a critical role by opening investment possibilities not only for high-net worth and institutional investors, but also for ordinary individuals with small savings. Large size fund pools otherwise not mobilized, such as pension and insurance funds, will now have a vehicle to funnel capital for long-term value creation.

Importantly, a stock market provides alternative sources of capital apart from what the country is singularly used to: banks. Bank loans in Ethiopia are expensive, collateralized, and inaccessible for the majority of the business community. With the instigation of a capital market, this exclusive dependency on the banking sector will decrease and open much needed room for small & medium enterprises to access bank loans with competitive interest rates as the loan seeking crowed dwindles over time. Additionally, capital markets encourage ordinary citizens to become business owners, allows company ownership transfers to be seamless, help the government finance its fiscal deficit by borrowing from local markets with a low cost, creates a venue where investors meet fund-seekers, thereby facilitating better returns for investors, help the country regenerate the existing fragmented and uncoordinated share market to a higher level of organization. Crucial to note that Ethiopia is among the very last countries to establish a capital market even if efforts for formation have been exerted for more than two decades but to no avail. In the days of the Emperor Haile Selassie I, a stock market in Ethiopia had been established, a basic undertaking at the time. The exchange was administered by the National Bank of Ethiopia, department of Share Exchange, and later on by other financial institutions and few private share dealers labelled as the “Share Dealing Group”, engaged in facilitation of transaction of shares and other services in the stock market. The group ceased to exist in 1975 when financial institutions and large companies were nationalized and transferred into government ownership by the Derg regime.

It is recommended that the stock market should be carefully managed so as to avoid malpractices witnessed in the region with undesirable consequences (i.e. low levels of liquidity, weak institutional capacity, lack of transparency and accountability, etc.), while taking initiatives to share indispensable experiences alongside successful stock exchanges in the region and beyond.

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