Building a vibrant capital market in Ethiopia
By Anthony Murage, Joseph Githaiga and Joseph Muendo,
Partner, Capital Markets & Accounting Advisory Services Leader, PwC Kenya | Associate Director, Head of Legal & Regulatory Compliance Advisory, PwC Kenya | Senior Manager, Capital Markets and Accounting Advisory Services, PwC Kenya
Introduction
The establishment of a capital market in Ethiopia marks the beginning of a new era. The propellers are turning, opportunities are ripe and key stakeholders are preparing for what will be known as the Ethiopian Securities Exchange to soon take off. Right now, the National Bank of Ethiopia is playing a pivotal role in setting up the Ethiopian Capital Markets Authority (ECMA) and developing relevant regulatory and licensing frameworks to ensure a solid foundation is built. The first players into the capital markets arena will likely be state-owned enterprises and large private banks and insurance companies, who are preparing for this fundamental shift in the Ethiopian economy. The introduction of a capital market, a dynamic platform where securities are traded, and equity and debt capital are raised, will create enormous opportunities for local and foreign investors to participate in the Ethiopian market.
In this article, we will cover the essentials for building a successful capital market ecosystem. We will examine what opportunities will arise, what are the potential roadblocks that government and regulatory bodies should be vigilant of, and finally, we will provide guidelines on how market players can succeed in Africa’s newest financial marketplace.
Key components for building
While basic forms of capital markets can develop in any economy, research has shown that development of a sustainable and well-functioning capital market can be accelerated by creating an overall enabling environment that includes an effective regulatory regime, high degree of market autonomy and overall macroeconomic stability.
Other drivers that are more closely focused on facilitating the arm’s length nature of capital market success and well-functioning trading of securities include easy access to relevant, timely and reliable information including financial statements, diverse investor base (domestic, foreign, institutional investors) and robust financial systems. These essential components provide a solid foundation for unlocking the opportunities presented in the capital market.
Opportunities in the new market
The role that capital markets play in an economy, and in economic development, cannot be overstated. Such markets can be used to promote savings and investments and to mobilize funding into key sectors of the economy such as infrastructure development. In this regard, the potential for Ethiopia is significant, following the enactment of the Capital Markets Proclamation and the proposed launch of the Ethiopian Securities Exchange (the “Exchange”), which will result in the creation of new investment products such as marketable securities (e.g. equities and bonds).
Corporate entities will have new sources of funding, as an alternative to bank borrowing, through the issuance of securities on the Exchange. Financial institutions, such as banks and stockbroking firms, will have a critical role to play in the development of the capital markets, as they will act as the intermediaries between the corporate entities issuing securities and the investors in such securities. This will unlock new revenue streams for banks that understand the intermediary roles and procure appropriate licenses.
Potential hurdles along the way
Notwithstanding the above, there are a number of challenges associated with a capital markets framework as detailed below:
How to prepare for the capital market
Conclusion
To conclude, the road ahead to developing Ethiopia’s capital market will be long with rigid terrain along the way, however, inevitably it will bring sustained outcomes and benefit millions of Ethiopians. The Government of Ethiopia, through its central bank, should continue to take the lead and invest in creating an enabling environment through deliberate market development efforts such as capacity building, financial literacy, technology and knowledge transfer to advance the operationalization of the regulatory framework. Once all components and risk mitigation measures are addressed, a booming capital market will certainly attract foreign and local investors to participate and contribute to Ethiopia’s homegrown economic reform journey.
