Ethiopia is at a crucial juncture in its economic development, with the potential to significantly enhance its capital markets. The establishment of a robust capital market can drive economic growth, attract foreign investment, and provide businesses with better access to financing. Here are several strategies to expedite the development of capital markets in Ethiopia.
It has been simplifying regulations as much as possible in order to create conducive environment to actors of the capital market can easily conduct their transaction and accelerate the flow of goods and services in a rapid manner. Customers who need money for their business also can obtain money from share seller companies without going to request loan from financial institutions.
In addition to that, simplifying the process of obtaining licenses for investment banks, securities firms, and other financial institutions and encourage more participants in the capital markets.
Senior Policy Advisor, Costentinos Berhetesfa (PhD) told the local media recently that the capital markets being introduced to Ethiopia are very important to the economy as they would raise capital from external and domestic sources of finance.
It is to be recalled that the government had established an institution and appointed leaders to start the long-awaited capital markets in Ethiopia.
The senior policy advisor further said that starting capital markets in Ethiopia is crucial to the private sector and the Ethiopian economy at large.
He said that capital markets are very important for the national economy in terms of raising capital for development projects that the government or the private sector is undertaking and capital markets are also very important in terms of building the capital of the private sector.
He also stated that starting capital market will give opportunities for public and private banks, companies and others that are advertising on media outlets to sell shares to have prospects of profit making status that enables investors make decision easier with minimized risk.
When capital markets flourished, people will go and buy shares; when they see a company is making profit; they will buy shares. If one advertises, for example, a new company and say the company is going to be a game changer in a sense, then people will take risks to invest in this company. That is where the capital market is going to be an important player.
However, he believes that introducing capital markets should be aligned with other reforms of economic components for the fact that capital markets cannot function alone. They have to be part of a sea of other components, including Ease of Doing Business, financial liberalization, transformation and intermediation that are very significant in the development of financial markets in the country.
“So, when you have this kind of capital markets, it is very important that we have Ease of Doing Business and it improves also tremendously.” Costentinos said.
Elaborating further, he mentioned the agriculture sector in Ethiopia by pointing out that the country has huge potential in agriculture with 74 million hectares of agricultural land and rivers outflowing 122 billion cubic meters of water annually.
For him, investing in this immense agricultural potential is crucial and needs huge financing. The capital markets will contribute to solving this primary investment challenge, especially for Ethiopian investors. With this kind of potential, Ethiopia has a huge investment challenge and most of the problems the nation has is lack of finance.
The capital markets will assist especially Ethiopian investors who want to invest in these huge potential sectors to raise additional fund for agriculture and other projects.
Costentinos acknowledged that the Commercial Bank of Ethiopia and Development Bank of Ethiopia have been giving agricultural loans to raise the productivity of the sector. Capital markets can raise money not only from local sources but also from external sources for instance from citizens who just keep their money sitting in the banks as saving accounts. They can invest it and get up to 50% dividend from capital market.
The senior advisor further stated that the introduction of the capital markets in Ethiopia will enable domestic companies that want to raise capital in the international stock market to have their prospects of profit making so that investors can buy from anywhere in the world without the need to come to Ethiopia and get investment license.
Ethiopia approved a new Capital Markets Establishment Proclamation in 2021 to provide the legal foundation for the development of capital markets in the country and to support economic development through increased capital mobilization, financial innovation, and risk sharing in investment.
In another development, it was learned that Heads of the Ethiopian Securities Exchange (ESX) eye the listing of more than 90 businesses on their boards as the country’s maiden stock market nears inauguration.
If the ambitions hold true, the number of initial public offerings (IPOs) would instantly surpass the stocks listed on the Kenyan stock exchange, which the minds behind ESX have used as a reference point in the four years preparing for launch.
The Exchange has managed to raise 1.6 billion Birr in capital, far exceeding the initial target, and despite growing interest to invest in ESX; its executives have suspended reviews of new offers, according to the sources.
“The subscription capital collected so far is adequate. We do not need to invest in property or other investments,” said one officer at ESX, who spoke on condition of anonymity.
Ethiopian Investment Holdings (EIH) holds a 25% stake in the Exchange on behalf of the federal government. State-owned firms Ethio telecom, Ethiopian Shipping and Logistics Services Enterprise (ESLSE), the Ethiopian Insurance Corporation (EIC), and Berhanena Selam Printing Enterprise combined hold another 25% stake.
According to the African Initiative President, Kebour Ghenna, capital market creates a Clear Legal Framework which is the best possible option through enhancing mutual trust among actors and regulators. In addition, it helps establishing a comprehensive legal framework that outlines the rights and obligations of all market participants and will promote transparency and build investor confidence.
It also empowers regulatory institutions strengthening the capacity of regulatory bodies, such as the Ethiopian Securities Authority, will ensure effective oversight and enforcement of market regulations.
As to the report obtained from Ethiopian Security Exchange, capital market enables to create establishing Trading Platforms so that business men with no time and place limit can transact their money through preferred option and maximize their profit.
Developing Electronic Trading Systems is also very crucial because, without following such approach, doing such business is unthinkable. Implementing electronic trading platforms will facilitate efficient transactions, improve liquidity, and reduce costs associated with trading.
Moreover, establishing a centralized system for clearing and settling trades will enhance operational efficiency and reduce counterparty risk.
It is also helpful that adopting International Financial Reporting Standards (IFRS) encourages companies to enhance the quality of financial reporting, making it easier for investors to assess the financial health of businesses.
Implementing educational initiatives to inform potential investors about capital markets, investment strategies, and risk management can increase participation.
To strengthen the venture in this regard, hosting events that bring together industry experts and potential investors is essential. It is also vital to foster a better understanding of market opportunities.
As to Kebour, capital market incentivizes institutional investors through creating level playing field to their business competition and to draw lesson from international companies participate in the market and enhance their role at the wider level.
Moreover, it serves actively promoting investment opportunities in Ethiopia, particularly in key sectors like agriculture, manufacturing, and technology which can attract foreign investors. In doing so, fostering innovation and technology will be realized.
It also helps promoting mobile banking and digital investment platforms and will increase access to financial services, particularly in rural areas. Fostering collaboration between government entities, financial institutions, and private sector will create a more integrated financial ecosystem.
Utilizing public private partnership to develop infrastructure and services can enhance the efficiency and reach of capital markets.
Expediting the development of capital markets in Ethiopia is essential for driving economic growth and improving financial access. By implementing regulatory reforms, enhancing market infrastructure, promoting investor participation, leveraging technology, and fostering collaboration, Ethiopia can create a vibrant capital market that supports sustainable economic development. These efforts will not only attract domestic and foreign investment but also empower businesses and contribute to the overall prosperity of the nation.
BY ABEBE WOLDEGIORGIS
The Ethiopian Herald December 8/2024
