It is a globally established fact that finance is paramount in bringing economic development and in efficiently allocating and using rare capitals. Ethiopia, like its fellow developing countries, has little capital. It faces a wide gap between the availability of financial resources and its desire to create economic opportunities for its average citizens.
So, promoting access and use of financial services, especially among its poor people, is vital for the country’s ambition of achieving inclusive economic growth. To this end, the country should work to generate and mobilize every available financial resource, both local and foreign, and tackle financial access barriers at the same time.
According to a recent study, for instance, at least 100 trillion USD in financing is available from institutional investors across the world, which is more than enough to cover the 4.5 million USD in financing needed by developing countries each year to achieve the Sustainable Development Goals (SDGs) by 2030.
In order to tap into this vast pool of private capital, or to mobilize any other available resources, a new mind-set is required – a new mind-set that look beyond traditional forms of financing.
Obviously, as a developing country, Ethiopia should look into innovative ways to tap into this vast pool of capital, and its own economy, so as to mobilize available financial resources and provide a wide variety of investment choices to its entrepreneurial workforce.
One avenue for this could be alternative investment. The concept of alternative investment offers an extremely broad and diverse group of financial products and services. And as one segment of financial service, it can help mobilize capital for the country’s burgeoning tech start-ups, small and micro enterprises, and mid to big enterprises.
As alternative investment/financial service or product can include anything from private equity and hedge funds to venture capital and investment banking, Ethiopia can take benefit hugely by tailoring it to its economic realities and needs. Of course there needs to be better risk management to go along with it.
Dr. Teshome Adugna, an Economist, believes that such alternative is necessary for the country as the banking service that is provided in Ethiopia is narrow and limited. Except for handling deposits and offering credit service, there are not many services that are provided, he added.
People need to get access to finance through various avenues, and to that end, various banking service is needed in Ethiopia. “And the economy needs it.” Countries like Nigeria and Kenya for most use non-banking finance to manage their economy, he opined.
There is a shift from traditional to alternative mode of financing, with non-banking services dominating the financial market.
As to Mushe Semu, an Economist, alternate financial service like investment banking for instance is necessary; “For me, it is all comes down to the market demand for such services, and the ability to provide it.”
Further elaborating, he said that
if the government makes it open as a policy directive, and if there is resource prepared for it, it is inevitable. “They should not exactly be like the ones in US or Kenya; as there are things that can be done by our own capabilities. After all, the bulk of investment banking is about providing financial consultancy services to clients.”
He argued that starting now is important so that the country will be in a better place gain experience, build up on it and reach the heights other countries have reached, and ultimately gain its benefits. “If we do not start now, when are we going to?” he asks.
Finance is powerful, and depending on how the financial system monitors the players and diversifies risks, it can be a cause of economic havoc as much as it can be a catalyst of economic growth.
Tesfaye Hailemichael, Accountant and Managing Director of Cornerstone Advisory Services, for his part said that it should be done phase by phase in line with the country’s economic capabilities, and should start from establishing capital market. For instance, there are bonds the government sells. “You can buy the Grand Ethiopian Renaissance Dam Bond, but you cannot get cash for it because you cannot sell it. So, a market to sell and buy bond should start.” Since the prerequisite for it would not be too much like the Initial Public Offering (IPO) and the others, it should be started from it and go from there, he notes.
Alternative financial instruments like corporate bonds and hedge funds should not be entertained in Ethiopia currently. So, the process should go phase by phase in clearly defined and well-thought out plan, where professionals have participated in the design, Tesfaye remarked.
All in all, the high diversity feature of alternative financial products and services can help Ethiopia mobilize capital resource it needs to unleash its entrepreneurial potential. And while capital emerging from the alternative financial landscape can increase access to finance for average Ethiopians, there should be a better risk management and regulation mechanism in place in order to fully exploit its benefit, and divert its unintended consequences.
The Ethiopian herald April 3/2019
By Robel Yohannes
