Besides its economic value, economists consider the presence of a capital market would facilitate wealth distribution in an economy. On the other hand, some also argue that capital markets will not have significant economic contributions in developing countries where there are few companies with the capacity to take part in capital markets.
In Ethiopia, a commercial law that governed share companies was formulated around 1960. Then after, sugar factories introduced stock market and sold their shares. But the initiative was short-lived as the Dergue, the communist military junta, dismantled it as soon as it came to power. In 1993 Ethiopia embraced a free market economy and currently, there are more than 1000 share companies.
But still, there is no stock exchange market if the companies want to go public. General Secretary of African Chamber of Commerce, Kibure Gena recently told the Amharic Daily Addis Zemen that it is not the right time to establish capital markets in Ethiopia as the number of companies that meet the criteria to engage in capital markets is limited.
The criteria include respecting rules and regulations, paying taxes and having a bookkeeping system that meets international standards. “For instance, most companies in Ethiopia are not willing to reveal their profit to evade tax.” Hence, as there are few companies that could take part effectively, capital markets will have a very limited role for economic development and distribution of wealth, argued Kibur.
Some 19 African countries have currently capital markets but the markets have not been delivering meaningful contributions to the economies as most of them do not have a well organized financial system. All most all are small capital markets, he said adding hence, even if Ethiopia establishes capital markets, the outcome would not be any different.
“Moreover, in the first place, it requires the presence of large companies in Ethiopia to attract foreign companies to its capital market.” But, Zemedenehe Nigatu, Chairperson of Fairfax Africa Fund, an investment company, says though every criterion have not been fulfilled, it is timely to commence capital markets as the ongoing investment activities are demanding a huge sum of capital.
So far, Ethiopia’s private companies have sold hundreds of thousands of share under close scrutiny of the National Bank. The large state-owned enterprises to be fully or partially privatized, private companies, and the 16 banks and insurance companies are the major ones expected to take part in Ethiopia’s capital market. In the last 15 years, Ethiopian banks have only managed to sell share worth of 30 billion Birr.
This is really small considering the fact that Ethiopia is the third largest economy in sub-Saharan Africa. “The overall capital of Ethiopian banks is estimated to be one billion USD. Thus, when there is an organized capital market, they would be able to sell their shares and easily accumulate a large amount of capital. Hence, it is better to commence a capital market and let it grow gradually,” he argued.
But for Kibure, currently, the companies’ shares are in the hands of few and these are the groups who are calling for capital markets to be established as they already own a large number of shares and currently there is no way for them to trade and make money out of them. “A capital market established for this purpose will not have any meaningful economic significance.” Zemedenehe, on the other hand, stated that there are many companies in Ethiopia that are in need of a large amount of capital.
For instance currently, banks’ and insurances’ shares are being sold and bought illegally. In addition, the government has decided to sell the stocks of gigantic public enterprises such as Ethio telecom, Ethiopian Airlines, and Ethiopian Electric Power. Hence, the need for a well organized and legal capital market is not debatable as it will have its own effect in the distribution of wealth as millions of Ethiopians would take part in the markets.
Zafu Eyesus Worqe Zafu, insurer and expert in the financial sector on his part said the importance of a capital market is not a debatable issue. “This is because capital markets have a central role in raising capital and establish giant companies. That is why the government is currently striving to set up a capital market.” Zemedenehe advises that before launching a capital market, there is a need for setting up a government organization that protects the country’s investment interests and controls the daily trading in the capital market.
“There is also a need for rules and regulations that govern the market, and skilled and legally registered or licensed capital market brokers who trade on behalf of their customers. There also has to be an investment bank that prepares criteria on whether the companies that are to sell their stocks are fit or not.” As Ethiopia is undergoing an overall economic reform, the Premier has indicated that the country will have a stock market by 2020; hence companies and stakeholders have to undertake all the necessary preparation.
The Ethiopian Herald, April 4/2019
BY STAFF REPORTER
