(Associate Professor of Economics Department of Policy Studies Ethiopian Civil Service University)
Capital market development is crucial for developing countries like Ethiopia because it provides access to long-term financing for businesses and governments, fosters economic growth and stability, allows for diversification of risk, encourages entrepreneurship and innovation, protects investors, and promotes financial inclusion.
Through developing a well-functioning capital market, Ethiopia can benefit much by attracting domestic and foreign investments, supporting the growth of small and medium-sized enterprises, creating job opportunities, and mobilizing savings for productive investments. The capital market development also helps in reducing reliance on banking systems and promotes a more efficient allocation of resources in the economy. Moreover, a well-developed capital market can enhance transparency, accountability, and investor confidence, leading to increased investment flows and economic development.
Ethiopia has attempted to establish a capital market since 1964, but despite efforts by various stakeholders, the country has not been able to do so until recently. In 2021, the Ethiopian government enacted Proclamation No. 1248/2021, highlighting the importance of a capital market to the Ethiopian economy. Since then, the government has made significant progress towards establishing a full-fledged capital market. It has established the Capital Market Authority (CMA) and is developing the regulatory framework for the capital market.
It has also prepared a long-term capital market development roadmap and creating an enabling environment by reviewing institutional investor regulation, macro-financial policies, and tax policies. Besides, the government has held consultation
workshops with stakeholders to discuss and get feedback on the proposed directives and roadmap for establishing a full-fledged capital market. The government is also working on several protocols and other instruments critical for the operationalization of the capital markets. We know that dozens of directives are in the pipeline.
In a situation like Ethiopia where there is no history of formal and well developed stock exchange markets and where investors are new to such markets, the importance of enhancing the level of financial literacy of investors and their perceptions is a very important precondition among lots of pre-condition for capital market establishment. In this short essay, I would like to stress on these two issues. Investor perception and financial literacy are crucial in the initial stage of development of capital market for a number of reasons as discussed below.
First, educating investors on financial literacy related to stock exchange markets plays a crucial role in helping them understand the concept of stock markets, the associated risks, and potential benefits of such markets. It empowers investors with knowledge about investment products, market dynamics, and investment strategies. This knowledge enables them to make informed decisions and reduces the likelihood of falling prey to scams or making uninformed investment choices.
Second, building trust among investors is generally important in business and particularly a requirement for the development of new market systems such as capital market. This is because investors’ perceptions are closely tied to their level of trust in the market. Without a history of capital markets, trust-building should be essential component of the process of capital market establishment. Financial literacy campaigns and investor education initiatives can help build trust by providing transparent information, explaining the benefits of investing in capital markets, and highlighting the regulatory safeguards in place.
Third, businesses investments in general, capital markets in particular, inherently involve risks, and to be successful investors need to understand and manage these risks effectively. Financial literacy helps investors assess the risks associated with different investment options, evaluate the suitability of investments based on their risk appetite, and develop and implement risk management strategies. This knowledge help reduce the chances of making hasty investment decisions or falling victim to fraudulent schemes.
Fourth, investors’ perceptions and financial literacy also play a crucial role in the development of capital markets. When investors are knowledgeable and have confidence or trust in the market, they are more likely to participate, thereby increasing market liquidity and attracting further investments. This, in turn, contributes to the growth and development of the capital market ecosystem.
Fifth, financial literacy helps investors understand their rights, responsibilities, and the available investor protection mechanisms. When investors are aware of their rights, they can actively demand transparency, accountability, and fair treatment from market participants and regulators. This encourages competition, a more investor-friendly environment and improves the overall integrity of the capital market.
Generally, to establish effective capital market in Ethiopia, it is important to prioritize investor education and enhance financial literacy initiatives. Hence, it is critical to assess the level of investors’ financial literacy and trust and then design appropriate training campaigns to build investor trust and enhance their level of financial literacy. These efforts can help investors navigate the new market landscape, make informed investment decisions, and contribute to the long-term development of a robust and sustainable capital market ecosystem.
BY AMSALU BEDEMO BEYENE (PhD)
The Ethiopian Herald November 9/2023
