6 Things to Put in Place Ahead of Ethiopia’s Capital Market Launch

Ethiopia is in the process of building a market where buyers and sellers trade financial securities such as bonds and equities, following the recent commencement of implementing the Capital Markets Proclamation.

To put the Proclamation into full action, putting in place the necessary institutions, policies, legal instruments (directives and regulations), technologies, and market infrastructure are the vital prerequisites of success, says Ermias Wodajo.

The NBE established the Ethiopia Capital Markets Project Implementation Team (CMPIT) to put the Capital Markets Proclamation into action. Until the Prime Minister appoints a Director-General for the Capital Markets Authority, the CMPIT reports to the Governor of the National Bank of Ethiopia (NBE).

According to a Corporate Counsel and Global Insight Provider, Ermias Wodajo, six things need to be executed and completed before unveiling the looming Ethiopia’s Capital Market.

1. Liquid Money Market: Development of liquidity of banks and the money market through security instruments transactions (On 10 June 2021, NBE approved primary market directive to prepare the market for liquidity and start trading of security instruments in Open Market Operations (OMO) and Standing Facilities (SF).
2. Institutions: Ethiopian Capital Market Authority-ECMA (capital market and service providers licensing and regulatory public body); Ethiopian Securities Exchange (ESE); derivatives exchanges, over-the-counter trading platforms, Securities depository and clearing companies that will be licensed after establishing as share companies; aka The Capital Markets Tribunal.
3. Technology: A technology that ensures secure financial transactions or markets among banks and depositors through security instruments.
4. Policy: Based on the preamble reading of capital market proclamation 1248/2021, the government role will only be regulating supervision of the capital market to ensure fairness, integrity and efficiency of the market and protecting investors (This is expected to be elaborated in detail in upcoming policy framework or operational manual of ESE).
5. Market Infrastructure: Licensing and supervision of service providers that include securities brokers, securities dealers, investment advisers, investment banks, credit rating agencies, custodians, market makers, appointed representatives of capital market service providers, central clearing counterparties, securities exchanges, and central securities depositories.
6. Legislative requirements: Legal framework for secure financial transaction, market infrastructure such as Central Security Depository (CSD) and trading platforms, developing a policy framework on all procedural aspects relating to the licensing and ongoing supervision of capital market service providers; market players intelligence.

Apart From Those Featured Above, Ermias Pinpoints Remaining Works for Upcoming Ethiopia’s Capital Market for Successful Operationalization. They are:

• Issuing Directives that appropriately address the licensing and supervision needs for various types of capital market service providers in Ethiopia. Furthermore, requirements for self-regulatory bodies to be recognized, placing Directors and key executives of capital market service providers with proper qualifications. And ongoing capital market service provider licensing requirements such as prudential, business conduct, governance, application, rejection, approval, suspension, and revocation of licenses. 
• Develop a licensing manual for the Capital Market Authority setting out the operational procedures for licensing of capital market service providers – from application to suspension/revocation of a capital market service provider license.
• Develop a market supervision manual for the Capital Market Authority to set out the operational procedures for monitoring and supervision licensed capital market service providers.
• Coordinate stakeholder engagements for policy development and regulatory review processes and incorporate relevant stakeholder comments to the draft rules and regulations.
• Propose appropriate amendments to such other laws as may be required to support licensing and supervision of capital market service providers.

BIE Highlighted A Few Things to Consider When It Comes to the Opportunities Ethiopian’s Capital Markets Would Offer

• Provide an alternative financial savings option for households and institutional investors comprising equities, bonds, and other securities. Furthermore, Ethiopians will save with long-term maturities and have access to long-term savings liquidity through the Capital Market.
• Floating shares, issuing bonds, securitizing loans, and other opportunities are embodied with the capital market for financial institutions to access additional sources of capital. Upcoming Ethiopia’s capital market will likely pressure businesses to innovate and avails of different risk-hedging options. It will also open up a new market for the country’s financial ecosystem players.
• Non-financial enterprises will gain access to capital for long-term, riskier initiatives, putting pressure on them to enhance corporate governance and innovation while also providing opportunities for risk hedging.
• The government will have the power to lessen reliance on inflationary and distortive sources of funding and external financing. It’s also likely to pressure the government to improve its fiscal and monetary policies.

Look at the Two Categories of Financial Markets Before Moving on to the Next BIE Publication

1. Money Markets: T-bill’s market, Interbank money markets, and Others (e.g., commercial papers, derivatives, etc.)
2. Capital Markets: Equity/Stock Markets, Debt/Bond Markets

The views and opinions expressed in this information are those of the authors and do not necessarily represent the official view of BIE Intelligence PLC or Business Info Ethiopia.