Capital markets in Ethiopia: Heralding a new era
August 18, 2022
Stakeholders came together to discuss and provide feedback on the proposed draft directives and proposal that underpin the Capital Market Roadmap leading to the establishment of full-fledged Capital Markets in Ethiopia.
The consultation was organised in June 2022 by the National Bank of Ethiopia's Capital Market Project Implementation Team (CMPIT).
The Roadmap has four pillars: market development, infrastructure development, capacity development and policy reviews. A ten-year implementation action plan accompanies the roadmap.
The CMPIT is currently working on several protocols and other instruments that are critical for the operationalization of the capital markets.
A well-developed and vibrant capital market can promote economic growth. It can also play a key role in the efficient allocation of financial resources to areas where they are needed most, generating the highest return for firms, enabling risk sharing and facilitating the flow of finance to more risky but high-return projects.
A robust capital market has several beneficial features for different participants in the economy. Domestic capital markets provide an alternative source of funding that can complement bank financing for a company or entity in need of funding.
Capital markets can offer better pricing, longer maturities, and access to a wider investor base. They can also offer to fund riskier activities that would traditionally not be served by the banking sector and so contribute significantly to innovation in an economy. While some governments can access international capital markets, the development of local capital markets can increase access to local currency financing and help better manage foreign exchange risk and inflation.
A vibrant capital market would also allow governments to finance fiscal deficits without resorting to financial repression or foreign borrowing. In addition, the capital market supports the conduct of monetary policy through an enhanced monetary transmission mechanism. Moreover, capital markets also promote national savings, serving as alternative saving and financial investment vehicles for the public.
Cognizant of the role of capital markets, the NBE issued the Capital Markets Proclamation No. 1248/2021 in 2021 and established the CMPIT to steer the operationalization of the Proclamation. A well-developed capital market could help to provide a more reliable supply of long-term funding to the private sector. The Government's effort in this respect, could strengthen the economy’s resilience to shocks, mitigate the risk posed by an overreliance on the bank-dominated financial sector, and impose the allocation of resources.
The Capital Market Authority would supervise related activities of the market. The Authority would set the minimum admission criteria and conditions for enlisting in the exchange such as preparing the prospectus upon enlisting.
Similarly, the issues of liquidity and transparency are very important to take note of and establish as the market Roadmap is implemented. According to Ms Martha Ibrahim, one of the presenters, capital markets are based on trust.
UNDP is supporting the development of the capital market. This included the provision of technical advisory support, facilitating experience exchange visits to Kenya and Turkey, setting up the CMPIT office, developing the regulatory frameworks and directives and eventually setting up and operationalizing the Capital Market Authority.
UNDP continues its partnership with the National Bank of Ethiopia to promote access to innovative and inclusive finance through establishing an innovative finance lab that would test, pilot, and scale up innovative financial instruments. Various innovative financial instruments are developed to ensure the inclusion of MSMEs and other key players in the capital market ecosystem.