Capital Market, Takes More Than Legal Frameworks

The news of the establishment of a capital market has been received with hype and enthusiasm. It is hoped that it would support the national economy through the mobilization of capital for new ventures, promotion of new financial products, etc.
The idea of forming a securities exchange was raised in the late 1990s and early 2000s. Unfortunately, with the emergence of the developmental state model in Ethiopia in the middle of the 2000s, the idea was shelved. More than a decade has had to pass for the issue to resurface. As part of the recent economic reform package, the agenda of establishing a securities exchange came to light. After two years of efforts, the Council of Minsters approved the establishment of a capital market. A couple years ago, when the idea gained increasing attention, it was promised that the market would be operational in 2020. But there is still much work to be done. The new proclamation contains a large number of issues including the formation of a regulatory body, the securities market, ownership, etc. Preceding the proclamation, as part of financial sector reform package, some groundwork had been laid in the money market sphere. The market-based treasury bill market began a year ago and is thriving. Efforts are being made to reactivate the inter-bank money market, which has been dormant for more than a decade.

With the establishment of the securities exchange, the government has made several enthusiastic claims, from FDI to promotion of significant investments. No doubt, the establishment of the securities exchange will bring the existing fragmented market into a formal and regulated platform. The market will be a venue where shares, bonds, derivatives, and other securities will be traded, making price discovery simpler and trading in securities fairer and easier. However, some caveats should be added to the hype surrounding the formation of the stock exchange.

Currently 29 African countries have stock exchanges. Apart from in South Africa, Egypt, Nigeria, and Mauritius, stock exchanges elsewhere in Africa have less than 100 listings. Even the century-old Casablanca Stock Exchange in Morocco has about 80 listings. Kenya’s Nairobi Stock Exchange, established in the mid-1950s, has 65 listings. In Ethiopia, the number of companies that can qualify for listing may not be more than few dozen. Except for banks and insurance companies, it is very hard to find companies with public ownership that are well regulated and have good performance track records and performance disclosure experience.

Ethiopian business are known for their family ownership, use of bank credit for growth, and secrecy in operations. Stock market listing entails transparency, accountability, and discipline, both legally and in the market. Attracting family-owned businesses for listing is a very cumbersome task. In a capital market dominated by financial-sector companies whose shareholders are reluctant to sell their shares as they already see decent returns and lacking alternative investments, the volume of transactions may not be adequate and could lead to a relatively inactive exchange.

Over the past decade-and-a-half, dozens of share companies have made initial public offerings (IPO) in a disorderly and unethical manner. They promised much but achieved little. With the exception of a few thriving companies in the financial services sector, most have gone into the abys, causing considerable losses to investors. This episode has tainted IPOs, resulting in a huge distrust on such schemes. Gaining the public’s trust requires considerable work.

A well-functioning securities market requires quality, timely, and adequate data about the listed companies. This would enable investors to make informed decisions. One of the most significant steps taken in recent years is the adoption of International Financial Reporting Standards (IFRS) and the International Audit Standards (IAS) as well as the formation of a regulatory body. The implementation of IFRS has improved the quality of information contained in the annual reports of companies but has increased the reports’ volume and complexity. What worries me is that in a country where the level of financial literacy is low, investors may find such voluminous and complex information difficult to comprehend. The establishment of the capital market should take this factor into account and create a platform to upgrade the financial understanding of the potential investors.

A securities market requires a physical venue, technological infrastructure, and professionals in a range of trades. The venue can be readied with ease and the technological infrastructure can be acquired. But having the right mix of professionals in areas where there is no previous experience needs some time.

9th Year • Mar 16 – Apr 15 2021 • No. 96


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