One of Africa’s biggest economies is taking a step closer to establishing a capital market to allocate capital more efficiently. The National Bank of Ethiopia (NBE), the central bank, has published a draft Capital Markets Establishment Proclamation for consultation.
According to a news report in Fortune newspaper, a technical committee consisting of people from the central bank, the Ministry of Finance, the Office of the Attorney General and external advisors, has been working on the for the past year. The bill is expected to be turned into law before the end of 2020.
Setting up a Capital Market Authority regulator is a key part of the draft bill. The proposed CMA will have a wide mandate, including promoting the development of capital markets by removing impediments and creating incentives.
It will also have the usual regulatory functions of ensuring a system for orderly, fair, efficient and transparent issuance and trading in securities, protecting investors and reducing systemic risk. The market will feature equities, bonds and financial derivatives.
Ethiopian Securities Exchange
The Authority will decide when to give a licence for establishing an Ethiopian Securities Exchange to provide the trading platform. It may even allow more than one exchange in future. The Exchange will provide a trading platform for equities, debt securities, derivative instruments, units in a collective investment scheme, real estate investment trusts (REITs), currency exchange contracts and other products to be declared by the Authority’s directive.
Government will be a minority shareholder in the Ethiopian Securities Exchange with a target of 5%-25% of the shareholding. Corporations, capital market intermediaries and international securities exchange operators are expected to hold 25%-55% and individuals 20%-40% of the shares. The aim is that foreign investors should not own over 25% of the shares. However, if no-one wants to invest in owning a stock exchange, then Government could own 100%.
Other work for the CMA includes creating regulations to govern the listing and delisting of financial products. It will grant licences to securities brokers, securities dealers, investment advisers, fund managers, investment banks and collective investment schemes.
One news report quoted a source: “The idea is to make the market predominantly owned by the private sector and the Government to be a strategic partner and market maker in the process. It’s likely that the market will kick off with stocks and bonds. The other financial market products are listed in order to give breathing space for a legal framework to be in place to be used at a later time.”
Information about the planning and timetabling has been scarce. We have previously reported the excitement at a finance summit in December 2018 when Zemedeneh Negatu, Global Chairman of Fairfax Africa Fund, said as many as 50 to 70 companies were ready for listing. Ethiopian banks and insurance companies are already well regulated with high standards of disclosure and many have large numbers of shareholders.
History of stock exchange in Ethiopia
Ethiopia saw its first initial public offering (IPO) of shares in 1959. To get the market more organized and efficient, the Share Exchange Department at the former State Bank of Ethiopia ran a successful stock market from 1960. This included capital raising through issuing shares and secondary trading in shares. However, the exchange was closed after the military overthrew the Government in 1974.
Democracy was restored after 1991 and a group of private-sector leaders worked together on preparations. By 2000 they were ready to launch the Addis Ababa Securities Exchange, but Government said other priorities needed to be tackled first.
Prime Minister Abiy Ahmed took office in 2018 and announced plans for economic reforms including a regulated capital market and stock exchange to support capital raising, growth and jobs.
Who will the new regulator be accountable to?
According to the draft law, the new regulator will be accountable to Parliament and the seven-strong Board will include the Minister of Finance, the Governor of the Central Bank and the Attorney General, or their representatives, and three other stakeholders appointed by Parliament on recommendation from the Prime Minister, with the Prime Minister appointing the Chairman from among members. Parliament will also appoint the CEO and deputy CEO on recommendation from the Prime Minister.
According to news agency Bloomberg: “Ethiopia is among the biggest 5economies in sub-Saharan Africa and the second-largest by population, but doesn’t have a stock market. Since Prime Minister Abiy Ahmed came to power in 2018, the country has pursued economic reforms, including opening up formerly closed-off sectors such as telecommunications.”