Capital market evolution in Ethiopia
Capital markets are a crucial part of a functioning modern economy fostering economic development and providing investors with a diverse range of investment opportunities beyond traditional avenues. This diversification allows individuals and institutional investors to build well-balanced portfolios, potentially enhancing returns while managing risks.
Ethiopia has had a long history of trade and commerce. However, the formal establishment of a stock exchange has been a journey fraught with challenges and interruptions.
A sign of a nascent stock exchange began to emerge in 1956, where Ethiopian Abattoirs issued the first shares for public subscription, marking a significant milestone in the country's financial history. In the years that followed a number of other companies including foreign companies, significantly HVA of Netherlands issued shares for public subscription. These early endeavours were characterized by a lack of comprehensive legislation and regulatory frameworks, with transactions conducted over-the-counter and facilitated by the state bank of Ethiopia.
At the time, the issuance of shares had signalled the potential for the development of a formal stock exchange. However, with the advent of the military regime in the early 1970’s, known for its nationalization policies and centralism, the development of a formal stock exchange was discouraged followed by the dissolution of the Share Dealing Group in 1975 marked.
Till recent times, while share companies utilize equity finance through Initial Public Offerings (IPOs), a comprehensive stock exchange remains elusive.
Heralding a new era
Despite studies conducted by the National Bank of Ethiopia in 1995 explored the feasibility of a securities exchange market, efforts towards establishing a stock exchange have taken a long time.
In order to turn around this long overdue problem, the Ethiopian government has enacted the Capital Market Proclamation (No 1248/2021) to lay the foundation for a robust and inclusive financial ecosystem. This legislation aims to mobilise long-term capital and foster innovative financial instruments, facilitating broader economic participation. Complementing this legal framework, the Ethiopian Capital Market Authority (ECMA) has been established to regulate and supervise capital market activities, ensuring fairness, integrity, and efficiency. The ECMA is tasked with issuing exchange licenses, establishing admission criteria, and facilitating listing securities on the exchange.
In line with the capital market regulation, the Ethiopian Securities Exchange (ESX) was also established in 2023 to provide a modern, reliable, transparent, and efficient environment for securities trading in Ethiopia, through the adaptation of modern exchange business operations, skill, technology, and trust.
It is expected that ESX will provide a range of products, including financial derivatives and a trading platform for equities and fixed-income securities.
In addition to increasing finance for economic investments, the securities exchange will benefit the economy by requiring companies that are likely to be traded to adhere to particular corporate governance standards, which will guarantee accountability and openness in the industry.
The Ethiopian Securities Exchange (ESX) offers a diversified platform with two distinct market segments: the Main Market and the SME/Growth Market. Each segment serves a specific niche within the investment landscape, providing businesses with tailored opportunities to list and trade securities effectively. While the Main Market serves as a prestigious platform for large, established companies, the Growth Market provides growth-oriented SMEs with access to capital and growth opportunities within a supportive regulatory framework.
ESX has achieved a remarkable milestone in its journey towards operationalization, as it successfully closed its initial capital-raising campaign, with subscriptions (including foreign strategic investors) exceeding its initial target by 240%. This momentous achievement underscores the enthusiastic response from both domestic and foreign investors towards the establishment of the ESX as a pivotal player in Ethiopia's financial landscape.
The successful closure of the capital raised heralds a new era for Ethiopia's financial sector, as ESX prepares to unlock opportunities for investment, spur entrepreneurship, and drive sustainable development across various sectors of the economy. With investor confidence soaring, all eyes are now on ESX as it embarks on the next phase of its transformative journey.
What is to come
Since Prime Minister Abiy Ahmed took office in 2018, Ethiopia has embarked on a transformative journey, through a comprehensive political and economic reform.
These deep-rooted and remarkable reforms conceivably positioned Ethiopia as:
- One of the fastest-growing economies in Africa as per IMF’s forecast its GDP will grow by 6.2% this year and 6.5 % in 2025, surpassing global and regional growth rates.
- The fifth-largest economy in Africa with 205.1 billion Nominal GDP
- The second most populous country in Africa, with a growing population of over 120 million, of which two-third is under the age of 30.
Given the deepening of financial policy reform and development potentials, ESX creates an environment whereby Ethiopians across the country, Ethiopian diaspora as well as foreign investors, can easily invest in listed equity and debt instruments.
- To access the markets, investors should have a Central securities Depository (CSD) account and select a licensed member of the exchange/brokerage firm (ESX Trading Member) to transact on the platform.
- Investors can choose and appoint a licensed member/broker from members directory of ESX website.
- The licensed member will support the investor in acquiring the relevant CSD account number.
- Investors will be required by the licensed member to provide relevant KYC information and forms.
- After adding necessary funds to its investor account, in line with guidance provided by the member, the investor can start trading by placing orders to buy or sell securities through the licensed member of ESX.
- An investor can monitor market prices through information platforms provided by the exchange on its website, mobile application, trading tools, and other information gateways provided to the member.
For more detail and easily identify the required information, the ESX indicated how do investors access the market on the ESX website (esxethiopia.com).
