ESX’s organizing team plans to organize roadshows abroad
Six months into operation, the Ethiopian Stock Exchange (ESX) project office is racing against the clock to operationalize the secondary market by the first half of 2024. The project team consists of various legal advisors who have returned to Ethiopia from the United States solely to give birth to the ESX. Technical assistance is being provided by Financial Sector Deepening Ethiopia (FSD).
The newly founded Ethiopian Capital Market Authority (ECMA) is finalizing dozens of laws required to license capital market service providers, led by Brook Taye (PhD), a diaspora returnee recently appointed by the Prime Minister.
The project team is currently researching the capital market’s financial model and business plan. A study is also being conducted to determine the volume and value of shares, Treasury bills, and bonds. A financial consultant has already been chosen.
The ESX project team is currently planning roadshows over the next two to six months.
“The roadshows will be organized domestically and abroad, with the resources used to cover the funds and expenses required to operationalize and maintain the capital market,” says Michael Habte, project manager of ESX, who has worked at Citibank among others.
“Over 70 percent of the establishment capital will go to the data system expenses. The data system will be available 24 hours a day, and it is critical to the trading floor’s launch.”
Despite being one of the four largest economies in the sub-Saharan region and with the second largest population in Africa, Ethiopia has not had a single stock market so far.
“Let us not dwell on what we have lost so far but move forward,” an optimistic Brook said. “Ethiopia has a big potential to create a robust capital market, but the private sector must be ready.”
Nevertheless, he admits the stock market will not completely solve the access to finance problem in Ethiopia. “At least we will be an option.”
The Authority is preparing 10 directives and two regulations required to license stock market participants and operationalize them. The first license will be given for the ESX, and the Authority will soon disclose the minimum capital threshold for the Exchange. About 15 service providers will be licensed and operate in the capital market ecosystem. These will include valuators, dealers, brokers, certified accountants and auditors, rating agencies, investment banks, and others.
Government Treasury bills and bonds will also be traded on the secondary market. Banks and insurance companies will also be the first to be listed. These companies already follow a share company format and comply with International Financial Reporting Standards (IFRS). Other PLCs that meet the criteria will also be traded after going public. Initial Public Offerings (IPOs) will also be on the market, generating finance for entrepreneurs.
“In Ethiopia, so many people have collected investments in the name of organizing the formation of new share companies, but the organizers are nowhere after raising huge capitals from the public. This is especially common in the real estate sector, among others. The capital market will resolve this crisis,” Michael Teshome, a business lawyer and director of the Ethiopian Arbitration Center, said.
Michael says investment money will only be raised for feasible project ideas through registered and legitimate promoters in the capital market. “It will be a big solution for idea financing,” he said. Michael is currently handling court cases over failed investment fund-raising efforts but could not find the organizers who collected the money from investors and disappeared.
A balance will be maintained between protecting investors’ money and taking the risk of financing new business ideas, according to Brook.
Banks, insurance companies, companies that want long-term financing, collective investment schemes, funds, or even individuals will actively work on the capital market. These will forward their capital to issuers. The issuers can be companies or governments, a fund or a project, which will issue securities documents, including shares, bonds, funds, derivatives, and other types of securities that can generate liquidity. It does not, however, include commercial paper. This is the difference between capital and the financial market.
The investment money taken from the capital market will be paid back with interest.
However, some experts fear that the capital market might not be successful under Ethiopia’s rising inflation. This is because investors in the capital market will expect a return exceeding the inflation rate.
However, Solomon Zewdie, senior capital market legal advisor at the Authority, begs to differ.
“Inflation is currently above 30 percent. Let us say the return on investment from the capital market is between 15 percent and 20 percent. Logically, it is lower. But people are currently depositing their money in banks at seven percent interest rate,” argues Solomon.
Others worry that it will be difficult to find trustworthy local firms that will be traded on the stock market. This is especially true because local firms lack transparency in the public eye.
Given that over 90 percent of businesses in Ethiopia are small enterprises and are largely engaged in informal businesses because they cannot access bank credit, bringing them on board is another challenge.
Finding fit and proper professionals to operate in the capital market ecosystem is also another concern. A new training institution is being considered, in addition to sending professionals abroad for short-term trainings.
The capital market will also have sharia-compliant services like Sukuk.
KYC (Know Your Client), quality and real-time information, data centers, and institutional interfacing are also other concerns. Currently, the project team is negotiating with ethio telecom, for the data system installation.
“We are working with the Ministry of Trade, the Information Network Security Agency (INSA), the Ministries of Finance and Revenue, and other institutions regarding how the capital market’s ecosystem will be created seamlessly,” Solomon said. “For instance, we are working with the Ministry of Revenue on how the tax law applies to the capital market.”
A nationally centralized data system will be installed, interfacing with all stakeholder institutions. All the shares, T-bills, bonds, corporate bonds, and other tradable securities will be digitized. The data system will be operated with block chain technology, and data generation will be a major source of revenue for ESX, apart from transaction fees.
“Capital market participants, including investors, brokers, dealers, investment banks, accountants, and others, will make the funds flow. However, market infrastructures are required for actual transactions to take place,” Hanna Tedla, senior capital market legal advisor at the Authority, said.
Hardware technologies are also key for helping over-the-counter (OTC) or listed companies transact, according to Hanna. She says that accurate information is required to help investors make wise business decisions and also avoid defaults. “We are preparing in all aspects to install a successful capital market in Ethiopia.”
The project team also picked the International Organization of Securities Commission (IOSCO) as the international regulator of Ethiopia’s capital market. The Commission has 38 principles, which the Ethiopian capital market will have to meet.
But the work the ESX project team plans to accomplish in the next year will determine the success rate of Ethiopia’s capital market. Ethiopian Investment Holdings, which will own up to 25 percent of the ESX, and other investors are expected to inject capital into the market, especially in the next few months. This will help the project team undertake its work.
Brook believes that creating the system and launching the trading floor is a simple task once every assignment is finalized.
“The tough task is licensing and organizing the participants. We want to create a vibrant capital market that will finance entrepreneurship and investments. “We also want to attract investors, particularly from the diaspora,” Brook said.