Sunday, June 23, 2024
CommentaryRegulating Ethiopia's Business Landscape

Regulating Ethiopia’s Business Landscape

Ethiopia’s business landscape has seen a range of scandals, from outright scams to utterly irresponsible conduct. The late 2000s and early 2010s witnessed the proliferation of initial public offerings (IPOs) in various industries, promising mouthwatering profits.

With the exception of a few companies in the financial services and real estate sectors, almost all of the companies went into liquidation, leaving shareholders with significant financial losses while the company promoters escaped unscathed. That episode eroded public trust in such ventures. Similarly, the real estate market is riddled with controversial cases.

Despite not learning from previous troubles, such questionable schemes continue to emerge. For example, a very controversial case has flooded social media in recent weeks: Purpose Black’s new scheme for share and house ownership.

The company is promoting a three-bedroom, 100 square meter house ownership scheme with a price tag of 1.5 million birr. The housing units will reportedly be built on a 115 floor tower in Mexico area, a sought-after neighborhood in the city.

Given Ethiopia’s history of real estate scandals that have harmed consumers, the public should carefully scrutinize Purpose Black’s plan, as the company is collecting significant funds.

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Ethiopia has witnessed several real estate scandals. In all cases, house buyers lost their savings or struggled financially. For example, the Access Real Estate scandal left thousands of homebuyers in financial ruin. The effects of that episode are still felt by thousands today, and the case remains unresolved.

Purpose Black appears to be headed in the same problematic direction as Access Real Estate. The good news is there is still time to reverse course and avoid replicating mistakes.

A modern market economy relies on regulation, trust, fair play, and transparency of information. With weak regulation and a lack of information, markets are vulnerable to abuse by unscrupulous players. Market abuse can include scams, irresponsible conduct, and the exploitation of gaps in regulations.

Scams can be dealt with under criminal codes, and those who exploit gaps in share and real estate market regulations often avoid consequences, leaving shareholders and homebuyers in dire straits.

Regulation and adequate information disclosure can address these issues that repeatedly arise in Ethiopia’s business environment. Protecting investors and advance payers should be at the core of regulations, similar to depositor protections in banking regulation. The regulatory framework should ensure that investors in public companies and advance payers to real estate firms receive adequate information.

Intentionally providing misleading information, lying to attract investors and home buyers, and causing financial harm as a result should lead to prosecution. Those successfully prosecuted should be banned from senior executive positions in public offices.

Irresponsible business behavior thrives when companies have less skin in the game. The concept of ‘skin in the game’ can mitigate such behavior. Any company dealing with public funds – like real estate firms – should have proportional equity on its books. The higher the stake owners have in a company, the more responsibly they tend to act. Companies should also be prohibited from using public money to achieve other purposes.

Most importantly, the regulation of share issues falls under the jurisdiction of Ethiopia’s Capital Markets Authority (CMA), which has already been established. The CMA should urgently investigate Purpose Black’s housing scheme before it is too late.

Potential investors and homebuyers should thoroughly examine schemes before investing their money. At a minimum, they should demand adequate, verifiable information and consult professionals to verify claims and assess risks. More diligence on the part of consumers would incentivize more transparency and accountability from companies.

Contributed by Abdulemenan Mohammed

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