Currently, Ethiopia is nearing the launch of its first full-scale stock market, the Ethiopian Securities Exchange (ESX) anticipated to begin functioning by late 2024 or early 2025. The ESX is anticipated to drive both domestic and foreign investments, with participation from entities like the Nigerian Exchange Group and the Nairobi Exchange Market. This development is considered a crucial move towards unlocking the country’s capital market, which has remained largely untapped. The government, along with private sector participants and international development partners, aims to use this platform to draw both domestic and foreign investments.
The Ethiopian Capital Market Authority (ECMA) has already been established to regulate the exchange, with the first batch of listings on ESX expected to include approximately 50 companies, including offerings from state-owned enterprises via Ethiopia’s sovereign wealth fund, Ethiopian Investment Holdings. The exchange will enable trading in equities, derivatives, debt securities, and foreign exchange contracts, playing a key role in improving capital access for local businesses while reducing the country's reliance on external debt. In this context, various laws and mechanisms are being established to support the market's development.
In August 2024, the Ethiopian Capital Markets Authority introduced the Ethiopian Capital Market Regulatory Sandbox. This initiative provides FinTechs, SMEs, startups, and other innovative businesses with a platform to trial and fine-tune new capital market products and services prior to launching them to the public. With applications currently open, the Sandbox helps these companies identify potential risks early, while giving regulators insights into new market developments, allowing for better regulation. For participants, it also reduces regulatory hurdles and encourages innovation in Ethiopia’s capital market landscape.
The ratification and operationalization of the Directive on Public Offering and Trading of Securities are expected to occur very soon. Both the ECMA and ESX have targeted 2024 for the official inauguration of trading activities. Additionally, the Directives governing the issuance of Collective Investment Schemes, Asset-Backed Securities, Derivatives, and Securities offered through Crowdfunding has already been ratified and is now in effect. This directive, formally titled the "Directive on Licensing, Operation, and Supervision of Securities Exchanges, Derivatives Exchanges, and the Over-the-Counter Market No. 1009/2024," has also become operational.
The market-driven exchange rate introduced in late July this year is expected to reduce uncertainties related to currency distortions, which have long deterred foreign investment. This development is promising for both retail and institutional investors looking to enter the Ethiopian market. Additionally, capital market service providers stand to benefit from this shift as well. The ESX is also poised to gain from the floating, as it fosters a more predictable investment climate. With the birr now reflecting its true market value, foreign investors are more likely to participate in Ethiopia’s capital markets. Previously, currency overvaluation had made the market less attractive, exposing international investors to significant currency risks and repatriation challenges.
Service providers can enter and establish themselves in the market as foreign investors. According to the relevant investment law, the term "Foreign Investor" extends to any individual or entity that has invested foreign capital in Ethiopia. This includes foreign nationals, foreign-owned enterprises, enterprises registered outside Ethiopia by an investor, and joint ventures formed by two or more investors. All entities within these parameters are eligible and encouraged to engage in any services listed and regulated under the CMSP Licensing and Supervision Directive No. 980-2024, and Fee Directive No. 996/2024 issued by the ECMA.
As industries such as telecommunications continue to open up and state-owned enterprises get ready for listing, various professionals including investment bankers, advisors, market makers, and portfolio managers will play crucial roles in this transformation. They will guide firms through the listing process, structure offerings, and underwrite securities, demonstrating their expertise in this emerging market. This trend highlights the increasing demand for skilled capital market service providers, creating significant opportunities for specialized investors.
The liberalization measures, notably the banking liberalization policy introduced in 2022, along with the ongoing privatization efforts since 2018, the opening of the telecom sector, the introduction of public-private partnership (PPP) opportunities across various sectors, and ongoing discussions around exchange rate liberalization, present promising prospects for investors seeking to participate in Ethiopia’s capital markets.
Foreign companies with significant expertise in capital markets, particularly in stock markets, can establish a local presence in Ethiopia by forming subsidiary entities recognized under the Commercial Code. These subsidiaries have the flexibility to adopt various legal structures, including Private Limited Companies (PLC), Share Companies (SC), or One Member Private Limited Companies. Alternatively, they may choose to set up a Branch Office. The selection among these options will depend on the specific requirements set forth in the regulations governing each service provisioning regime.
By opting for a limited liability company structure such as a PLC or SC, investors can provide securities brokerage services that facilitate the buying and selling of securities on behalf of clients, or they can operate as securities dealers engaged in trading securities for their own accounts. Furthermore, foreign investors specializing in digital securities trading platforms can offer sub- brokerage services, thereby extending access to online trading and investment opportunities for a broader range of investors.
The legal framework enables investment banks to play a pivotal role in facilitating capital-raising activities for companies through debt or equity issuances, mergers and acquisitions, and comprehensive advisory services. Similarly, investment advisers can enter the market by providing tailored advice to local investors, assisting with securities selection, portfolio management, and risk mitigation strategies. For Shariah-compliant investors, the framework allows specialized foreign firms in Islamic finance to offer advisory services concerning Shariah-compliant capital market products. Additionally, automated investment advisory services delivered through digital channels, which provide algorithm-based recommendations for asset allocation and investment decisions, are also licensable under the directive, presenting further investment opportunities.
Moreover, foreign asset management firms can establish collective investment schemes to pool funds and create diversified portfolios of securities. Crowdfunding platforms operated by foreign entities can serve as crowdfunding intermediaries, significantly contributing to fundraising for businesses and promoting capital formation and entrepreneurship. By engaging in these activities, foreign entities can generate investment gains while establishing a foothold in the emerging market.
Securities appraisal firms’ licenses are also regulated under the framework. Such firms stand to benefit from a market opportunity created by regulatory requirements for thorough security appraisal before public share sales. Previously, companies, including major private banks, often determined share values without undergoing rigorous appraisal. However, the new framework alters this practice, emphasizing the necessity for securities appraisal. Consequently, these firms are poised to experience heightened demand and can strategically invest to establish a notable presence in the evolving capital markets. In engaging in these and other licensable activities, foreign investors can access investment opportunities by providing valuable services to local investors and businesses, thus fostering its development and growth.
Overall, acting as a capital market service provider allows investors to tap into various income streams commissions, fees, advisory income, and trading profits—while playing a crucial role in the development of Ethiopia’s financial markets.