By Muluken Yewondwossen

The Ethiopian Capital Market Authority (ECMA) has announced its readiness to grant licenses to participants, marking a significant advancement in the long-awaited launch of the capital market. However, the establishment of subsidiaries by local retail banks, as permitted by a central bank directive, is still pending.

On Wednesday, February 7, the Director General of ECMA, Brook Taye, informed the media that the Authority will begin accepting applications from prospective actors starting tomorrow. Brook added that if all the necessary paperwork is submitted correctly, the licenses will be granted in less than a month.

The ECMA offers a range of licenses that service providers can apply for in order to participate in the upcoming capital market, which will be operated by the Ethiopian Securities Exchange (ESX). These licenses include securities brokers, investment advisers, operators of collective investment schemes, investment banks, securities dealers, custodians, market makers, credit rating agencies, securities appraisal firms, securities portfolio managers, and others, as listed in the ‘capital market service providers licensing and supervision 890/2024’.

Investment banks, as non-deposit taking financial institutions, are expected to be among the major participants in the securities market. Brook mentioned that three well-known multinational companies have expressed a strong desire to participate in the industry, but he refrained from disclosing their identities to protect their commercial interests. He also noted that two local retail banks are diligently preparing to apply for a license to actively engage in the alternative financial sector.

There is anticipation that a potential new law from the National Bank of Ethiopia (NBE) would support the endeavors of retail banks. Both the ECMA and NBE, which are separate regulatory bodies for the financial industry, have recently disclosed that discussions have taken place to provide retail financial institutions with more opportunities to operate in the upcoming secondary market.

The two regulatory bodies currently have laws in place that prohibit retail banks from participating in any capacity in the capital market or investment banking activities.

To address this, both parties have reached an agreement that the central bank should introduce legislation requiring local banks to establish subsidiary entities that would function as investment banks. This would enable local retail banks, who are potential sources of life for the capital market, to participate. However, the regulatory authority, the National Bank of Ethiopia (NBE), has not yet officially released the potential directive.

“On our end, we have made preparations to handle the license applications for securities exchange actors, including applications for an investment bank license from the Ethiopian Capital Market Authority (ECMA),” said Brook, the Director General of ECMA. He emphasized that the responsibility lies with the central bank, stating, “We are aware that the central bank is working on issuing the directive that would allow the formation of subsidiaries for local banks, but we cannot provide a specific timeline for when it will be issued.”

Investment banks operate as security brokers, dealers, and financial advisors. They also facilitate the issuance of securities by companies, governments, and other entities through underwriting. Additionally, they serve as intermediaries between securities issuers and the investing public, as well as assist in mergers and other company reorganizations.

Brook stated, “With respect to issuing licenses, the regulatory authority has taken another significant step, creating a favorable environment for the Ethiopian Securities Exchange (ESX) to commence its operations.” However, he noted that the readiness and decision to open the doors of the securities exchange ultimately lie with the ESX.

Industry insiders view the recent development by ECMA as a significant milestone for the launch of the new market, which Ethiopia has been without for approximately fifty years. Ethiopia is one of the few remaining nations without a capital market.

Capital has been unable to obtain further information from the National Bank of Ethiopia (NBE) at this time.