Modeling the capital market

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The government may follow the approach of the formation of Ethiopian Commodity Exchange (ECX) on the establishment process of the capital market. Interest is expressed by local and foreign investors to take share on Ethiopian Security Exchange while the transformed business model is expected to be an alternative financial source for the economy.
Chartered Institute for Securities and Investment (CISI), a London based firm, partnered with facilitators of the capital market formation to enhance capacity building on the new business platform.
Melesse Minale, the Capital Market Advisor at the National Bank of Ethiopia, told Capital that the government shall undertake a formation process by the financial support of other international partners.
“We are focused on advocacy concerning the opportunity of the upcoming capital market for potential investors and partners. The ratification of the proclamation may lead us to openly invite investors to be part of the new market,” he said.
So far the World Bank and Financial Sector Deepening Africa that is financed by the UK government are funding the process of the under formation process of the capital market.
Africa Development Bank and European Union have also contributed their support by hiring professionals.
“The World Bank is also supporting to the formation of the regulatory body, Capital Market Authority,” he said.
He told Capital that the government is working with regards to financing the initiative that shall be through donation or as investor.
Melesse said that the interest of local and international investors have already been seen with regards of investing in the capital market.
“It is still in early stages since the proclamation has not yet been ratified by the parliament but informally we have discussed with different players in the international arena including prominent ones in the sector. There is interest to be part of the new platform in different capacity either as an investor or service provider,” the Advisor said.
He said that as per the coming proclamation they will invest in the country.
The article 31 draft proclamation that was sent to parliament mid-January indicated that Ethiopian Security Exchange will be formed. The exchange will be formed as a share company by the government in partnership with the private sector which also includes foreign investors.
The same article sub article 2 said that the total ownership of the government and government owned entities shall not exceed 25 percent of the exchange’s capital.
“If there is insufficient interest from the private sector, the government’s ownership of the exchange can be increased to whatever amount is needed to establish the exchange,” sub article 3 three reads.
The fourth article further added that if there is no interest at all from the private sector, including from foreign investors, the exchange shall be established as a fully government owned public enterprise by regulation of the Council of Ministers.
When ECX was formed in 2008 with the capital of 250 million birr, the contribution of the first 100 private investors was only 50 million birr, while the balance was covered by a consortium of financing partners including UNDP, the World Bank, USAID, Canadian International Development Agency CIDA and the World Food Programme and is co-financed by the government.
Melesse hinted that the government may follow a similar approach to amass the required start up fund.
Under the explanation document for the proclamation, it had indicated that the intention of the government to take share at the company is only that the upcoming capital market is new for the country and that private inventors may not have eager to take share because of different reasons including clue about the business. Besides that, the involvement of the government as a shareholder is to boost the confidence of the private sector, which is expected to take the major share.
For the past one year massive capacity building programs was given for public offices and private sector experts with financial support of different stakeholders. CISI, which is one of the leading professional bodies for securities, investment, wealth and financial planning professionals, has been the major player on skill development for Ethiopians.
“Qualified certification training has been given for more than 100 individuals, while we have a plan to expand it for others that need significant amount of cost, which may be covered by partners,” he says, adding, “in the future, local training capacity will be built.”