Ethiopia has enjoyed strong economic growth over the past two decades, averaging about 9 to 10 percent. With strong fundamentals, such as young and educated labour force and improved infrastructure, the economy has the potential to sustain such a high growth if structural challenges, such as limited access to finance, are addressed. In the past few years, the government has implemented several reforms to open the economy and the launch of a securities exchange is said to be a catalyst for attracting new investment from the private sector.
On May 18, 2022, the Ministry of Finance, the Ethiopian Investment Holdings and FSD Africa inked a cooperation agreement to establish the Ethiopian Securities Exchange (ESX). During the launch, Capital’s Metasebia Teshome reached out to Mark Napier, CEO – FSD Africa, for insights of the corporation and the establishment of ESX amongst other pertinent questions. The following are experts from the candid interview;

Capital: Tell us about today’s launch and FSD Ethiopia in brief.
Mark Napier: Today’s program is about launching FSD Ethiopia which is really going to be a catalyst for the transformation of the financial sector in Ethiopia
What FSD Ethiopia will do is provide financial and technical resources to government partners and also to the private sector to bring about a change in financial markets that will hopefully boost prosperity and address policy issues.

Capital: How do you see the development of the financial sector in Ethiopia?
Mark Napier: Well, there are huge challenges but they’re also very big opportunities as well. We’re living in a very difficult market environment. I’m not only talking about Ethiopia but also about the whole of Africa and the globe due to certain issues including the Ukraine situation, climate challenges and other issues.
In that context we have to be very creative about finding new solutions to push forward and change the financial markets.
At the moment there are two big issues in Ethiopia of which one is access to financial services. Access to financial services is very low and we need much more in the way of digital financial services in order to reach poor communities and in order to make value chains more efficient. The second is that there is a need for much more investment and private sector investment in order to create jobs and build the infrastructure that we need in future, and there are all sorts of reasons why that investment is not happening. One of the reasons is that the financial sector in Ethiopia is very bank dominated since there isn’t any capital market.
And banks take deposits in a very short term period of time, and they lend that money out, because they’re not prepared to take long term financing risk.
When you’re financing infrastructure you need to take long term since these are long term projects so it is needed to find these kinds of investors and insurance companies and bond investors who can take that long term risk in order to make the investment needed for the economy in the long term.

Capital: What are the main challenges for the financial sector in Ethiopia?
Mark Napier: One is that there is no capital market that’s the big challenge. I think capital markets and bank markets or the banking sector can be very complimentary. They can work closely together. It’s not a competition between banks and capital market. It’s just that they do different things.
Secondly, I think is access to finances as access to financial services is low. Access to finance is low partly because Ethiopia doesn’t have enough financial products that get into the rural areas in particular. And I think the way Ethiopian economy has been structured until now has not helped the development of the digital financial sector.
Of course now that’s changing. Reforms that are changing now are a great opportunity to push forward digital financial services, especially with this motivated government that wants to bring about significant changes in access to finance, so we have to support that.

Capital: What’s your evaluation on government’s efforts to improve the sector?
Mark Napier: Well, the government is very motivated around financial sector reform. I think initiatives like supporting investing in Ethiopia, supporting the development of a securities exchange all point towards a positive trajectory.
The government is taking very courageous decisions to change the way things normally operated and I would say that government is very forward looking.

Capital: Regarding the establishment of the stock market, do you think Ethiopia is ready?
Mark Napier: If you just wait until the time is right then you’ll never get it so you have to start a process. From my perspective, remember that today’s event was the starting process to Stock Exchange and it was not the launch of the stock exchange itself. So it will take 18 months to two years maybe to launch the stock exchange. The government wants an intermediary but there are things and steps we need to go through in order to launch the exchange.
Of course it may not come as a surprise that there might be low awareness about the exchange and the benefits that it may bring since it will be Ethiopia’s first time to stake ownership in the country’s economic future. However this should be an exciting time for all to think about buying shares and I am sure that awareness will grow very rapidly. All in all, I believe Ethiopia is more than ready to welcome the exchange market.

Capital: What is your view on the overall policies and regulations of the sector?
Mark Napier: There has been a huge effort to improve policies and regulations over the years in tandem with the reform programs. And with the capital markets, there weren’t any policies and regulations because you didn’t have a company listed. Overall, there’s been a big investment in building out the policy and regulatory framework.
So I would say there is a sharply improving picture of policy and regulation. I think risk factors are still there, so what government can do is to create a solid enabling environment to allow investment to flourish.

Capital: What are your thoughts on Ethiopia’s investment policy and its challenges?
Mark Napier: One of the big challenges is in foreign exchange. I’m sure that there will be discussions in the coming years about that and how reforms or transactions can take place and help to address some of the challenges for an exchange. I can’t comment on exactly what that will be.

Capital: What roles will FSD play with regards to financial inclusion and human capital?
Mark Napier: There are skills shortages but I think we should learn by doing and pick up progress from there.
Focusing on just classroom based learning, online learning, to build technical capacities, is a small part of the solution. I think the bigger part of the solution is to learn by doing and to get transactions to happen to support innovation so that we figure things out on the go.
I think that’s true in the digital space as well. If there is donor funding from FSD Ethiopia’s drive initiatives and financial inclusion, I think the capacity will be built as we go along. I think if we wait to develop capacity and then do those transactions, we will be waiting a very long time. So we just need to get on and do some things in between.
We do offer certification on capital markets as well as other trainings, but it is wise to note that learning comes from doing.

Capital: The government is putting a lot of effort to improve the sector. From your perspective what do you think should be added?
Mark Napier: I would say strengthening regulations.
In all the discussions we’ve been having with the government, they all encompass around policy regulation in capital market reforms.
But I think there’s a big opportunity to strengthen the policy regulatory frameworks in green finance and climate. Internationally there are investment capitals looking for environmental projects. And Ethiopia should create a more conducive environment for climate payments to come into Ethiopia to invest in the structure. So we would like to see more activity around climate finance. I also respect the fact that government hands are busy by already doing a lot on this front.

Capital: What should we expect from the FSD Ethiopia?
Mark Napier: FSD Ethiopia tends to operate in a number of different sectors including in capital markets, digital financial inclusion, risk markets and insurance. So the FSD will be investing in policy and regulatory reform and also support capacity building. In some areas capacity is quite weak both in the private sector as well as in the government, so capacity strengthening are areas we look forward to work on.
And I think you will see lots more in the way of sort in visibility around financial sector as an economic component. We will have similar events like that of today in order to bring together technical experts around the world to connect investors to projects and to connect government to the private sector.

Capital: How is FSD Ethiopia going to work with the government?
Mark Napier: FSD Ethiopia will first have to map what government priorities are. Secondly, I think FSD Ethiopia needs to be able to do other things in the financial markets that may not be government priorities where there’s a need for other initiatives. So understanding government priorities is one thing and bridging the gap is also required.
Moreover, I believe that FSD Ethiopia needs to be very independent in the way that it renders support to the government also.

Capital: Ethiopia has complex regulations and policies in different sectors. Do you think that presents a challenge? If so, how are you planning to cope with it?
Mark Napier: In Ethiopia the financial sector doesn’t exist in isolation. The financial sector is part of the whole economy.
So it is very important that we’ve spent a lot of efforts to try to make sure financial sector reform stay relevant to the real economy, such as agriculture, trade, the housing sector and so on.
When we think about financial sector reform, we need to understand how that reform is going to impact the real sector. Proper analysis and understanding is required to bring change in the real world economy. Thus we can create linkages so as to have sectors working in synergy with one another for the compounded success for all.

Capital: Specifically to the capital markets, what will be the role of FSD and do you have a plan to buy shares?
Mark Napier: Our primary role is to accelerate the development of capital markets in Ethiopia. FSD Ethiopia will overtime build its own capacity to support capital markets in Ethiopia.
Our assistance for establishing the Ethiopian Securities Exchange will leverage FSD Africa’s vast expertise and experience in developing capital markets infrastructure across Africa. This support signals our long-term commitment to a thriving capital market that is deep, liquid, and efficient.
With regards to investment, we could potentially invest in the stock exchange. We’re providing funding to basically cover the costs; and when the capital is raised for the stock exchange, we will decide whether we keep the investments, or change or convert the money that we’ve incurred into an investment.

Capital: It’s been almost ten years since FSD Africa was established; could you share with us some notable success stories?
Mark Napier: I think we have particularly adapted to the needs of the market that we have operated in. We have been successful at spotting the need for capital markets reform in many countries and I think we’ve been very responsive to the needs of those markets. I’m personally very proud of the fact that we’ve been able to play a valuable role in building capacity around Africa and also to bring on streams of investments.
Capital markets in Africa before FSD Africa started was not part of the vision for African countries. We made it part of their vision and we built an innovative Investment Fund which I think is making real progress.