FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
CHALLENGE AND PROSPECT OF
ESTABLISHING CAPITAL MARKET IN THE
CASE OF ETHIOPIA
BY
Aziz Tsehay
TO
Mohammed Beshir
A RESEARCH UNDERTAKEN IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR DEGREE OF BACHELOR IN ECONOMIC
DEPARTMENT

June 2022

Assela

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 Table of Contents
List of Abbreviations ..................................................................................................................... iv
Acknowledgements ....................................................................................................................... v
Abstract .......................................................................................................................................... vi
Chapter1: Introduction ................................................................................................................ 1
1.1 Background of study ...................................................................................................... 1
1.2 Statement of Problem..................................................................................................... 3
1.3 Objective ......................................................................................................................... 4
1.3.1 General Object ........................................................................................................ 4
1.3.2 Specific objective ..................................................................................................... 4
1.4 Significant of study ......................................................................................................... 4
1.5 Scope of the study ........................................................................................................... 5
1.6 Limitation of Study .............................................................................................................. 5
1.7 The Organization of the Study ......................................................................................... 5
Chapter Two: The Review Literature......................................................................................... 6
2.1 Theoretical Literature.................................................................................................... 6
2.1.1 Capital Market ........................................................................................................ 6
2.1.2 The Relations between Stock Prices and Bond .................................................... 7
2.1.3 Primary vs secondary market ................................................................................ 8
2.1.4 The Role of Private Investment ............................................................................. 9
2.2 Empirical literature........................................................................................................ 9
2.2.1 Stock exchange in Africa ........................................................................................ 9
2.2.1 Challenge of finance growth in Horn of Africa .................................................. 10
2.3 Knowledge Gap ......................................................................................................... 17
Chapter Three: Research Methods .......................................................................................... 18
3.1 Research Design............................................................................................................ 18
3.2 Data Sources and Type ................................................................................................ 18
3.3 Data Collection Technique .......................................................................................... 18
3.4 Analysis of data ............................................................................................................ 18
Chapter Four: Data Analysis ..................................................................................................... 19

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4.1 Opportunity of Stock Market ............................................................................................. 19
4.1.1 Foreign Direct Investment .......................................................................................... 19
4.1.2 Market monitoring ...................................................................................................... 20
4.1.3 Inflation Rate ............................................................................................................ 20
4.1.4 Ethiopia Exchange Rate ........................................................................................... 21
4.1.5 Education .................................................................................................................... 21
4.2 Challenge ........................................................................................................................... 22
4.2.1 Low domestic saving .................................................................................................. 22
4.2.2 Lack Public Awareness .............................................................................................. 23
4.2.3 Infrastructure .............................................................................................................. 24
4.2.4 Conflict ...................................................................................................................... 24
4.3 Capital Market for Ethiopia............................................................................................ 25
4.4 Kenya trained ............................................................................................................... 26
Chapter Five: Conclusion and Recommendation ......................................................................... 30
5.1 Conclusion ........................................................................................................................ 30
5.2 Recommendation.............................................................................................................. 32
Reference ..................................................................................................................................... 34

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 List of Table

Figure1: Gross domestic saving .................................................................................................... 23

Figer2: Stock market capitalization to GDP for Kenya ................................................................ 28

List of Figure

Figure1: Gross domestic saving .................................................................................................... 23

Figer2: Stock market capitalization to GDP for Kenya ................................................................ 28

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 List of Abbreviations
ADB African Development Bank

USSCE United States Security and exchange Commission

IOU I own you (Promissory note)

NYSE New York Stock Exchange

NASDAQ Dealers Automated Quotations

OTC Over the Counter

USD United State Dollar

IPO Initial Public Offering

GDP Gross Domestic Product

FDI Foreign Direct Investment

ODA Overseas Development Assistance

JMMI Join Market Monitoring Initiative

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 Acknowledgements
First and for most All Praise and Glory goes to Almighty God!

I would like to send my sincere gratitude to my advisor Mr Mohammed for his unflagging
encouragements, critical comments and guidance; starting from the beginning of the title
selection up to the write up of this research. I attribute the success of my research work to his
encouragement and effort, and without him it would not have been completed.

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Abstract
The study intends to challenge and prospect of establishing capital market. The mixed research
approach was adopted for the study. Survey was conducted with professionals engaged in
establishing Ethiopian capital market. Prospect coming of Capital market are reduce inflation
rate, encourage foreign direct investment, normalized Ethiopian exchange interest rate and
generate a lot of education about capital market. On other side it faced or challenged by low
domestic saving, lack of public awareness, less finance infrastructure, internal instability and
external Russia- Ukraine have negative impact on coming capital market.

The study suggests that government should Retention/stay the establishing of capital market until
the internal conflict resolve and infrastructure become well organized. The capital market
should be beginning with strong infrastructure to capture public confidence.

Key word: capital market, equity market, bond, stock market

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Chapter1: Introduction
1.1 Background of study
In a typical developed country there is a multitude of financial services enabling people to make
payments; borrow at reasonable interest rates; save for retirement; and limit economic risks
through insurance. These services are provided by various institutions acting in a complex network
of regulations and relationships that together make up the financial system. From a
macroeconomic perspective, this system allows efficiency through decreased transaction costs,
allocation of resources to productive use in enterprises and infrastructure, and the pooling of risks.
(Obstfeld, 2004).

In developing countries, however, the situation is often quite different. The financial system is less
developed and financial services are less widely available or of much poorer quality. An
entrepreneur wanting to grow his business may not be able to raise capital; a worker may not be
able to earn interest on her pension‟s savings; investors have disincentives to invest capital due to
high transaction costs or high risks perhaps the only reliable investment available is gold or foreign
currencies because of high inflation and fluctuant exchange rates. Such an economic environment
has negative consequences for the individual, but also for the country as a whole Fredholm (2006).

Africa was left out of the massive flows of international investment capital to developing countries
resulting from the opening up of the world economy in the 1980s. Indeed, while the decade of the
1980s was a period of virtually uninterrupted expansion of economic activity in Western
economies, it was considered "the lost decade" for the Sub- Saharan Africa. During this same
period many Asian countries, such as Malaysia, Thailand, and Indonesia, achieved startling real
economic growth rates that often exceeded ten per cent per annum. Most African countries, by
contrast, faced desperately poor economic performance, with low or negative real growth rates and
deteriorating per capital income levels Senbet (1997-02).

Capital market development is dependent on a ground work of a strong enabling environment

including coordination mechanisms, strong regulatory and legal frameworks and adequate
financial infrastructure. In sub-Saharan Africa, there has been good progress on building such

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frameworks, but there is much that still needs to be done, especially in low-income countries.
Progress could be accelerated and strengthened by the measures discussed below Tyson (2021).

History tells that share market has existed in Ethiopia during the Imperial regime. Before the
nationalization of private property in 1975, there had existed a rudimentary share market in
Ethiopia. Share dealing was handled by the National Bank of Ethiopia, department of Share
Exchange and later the bank allowed other financial institutions and few private share dealers
known under the name of “Share Dealing Group” to participate in shares trading. The Share
Dealing Group was engaged in facilitation of transaction of shares and other services in the share
markets. The financial institutions that played an intermediary role in transferring and delivery of
traded shares were the Addis Ababa Bank, the Commercial Bank of Ethiopia and the Ethiopian
Investment Corporation. They provide over-the-counter share dealing services and enjoyed a
significant confidence of the private investing community. The volume of shares expanded at a
faster rate from Birr 152,300 in 1959 to Birr 1,159,090 in 1963. The major development seen
during this period was that there had been an excess of sales to the public over purchases from the
public exhibiting an increasing interest of the private saving community in the investment of
shares Tiruneh (2012).

A short-lived stock market started informally in the late 1950s and was formally instituted in 1965.
The stock market was administered by the National Bank of Ethiopia which was the known
regulatory body in the Ethiopian financial sector. The Imperial government tried to improve
resource mobilization through the National Bank tried by establishing a share-dealing group -
which served as the connecting link for buyers and sellers in an auction process. The National
Bank laid out the rudimentary rules and regulations for the auction market. According to Asrat
(2003) cite Tiruneh (2012) the stock market was moderately successful in its pioneering efforts to
provide an organized market for companies whose shares were relatively widely held. Workable
trading practices and standards had been developed and a smoothly operating market mechanism
had been created.

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 1.2 Statement of Problem
Capital markets play an important complementary role for bank financing in economic development.
They are particularly important for mobilizing the large-scale and long-term finance needed for
infrastructure and capital investments in the private sector. Capital market development has
progressed in sub-Saharan Africa over the past two decades and there are now 28 stock exchanges
with listed equity and bonds, and more than $1 trillion has been raised Tyson (2021).

Africa is the only developing region where development assistance flows exceed private capital
flows (Lemma and Otchere, 2008 cited Tiruneh, 2012). This was mainly attributed to the lack of
well-developed financial markets and the poor economic policies and institutions in African
countries, where Ethiopia is not an exception. Financial markets are vital part of an economy making
it possible for industry, trade and commerce to flourish without any obstacle in terms of financial
resources. The financial markets play a pivotal role in expediting the nation‟s economic growth
(Firew, 2009).

Even though recently there were disseminations of different share companies in Ethiopia, capital
market becomes an irony that never has been discovered. For the past five decade; Ethiopia has tried
to have her own capital market though; it has been not sustain appreciated yet. Hence, still today,
there were no both primary and secondary security market and no secondary bond markets in
Ethiopia. To this end, Treasury bill which is the primary government bond was the lonely capital
market presently serving within the country. But currently, the country has proposed the launching
of Euro bond market with the ten year maturity at 6.75% with the total value of one billion US dollar
either before the end of December, 2014 or may be at the beginning of January, 2015 Dasalegn
(2014).

Reviewed different countries literatures and gives an insight of the lessons that Ethiopia should have
to learn from these failures and successes. This is significant because a good practice to promote the
new thing is reviewing what went well and celebrating that as per the countries past, current and
future status.

Ethiopia should have to continue to reinforce institutional strengthening, better operational and
financial performance, getting some robust internationally recognized mentors, consider capital
market as a cheap package of funding and as the debt and then increase effective public debt

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management, increasing diplomatic relations to integrate for trade, foreign direct investment and
technology transfer, developing the most capable professional, regulatory, well-informed consumers
and investors in the capital market, promoting international accounting standards and adherence to
sound corporate governance based upon international best practices to promote good governance
frameworks, transparency and accountability among all (Dasalegn, 2014).

Despite the improving regional trend in growth performance, there is a marked difference in growth
experience within the sub-region of horn. The overall disappointing growth performance in the Horn
of Africa has led to poor socio-economic indicators in the member countries (Abdi and Emerta,
2012).

Thus Ethiopia one of the sub regions, whereas face the challenge of economic growth as region and
as country. Eventually, the researcher interested to assess the prospect and challenge of coming
capital market in Ethiopia compare with neighboring country of Kenya established capital market.

1.3 Objective
1.3.1 General Object
Assess prospective and challenge of coming capital market in Ethiopia with aspect of economic
growth.

1.3.2 Specific objective

 Find out the challenge of establishing capital market in Ethiopia
 Examine the opportunity of capital market for the growth of Ethiopian economic
 Identify the capital market whether important or not

1.4 Significant of study

The study gave the benefits to different sectors of the countries. This study wills an effort to
examine deeply and identify the challenges and prospects towards the establishment of stock
exchange market in Ethiopia.
This study will be significant to three parties whom are academicians, government authorities and
the general public. Advantage to academicians- to take further studies and can also be in use as an

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addition to the pre-existing literature on stock exchange establishment in Ethiopia and also for
conducting detailed and comprehensive study regarding the subject matter; to government
authorities- in pushing forward in the establishment or not of stock exchange market.

1.5 Scope of the study

The study was focused on the challenge and prospect of establishing capital market in in Ethiopia.
The study was cover all over the country which mainly the data gather from secondary data. The
study was restricted to examine topics related with challenges and prospects in establishment of
stock exchange market. Despite this, it also covered the fundamentals in formation of capital
market.

1.6 Limitation of Study

The research was conducted on establishing capital market which is under formation would not
access primary data. Instead of the primary data employed secondary data to substitute the primary
data. Other limitation some of national and international updated data couldn‟t access easily
through internet plate form.

Even though these limitations are inevitable the researcher tried to handle the difficulties by
different mechanisms. Such as briefly explaining to the accessible data, applying efficient use of
time and other resources and attempting to triangulate data to avoid data inconsistency and
exploring different data sources.

1.7 The Organization of the Study

The paper is organized in five chapters. The first chapter deals with the introduction part under
which the background, the objectives, significance, scope and limitations of the study are
comprised. Chapter two briefly discusses both the empirical and theoretical literatures. The
methodology, data source and method of collection and sampling techniques and data analysis are
included in chapter three. Chapter four provides data presentations. The last chapter dealt with,
conclusion and possible recommendations.

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Chapter Two: The Review Literature
2.1 Theoretical Literature
2.1.1 Capital Market
The primary role of the capital market is allocation of ownership of the economy's capital stock. In
general terms, the ideal is a market in which prices provide accurate signals for resource
allocation: that is, a market in which firms can make production-investment decisions and
investors can choose among the securities that represent ownership of firms' activities under the
assumption that security prices at any time fully reflect all available information. A market in
which prices always fully reflect available information is called efficient Fama (No date).

According to (Raubenheimer, 2019) the critical role of stock exchanges in the global economy
cannot be overemphasized. Not only do exchange businesses contribute to the economic objectives
of their jurisdictions raising money and investing but they also have a social responsibility to, for
example, prudently allocate resources and create employment, among other obligations.

In the developed world, major stock markets emerged in the 19th and 20th centuries, led by the
London Stock Exchange and New York Stock Exchange. Today, virtually every country or
territory in the world has its own bourse. All of the world‟s major economic powers have highly
sophisticated stock markets that are active and considerably contributing to their national GDPs.
There are approximately 48,000 companies listed on stock exchanges around the world, and nearly
USD95 trillion trades across these exchange platforms. In Africa, the first stock market was
established in 1861, and 15 decades later, the region is now home to 36 stock exchanges serving 43
economies and representing 1,400 listed companies with a turnover of USD41.14 billion. These
markets have grown steadily and demonstrated their capability to create prosperity on the
continent. Successful fundraising initiatives by multilateral entities, such as the African
Development Bank (ADB) and the Trade and Development Bank, continue to borrow in domestic
currencies from local capital markets, which demonstrate the growth and capacity of these
exchanges. Proceeds of such fundraising are directed toward developmental projects in the
respective jurisdictions. For instance, in 2014, the ADB successfully raised NGN12.95 billion
(approximately USD80 million) through its maiden local currency issuance in the Nigerian capital

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market. The proceeds of the successful NGN issuance went toward funding local small and
medium enterprises (SMEs) and some infrastructure projects requiring local currency financing.

However, despite such encouraging success stories, African exchanges are still characterized as
being illiquid and highly fragmented and as operating under weak regulatory environments. This
categorization is supported by dismal activities on the stock exchanges and shrinking foreign
investor participation across the markets. Conversely, the continent faces an infrastructure deficit
of approximately USD108 billion, which could be easily accessed through the local capital
markets (Ibid).

On the other hand in this new century, stock investment is not only heavily traded by local
institutions and foreign institutions; it has become very common for household investors to involve
in stock market as well. This is due to the transparency of the reporting requirement by the public
listed companies and the new advanced technology and software. (Lee, et al 2015).

2.1.2 The Relations between Stock Prices and Bond

The stock and bond markets are closely related and the conversation between stock prices and
bond yields is an indicator of the factors driving the financial markets. The degree of conversation
is furthermore important for investors wishing to diversify their portfolios.

According to the US SCE (2012) a bond is a debt obligation, like an IOU [note]. Investors who
buy corporate bonds are lending money to the company issuing the bond. In return, the company
makes a legal commitment to pay interest on the principal and, in most cases, to return the
principal when the bond comes due, or matures. To understand bonds, it is helpful to compare
them with stocks. When you buy a share of common stock, you own equity in the company and
will receive any dividends declared and paid by the company. When you buy a corporate bond,
you do not own equity in the company. You will receive only the interest and principal on the
bond, no matter how profitable the company becomes or how high its stock price climbs. But if the
company runs into financial difficulties, it still has a legal obligation to make timely payments of
interest and principal. The company has no similar obligation to pay dividends to shareholders. In
a bankruptcy, bond investors have priority over shareholders in claims on the company‟s assets.

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The basic financial terms of a corporate bond include its price, face value (also called par value),
maturity, coupon rate, and yield to maturity. Yield to maturity is a widely used measure to
compare bonds. This is the annual return on the bond if held to maturity taking into account when
you bought the bond and what you paid for it. A bond often trades at a premium or discount to its
face value. This can happen when market interest rates rise or fall relative to the bond‟s coupon
rate. If the coupon rate is higher than market interest rates, for example, then the bond will likely
trade at a premium.

Stock exchanges are places where brokers and other investors buy and sell stocks to one another.
These exchanges provide a physical marketplace where trades occur. First organized in 1792, the
New York Stock Exchange (NYSE) is perhaps the most well-known. Other exchanges include the
American Stock Exchange, Pacific Stock Exchange and various others throughout the world, such
as the London Stock Exchange. Each exchange sets financial and other requirements to be met by
a corporation before its shares may be traded on the exchange (bid).

In addition to stock exchanges, shares are also traded electronically in the over-the-counter (OTC)
market. The largest of these electronic markets is the National Association of Securities Dealers
Automated Quotations (NASDAQ). The exchanges and the NASDAQ stock exchange play a vital
role in our economy by providing investors with liquidity the ability to easily buy and sell their
shares Hansen,.J, (2015).

2.1.3 Primary vs secondary market

Primary markets are a type of platform, on which the buyers and sellers are investors and investees
in equities. Platforms need to attract buyers and sellers, and succeed as more buyers and more
sellers join. Balancing the interests of investors and investees was therefore important in our
analysis, which focuses on: regulation; reasons for listing and de-listing (section 4); economics of
listing for small firms; cross-border listing in the EU; reasons why large unlisted firms may not
seek to list and the IPO process Oxera Consulting (2020).

Secondary equity markets are where investors buy and sell shares. A well-functioning equity
market provides liquidity and a reliable price-formation process. These market functions allow
investors to reallocate their asset holdings at low cost, enabling them to manage their financial

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risks according to their preferences. More efficient secondary markets also lower the cost of
raising capital for issuers in the primary markets Oxera Consulting (2020).

2.1.4 The Role of Private Investment

One of the first questions that should be asked is what role private investment can be expected to
play in the developmental process. Without an active private sector there cannot be a meaningful
capital market. Consequently, many of the problems associated with identifying a role for a capital
market are essentially concerned with attempting to overcome some of the constraints in finding a
positive role for the private sector. That such a role can be found should not be taken for granted.
As one commentator said, "The closer identification of private enterprise with the broader aims of
the nation and society has been one of the outstanding developments of the 20th century in the
richer countries. In many of the developing countries, unfortunately, this identification is still
lacking "1. Somehow private investment (and hence the capital market) must be integrated into a
country's development programmed. It must be aware of, and respond to, the needs of the
population as a whole. Anything less may survive on a temporary basis but, with rising
expectations and the repercussions of democratization, long term stability is dependent on
considerable overlap between both private and social objectives and their respective costs. The
optimum balance between private and public finance depends on many factors, not least the
circumstances of each individual country, and even for a given country this balance can be
expected to vary over time (Lloyd and Bruce, 1997).

2.2 Empirical literature

2.2.1 Stock exchange in Africa
It is well documented that Africa has one of the lowest financial inclusion rates in the world. The
financing of the economy is essentially bank-based, with underdeveloped capital markets across
the continent except in South Africa. These markets are composed mainly of stock exchanges and
bond markets, even if other capital markets such as private equity markets and crowd funding
platforms are gaining ground. While stocks traded on exchanges are issued mainly by big firms,
for bonds, governments are the main issuers. Corporate bonds constitute a tiny part of the capital
markets in most African countries. Despite this under-development, there is still huge potential for

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market expansion given both the financial development gap and the huge infrastructure
development gap in Africa (Soumaré, 2021).

Regionalization or regional financial integration can be defined as a market or institutionally

driven process of broadening and deepening the financial interrelationships within a region.
Regionalization is expected to create larger markets and expand the spectrum of opportunities for
financial intermediation, which makes it more cost-effective to improve financial infrastructure
and diversify financial services offerings. Efficiency effects also arise from the increase in the
number of participants promoting diversification and healthy competition, and thus, eventually
results in lower prices for services (Ekpo and Chuku, 2017 cite Soumaré, 2021). Finally,
regionalization could increase capacity to withstand financial crisis even though greater
regionalism may mean greater contagion effects in the future.

2.2.1 Challenge of finance growth in Horn of Africa

Determinants of Investment and Growth in the Horn of Africa including Ethiopia are explained b
different scholars the researcher prefer Ali and Emerta explanation for this topic. According to Ali
and Emerta (2012) the Horn of Africa, economic activities must be constrained by at least one of
the following three factors: (i) financing related problems, (ii) the social return to economic
activity, and/or (iii) the private appropriability of returns. The hypothesis is that these countries
have not developed because of undesirable effects of either or all of the above three factors.

The most important step in providing a workable policy recommendation is to identify which of
the above factors characterize the sub-region by comparing economies in the sub-region with the
rest of the developing world. Finance related problems are related to high cost of finance, low
saving and poor intermediation. If the sub-region is constrained by high cost of finance, that can be
identified by high real interest rates, low savings, and high current account deficit, which can lead
to difficulties to borrow from foreign sources. In economies which are constrained by finance, an
exogenous increase in investible funds, such as foreign aid and remittances, can spur investment
and other productive economic activities. Policies that are directed to encouraging savings and
promoting productive investments can also help.

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Low returns on investment could be attributed to low social returns or low private appropriability.
The sub-region is labeled as social return constrained if there are some diagnostic signals of poor
human capital, or inadequate infrastructure. If human capital is a serious constraint in the Horn of
Africa, one would expect the returns to education or the skill premium to be high vis-à-vis
comparable regions. Moreover, various indicators of human capital will be inferior as compared to
counterpart sub-regions. If infrastructure is the problem, one would observe various bottlenecks on
access to markets.

Low private returns could be as a result of low private approprability, associated with government,
or market failure. The Horn of Africa sub-region is constrained by low private approprability if
there are macroeconomic instabilities in the form of huge inflation, deficits, and unemployment,
and the business environment is poor owing to high tax rates and corruption, among others.

Access to finance as a constraint

Various growth analysis have underlined that countries that achieved strong growth are those with
better access to financial services. Following such theoretical and empirical studies, access to
finance as a constraint for growth in the Horn of Africa is examined by assessing the adequacy of
domestic and external finance. Access to domestic finance: Countries in the Horn of Africa have
one of the least developed local financial systems, and access to domestic finance is constrained.
Access to domestic finance can be examined in terms of the size of domestic credit provided to the
private sector. In this regard, the Horn of African countries are marginally inferior as compared to
developing East Asia and the Pacific, and sub-Saharan Africa countries, with private sector credit
to GDP ratio of only 17 percent. Despite the low regional average, Djibouti, Eritrea and Kenya are
in a better position. Another indicator for the domestic access to finance is domestic credit
provided by the banking sector. With respect to this, the sub-region has an unsatisfactory level of
credit from the banking sector. Domestic credit from banks in the Horn of Africa is just 29 percent
over the last ten years for which data are available, as compared to 124 percent and 86 percent in
the developing East Asia and the Pacific, and sub-Saharan African countries, respectively. At
country level bank credit to the private sector performed at relatively better levels in Eritrea,
Ethiopia and Kenya

Table 1: Domestic credit to the private sector (as percent of GDP)

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 Total Domestic Credit Provided
Domestic Credit to the Privet By the Banking Sector (Percent
Sector (Percent of GDP) of GDP)
Country/Region 1981-90 1991-00 2001-09 1981-90 1991-00 2001-09
Djibouti … 42.7 22.8 … 47.8 27.4
Ethiopia … 33.2 27.2 … 104.6 130.5
Eritrea 11 14.6 20.7 35.8 40.4 46.1
Kenya 30.5 30.2 27.7 50 47.9 40.2
Somalia … … … … … …
Sudan 10 2.6 8.2 30.2 104.9 13.8
Uganda 1.9 4.6 9.3 14.5 8.3 8.8
The horn of Africa 17.2 16 17.1 38.1 57.9 29.2
East Asia and Pacific
(developing only) 57.4 90.2 103.7 62.6 95.8 123.6
Sub-Saharan Africa (all
income developing) 37.9 55.9 58.9 58 77.1 85.2
Sub-Saharan Africa
(developing only) 37.9 55.9 59.6 58 77.1 86.3
Sources: World Bank Development Indicators cited by Ali and Emerta (2012)

Access to external finance: Another possibility for the countries of the Horn of Africa to finance
investment is by international finance. Access to external sources of finance by the sub-region is
limited owing to the low incomes in these countries, fragmented financial sectors, and rudimentary
domestic financial markets. The sources of external finance can be broken down to Foreign Direct
Investment (FDI), Overseas Development Assistance (ODA) and workers‟ remittances. As shown
in Table 3.2, ODA and remittances are by far the larger sources of external finance in the Horn of
Africa amounting to 6.5 percent and 4.1 percent of GDP. Remittances (as percent of GDP) are in a
better condition compared to other developing regions in the world. At the country level, Ethiopia
and Eritrea are the lowest recipients of workers‟ remittances. ODA inflows as a percent of Gross
National Income are much better in the Horn of Africa, owing to the low level of development and
the high demand for aid in the sub-region. Unlike remittances, Ethiopia and Eritrea are the main

12
destinations of ODA within the Horn of Africa countries. In comparison to other sub-regions, FDI
as percent of GDP is very low in the Horn of Africa, although it improved in 2001-09 (Table 2).
The current rise of FDI is as a result of the return of peace and stability in member countries of the
sub-region. Djibouti and the Sudan are emerging as growing destinations of FDI in the sub-region

Table 2: FDI, ODA and workers‟ remittances in the Horn of Africa

Net FDI Inflows Net ODA Received Worker‟s Remittances

Country /Region (percent of GDP) (percent of GNI) (percent of GDP)
1981- 1991- 2001- 1981- 1991- 2001- 1981- 1991- 2001-
90 00 09 90 00 09 90 00 09
Djibouti … 0.5 9.1 … 19.5 11.5 … 2.6 3.2
Ethiopia … 9.5 0.7 … 18.1 23.7 … … 0
Eritrea .. 1 2.9 5.8 9.7 15.2 0.1 0.3 1
Kenya 0.4 0.6 0.5 8.7 7.6 4.2 1 2.5 4.6
Somalia -0.4 … … 51.3 … … 0.7 … …
Sudan 0.03 1.2 6.3 7.1 3.8 4.4 2 3.05 5.2
Uganda -0.02 1.9 4.4 7.2 15.8 13.8 0 0.8 4.7
The Horn of
Africa 0.1 1.1 3.8 5.2 7.9 6.5 1 1.8 4.1
East Asia and
Pacific
(developing
only) 0.9 3.5 3.3 1 0.8 0.3 0.5 0.7 1.4
Sub-Saharan
Africa (all
income
developing) 0.5 1.5 3.2 4.4 5.4 5.1 0.6 1 1.7
Sub-Saharan
Africa
(developing
only) 0.5 1.5 3.1 4.4 5.4 5.1 0.6 1 1.7
Sources: World Bank Development Indicators cited by Ali and Emerta (2012)

The cost of capital as a constraint

Banks constitute the main financial institutions in the Horn of Africa and financial markets are not
well developed. Banks dominate the financial sector in the sub-region, and short-term credit
characterizes financial products in these countries. The short-term nature of the bank credit is a 15
function of the short-term nature of the deposits in financial institutions27. Capital markets are not
developed, or are non-existent in most countries of the Horn of Africa. In this weak financial

13
sector a binding constraint for growth could be the high cost of financing a project. The cost of
capital is examined by looking at the level of real lending rates. As shown in Table 2, real lending
interest rates in the sub-region are among the lowest in Africa showing that the sub-region is
clearly a low cost finance area. The real lending rate ranges from -4.6 percent in Ethiopia to 13.3
percent in Uganda on average for the period 2001-09.

Table3: Real interest rates

Country 1981-85 1986-90 1991-95 1996-2000 2001-09 Average

The Horn of Africa
Djibouti … … … … 0.6 0.6
Eritrea … … … … … …
Ethiopia -10.6 4.7 -2 9.6 -4.6 -0.6
Kenya 0.8 4.8 2.3 19.1 4.1 6.2
Somalia … … … … … …
Sudan … … … … … …
Uganda -58.7 -94 -4.2 16.5 13.3 -25.4
Other African
countries
Malawi 4.9 1.5 -5.5 13.4 24.8 7.8
Nigeria -5.8 -8.6 -25.5 7.2 6.5 -5.2
Rwanda 7 10.6 21.8 11.7 8.1 11.8
Senegal 2.9 14.1 17.3 … … …
South Africa 4.8 1.3 6.5 12.1 6.9 6.3
Tanzania -17.8 -9.7 -4.9 12.6 8.9 -2.2
Sources: World Bank Development Indicators cited by Ali and Emerta (2012)

We can also test for the cost of financing in the Horn of Africa sub-region by examining the size of
interest rate spread. The nominal spread is comparable to other countries. The interest rate spread
is as high as 22 percent in Malawi and 15 percent in Kenya, the country with the highest spread
among Horn sub-region. The low cost of finance in the face of constrained access to financial
services as reflected by other variables discussed above may indicate that interest rates are highly
controlled. Hence, interest rates in the Horn of Africa are of limited help to conclude that credit
scarcity is a binding constraint.

14
Low savings as a constraint

Various growth theories underline the importance of savings in the growth process. Cross-country
growth studies using saving rates as one of the determinant factors for growth established that
countries with low saving tend to have low investment and low growth rates. Thus, it is imperative
to build on the fact that adequate domestic saving is required to sustainably finance private and
public investment projects. The gross saving as percentage of GDP for the Horn of Africa ranges
from 18.8 percent in Kenya to 6 percent in Sudan (Table 4). The region‟s average of 13.5 percent
is significantly less than that of developing East Asia & Pacific and sub-Saharan Africa, which are
36.5 percent and 16.3 percent, respectively. Although low in comparison with other regions, the
saving rate in the Horn of Africa has improved.

Table 4: Gross domestic saving

Country/Region 1981-85 1986-90 1991-95 1996-2000 2001-09 Average

Djibouti … … 11.8 9.8 24.7 15.4
Eritrea … … 46.1 16.5 … …
Ethiopia 12 14.6 14.7 16.9 18 15.3
Kenya 17.5 18.7 25.5 17 15.3 18.8
Somalia 13.4 26.1 … … … …
Sudan 3.3 3.5 3 6.5 13.4 6
Uganda 6.5 5.2 12.5 18.1 18 12.1
The Horn of Africa 10.9 12.1 15.4 14 15.7 13.6
East Asia &
Pacific
(developing only) 32.1 34.1 37.7 36.5 42.2 36.5
Sub-Saharan
Africa (all income
levels) 18.3 17.4 14.9 15.4 15.8 16.3
Sub-Saharan
Africa (developing
only) 18.3 17.4 14.9 15.4 15.8 16.3
Sources: World Bank Development Indicators cited by Ali and Emerta (2012)

As the low domestic saving is a potential constraint on the Horn of Africa‟s growth, it is important
to understand the causes of low saving. Low domestic saving in developing countries could be
attributed to multiple economic factors that include the low level of per capita income, limited
productive employment, undeveloped financial saving instruments and high foreign debt and
current account deficit. External distress factors and economic instability in general could lead to

15
leakages of domestic financial resources and capital flight that limit domestic saving. Data from
World Bank‟s Development Indicators database show that the Horn of Africa sub-region has a
very high foreign debt ratio and current account deficit. The current account deficit as a percent of
GDP reached 9.1 percent as compared to a surplus of 4.3 percent for developing East Asia and the
Pacific countries in 2001-09. Another test of whether the Horn of Africa is savings constrained is
to examine the link between investment and saving. The strong correlation coefficient of 0.64
observed between investment as a percentage of GDP and national saving as percentage of GDP
(Table 5) and the low absolute level of saving support the hypothesis that saving constitutes a
binding constraint to investment and growth in the Horn of Africa.

Table 5: Investment and domestic saving (in percent of GDP)

Country/Region
1981-85 1986-90 1991-95 1996-2000 2001-09
investment … 14.1 11.4 9.6 20.0
Djibouti saving … … 11.8 9.8 24.7
investment … … 18.1 32.1 22.7
Eritrea saving … … 46.1 16.5 …
investment 14.3 16.6 14.5 19.9 22.8
Ethiopia saving 12 14.6 14.7 16.9 18
investment 22.2 24.1 19.3 16 18.1
Kenya saving 17.5 18.7 25.5 17 15.3
investment 26.7 25.6 … … …
Somalia saving 13.4 26.1 … … …
investment 14.2 10 17.7 16.3 24.4
Sudan saving 3.3 3.5 3 6.5 13.4
investment 7.8 10.6 14.7 18.8 21.5
Uganda saving 6.5 5.2 12.5 18.1 18
The Horn of investment 16.7 17 17.2 17.5 21.5
Africa saving 10.9 12.1 15.4 14 15.7
Sources: World Bank Development Indicators cited by Ali and Emerta (2012)

Constraints on appropriate ability of returns

Appropriate ability is related to whether it is easy for people to benefit from the returns of their
activities. The return from investment determines the rate of investment. Investment in the Horn of
Africa could be restricted because investors do not expect to appropriate the high social returns
that their investments generate. This could happen through a number of channels including

16
government failures such as macroeconomic risks (external and internal deficits, and inflation),
poor business environment (high tax rates, corruption and other governance indicators) and market
failures such as inputs and factor market failures.

2.3 Knowledge Gap

Access to capital markets is one recent phenomenon on the African continent that is being
facilitated by the Federal Reserve‟s quantitative easing policy of injecting money into the U.S.
economy, and this phenomenon is gaining steam. Between November 2008 and September 2013,
the purchased approximately $3.5 trillion in bank debt, mortgage-backed securities and Treasury
notes (Evans 2013). As a result, the market was flooded with excess liquidity and unprecedented
low interest rates suppressing returns in the U.S. and other developed markets. Investors have
turned to emerging and frontier markets for better yields. The response has been strong from sub-
Saharan African countries Songwe et al. 2014).

17
 Chapter Three: Research Methods

3.1 Research Design

This research was used for this study is descriptive study which means employ both quantitative
data type and qualitative data type. Both qualitative and quantitative data are useful in this research
but it will be dominated by qualitative data type. A mixed-methods approach is a research
methodology in its own right. As stated by Creswell and Plano Clark (2011), a mixed-methods
research design is a research design that has its own philosophical assumptions and methods of
inquiry. As a methodology, it includes philosophical assumptions to provide directions for the
collection and analysis of data from multiple sources in a single study.

3.2 Data Sources and Type

The valuable and crucial data was obtained from secondary sources. Secondary data were
qualitative and quantitative data type. The secondary source accessed from annual documents,
published and unpublished book and newspaper and report.

3.3 Data Collection Technique

In order to collect data secondary data the research use different techniques:
Document analysis: The data access from various source annual documents, magazine and others
from the government and non-government organization. This data were also collect for farther
investigation about capital market.

3.4 Analysis of data

The data collect through different techniques which are analyzed to make valuable information.
Collected data were mixed of qualitative and quantitative data type. Therefore, the quantitative
data were analysis in numbering and percentage which were present in tabulate, graph and pie
chart. The qualitative data also interpret and elaborate based on access data. Quantitative data
collected and analyzed by the use of descriptive statistics such as percentages. To sum, the analysis
of quantitative data and interpretation of qualitative data combines to seek convergence among the
results (Creswell, 2003).

18
Chapter Four: Data Analysis
Stock exchanges facilitate trade in the stocks of companies by connecting people who seek money
with those who can provide it. The major role of the stock market as a center of trading in
securities is the raising of funds for investment in long term assets. People in Ethiopia have excess
liquid cash at their disposal due to few investment opportunities available. A stock exchange
market is one of the investment paths yet to be developed in the country. The creation of a vibrant
stock market has been accepted as a necessary associated to the development agenda of the
country. Though the stock exchange market is necessary to improve the Ethiopia economy, its
implementation may face many challenges and opportunities such as:

4.1 Opportunity of Stock Market

Capital market provides an opportunity for the investing public to know the trend of different
securities and the conditions prevailing in the economy. It enables the country to achieve economic
growth as capital formation is promoted through the capital market. Some of the capital market
opportunities are explained as follow.

4.1.1 Foreign Direct Investment

Table 6: Foreign direct investment from 2016 – 2020

Years Inflows, US $ FDI% of GDP

2016 $3.9B 5.58%

2017 $2.52B 4.91%

2018 $3.36B 3.99%

2019 $4.02B 2.62%

2020 $4.14B 2.23%

19
The above table 4.1 displays about the foreign direct investments which is show that foreign direct
investment high score related with GDP during in 2016, yet not either continue as it is or rise FDI
rather than decline the throughout the years.

According to table 4.1 the flow of the money shows nominal money increase from the 2016 up to
2020 except 2017 but not rise real money term.

4.1.2 Market monitoring

Stock exchange may play the role of market monitor to ensure that the said market is working
efficiently, fairly and transparently. Such of that are help the Ethiopia Join Market Monitoring
Initiative (JMMI) is to provide regular, reliable information on prices and market functionality
through the use of harmonized tools and validated analysis (JMMI, 2021). This also helps to access
information for the stock exchange.

Stock exchange also makes market monitor to certify that the said market is working efficiently,
fairly and transparently. This will be done by setting up requirements related to the submission of
all financial information regarding companies whose securities are sold on the stock exchange.
Such requirements exercise a control on a company management and keep its malpractice in check
thus improving corporate governance.

4.1.3 Inflation Rate

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate
of the rate at which the decline in purchasing power occurs can be reflected in the increase of an
average price level of a basket of selected goods and services in an economy over some period of
time. The rise in the general level of prices, often expressed as a percentage, means that a unit of
currency effectively buys less than it did in prior periods.

Table7: Ethiopia Inflation rate from 2017 to 2022 (compared to the previous year)

Characteristic Inflation rate compared to previous year

2022 36.48%

20
2021 26.78%
2020 20.35%
2019 15.81%
2018 13.83%
2017 10.69%
Source: - Ethiopia inflation rate 2014/statista

Ethiopia inflation rate accelerated over the years to 36.48% in 2022 from 10.69% in the previous
year‟s 2017. That was the highest inflation since 2017 up to in this year‟s (2022). The inflation rate
rise continues from year to year without any gap which means the purchasing power of currency
lost continuously from 2017 to 2022.

4.1.4 Ethiopia Exchange Rate

Table 8: Ethiopian exchange rate from 2017 to 2022

2017 2018 2019 2020 2021 2022

Exchange Rate (vs 27.58 28.20 32.00 34.95 51.115 51.47

USD)

Source: US Dollar to Ethiopian Birr Spot Exchange Rates for 2022

Exchange rate, USD in Ethiopia, the above table 8 provides data for Ethiopia from 2017 to 2022.
The average value for Ethiopia during that period was 36.55 Ethiopian Birrs per USD with a
minimum of 27.58 Ethiopian Birrs per USD in 2017 and a maximum of 51.47 Ethiopian Birrs per
USD in March 2022.

4.1.5 Education
Establishing of the capital market will bring a lot of experience and education for Ethiopia
financial sectors such as legal and regulatory reform Collaboration on creation and implementation
of new operational infrastructure will be increase stock market efficiency and public confidence;
facilitate privatization which assistance with preparation of privatization policies. That will

21
improve the capacity within the Ministry of Finance and Economic development of State Owned
Enterprises to carry out privatization activities; Capital market Provided support in developing a
new credit rating agency and new commercial regulations as well as a new system for auctioning
money market securities, At financial Sector that will assist in improving in Bank of Ethiopian‟s
institutional capabilities and its relationships with central bankers in the country, region and
globally, in part due to the development of an electronic funds transfer system and will improve
Bank Ethiopia‟s on interest rate and other policies, the design of credit instruments and training.
Another one shall be technical support on development of the secondary mortgage market,
including drafting of a prospectus and development of operating procedures.

Furthermore, the capital markets as society and individual through the brokerage community,
investment advisers, security analysts, and well developed financial journalists serve to educate the
investing public. Such institutions are critical to an economy. The exchange can in fact be
mandated to educate the public on the benefits associated with trading on stock markets. Some
other opportunities regarding the establishment of a stock market in Ethiopia include: Regional
integration, Diaspora resources to be channeled into the stock market, the entrepreneurial spirit of
Ethiopia and Geographic advantage with Ethiopia being the center of Horn and East Africa.

4.2 Challenge
4.2.1 Low domestic saving
According to table Ethiopia savings as percent of GDP from 2018 – 2022: For that indicator, the
data for Ethiopia from 2018 to 2022. The average value for Ethiopia during that period was 26.84
percent with a minimum of 19.62 percent in 2022 and a maximum of 33.16 percent in 2018. The
latest value from 2022 is 27.24 percent. This data display that domestic saving continuously
decline or lowered.

Gross domestic savings (% of GDP) in Ethiopia is reported at 19.62 % in 2022, according to the
World Bank collection of development indicators, compiled from officially recognized sources.

Table 9: the gross domestic saving in Ethiopia from 2018-2022

22
 Gross Domestic Saving
35 33.16

30 29.03
27.24
25.17
25
19.62
20

Saving
15

10

0
2018 2019 2020 2021 2022

Figure1: Gross domestic saving

Source: The World Bank on May 2022

4.2.2 Lack Public Awareness

Currently, 20.9 % of the population of Ethiopia is urban (23,376,340 people in 2019 (Ethiopia
Demographics, 2020). The else population live in rural Ethiopia this indicate that 80.2 % people
live in rural. The lack of reliable information on issuers and all about the capital market
information which may be lead to failures and reduce the participant of shareholders.

A well-functioning financial market is important for smallholder agriculture development and for
the transformation of rural economies. Yet a substantial proportion of the rural population in
Ethiopia remains underserved. The literature points to market failures, attributed to information
asymmetry between lenders and borrowers, which affects households‟ access to financial services.
In the case of credit, this problem is exacerbated by households‟ lack of collateral to pledge to
access loans. Information asymmetry arises because lenders lack the information needed to screen
the creditworthiness of potential borrowers and monitor them after granting loans. Also, serving
poor rural communities geographically dispersed involves high transaction costs. Insurance and
savings financial services are subject to the same challenges. In response, lenders require collateral

23
that incentivizes borrowers to reduce non-repayment. This chapter documents the progress made in
unlocking these challenges and discusses avenues for maximizing the transformational roles of
these markets in Ethiopia (Guush and Kibrom 2019).

4.2.3 Infrastructure
Infrastructure one of key component of capital market of the financial system, delivering services
to smooth functioning of financial markets. Well designed and reliable financial market
infrastructure can be both financial stability and operational efficiency. Infrastructure serves as
device, bringing a network of counterparties together to support trading liquidity and the netting of
exposures and settlement obligations. They also establish secure arrangements for the timely
clearing and settlement of obligations between counterparties; assist institutions in the
management of counterparty credit risks; and help to coordinate actions in the event of a market
participant's default.

However, Ethiopia ready to establishing capital market, yet no experience about capital market and
no more infrastructures delivered before this phenomenon on capital market. Due to this reason
may be face as obstacle for establishing capital market.

4.2.4 Conflict

The internal conflict, which broke out months ago in Ethiopia, is taking a heavy economic toll. The
high cost of the war imposed a heavy burden on the economy especially after stagnation hit all the
world's economies because of the Covid-19 pandemic. As a result, international institutions
lowered their estimates for Ethiopia's economic growth to 2 per cent for 2021, from 6 per cent in
the previous year, according to the World Bank.
The real gross domestic product (GDP) growth averaged 10.9% in 2004-2014, driven by economic
reforms. This made Ethiopia a model for economic recovery in Africa and one of Africa's fastest
growing economies up to 2019.
The International Monetary Fund, however, with held its GDP growth forecast for Ethiopia in its
latest World Economic Outlook for the next four years due to instability across the country. In its
previous Outlook, the IMF forecasted that Ethiopia‟s real GDP growth will go up to 8 % by 2022.

24
No doubt, the political and security developments in Ethiopia caused a fast-paced economic
deterioration that not only slowed down the economic growth, but also were reflected in the
domestic and foreign performance indices and led to a deterioration of the living standards of
Ethiopians (Bagouri,S, 2021).
Thus currently Ethiopian economy decline by many factors generally Covid-19 and Russia
Ukraine war consider as external cause and internal instability are contribute for the decline of
Ethiopian economy.

4.3 Capital Market for Ethiopia

Art media production had been hold discussion on Ethiopian capital market who invited on
discussion Dr. Solomon Abay teacher of Finance and Economics law from Addis Ababa
University, Jetu Edosa (PhD candidate) teacher of finance and investment law in Addis Ababa
University and Solomon Gizawe Managing Director Consulting and Learning Solutions at Hst
Consulting. Dr Zemedehun the host of the program.

The question forwarded the host, Does Ethiopia need or not a capital market?

Ato Solomon responses that, developing country institutions are not well developed like that of
developed countries. If that institution have effective and efficient manage itself, will be applied
capital market. Therefore, instead of capital market use restructure bank law and principle which
bank give service in the place of capital market until the country becomes developed and
institution are well establish. Moreover, stock market is essential for developing country, but they
properly used when they become developed. Developing country will apply stock market may be
face low performance institution that lead to lack public confidence which is very difficult to
return back public confidence when institution stand on strong performance. Moreover, some
companies finance request above the capacity exist capital market example, Ethio-telecom, EEP,
Ethiopia airlines. Thus, Ethiopia is careful before starting stock market which is not support by one
institution rather than by many and complicated it.

Getu Edose replied that some country investment banker used as transition period. But as our
country situation banks have not stock market unless as institution (bank) did that means of

25
payment under Formation Company and subscribe i.e. to pay share through bank which
unacceptable idea is banks in Ethiopia are not sells stock especially secondary market.

When we want attract foreign direct investment not only the sack of dollar flow abroad to domestic
but also knowledge and technology transferring. Foreign investment attracted by domestic source
of finance that fiancé resources mobilize from the society out of bank alternative. Source of
finance that out of bank is no alternative and long term involve money.

Moreover, capital market brings importance for a society such as alternative finance source. We
have to say, it is another alternative to society which one is more return to deposit bank or buy
share from the company. For instance, someone have share in hand and face, can sell share and
make it liquid. Alternative source of finance must exist for advantage of society.

Therefore, capital market is essential for developing country, but conditions should fulfill such as
trust and public confidence should be governed by law and principle.

Dr solomon also replied that If we think absence of stock market in once country, it makes
unbalanced finance form. Bank usually provide for short term loan for finance seeker except
exceptional cause allowed long term. In other word it cannot provide long term finance through
bond or share.

In the absence of capital market bond and share have not formal market i.e. there is no alternative
finance source. In other expression banks provide bond but not equity finance which make gap to
access long term finance. In general, developing counties continue without existing the capital
market means that judge to block alternative finance. This also contributes for stagnant economics
growth. Investment is essential for growth, which also need long term finance. Therefore, if there
is no capital market it will have low investment attraction and growth.

4.4 Kenya trained

According to table 5 display that Kenya has relative well performance in east Africa on capital
market in all aspect. Kenya‟s equity market, the Nairobi Securities Exchange (NSE), is the most
vibrant and diverse in the region. It changed its name from the Nairobi Stock Exchange in July
2011 to the Nairobi Securities Exchange.

26
Table 10: East Africa capital market performance

Kenya Tanzania Uganda Rwanda

Equity market capitalization $20.64 Bn $8.61 Bn $6.4 Bn $3.35 Bn
Debt market capitalization $15.55 Bn $4.03 Bn $0.67 Bn $0.28 Bn
Number of listed company 63 28 17 8
Number of issuer (bond) 16 4 2 2
Domestic equity local market 23.44% 8.08% 6% 56.59%
Cap/GDP
Total equity market Cap/GDP 23.48% 16.37% 23.29% 360.13%
Domestic debt market 17.68% 7.96% 0.3% 30.52%
Cap/GDP
Equity market share volume 6,335,817,398 790,309,259 589,600,000 83,854,000
traded
Debt market instrument volume 562,716,006,443 1,063,000,000 0 9,740,400,000
traded

Figure 3 display that about the stock market capitalization in Kenya from 2016-2020. Stock market
capitalization continues the former three years had the same growth rate and similar portion on
cap/GDP (24%), the fourth year or in 2019 Cap/GDP 26% which is show that to 2% capital per
GDP growth. The last year, 2020 score the lowest point that may be the world economy was hit by
the COVID pandemic. Hence, the Kenya stocks markets capitalization almost all or the average
cap/GDP around 24% that shows constant growth (zero growth) of the capitalization.

27
 Stock Market capitalization

Year Capitalization GDP %

2016 2017 2018 2019 2020

24% 24% 24% 26% 22%

1 2 3 4 5

Figer2: Stock market capitalization to GDP for Kenya

According to CFA (2019), the challenge of capital market in Kenya some of them are, first;
markets are generally fragmented and illiquid, hindering transparency and price formation. This is
reflected in low turnover (average bond turnover/value of outstanding bonds), which in 2018 stood
at 26.8%. Second, Dependence on foreign investors are, mainly from emerging markets and
investors investing with a dollar-based currency. Third, Drastic dollar policy changes is that have
detrimental effects on economic growth. Forth, Lack of local investor confidence and risk appetite
is still prevalent, despite heightened awareness about the benefits of investment in the stock
market. Fifth, Bank collapses have greatly affected the corporate bond market because most of the
issuers are financial institutions. Furthermore, competition for alternative sources, such as private
equity, is another key impediment to the growth of the corporate bond market. Issuers have
preferred favorable foreign-currency-denominated financing, rendering the local corporate bond
market financing less competitive.

Kenya‟s increasing access to international financial markets has helped it reduce the amount of
concessional debt and grow its commercial and semi-concessional loans. With most developed
market yields trading below or close to zero, bond markets such as Kenya‟s have become attractive
to foreign investors because of the high-yield advantage.

28
In Kenya going forward, we expect improved liquidity with the repeal of interest rate capping,
which will further spur private-sector led growth. The shilling is likely to remain strong against the
dollar, hence keeping foreign exchange risk at bay. Tanzania, Uganda, and Rwanda policymakers
are also keen to stabilize their local currencies and the macro economy to offer a more conducive
investment environment.

29
Chapter Five: Conclusion and Recommendation
5.1 Conclusion
Foreign direct investment (FDI) in Ethiopia continuously decline or not either continue as it is or
rise FDI rather than decline the throughout the years. Thus, the establishing of capital market may
bring the rise of foreign direct investment or flow of money that finally contribute the growth
Ethiopian economy.

Stock exchange may play the role of market monitor to ensure that the said market is working
efficiently, fairly and transparently.

If stock market existing contribute a lot among that one will be make market monitor which is
market working efficiently, fairly and transparently. The stock market serves as discloser of
information regard to company that disclosed to anybody who need information about the
companies‟ situation. On the other hand the Ethiopia Join Market Monitoring Initiative is also to
provide regular, reliable information on prices and market functionality through the use of
harmonized tools and validated analysis. This also helps to access information for the stock
exchange. Therefore, the establishing of capital market will generate efficient, faire and
transparency market working style.

Ethiopia inflation rate accelerated over the years rise to 36.48% in 2022 from 10.69% in the
previous year‟s 2017. The inflation rate rise continues from year to year without any gap which
means the purchasing power of currency lost continuously. Now the highest inflation rate recorded
in this year. The capital market donates for the expansion of investment which leads to deflation or
increase the purchasing power of money.

Exchange rate like that of inflation rise for years and currently record the highest exchange rate
USD Ethiopia. The capital market may bright foreign currency from abroad to domestic which is
inject the new blood to economic circulation

Establishing of capital market generates a lot of experience and education on the sector of financial
and other related sector. This market adds to market become efficiency, public confidence, adapt
new policy, privatization etc. Therefore, the experience and education on market that is support the
growth and expansion of Ethiopian economy.

30
Ethiopian domestic saving is weak particularly from time to time saving practice become reduces.
The foreign direct investments find well better domestic saving which is mobilize to investment.
As result, low domestic saving will be obstacle for establishment of capital market in Ethiopia.

Most of the Ethiopian people around 80% live in rural part of the country which part of the country
cannot access quality information with in specific period of time compere to urban availability.
That makes information asymmetry about company situation and its price that provide share to the
market especially to remote/rural area. Thus, the information and infrastructure access mostly in
town and city which means for 20% population active participant else population may passive
engagements in establishing capital market.

Infrastructure one of key component of capital market of the financial system, delivering services
to smooth functioning of financial markets. Well designed and reliable financial market
infrastructure can be both financial stability and operational efficiency. However, Ethiopia ready
to establishing capital market, yet no experience about capital market and no more infrastructures
delivered before this phenomenon on capital market. Due to this reason may be face as obstacle for
establishing capital market.

Ethiopian unrest is devastating a lot of human live and property that also is lagging Ethiopian
economic growth. On the other side that capital market bases for investment expansion. Security is
necessary condition for the investment and capital market if not it is difficult to adapt capital
market with in this situation. In addition Russia- Ukraine also brings unexpected phenomena all
over the world that will have impact on the establishing capital market in Ethiopia.

According to dialog the two antagonist idea emerged, the first one claim that capital mark no more
necessary in Ethiopia currently and the second one is the capital market essential for developing
Ethiopia. The former one capital market is essential but not right time because of institutions
which will support that markets are weak which lead to finally lost public confidence. Other reason
is a few companies request above the capacity of capital market such as, Ethio-telecom, EEP,
Ethiopia airlines and other. Instead of capital market bank served to fill the gap, the bank should
be improve include rule and principle of stock market in the bank. Therefore, the inclusive bank
(give capital market service) is essential for the developing country rather than establishing capital
market.

31
The later one argues idea insisted that capital market is essential and the right time to establishing
capital market for developing country. The reason why to establish capital market are attract
foreign direct investment, it is alternative source of finance for as a whole society and investor, to
provide formal market for stock (especially secondary market) and to provide long term finance
which contribute for the development of investment and economic growth. Thus, the capital
market is important it establishing, if the supportive institution existed and other necessary
condition are ready to support.

5.2 Recommendation
 However, the Foreign direct investment attracted by establishing of capital market and it
contribution such as increase of domestic capital, the enhancement of efficiency through the
transfer of new technology, marketing and managerial skills, innovation, and best practices; the
current situation (political, social and economic instability) of country not allowed to begin this
market. Therefore, Ethiopian government attract foreign investment other alternative rather
than capital market such of them ensure political stability of a country (favorable legislation
and political goodwill), transport and infrastructure network and smart tax rates.
 Well understood stock exchanges have a great importance to develop market monitoring with
in the country. But this activity partially replaced by Ethiopia Join Market Monitoring
Initiative (JMMI) which provide regular, reliable information on prices and market
functionality through the use of harmonized tools and validated analysis.
 Inflation rate in Ethiopia aggravated from time to time, to return back to the normal stage from
the high rate may the capital market have some effort, but not the only way to reduce the
inflation rate. In order to constrain inflation the government employs many alternatives such as
being more ambitious as for agriculture industry and less emphasis „Decorating project‟ that is
heavily engaging in the economy. Therefore, that agriculture should resist international food
price hike. The other factors constrain inflation money supply/credit expansion, inflation
expectation and interest rate
 The government of Ethiopia should consolidate infrastructure and information to accessibility
of finance information to every corner of the country. That accessibility will eradicate
asymmetry information. First, information and infrastructure should be strengthened and made
available, then comes capital markets.

32
 Ethiopian unrest is devastating a lot of human live and property that is lagging Ethiopian
economic growth. In addition Russia- Ukraine war also brings unexpected phenomena all over
the world that will have impact on world economy. Both internal and external security is
essential condition for investment and capital market if not it is difficult to establishing capital
market in Ethiopia
 Until coming the right time and Ethiopia be make itself right place for capital market, the
government take a commitment to improve the rule and principle of bank services which is
provide services instead of capital market
 If capital market establishing with weak infrastructure, will lost public confidence and difficult
to restore public confidence when the right time comes. Therefore, first the government should
exert effort to make strong the infrastructure.

33
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Drivers and Determinants. The Horn Economic and Social Policy Institute (HESPI)

Ali I. Abdi and Emerta A. Aragie. (2012) Economic Growth in the Horn of Africa: Identifying
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