College of Finance, Management and Development

Department of Public Financial Management and

Accounting

A Proposal on Establishing Stock Market in Ethiopia:

Status, Challenges and Prospects

By: - Tsion Yeshitila

ID. No: ECSU/2103936

Advisor: Bamlaku (PhD)

December 2023
Addis Ababa, Ethiopia
 ETHIOPIAN CIVIL SERVICE UNIVERSITY
College of Finance, Management and Development

Department of Public Financial Management and

Accounting

Establishing Stock Market in Ethiopia: Status,

Challenges and Prospects

A Thesis proposal Submitted in partial fulfillment of the

requirements for the award of a Master’s Degree in Public
Financial Management and Accounting

By: - Tsion Yeshitila

ID. No: ECSU /2103936

Advisor: Bamlaku Kassie (Ph.D.)

Assistant Professor in Accounting & Finance,

December 2023
Addis Ababa, Ethiopia

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ACKNOWLEDGEMENTS

I would like to express my gratefulness to God who loves, supports and provides me
throughout my life. I owe my special appreciation to my research advisor Bamlaku ( PhD),
who intensively supervised me in conducting this research work.

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Abstract
Purpose

This research proposal shall aims to provide a comprehensive review of the literature on the
determinants of stock market development in the title of “Establishing Stock Market in Ethiopia:
Status, Challenges and Prospects” The purpose of the study was to identify the challenges and
prospects that exist to establish Ethiopia’s stock market. The study used mainly a quantitative
research approach and data was collected from both primary and secondary sources. A
qualitative research approach was also used in the research to enhance the quantitative data.
Primary data was collected through questionnaires and secondary data was collected from
various credible sources.

Findings

Based on the theoretical literature, in order to identify the challenges and opportunities of
stock market, first we should find some causes or factors that leads to failed to adopt
the stock market establishment in Ethiopia. Therefore, Some factors should consider in this
research proposal which is the determinants of stock market development can be broadly
classified into two groups: macroeconomic factors and institutional factors and other factors are
identifying in this research proposal. The theory and the empirics predict different ways in which
macroeconomic factors affect stock market development. Challenges for Establishment of Stock
Markets the main determinants of stock market development are classified into four sets of
factors which are: supply factors, demand factors, institutional factors and economic policies.
Demand factors are those that affect investors’ decisions regarding investment in stock markets
while supply factors are those that affect companies’ decisions to issue shares .
In terms of the institutional factors, the literature indicates that different legal origins and stock
market integration can have a positive or negative impact on stock market development. In
addition, factors such as legal protection of investors, corporate governance, financial
liberalization and trade openness contribute positively to the development of the stock market. In
general, This proposal paper accesses the concept of stock market development and suggests
five dimensions for assessing it. In addition, it proposes four sets of factors that shape or
determine stock market development: supply factors, demand factors, institutional factors and
economic policies. While both supply factors and demand factors serve as “building blocks” of
the stock market, institutional factors and economic policies serve as “supporting blocks. The
paper shall concludes by emphasizing three principles. First, stock market development is a
difficult, complex, multi-faceted, and long-term process. Second, stock market development is
only part of the overall development of a country’s financial system. Third, stock market
development is mainly a private sector activity.

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Key Words: Stock Market Development, Institutional Factors

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 Table of Contents

Contents…………………………………………………………………………………………pages
Aknowledgement ………………………………………………………………………………………………………………………….………iI
List of Table………………… .…..……………………………………………………………………………………………………………….
…..iiList of Figure………..……….…………………………………………………………………………………………………………………...
… iiiACRONYMS AND ABBREVATIONS…………..
………………………………………………………………………………………………iv Abstract……………………………………..
………………………………………………………………………………………………………….. v

CHAPTER ONE..............................................................................................................................................1
1. INTRODUCTION.......................................................................................................................................1
1.1 Background of the study..............................................................................................................1
1.2. Statement of the problem................................................................................................................3
1. 3 Research Question............................................................................................................................5
1.4. Objectives.........................................................................................................................................5
1.4.1 General Objective.......................................................................................................................5
1.4.2 Specific Objectives.....................................................................................................................5
1.5. Significance of the study...................................................................................................................5
1.6. Scope of the Study............................................................................................................................6
1.7. Limitation Study................................................................................................................................6
1.8. Organization of the paper.................................................................................................................7
CHAPTER TWO.............................................................................................................................................8
2. REVIEW OF LITERATURE REVIEW.........................................................................................................8
2.1 Theoretical Literature Review............................................................................................................8
2.1.1. Theory of stock market..............................................................................................................8
2.1.2. The Concept of Stock and Stock Market......................................................................................10
2.2. History of Stock Market in Ethiopia................................................................................................11
2.3. Prospects of Establishing Stock Market..........................................................................................13
2.3. 1. Demand/Supply......................................................................................................................13
2.3. 2. Online /Traditional Trading....................................................................................................14
2.4. Benefits of Establishing Effective Stock Market..............................................................................14
2.4.1. Society Benefit........................................................................................................................15

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 2.4.2. Consumers Benefit...................................................................................................................15
2.4.3. Employees Benefit...................................................................................................................16
2.5 Challenges for establishment of Stock Markets...............................................................................16
2.6. Empirical Review.............................................................................................................................20
2.7. Conceptual framework...................................................................................................................23
Figure 1. Conceptual framework of the study...........................................................................................23
CHAPTER THREE........................................................................................................................................24
3. RESEARCH METHODOLOGY...................................................................................................................24
3.1 Research design...............................................................................................................................24
3.2. Research Approach.........................................................................................................................24
3.3. Population of the study..................................................................................................................25
3.4. Sampling Design.............................................................................................................................25
3.5. Sample Size Determination.............................................................................................................25
3.6. Data Type and source.....................................................................................................................26
3.7. Data Analysis Method.....................................................................................................................26
3.8. Reliability and Validity....................................................................................................................27
3.9. Ethical Considerations....................................................................................................................28
CHAPTER FOUR..........................................................................................................................................29
4. BUDGET PLAN........................................................................................................................................29
4.1. Financial Budget.............................................................................................................................29
4.2. Time budget (schedule)..................................................................................................................29
Reference...................................................................................................................................................III
Appendices ……………………………………………………………………………………………………………………………………………

Appendix 1 - Questionnaire …………………………………………………………………………………………………………………

Appendix 2 - Interview Checklist …………………………………………………………………………………………………….……

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 LIST OF TABLE

LIST OF FIGURES

Figure 1. Conceptual Framework of the Study

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 ACRONYMS AND ABBREVATIONS

ACCA Association of Chartered Certified Accountants

AABE Accounting and Auditing Board of Ethiopia

FDI Foreign Direct Investment

GDP Gross Domestic Product

ICT Information and commendation technology

IMF International Monetary Fund

IPO Initial Public Offering

MOFEC Ministry of Finance and Economic Commission

MOF Ministry of Finance

NBE National Bank of Ethiopia

PFEA Public Finance Enterprises Agency

PPESA Private and Public service Agency

Sd Standard Deviation

WB The World Bank

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 CHAPTER ONE
1. INTRODUCTION

1.1 Background of the Study

For an economy to grow, money needs to shift from less to more productive activities. The stock
market is one of the most important sources for companies to raise money. Stock exchange
encourages investments by enabling unused money and savings to become productive by
bringing the borrowers and lenders of money together at a low cost (Etienne, 2008). The origin
of stock markets is at the beginning of the Industrial Revolution that began in Europe. The early
associations for trading were either individual owners or partnerships. At the moment, there are a
number of different stock exchanges in operation in the world through which securities can be
bought or sold (Guiso & Jappelli, 2005).

Initially, trading in shares began informally on the streets of London. As the volume of shares
increased with more companies floating shares (giving people opportunities to buy their shares),
the need for an organized market place for the exchange of these shares escalated. As a result,
these traders decided to meet at the coffeehouse, which they used as the marketplace (Valdez,
2003). Financial intermediaries (brokers, fund managers, investment advisors, investment banks,
etc.) and other instruments like bonds then followed suit as an evitable consequence.

However, due to the relative underdeveloped nature of equity markets in Africa, the region has
attracted a disproportionately small share of recent international private capital flows to
developing countries. Most African stock markets are characterized by their small size, low
levels of liquidity and fragility and often unstable political and economic environments.
Therefore, returns on these markets tend to be somewhat volatile. Africa‘s smaller markets tend
to float between 10 and 20 percent of GDP. The exchanges are small relative to their own
economy. Even the older markets in Zimbabwe, Kenya, and Nigeria are typically less than
onethird the size of the economy. African markets also remain highly illiquid as mentioned
above, meaning that shares are rarely traded. In theory these small trading levels are reflective of
local market conditions and the size of the local players. In practice, however, the scarcity of

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actual trading effectively prevents many institutional investors in developed countries from
participating in African market (Etienne, 2008).

Ethiopia does not have a stock market except for commodities exchange which is allowing for
few agricultural products. As one of most recent reform agenda, the current government
announced to sell mega public enterprises such as Ethiopian Airlines, Ethiotelecom, Ethiopian
Electric Power and others which are owned by the government. Following this reform idea there
is the central question of how these mega public enterprises transfer to private sector. There is no
transparent and clear platform to allow people and companies to invest and buy shares of these
public enterprises. There are financial and non-financial institutes who have shares but there is
no central place of exchange that is an important arrangement required to be in place to initiate
stock exchange.

According to National Bank of Ethiopia monetary policy framework (2009), Monitory policy
committee’s code of conduct stated out that to promote financial sector development the
committee expected to propose specific financial sector reform measures including restructuring
of existing state owned banks, introducing stock market, venture capital, modern payment
systems, other security markets (both primary and secondary), lease finance (NBE, 2009, P.11).

Different scholars define stock markets based on their own view. A contemporary literature
suggests that stock markets provide services that boost economic growth and contribute to the
achievement of national goals. According to Ruecker (2011) research work financial market is a
place in which financial assets are created or transferred that it is channeling money from those
who do put for immediate use from who do have. A place stocks, shares and bonds of all types
are bought and sold (Gomez, 2013) and one way of efficient financial movement. Among the
global stock market London and New York stock markets are oldest and well organized in the
world. As depicted by (Edosa, 2014) provides facilities for stock brokers, investors and
corporations to trade in stocks. Instruments such as bonds, stocks, commodities, derivatives,
options, currencies and so on are traded ( Mishkim and Eakins, 2006). It is a part of global
economy.

Many people (especially the poor) a chance to buy shares of listed companies and become part-
owners of profitable enterprises. Allow sharing the profits of businesses to many people and

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helps to reduce large income inequalities (Kannan and Ijigu, 2013). Worku (2017) provides an
overview that stock market is effective in rising capital, investment opportunity for individuals
and institutions. Many scholars and researchers indicated that if countries establish a well-
functioning securities market, it will provide substantial benefits for economic developments and
to decrease monopoly.

Levine and Zervos (1996) conducted an empirical study and found out that there is a strong
positive correlation between stock market development and long-term economic growth. Not
only benefits to developed countries but also economy of least developing in a number of ways.
A study which is done by Tesemma (2003) provided an overview that introducing stock market,
allows de-concentration of ownership, improve accounting and auditing standards, provide
effective tools for monetary and fiscal policy and help privatization efforts. Stock market
generally used as economic policy instruments for financial management. Stock market
improved regulation, privatization of state assets and the growth of institutional investors
(Carmicheal and Pomerleano, 2002). Beside, improve allocation of resource as well as better
management of risks. Hence, in this study the researcher aims to accesses the challenges and
prospects of establishing stock market in Ethiopia.

1.2 Statement of the Problem

Ethiopia is one of fastest growing economies in the world. However, the economy has been
under state control through a series of development plans ever since the Imperial government
that private sector role and contribution remained minimal. According to Ruecker(2011)
assessment even though a significant development step has been taken by the Government since
1991, Ethiopia’s financial sector is relatively small, closed and much less developed than those
of other African countries. Poor financial infrastructure and less inclusiveness are cites as major
barrier of the sector. The government dominates lending, interest rates, exchange rate and the
largest banks and enterprises.

Many of African countries including Ethiopia their expenditure fund which is available from
external source either through loan and debts. Further, the development of securities markets
contributes to economic development through the mobilization of savings and their channeling to
the most productive enterprises (Tessema, 2003).
Although the formal Ethiopian state structure has been transformed from a highly centralized
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system to decentralized one, a number of challenges and problems are still
remaining(Rucker,2011). The growth of corporation has a sound contribution to economic
development through the participation of private sector. However, as depicted by Girma(n.d.)
without an active and efficient security market , corporation will have only a modest impact.

According to National Bank of Ethiopia report (2023) are thirty banks (including commercial
bank of Ethiopia) and more shareholders, eighteen insurance. Further, there are non-financial,
many private companies and a few corporations who have been selling shares. But there is no
legal market which is systematic, legalized and organized for share trading and re-trading
implying that there is high share illiquidity.

With total assets of 46 percent of GDP, Ethiopia’s financial system is shallow and does not serve
well the needs of a transforming economy. Access to finance is identified as the main obstacle to
business by 40 percent of firms (World Bank, 2015). Credit to the private sector was at a low 12
percent of GDP in 2017. The two state-owned banks, Commercial Bank of Ethiopia (CBE) and
Development Bank of Ethiopia (DBE), represent 63 and 6 percent of total banking assets
respectively serve as a key source of finance for infrastructure investments, SOEs and
developmental projects. The resulting asset liability mismatch and a high portfolio concentration
in specific sectors and enterprises create risks in the system and limits financing to private sector
firms (World Bank, 2018).

According to Ministry of Finance and Cooperation domestic saving is insufficient to finance its
ever increasing investment need. Moreover, foreign exchange earnings from export of goods and
services finance a small portion of the country’s imports. This calls for the need to finance the
current account gap from capital flows. The country’s total public debt including central
government, government guaranteed and public enterprises borrowing increased from USD 2.3
billion in 2006/07 to USD 23.5 billion in June(MOFED,2018).

Ethiopian investment sector tends to rely heavily on the banking. Accordingly, examine
contributed for financial shortage. Besides, financial shortage is one of a main challenge for
Ethiopian Small and Micro Enterprises. They have only met about 50% of the demand for their
financial need (Girma, 2015). Through stock market and the corporate sectors are source of long

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maturing funds with relatively competitive prices. Accordingly, can generate finance for
innovative, new and riskier business ideas and initiatives at a relatively low cost (Bekele, 2018).

Decision to establish stock market is in the power of the Ethiopian government and fill the
existing financing gap of public and private companies by offering them an alternative financing
route via the stock market. The study will to investigate and forward challenges and prospects of
the establishment stock market in Ethiopia, by taking under the estimation of the intended
economic reform.

1.3 Research Question

The study will answer the following questions:

1. What looks the present status of stock market in Ethiopia?

2. What are the main challenges that affect the establishment of stock market in Ethiopia?
3. What are the opportunities for adoption of stock market in Ethiopia?

1.4 Objectives
1.4.1 General Objective
The general objective of this study will to assess challenges and prospects of the establishment
stock market in Ethiopia

1.4.2 Specific Objectives

1. To assess the present status of stock market in Ethiopia
2. To examine the main challenges for the establishment stock market in Ethiopia
3. To identify opportunities for adoption establishment stock market in Ethiopia

1.5. Significance of the Study

This study will provide an inkling to resolve the discussions over establishing of stock market in
Ethiopia. In addition, this study attempts to provide a solution for the question market efficiency,
exciting as they are, will be important if the stock market establish in Ethiopian economic
activity.
For investors, managers and other stockholders will obtain integrated information about stock
market. Further, this study distinguished how to establish good quality institutions such as law

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 and
order, democratic accountability, bureaucratic quality as important determinants of stock market
development.

Thus, this study helps to reduce macroeconomic and institutional challenges and risks to enhance
the viability of external finance. Besides, this study gives clues for high level of stock market
development and provides evidences to enhance financial development by promoting a strong,
independent and effective legal system, where the judiciary can play an important role in
enforcing the constitutional protection of individual and property rights and by arbitrating.
On other hand, the findings of the study provide accurate information to the policy makers, so
that they can use it as input in their policy development. The study also provides information to
the government to establish stock market. The study will also show how the stock market
influence Ethiopia‘s economy if it is established.
It will give insight to researchers and students about the problem and stimulate further
investigation of the issue. Finally for new researchers, this study will serve as a standing stone
and be a base for theoretical and empirical concept for their further study in the same title and
concept

1.6. Scope of the Study

The main objective of this study will limited to identifying the challenges and opportunities to
establish Ethiopia’s stock market. This study also an expected limitation in the amount of data, it
used because the research will focused on sleeted institutions consider as participants that have
stock market awareness.
There are various determinants that related with the term. However, this research focused on four
basic key determinants factors: institutional, economic, and political and deals the prospects to
establish Ethiopia’s stock market.

1.7 The Limitation of the Study

The study will focused only on the current challenges and prospect to the establishment stock
market in Ethiopia. This study is not fully and widely covered all financial institutions as the role
of commercial banks in establishing stock market in Ethiopia to come up with more reliable

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result and valid conclusion. The study is limited to include only respondents from Addis Ababa
in selected institution.

The other major problem may be the employees were not willing to fill out questionnaire with
due care and return them on time. On the other hand researcher’s lack of prior experience in
conducting systematized research was one of the limitations

1.8. Organization of the Paper

This research paper will be consist five chapters. The first chapter includes background of the
study, statement of the problem, research questions, objective of the study, significant of the
study, scope of the study, and organization of the study. The second chapter covers the review of
related literatures. The third chapter was all about research design and methodology of the study.
Results and discussion will discuss under chapter four. The last chapter five will be about
summary of major findings, conclusions and recommendations

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 CHAPTER TWO

2. LITERATURE REVIEW

In many study and available data suggests that an efficient stock exchange market has an
important role for economic development policy. However, in Ethiopia the establishment is
subject of debate to policy makers, private and public sectors. This paper will to focus on
challenge and prospect of development of stock exchange market in Ethiopia. This chapter
presents a summary of the review of the literature. The first part presents the review of the
theoretical literature. The second summarizes relevant empirical evidence of stock exchange
market. The third section presents the conceptual model.

2.1 Theoretical Literature Review

2.1.1. Theory of Stock Market

The history of capital market tracks back to the 17th century has been operating in various
forms. During Industrial Revolution in Europe capital market played essential roll by providing
capital for new ventures. Especially stock market was originally started from 1883 in the
continent of Europe and in Alexandria the innovative exchange in the Mediterranean (Jaleta,
2014). Max Weber suggests the idea of the stock market as a dynamic institution. The German
sociologist defended the stock market against the conservative sectors those opposed to the
commercialization and against socialists that took as symbol of capitalist iniquity. Weber argued
that pure speculative commerce is helpful for private community and as important functions in
price leveling but limited with regulation. By 1773 the first stock exchange, the London Stock
Exchange was found (Vincent and Musomera, 2008).

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“Stock market is a security that represents a share of ownership in a corporation” (Mishkin and
Eakins, 2006,p.4). Further, efficient markets theories shows that stocks are always in equilibrium
and impossible for an investor to consistently beat the market. Fairly priced, reflect all publicly
available information on each stock affect monopoly and prevent market failure.

Capital markets may be classified as primary markets and secondary markets. In primary
markets, new bond or stock issues are sold to investors via the mechanism known as
underwriting. On the other hand existing securities are sold and bought among investors or
traders, usually on a stock exchange in the secondary markets (Gomez, 2013). Accordingly,
through which a person who wants to save can directly supply funds to a person who wants to
borrow. One form of financial liberalization in fostering financial development may increase
long-run economic growth (Worku, 2017). Al-Wassal (2013) finds the primary function of stock
markets is to serve as a mechanism for transforming savings into financing for the real sector

According to Ruecker(2011) stock market promote private sector development, enhance

competition among banks, improves corporate governance, rewards sound economic policies and
creates tools to conduct monetary policy. Recently, World Federation of Exchange and
UNCTAD (2017) research report provides an overview of some of the ways in which stock
exchanges contribute to economic growth and sustainable development. It focused on two main
roles of exchanges: mobilizing resources to facilitate sustainable economic growth and
development; and promoting good governance.

Financial market increases diplomatic relations to integrate trade, foreign direct investment, and
technology transfer, developing the most capable professional, regulatory, well-informed
consumers and investors’ relationships. Besides, promoting international accounting standards,
corporate governance, good governance, transparency and accountability among all (Tessema,
2003). Kannan and Ejigu(2013) and ElWalassal(2013) identifies the advantages of stock market
is to enhanced saving mobilization and risk management, offering liquidity to investments,
redistribution of wealth facilitated by diffused ownership, improved corporate governance,
efficient resource allocation, vibrant financial system and as a barometer of the economy. Beside,
providing many people a chance to buy shares of listed companies and as a result reduce income
inequalities (Musonera, 2008) and increase remittances especially for (Legesse,2012).

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As depicted in research work UNCTAD (2015) stock market create: Investment horizons: by
providing ability to saving mobilizations as means of exiting investment, Transparency: helps to
address information symmetry and through the initial listings; Investor protection: by rules of the
exchange, combined with relevant securities market regulation, Pooling funds: by bringing
together a large and diverse set of investors. For Small and Micro Enterprises by listing, create
competition among Banks, increase volume of remittances, improves corporate governance

2.1.2. The Concept of Stock and Stock Market: A General Overview

Stock represents a share of ownership in a corporation (Mishkin, 2004).Such kinds of stocks

could be identified as security representing equity claims on the earnings and assets of the
corporation. In this regard, the term stock is used interchangeably with the term share. Stocks are
generally traded in stock market. Stock market refers to capital market in which stocks of
corporations are sold to investors (Yuwa, 2005). In simple terms, it is a market place where
equity interests are exchanged either at par value, premium value or for less than the par value
also called discount stock. Thus, stock market allows stockholders (shareholders) to transfer to
another investor when they want to sell their stocks. Stock Exchange or Stock Market is also
defined as an organized market for the trading of stocks, bonds and other securities. It provides a
mechanism through which companies can raise capital for expansion purposes by selling and
issuing securities (stocks and bonds).
According to Avadhani (2002), stock exchange means anybody or individuals whether
incorporated or not, constituted for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities; it is an association of member brokers for the
purpose of self-regulation and protecting the interests of its members. Market participants in
stock market are individual retail investors, institutional investors such as mutual funds, banks,
insurance companies and hedge funds, and also publicly traded corporations trading in their own
shares. Some studies have suggested that institutional investors and corporations trading in their
own shares generally receive higher risk-adjusted returns than retail investors (Andrea, Bernardo
and Marianna, 2011). Stocks can be sold and bought in primary or secondary capital market. In
primary markets, new business can start by obtaining funds directly from households in which

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new stocks are sold to investors via the mechanism of underwriting (Mebrahatu, 2004).The
selling of common stock to the public through Initial Public Offering (IPO) in the primary
market is an instance whereby widely held share companies under formation offer new shares to
the investors (Christiansen, 2009).
A capital market is a market for debt or equity securities and other financial instruments, where
companies, municipalities and governments can raise long-term funds. It is defined as a market
in which money is provided for periods longer than a year, as the raising of short-term funds
takes place on the money market. The capital market includes the bond market for debt
instruments and the stock market for equity securities. Sophisticated capital markets offer
derivative financial products such as futures, options and structured products.
Capital markets may be classified as primary markets and secondary markets. In primary
markets, new bond or stock issues are sold to investors via the mechanism known as
underwriting. In the secondary markets, existing securities are sold and bought among investors
or traders, usually on a stock exchange (SE), over-the-counter (OTC), or elsewhere (Ruecker,
2011). It is also vital to differentiate bond and stock. Bond is a security instrument which is used
either by the government or any other corporation to raise funds in the bond market. Unlike stock
it is an equity instrument, bond is a debt security evidencing that a promise has been made by a
government such as Treasury Bills (T-Bills) or by corporation such as debenture to pay a
specified amount of money in recognition of a loan to the business.
In general, a stock market is an open market place which provides facilities for stock brokers,
investors and corporations to trade in stocks. Stock markets generally provide the means by
which companies raise capital to start new business or expand the existing business by offering
new stocks to the public. It also provides a trading facility for investors to sell their share
ownership in corporations. Unlike the bond market, stock market provides an opportunity for
companies to finance their business through equity investment (Yartey and Adjasi, 2007).

2.2. History of Stock Market in Ethiopia

Ever since the abolition of the Addis Ababa Share Dealing Group almost half a century ago, no
capital market has been operational in Ethiopia. The nation’s short-lived stock market, under the
administration of the National Bank of Ethiopia, was informally launched in the late 1950s. It
was instituted in 1965 and successive attempts were made to put in place a capital market that
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bore little fruit. Efforts were exerted by scholars from academia, the Addis Ababa Chamber of
Commerce and Sectoral Association (AACCSA) and National Bank of Ethiopia (NBE) to also
introduce a local stock market. The first share that was offered for public subscription was issued
in 1956 by a company called Ethiopian Abattoirs. In the years that followed a number of other
companies issued varying amounts of shares for public subscriptions. These companies included
among others, the Bottling Company of Ethiopia (1957), Indo-Ethiopian Textiles (1958), and
Addis Ababa Bank (1963). Total investment in major publicly issued shares during the period
1959- 1963 was close to Birr 61 million. Of this amount, close to Birr 41 million (or 67% of the
total) was invested by foreign companies (Tiruneh, 2012).
With the growth of share trading in Addis Ababa the then State Bank of Ethiopia formed a share
exchange department in 1960 in order to encourage trading and holding of shares. The formation
of the department was the first step in institutional arrangement for share trading in Ethiopia.
Through this department, the Bank had acquired shares in many of the larger companies when
they were formed and played an important role as their underwriter. Its portfolio of shares was
adequate to support over-the-counter operations. The department was controlling the volume of
transactions at its over-the-counter facilities through prices. It was setting prices by trial and
error and by encouraging third parties willing to purchase or sell shares to quote their own bid or
ask prices. The prices so set were posted regularly at the Bank 's main office in the Piazza. The
Bank was also advancing loans against shares pledged as collateral by suitable borrowers. These
loans were used for personal purposes or as margins to finance share purchases (Jetu, 2014).
By 1965 the share market had expanded considerably. The quickening pace of economic
development at the time led to an increase in the rate of formation of new companies. This
resulted in an increasing number of new issues of shares made each year which in turn strained
the department's resources for underwriting. On the other hand, other financial institutions had
by then initiated their own share brokerage and dealing operations. There had also developed
fears of market dislocations when two large companies established by public subscriptions of
shares started to experience financial difficulties. At this point, an alternative institutional
arrangement was called for. The National Bank of Ethiopia, the successor of the State Bank of
Ethiopia, took the initiative to set up what was then called the Share Dealing Group. The Group
consisted of six institutions which were represented by their respective General Managers or
Managing Directors and one individual. The members of the Group were the National Bank of

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Ethiopia, Addis Ababa Bank, the Commercial Bank of Ethiopia, the Development Bank of
Ethiopia, The Investment Bank of Ethiopia, Sabean Utility Corporation, and a certain individual
called Mr. Alfred Abel (Araya & Tadewos, 1994).
Another important landmark in the history of Ethiopian share trading is the enactment of the
Commercial Code of Ethiopia in 1960. The Code consists of five books and over 80 chapters all
in all, and covers, among others, such topics as business organizations, carriage and insurance,
games and gambling, negotiable instruments, banking transactions, bankruptcy, and schemes of
arrangement. As share companies started to flourish in Ethiopia in the 1960s, shares were being
traded by the NBE. Later on, the Addis Ababa Share Dealing Group was established to trade
shares and government bonds in 1965. The Group started with the listing of 15 companies and
four government bonds. The number of companies listed reached 17 the next year. With a
socialist government coming to power, led by the Derg, which overthrew the imperial regime in
1974, all the traded companies were nationalized, and consequently, the stock market was
shattered (Ahferom, 2011).
The Ethiopian Government recently as part of the requirements to stabilize the macro-economic
stability, and make improvements to financial access and the development of a capital market,
where securities such as shares, bonds and derivatives are bought and sold. As a result, the
National Bank of Ethiopia (NBE), which is the central bank of the country, was tasked to prepare
the legal framework and came up with a draft capital markets proclamation, which was later
approved and enacted by the Federal Parliament in its regular session held on June 10, 2021, as
Proclamation No. 1248/2021. Consequently, actions are being taken by the government to
operationalize the Ethiopian Capital Market Authority and the Ethiopian Securities Exchange
through public-private partnership arrangements.

2.3. Prospects of Establishing Stock Market

2.3. 1. Demand/Supply

Stock market prospects include the current scenario in share buying is a testimony of the
existence of demand and supply sufficient to begin the long journey: the government has
consistently maintained that the macroeconomic situation is reasonably stable and there are
already some legal pronouncements, which can be reinforced a little more for a start (Teklay,

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2011). By definition stock market is an organized and regulated financial markets where
securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand
and supply. In a market economy, issues of securities help raise capital for projects whose
outputs are in the highest demand by society, and those enterprises which are most capable of
raising productivity. Thus, efficient enterprise management is rewarded by access to investment
funds. Without securities markets, companies must rely on internal resources (retained earnings)
for investment funds, on bank financing or on government grants or subsidies. Such forced
reliance on self-finance penalizes young companies whose products may have greater future
demand. These new and growing enterprises often have little in the way of retained earnings.
Bank lending to certain specified sectors (referred as priority sectors) leads to inefficient
resource allocation and widespread loan delinquencies (Tessema, 2003). According to Asrat
(2003), costs inherent in securities markets included market Cycles. During the early stages of
securities markets development, the supply of stocks and bonds is limited, manipulation is
relatively easy, investors are unsophisticated, underwriters and brokers are inexperienced, and
securities legislation often has loopholes. As a result, economic cycles are more difficult to
predict. Thus, the job of a financial analyst would be very difficult during the early years of
development.

2.3. 2 Online /Traditional Trading

Online stock trading service was introduced in 1994, with initial apathy across the globe. In
2000, online stock trading accounted for about 30% of the total stock trading transactions
executed all over the world(Lee-K & Chung, 2000). The sustainability of online trading service
is contingent on the attraction and retention of online trader service. As Pavlou (2003)
distinguished information technology adoption and usage model has found wide application in
the field of electronic finance, which is an integration of technology adoption with finance
concepts. Specifically, technology adoption model has been employed in studying the adoption
of online financial trading.

2.4 Benefits of Establishing Effective Stock Market

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Growing literature argues that stock markets provide services that boost economic growth and
contribute to the achievement of these goals. The economy of the world relies on the stock
exchanges to facilitate trade in the stocks of companies by connecting people who seek money
with those who can provide it (Ruecker, 2011). Accordingly, those well-functioning securities
markets can enhance savings. Stock and bond issues serve to increase the national savings rate
by creating incentives to invest. Since securities are risky investments, they generally earn higher
returns than more secure instruments such as bank savings deposit (Mishkin, 2004).
On other hand, stock markets can promote efficient financial system. Securities markets break
the oligopoly that would be enjoyed by the banks in the absence of securities markets. The
government does not automatically have privileged and subsidized access to funds and must
compete on equal terms. Securities markets provide impetus for the establishment of financial
prices based on scarcity values rather than on administrative fiat. Such market-determined
financial prices and investment options, in turn, attract more savings, creating a virtual circle of
innovation and mobilization that contributes to the overall efficiency of the financial system
(Mishkin, 2004). It also creates investment opportunities for small investors. As opposed to other
businesses that require a huge capital outlay, investing in shares is open to both large and small
investors because a person buys the number of shares that he can afford. Therefore the stock
exchange provides an extra source of income to small savers (Asrat, 2003).
In generally the Establishing of Effective Stock Market have Benefits on the following major
perspective:-

2.4.1. Society Benefit

In a market economy, issues of securities help raise capital for projects whose outputs are in the
highest demand by society, and those enterprises which are most capable of raising productivity
(Yartey and Adjasi, 2007). As a consequence, efficient enterprise management is rewarded by
access to investment funds. Securities prices serve as a means by which investors express their
confidence in enterprise prospects and management. Without securities markets, companies must
rely on internal resources (retained earnings) for investment funds, on bank financing or on
government grants or subsidies. Such forced reliance on self-finance penalizes young companies
whose products may have greater future demand. These new and growing enterprises often have
little in the way of retained earnings (Asrat, 2003).

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2.4.2. Consumers Benefit

Stock price maximization requires efficient, low-cost businesses that produce high-quality goods
and services at the lowest possible cost. This means that companies must develop products and
services that consumers want and need, which leads to new technology and new products. Also,
companies that maximize their stock price must generate growth in sales by creating value for
customers in the form of efficient and courteous service, adequate stocks of merchandise, and
well-located business establishments. People sometimes argue that firms, in their efforts to raise
profits and stock prices, increase product prices and gouge the public. In a reasonably
competitive economy, which we have, prices are constrained by competition and consumer
resistance. If a firm raises its prices beyond reasonable levels, it will simply lose its market share
(Ehrhardt and Brigham, 2009). Rajan and Zingales (2003) also found that trade openness
benefits financial development positively. The major focus was placed on the rules of demand
and supply which ultimately have influenced a country‘s openness to trade and hence, abolishing
controls that may hinder movement of capital flows. The study further emphasized the
importance of government support for financial development, which may be in the form of
standards on property rights, accounting and disclosure standards that encourage transparency,
legal systems that enforce contracts, and a regulatory infrastructure that protects consumers,
promotes competition, and controls unreasonable risk-taking.

2.4.3. Employees Benefit

There are situations where a stock increases when a company announces plans to lay off
employees, but viewed over time this is the exception rather than the rule. In general, companies
that successfully increase stock prices also grow and add more employees, thus benefiting
society. Note too that many governments across the world, including U.S. federal and state
governments, are privatizing some of their state-owned activities by selling these operations to
investors. Perhaps not surprisingly, the sales and cash flows of recently privatized companies
generally improve. Moreover, studies show that newly privatized companies tend to grow and
thus require more employees when they are managed with the goal of stock price maximization
(Ehrhardt and Brigham, 2009).

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2.5 Challenges for Establishment of Stock Markets
The main determinants of stock market development are classified into four sets of factors which
are: supply factors, demand factors, institutional factors and economic policies. Demand factors
are those that affect investors’ decisions regarding investment in stock markets while supply
factors are those that affect companies’ decisions to issue shares. Taken together, both sets of
factors serve as “building blocks” of the stock market. And the supporting blocks include mainly
institutional factors and economic policies. High quality institutions are, as well, important
determinants of stock market development: well-established institutions enhance investor
confidence just as appropriate economic policies are conducive to the development of stock
markets (Adelegan & Radzewicz-Back, 2009).
Finally, three principles concerning stock market development are worth highlighting. First,
stock market development is a difficult, complex, multi-faceted, and long-term process. History
has shown that the stock market will most likely be the last market among financial markets to
develop (El-Wassal, 2013). For investors, shares are the riskiest of the standard financial assets
while for companies, issuing shares is the costliest way to raise funds. Not surprisingly, stock
market development may take a long time. Secondly, stock market development is part of a
process of development of a financial system. A stock market cannot be developed in the
absence of a financial system that is both developed and balanced. Third, the development of a
stock market is primarily a private sector activity. Still, it must be remembered that the
supporting role of the government is crucial for a market to develop.

I. Unstable Macroeconomic Policies

A sound macroeconomic framework and stable macroeconomic policy is needed to attract

foreign capital and to ensure that monetary policy actions can be taken without causing excessive
interest rate volatility that would interfere with the development of bond markets. And
governments must adopt a clear issuance strategy and debt management framework so that
investors can anticipate a reliable supply of fixed-income securities. For example, Burger et al.,
(2012) found that countries with stable inflation rates (a proxy for creditor-friendly policies)
have more developed local bond markets and rely less on foreign currency-denominated bonds.

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II. Strong Legal and Institutional Environment

Strong institutions and a well-functioning legal system are also critical for the development of
local markets because they provide the basis for the protection of investor rights, including
minority interests, to attract widespread interest from investors and ensure that creditors are
repaid in an orderly fashion. For example, Burger et al., (2012) find that countries with creditor-
friendly laws (i.e., strong creditor rights) and stable macroeconomic policies have more
developed local bond markets. Asian capital markets, where creditor and investor rights tend to
be stronger and contract enforcement less costly, tend to be more developed than those in Latin
America (Eichengreen & Luengnaruemitchai, 2006). More generally, economies with investor-
friendly laws tend to have deeper capital markets and the firms in such economies tend to obtain
higher stock market valuations (LaPorta et al., 2002).
Laws mandating public disclosure and facilitating private enforcement through liability standards
benefit the development of securities markets, while public enforcement of securities laws has
little impact. This suggests that securities laws that empower the market by setting mandatory
disclosure and liability standards are to be preferred over laws that focus primarily on regulatory
enforcement of laws (LaPorta et al., 2002).
At the same time, strong securities laws and investor rights may be insufficient for the
development of local capital markets (notably equity and corporate bond markets) if corporate
ownership is concentrated and corporate governance is weak. In such environments, corporate
governance reforms may be needed to support investor rights. Such reforms could focus on
encouraging stronger oversight of corporate boards or the removal of barriers to takeover threats
(Laeven, 2014).
One challenge is that institution building takes time and requires a sustained and broad political
consensus. In reality, announced market-oriented policies are often reversed or not fully credible
initially (Eichengreen & Luengnaruemitchai, 2006).
The co-development of banking and local bond markets can also be a double-edged sword. Local
bond markets have often been developed by governments with a view to facilitate the placement
of longer dated government paper at local banks to finance large fiscal deficits. Such directed
lending to government by banks as a captive domestic audience is a form of financial repression
that gives rise to an excessively close connection between government and banks (Reinhart &

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Sbrancia, 2011). Another example of an undesirable close connection between banks and
sovereign is the euro area today where large holdings of domestic government bonds create a
vicious cycle between weak sovereigns and weak banks (Gennaioli et al., 2013).

III. Financial Infrastructure

A financial infrastructure refers to the physical underpinnings for a financial market exchange,
including trading platform and trading system, as well as the regulatory apparatus and industry to
process, evaluate, and validate the information being produced and used by the market. The
trading platform could be physical or electronic. The regulatory apparatus will consist of a
securities market regulator, together with any self-regulation imposed by the market itself. The
regulator’s job is to issue and enforce public regulations and promote the private disclosure of
information and private enforcement of rules. The rating process will be generated and supported
by rating agencies and credit guarantors.
The efficiency and security with which securities issues can be listed and traded on the exchange
together with the quality and flow of information to value securities will to a large extent
determine the market’s success. Unfortunately, for many small investors and small and medium-
sized firms seeking to tap financial markets to raise additional capital, large fixed costs
associated with accessing such markets are too steep to make such financing economical. Such
fixed costs come in the form of listing requirements, transaction costs and taxes, and the costs
associated with hiring an internationally recognized auditor (Laeven, 2014).

IV. Market Size and Complementarily

The development of local pension funds can provide another impetus to local market
development, especially bond markets. Pension funds need to invest in longer date instruments
for asset-liability management purposes and therefore can provide a stable market base for local
bond and equity markets. A good example is Chile which launched a funded pension system in
1981 which contributed to the development of local bond markets, making the Chilean bond
market one of the most developed in Latin America over the next two decades (Cifuentes et al.,
2002).

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Moreover, the creation of an institutional investor base will have positive externalities for the
development of local capital markets by stimulating financial innovation and the efficient
functioning of these markets. Institutional investors will exert pressures for better accounting and
auditing standards as well as for a more accurate and timely disclosure of information to
investors.
They will also encourage improved broking and trading arrangements and will help establish
more efficient and reliable clearing and settlement facilities. Additionally, they can improve
corporate sector performance by facilitating the privatization process and by promoting sound
corporate governance and the dispersion of corporate ownership (Vittas, 1992).
At the same time, it should be recognized that some economies simply lack the scale to support a
flourishing local capital market, even absent any economic or legal shortcomings, simply
because of lack of market size. Such economies would be better served by promoting foreign
listings and regional exchanges rather than investing in an illiquid, shallow market at home
(Laeven, 2014).

V. Supply of Shares

The cost of financing is the main determinant of “going public” for a firm. According to the
“pecking order” theory of capital structure, internal financing should be the first choice of the
firm, with debt being the second choice. Debt is in second place as it is more costly than internal
financing because of both the interest costs and the costs associated with issuing debt. Equity
issuing comes third among the choices available to the firm for financing as it is even more
costly than debt. Generally, there are three main types of cost commonly associated with issuing
shares. First, there is the cost of distributing dividends to shareholders, which is generally done
on a continuous basis, in contrast to a debt contract (e.g., issuing bonds). Second, since equities
are among the riskiest assets, investors will not hold shares unless the expected return is
significantly higher compared to other investment alternatives. Third, equity issuance is more
costly than debt due to the underwriting commission and the cost of information (Chami et al.,
2009). In short, issuing equity would be considered the last resort for financing a firm. Further, to
raise capital in stock markets, companies must meet the listing requirements of stock exchanges

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for publicly traded companies as well as the financial reporting and control requirements
imposed by securities market regulations.

VI. Demand for Shares

The demand for equity (investors) is the second building block of the stock market. Potential
shareholders/investors have preferences over risk-return combinations for the funds they invest
in some prefer high risk-high return combinations, while others prefer low risk-low return. In
general, these investors have three main concerns. First, since equity is one of the riskiest
investment alternatives, shareholders invariably expect a higher return. Second, shareholders
need to monitor the use of their funds and require a disclosure of information that enables them
to make sure that the management runs the firm in a way that maximizes their returns on
investments. Third, investors are always keen to be able to liquidate their shares at any point in
time. Still, investors will be willing to hold shares with a higher expected return in a liquid and
informative stock market (El-Wassal, 2013)

2.6. Empirical Review

Research paper conducted by Etienne (2008), investigates the challenges and prospects of
establishing stock exchange in emerging Economies. This study explains about the role and
benefits of stock exchange market in the development of an economy and states about the
possible challenges of establishing stock exchange in Rwanda. The result of the study shows,
though the stock market is necessary to the economic growth of Rwanda, its implementation will
face many challenges that need to be addressed such as low saving rate, complex tax regime, a
small economy and the structure of companies that are family owned and the absence of
financial intermediaries, financial advisory services and investment bank.

The study conducted by IMF (2007) examines the economic importance of stock markets in
Africa. The study discusses policy options for promoting the development of the stock market in
Africa and it applies an econometric investigation of the impact of stock markets on growth in
selected African countries and the results of the paper Show that the stock markets have
contributed to the financing of the growth of large corporations in certain African countries.

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However, African stock exchanges now face the challenge of integration and need better
technical and institutional development to address the problem of low liquidity. Another research
paper conducted by Ajit (2008) has provided a comprehensive review of the role of the stock
markets in economic development. It has surveyed analyses and evidence from both developed
and developing countries in order to assess how best, if at all, can stock markets contribute to
economic growth. According to the study, in relation to low-income developing countries which
do not yet have established stock markets or have only rudimentary ones. It is suggested that
these countries will be better off by encouraging the development of banks rather than expend
their human and material resources on establishing stock markets.
Studies conducted in Ethiopia such as by Ruecker (2011) elaborated on the importance and the
rationale behind the need for the establishment of a capital market in Ethiopia, and the result
favored the formation of a capital market citing several advantages for the development of the
country. Finally the research concludes as there is lack of willingness or commitment by the
government of Ethiopia to establish stock exchange. But they failed to see the mechanisms to
encourage Stock Exchange in Ethiopia. Jetu (2014) investigate the legal aspect of stock market
development in Ethiopia. According to this study, in the context of Ethiopia, the absence of
institutional, legal and policy framework for stock market activity, may adversely affect liquidity
there by adversely impacting economic development. There is lack of commitment on the part of
the government to establish prudent regulatory infrastructure there by hampering Ethiopia‘s
stock market development. This indeed impedes the development of stock market and dwarfs
down its role in the Ethiopian economy unless prudent regulation is put in place. Studies
conducted on the challenges of stock exchange and related topics in Ethiopia are very limited.
Below are the short Summary of some studies conducted on stock market and related issues in
developing countries as well as in Ethiopia.

Mulunesh (2019) also assessed the prospects and challenges of establishing stock market in
Ethiopia by utilizing descriptive analysis. The result of this study revealed that the reluctance of
the government, inadequate laws and regulations, insufficient technological infrastructure, and
low level of public awareness as a challenge of establish stock market in Ethiopia. Also the
prospects include the economic growth of the country, the agenda of poverty reduction,
privatization effort and unexploited resources, thus the government need to take real pragmatic

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measures to establish stock market and further reforming the legal, institutional and the
accounting and reporting requirements is necessary. The largest portion of the literatures agrees
with the benefit of establishing stock market but as it is not a unanimous motion. A great deal of
literatures challenge the benefit of stock exchange by mentioning other things like the trade of
between liquidity and profitability; the shortsightedness of investors.
Kibuthu & Osano (2010) studied developing securities markets in East Africa and outlined the
many challenges associated with developing securities markets in East Africa are laws and
regulations that constrain issuance and trading of securities, the limited capacity of regulators to
carry out their supervisory role or enforcement, limited technical expertise and fragmented
market information on products, as well as inadequate technology and market infrastructure.
The environmental foundation and opportunities researched by Tiruneh (2012) identified the
benefits of establishing financial markets in Ethiopia as, promotes private sector development,
liquidity function, helps mobilize local savings and makes resources available for local decision
making, enhances competition among financial institutions/banks and develops a greater
diversity of financial institutions, increases remittances and facilitate their use, leads to improved
corporate governance and promotion of specialized financial institutions and services, rewards
sound economic policies and create tools to conduct monetary policy, help in resource allocation,
allow de-concentration of ownership, improve accounting and auditing standards and promote
efficient financial system.
Challenges and prospects of establishing stock market in Ethiopia as studied by Getachew (2016)
are; there is no regulatory authority and other related institutions to trade in stock in the
Ethiopian market; basic principles and policies governing share circulation management were
not anchored at a sufficiently high juridical level of the law, with an effect on the level of
transparency and clarity of the regulations, and it has made enforcement difficult; absence of a
single agency with a mandate for formulation of stock market policy, and monitoring compliance
in ensuring clear and enforcement mechanisms; accountants and auditors in the country use
different accounting and auditing standards; lack of qualified human resources to exert stock
market and related financial matters.
According to Teferi (2021) the following impacts of establishing capital market on Ethiopian
commercial banks identified the major risk of the capital market to the economy like economic
risk to investments, inflationary/deflation risk, market value risk, being too conservative and

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political crisis by relating with the current situation of country regulation power. The major
opportunities of the capital market are meeting the financial need for the economy and it can
work with commercial banks.

2.7. Conceptual Framework

A conceptual framework is a set of broad ideas and principles taken from relevant fields of
enquiry and the experience of stock markets in developed countries shows that the development
of a stock market cannot be isolated from solid institutional structures (El-Wassal, 2013). The
model is made up of four variables: Institutional Factors (Regulatory and legal framework and,
Market infrastructure, Banking sector development, Political stability Education and public
awareness),Supply Factors (The stage of economic development , Economy size , The structure
of the economy and Prospects of economic growth),Demand Factors ( Economic growth and
sufficient level of per capita GDP , Investor base and institutional investors and Portfolio capital
lows),Economic Policies (Monetary policy,Fiscal policy/taxation policy and Foreign
participation policy).In general, in terms of stock markets: supply and demand determine the
pricing of stocks and other securities. Economic data, interest rates, and corporate results
influence the demand for stocks. Market dynamics, economic conditions and changes to
economic policy tend to impact the overall supply of stocks. In large part, supply and demand
dictate the per-share price of a stock. If demand for a limited number of shares outpaces the
supply, then the stock price normally rises. And if the supply is greater than demand, the stock
price typically falls. In other words, Supply and demand is a key factor in determining stock
prices.

“The price of a stock is determined by how many people want the stock and how much of it there
is,” explained William Haight, a director at Capital Choice Financial Group in Phoenix. “If more
people want to buy a stock, then the price will go up. But if more people want to sell, then the
price will go down.” The state of the economy which means current economic conditions can
greatly influence stock prices. Inflation, an increase in the overall cost of goods and services,
reduces the buying power of businesses and consumers( John Egan,2024).

So, if the inflation rate is climbing, investors might become jittery about the economy and sell some of
their stock. On the other hand, if the inflation rate is easing, investors may be more enthusiastic about
the economy and step up their stock-buying activity. In other words, the movement of inflation in a
positive or negative direction can affect stock prices. In general, the Factors that can Affect the
Stock Market are:-

 Inflation:
 Interest rates:
 Imports and Exports:
 Foreign Exchange:

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  Supply and demand:
 Political factors:
 Government policies: Government policies and changes significantly impact the country's
economic condition. ...

However, in my context I have focused on the four determinant factors that I shall propose in
this research proposal is that: Institutional factors, Economic policies, and Supply and Demand
factors. Therefore, I shall investigate the findings which is the four determinant factors that
how the variables ( dependent and independent) that relationships shall explain in this research
proposal of conceptual models as follows.

Figure 1. Conceptual Framework of the Study

Independent Variable dependent Variable

 Institutional Factors
 Supply Factors
 Demand Factors stock
markets
 Economic Policies

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CHAPTER THREE
3. RESEARCH METHODOLOGY

This chapter provides the research design methodologies that are used in order to achieve the
research objective. The research design, population and sampling techniques, types of data and
instruments of data collection, procedure of data collection, methods of data analysis, and finally
the ethical consideration are the areas presented in this chapter.

3.1 Research design

Among numerous investigation methodologies, in order to achieve the planned purposes of the
study, the researcher will be used descriptive and explanatory examination design The researcher
used the descriptive survey research design because of descriptive form of design to deliver
answers to the investigation difficulties and very significant in reducing the bulky volume of data
to manageable form (Glass& Kenneth 1984).This kind of research is used to obtain information
concerning the current status of the phenomena to describe what exists with respect to variables
or circumstances. Both descriptive and explanatory research design is used because descriptive
research involves describing a problem, context or a situation of research variables and
explanatory design enables to explain the relationship between challenges of establish Stock
Markets and stock markets. This has helped in the describing the topic at hand very clearly
through the use of close and open ended questionnaires.

3.2. Research Approach

In order to achieve the study objectives, the research will adopt mixed type of research approach
which comprises both quantitative and qualitative methods. According to Leedy (1993),
quantitative research is impersonally experimental, manipulating variables and controlling
natural phenomena, by constructing hypotheses and testing them against the hard facts of reality
through close ended questions. The qualitative techniques will be used for the open ended
questions to get the managerial position subjective assessment of opinions, behavior and
attitudes. It helps in-depth understanding of an individual’s insight and their suggestions, but the

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quantitative approach assists the reader to comprehend improved as it delivers numerical data
that could be observed and associated (Tashakkori & Teddlie, 2003)
Tashakkori and Teddlie (2003) described a mixed-method research approach delivers the
chances to find and gain in-depth evidence and answer to the elevated issue or research question.
Therefore, the researchers will both quantitative and qualitative data gathering method.

3.3. Population of the Study

Target population is a set of individual units in a population including those in the sampling
frame about which the research inferences and generalization is made. The selection and
inclusion of potential participant samples determined by several factors such as the research
questions, design and the availability of adequate number and type of participants (Geoffrey,
DeMatteo and Festinger 2005).

The target population for this study will focus on The source population of the study consists of
all members of ACCA Ethiopia (the Association of Chartered Certified Accountants) who have
been certified by the firm and academicians who are university instructors and member of
Ethiopian economic associations (Chamber of commerce, Ethiopian Economic Association and
accounting and auditing board of Ethiopia, 2020), who work in, Addis Ababa Ethiopia.
Therefore, the researcher will used as a total population of employees from selected from those
institutions mentioned above.

3.4. Sampling Design

The sampling design that will be used for the study are non- probability sampling techniques. In
order to acquire sufficient information on quality and quantity, the researcher will employ
Convenience sampling techniques. Convenience sampling is a non-probability sampling method
where units are selected for inclusion in the sample because they are the easiest for the researcher
to access. This can be due to geographical proximity, availability at a given time, or willingness
to participate in the research .due to this reason the researcher shall design the sample on

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members of ACCA Ethiopia (the Association of Chartered Certified Accountants) who have
been certified by the firm and academicians who are university instructors and member of
Ethiopian economic associations (Chamber of commerce, Ethiopian Economic Association and
accounting and auditing board of Ethiopia, 2020).

3.5. Sample Size Determinant

From the total population of this study employees who are working in the at selected members
of ACCA and academicians who are university instructors and member of Ethiopian economic
associations (Chamber of commerce, Ethiopian Economic Association and accounting and
auditing board of Ethiopia, 2020) in Addis Ababa city. Hence, the samples of from those
institution have been determined, the researchers used the following sample size determination
formula (Yamane, 1967),as follows:-
The total population of the thus institution formulated the sample size will be take to participate
in the study. The sample size determination is based on Yamane (1967), formula,
N
n=
1+ N ( e 2 )
Where n = is the sample size
N= is the population size, and
e = is the level of precision or sampling error

3.6. Data Type and source

In the subject study, the researcher will be used two types of data, primary and secondary data,
which were obtained from primary will be the main source of data for the study. This employees
were gave primary data by responding by filling the questionnaires and interview by require
question related challenges to establish stock market in Ethiopia, current level of economic
development to implement stock market, prospect to establish the market and the government
commitment to establish. There is also a need to develop a secondary data that help the
researcher to collect the relevant information for the study and secondary sources Primary data
sources were key informant selected from highly relevant institutions such as National Bank of
Ethiopia, Policy Research Institute, Accounting and Auditing Board of Ethiopia and Addis
Ababa Chamber of Commerce that have major stake in stock exchange market policy. In

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addition, in-depth review of various documents such as literature, policy proceeding, official
statistical reports , books, journals , relevant workshop seminar papers, magazines annual and
quarter reports, newspapers, proclamations, published and unpublished resources, MA thesis’s
and different websites will be used as a secondary resource of data and information will be used
for drafting this study.

3.7. Data Analysis Method

Descriptive analysis will be used to identify the background of respondents in the aspect of age,
gender, years of experience, and qualification. In order to analyze the quantitative data obtained
through questionnaire, first the data will tabulated, analyzed and interpreted by using the
appropriate statistical tools (descriptive statistics) like; frequencies, and mean supported by SPSS
software.

The researchers will be used SPSS (statically package for social science) software, to analyze the
quantitative data collected from the questionnaire. The data analysis involves descriptive and
inferential statistics.

Descriptive statistics like mean, frequency, and percentage is used to profile sample
characteristics and major patterns emerging from the data. As a result the demographic
characteristics of the respondents are easily visible to the reader.

Inferential statistics will be used such as Pearson’s correlation is employed in order to explain
the relationship between the variables, dependent (stock market) and the independent
(institutional factors, supply factors, demand factors and economic policies). Pearson’s
correlation allows us how well variables are related; their strength and direction of the linea
relationship and regression analysis will be conducted to assess the influence of impact to
establish stock market.

3.8. Reliability and Validity

Reliability is the degree to which what researchers measure is free from random error (Mooi and
Sarstedt, 2011) and it is concerned with the consistency or stability of the score obtained from a
measure or assessment over time and across settings or conditions. If the is reliable, then there is
less chance that the obtained score is due to random factors and measurement error (Marczyk et

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al. 2005). To improve the clarity and responsiveness of the questionnaire, before the actual data
collection the researcher distributed 20 questionnaires for non-sampled staff as a pilot test. Then,
after actual data collection Cronbach Alpha reliability statistics will be used to check reliability
of the instruments and the coefficient of the reliability of Alpha.

Validity refers to whether we are measuring or what we want to measure (Mooi and Sarstedt
2011). It is related to research methodology because its primary purpose is to increase the
accuracy and usefulness of findings by eliminating or controlling as many confounding variables
as possible, which allows for greater confidence in the findings of any given study (Marczyk et
al. 2005). To protect the issue of validity the researcher followed scientific research procedures,
every data collected from appropriate information providers and the collected data will be
measured by appropriate data analysis tools. Further, different theories and empirical studies will
assess to assure its validity.

3.9. Ethical Considerations

It cannot be ethical to access some confidential documents of the organization. Therefore, the
organization’s code of ethics will be taken in to account without significantly compromising
findings of the study.

A policy of secrecy for the employees and managers shall adhere as various confidential data
will access by the researcher. As the researcher indicate in the questioner at the top of the
heading respondents were informed to not include their name, address, branch working-in in
order to make sure they don’t have any doubts on their identities being exposed so it can help in
getting the required and honest information.

30 | P a g e
 CHAPTER FOUR
4. BUDGET PLAN
4.1. Financial Budget
Unit Cost Total Cost
NO Item Unit Qty Remark
Birr Cents Birr Cents
Stationary and service
1.1. Photocopy of page 500 1 00 500 00
Reference Materials
1.2. Internet Service package 1GB 1500 00 500 00

1.3. Pen (Lexis) No_ 25 10 00 250 00

1.4. White paper Ream 8 200 00 1,800 00

1.5. Typing and printing page 38*3 3 00 342 00

research proposal (1st
and 2nd draft
1.6. Typing and printing page 120 2 00 240 00
draft research report
1.7. Binding the research page 5 250 00 1,000 00
paper(special binding)
Total 4,632 00
2. Tools
CDRW/DVD Pcs 8 15 00 120 00
2.1
Total 120 00
3. Transportation and other facilities

31 | P a g e
3.1.
Transportation Meter tax 5 400 000 2,000 00

3.2.
Mobile Card No- 12 100 00 1,200 00

3.3.
Subsistence allowance Day 25 350 00 8,750 00

3.4.
Others % 3,000 00

3.5.
Professional Fee lampsum 10000 00

Total 24,950 00
Grand Total 29,702 00

4.2. Time Schedule

The year 2023/24

NO Activities
Nov Dec Jan Feb March April May June

1 Proposal Writing X
2 Review Literature X
3 Submission of Proposal X X
X X
Interview/Questioners X
4
Development
5 Data collection
X X
Data encoding to SPSS X X
6
software
7 Data Analysis
X
8 Zero draft
X X
9 Final write-up
X
X
10 Final Submission of report

32 | P a g e
Reference

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