The Ethiopian Government passed the Capital Markets Proclamation

No. 1248/2021 to set up a local capital market with a clear set aim of
developing the national economy through mobilizing capital, promoting
financial innovation, and sharing investment risks. The Government
has also set up a project team that has been working to draft proper
directives for approval by the Board of Directors of the Capital Market
Authority to supply detailed guidance and requirements to enable the
effective implementation of the Capital Market Proclamation.

Last January, the Ethiopia Capital Market Authority (ECMA) disclosed

that it has finalized preparations to start operation within the coming
two years.

Ethiopia capital market authoritiy

ntroduction
Capital formation or real investment is an essential ingredient for economic development and growth.
It is also widely believed that capital markets have the potential to be powerful engines of economic
growth in developing nations such as Ethiopia. Efficient capital market provides the public with
investment opportunities and mobilizes savings, as well as international capital, for productive
corporate financing.
One aspect of the Ethiopian Government’s recent reform measure aims to correct imbalances and
bring about macro-financial stability in the country, inter alia. With this in mind, the reform program
provides improvements to access to finance and the development of a capital market, where
securities such as shares, bonds and derivatives are bought and sold. As a result, the Capital Market
Proclamation No. 1248/2021 was adopted with the goal of establishing a capital market to support
the development of the national economy through mobilizing capital, promoting financial innovation,
and sharing investment risks.
Consequently, actions are being taken by the government to operationalize the Ethiopian Capital
Market Authority and such actions manifest themselves in the fact that the Government has setup a
project team which has been working to draft proper directives for approval by the Board of
Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the
effective implementation of the Capital Market Proclamation (cited as the proclamation hereafter).
The Concept of Capital and Capital: A General Overview
The term capital can be defined as “the stock or principal fund raised by a corporation through
subscribers’ contributions or the sale of shares”. Stock represents a share of ownership in a
corporation. By and large, such kinds of stocks could be identified as security representing equity
claims on the earnings and assets of the corporation. In this update, the terms stock and capital are
used interchangeably. It is also noteworthy that the proclamation encapsulates the words shares,
equities, bonds and derivatives under the category of securities.
Stocks are generally traded in stock market. Generally, speaking, stock market refers to capital
market in which stocks of corporations are sold to investors. Under the proclamation, “capital
market” is defined as a market where securities are bought, sold, issued, publically offered,
deposited, taken custody of, cleared, settled, lent, pledged, or transacted in any other form which the
capital market authority considers dealing in securities (see article 2(5) and (18) of the
proclamation) . 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.
It should be noted that stocks could be sold and bought in primary capital market. In primary
markets, new business can start by obtaining funds directly from households in which new stocks are
sold to investors via the mechanism of underwriting. The selling of capital to the public through
Initial Public Offering in the primary market is an instance whereby widely held share companies
under formation offer new shares to the investors (article 2(49)).
On the other hand, it is vital not to lose sight of the fact that secondary markets play an important role
in the regulation of initial public offering of shares through the listing standards, subject to the
discretion of stock exchanges. Secondary markets are markets where investors buy previously issued
securities from other investors as opposed to the primary market, where investors buy new securities
directly from the issuer or an intermediary (article 2(61)). In the secondary market, existing stocks
are sold and bought among investors or traders in the stock market through stock exchange.
Furthermore, secondary market could be either auction market or dealer market or as some would
call it exchange based market. While the stock market is part of an auction market, over-the counter
(OTC) is part of the dealer market. The difference between stock market and OTC is that the former
exchange market operates in a structured manner and physical facility with a trading floor to which
all stock transactions are supposed to be directed. However, OTC market traditionally operates in
unstructured manner without any physical facility in which any qualified firm freely engages in the
transactions of stocks.
At this juncture, 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 which as indicated before 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. Like stock, a
bond is another way of obtaining funds but this time “representing funds borrowed by the corporation
or the government from the holder of the debt obligation”. It should be noted that both stock markets
and bond markets are categories of capital market. Like stock market, bond market helps bond
holders to transfer their bond to third party when they want to sell it in the secondary market or use it
as collateral to get loan from banks.
In a nutshell, 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.
What has the New Proclamation come up with?
a) The Regulatory Aspect
The Ethiopian Capital Market Authority (ECMA), an autonomous government regulatory body that
is accountable to the Prime Minister has been established (article 3). The ECMA is tasked with
protecting investors, ensuring the existence of capital markets eco system in which securities can be
issued and traded, ensuring the integrity of the capital markets and transactions in order to reduce
systemic risk, and promoting the development of capital markets by creating an enabling
environment for long term investments.
The ECMA is empowered to regulate persons who are engaged in the exchange of securities,
derivatives, depositing of securities and clearing company or undertake any other professional
activity within ECMA’s jurisdiction, including activities of securities brokering, investment advisory,
collective investment scheme operation, investment banking, securities dealership, custody, market
making, and credit rating agency. One should keep in mind that this excludes activities of legal
practitioners, public accountants or public auditors.
b) Collective Investment Scheme (CIS)
CIS is an arrangement formed for the purpose of providing facilities for persons to participate in or
receive profits or income arising from the acquisition, holding management or disposal of securities
or any other property or sum paid out of such profits or income. The scheme’s assets are managed by
a person who is responsible for management of the scheme’s assets and client accounts. Investors
who participate in the arrangement do not have day-to-day control over the management of the
scheme’s assets (Article 2(11) and 85-91).
CIS may be established as investment companies such as mutual funds, limited partnerships or other
forms under the Commercial Code. The CIS has to be registered by ECMA. CIS can be managed by
collective investment scheme Operator. The Operator is a legal entity that has the overall
responsibility for management and performance of the functions of the CIS.
c) Prohibited Trading Practices
Insider trading, market manipulation, false trading, fraudulent transactions, front-running and similar
other trading practices are some of the prohibited trading practices listed in the Proclamation
(Articles 95-101). The proclamation also lists violations that entail criminal punishments as well as
administrative measures (Articles 106 and 107)
d) Compensation Fund
Compensation fund is established by the Proclamation for the purpose of granting compensation to
investors who suffer pecuniary loss resulting from the failure of a capital market service provider or
securities exchange to meet his contractual obligations and paying beneficiaries from collected
unclaimed dividends when they resurface (article 103).
e) Capital Market Tribunal
The Capital Market Tribunal is established by this Proclamation to hear appeals against decisions of
ECMA (articles 64-73). The Tribunal has the jurisdiction to hear and determine Appeals over the
decisions of the authority or persons exercising the functions and powers of the authority. A party
who is dissatisfied by the decisions of the authority may within 28 (Twenty Eight) days after being
served with notice of the decision, file an appeal to the Tribunal. A party to a proceeding before the
Tribunal who is dissatisfied with decision of Tribunal may within 30 (Thirty) days after being served
with the notice of the decision, file a notice of appeal, on questions of law only, to the Federal High
Court.
f) Settlement of Disputes
Without prejudice to the Tribunal’s appellate jurisdiction over matters arising from the decisions of
the authority or other persons exercising the powers and functions of the authority and the federal
high court’s power to review the Tribunal’s decisions on questions of law, disputes among parties
involved in the capital market concerning any civil matter arising under the Proclamation shall be
resolved by mediation first and then by arbitration. The decision of the arbitration panel shall be final
and binding on the parties.

Capital formation or real investment is an essential ingredient for economic development and growth.
It is also widely believed that capital markets have the potential to be powerful engines of economic
growth in developing nations such as Ethiopia. Efficient capital market provides the public with
investment opportunities and mobilizes savings, as well as international capital, for productive
corporate financing.
One aspect of the Ethiopian Government’s recent reform measure aims to correct imbalances and
bring about macro-financial stability in the country, inter alia. With this in mind, the reform program
provides improvements to access to finance and the development of a capital market, where
securities such as shares, bonds and derivatives are bought and sold. As a result, the Capital Market
Proclamation No. 1248/2021 was adopted with the goal of establishing a capital market to support
the development of the national economy through mobilizing capital, promoting financial innovation,
and sharing investment risks.
Consequently, actions are being taken by the government to operationalize the Ethiopian Capital
Market Authority and such actions manifest themselves in the fact that the Government has setup a
project team which has been working to draft proper directives for approval by the Board of
Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the
effective implementation of the Capital Market Proclamation (cited as the proclamation hereafter).
The Concept of Capital and Capital: A General Overview
The term capital can be defined as “the stock or principal fund raised by a corporation through
subscribers’ contributions or the sale of shares”. Stock represents a share of ownership in a
corporation. By and large, such kinds of stocks could be identified as security representing equity
claims on the earnings and assets of the corporation. In this update, the terms stock and capital are
used interchangeably. It is also noteworthy that the proclamation encapsulates the words shares,
equities, bonds and derivatives under the category of securities.
Stocks are generally traded in stock market. Generally, speaking, stock market refers to capital
market in which stocks of corporations are sold to investors. Under the proclamation, “capital
market” is defined as a market where securities are bought, sold, issued, publically offered,
deposited, taken custody of, cleared, settled, lent, pledged, or transacted in any other form which the
capital market authority considers dealing in securities (see article 2(5) and (18) of the
proclamation) . 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.
It should be noted that stocks could be sold and bought in primary capital market. In primary
markets, new business can start by obtaining funds directly from households in which new stocks are
sold to investors via the mechanism of underwriting. The selling of capital to the public through
Initial Public Offering in the primary market is an instance whereby widely held share companies
under formation offer new shares to the investors (article 2(49)).
On the other hand, it is vital not to lose sight of the fact that secondary markets play an important role
in the regulation of initial public offering of shares through the listing standards, subject to the
discretion of stock exchanges. Secondary markets are markets where investors buy previously issued
securities from other investors as opposed to the primary market, where investors buy new securities
directly from the issuer or an intermediary (article 2(61)). In the secondary market, existing stocks
are sold and bought among investors or traders in the stock market through stock exchange.
Furthermore, secondary market could be either auction market or dealer market or as some would
call it exchange based market. While the stock market is part of an auction market, over-the counter
(OTC) is part of the dealer market. The difference between stock market and OTC is that the former
exchange market operates in a structured manner and physical facility with a trading floor to which
all stock transactions are supposed to be directed. However, OTC market traditionally operates in
unstructured manner without any physical facility in which any qualified firm freely engages in the
transactions of stocks.
At this juncture, 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 which as indicated before 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. Like stock, a
bond is another way of obtaining funds but this time “representing funds borrowed by the corporation
or the government from the holder of the debt obligation”. It should be noted that both stock markets
and bond markets are categories of capital market. Like stock market, bond market helps bond
holders to transfer their bond to third party when they want to sell it in the secondary market or use it
as collateral to get loan from banks.
In a nutshell, 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.
What has the New Proclamation come up with?
a) The Regulatory Aspect
The Ethiopian Capital Market Authority (ECMA), an autonomous government regulatory body that
is accountable to the Prime Minister has been established (article 3). The ECMA is tasked with
protecting investors, ensuring the existence of capital markets eco system in which securities can be
issued and traded, ensuring the integrity of the capital markets and transactions in order to reduce
systemic risk, and promoting the development of capital markets by creating an enabling
environment for long term investments.
The ECMA is empowered to regulate persons who are engaged in the exchange of securities,
derivatives, depositing of securities and clearing company or undertake any other professional
activity within ECMA’s jurisdiction, including activities of securities brokering, investment advisory,
collective investment scheme operation, investment banking, securities dealership, custody, market
making, and credit rating agency. One should keep in mind that this excludes activities of legal
practitioners, public accountants or public auditors.
b) Collective Investment Scheme (CIS)
CIS is an arrangement formed for the purpose of providing facilities for persons to participate in or
receive profits or income arising from the acquisition, holding management or disposal of securities
or any other property or sum paid out of such profits or income. The scheme’s assets are managed by
a person who is responsible for management of the scheme’s assets and client accounts. Investors
who participate in the arrangement do not have day-to-day control over the management of the
scheme’s assets (Article 2(11) and 85-91).
CIS may be established as investment companies such as mutual funds, limited partnerships or other
forms under the Commercial Code. The CIS has to be registered by ECMA. CIS can be managed by
collective investment scheme Operator. The Operator is a legal entity that has the overall
responsibility for management and performance of the functions of the CIS.
c) Prohibited Trading Practices
Insider trading, market manipulation, false trading, fraudulent transactions, front-running and similar
other trading practices are some of the prohibited trading practices listed in the Proclamation
(Articles 95-101). The proclamation also lists violations that entail criminal punishments as well as
administrative measures (Articles 106 and 107)
d) Compensation Fund
Compensation fund is established by the Proclamation for the purpose of granting compensation to
investors who suffer pecuniary loss resulting from the failure of a capital market service provider or
securities exchange to meet his contractual obligations and paying beneficiaries from collected
unclaimed dividends when they resurface (article 103).
e) Capital Market Tribunal
The Capital Market Tribunal is established by this Proclamation to hear appeals against decisions of
ECMA (articles 64-73). The Tribunal has the jurisdiction to hear and determine Appeals over the
decisions of the authority or persons exercising the functions and powers of the authority. A party
who is dissatisfied by the decisions of the authority may within 28 (Twenty Eight) days after being
served with notice of the decision, file an appeal to the Tribunal. A party to a proceeding before the
Tribunal who is dissatisfied with decision of Tribunal may within 30 (Thirty) days after being served
with the notice of the decision, file a notice of appeal, on questions of law only, to the Federal High
Court.
f) Settlement of Disputes
Without prejudice to the Tribunal’s appellate jurisdiction over matters arising from the decisions of
the authority or other persons exercising the powers and functions of the authority and the federal
high court’s power to review the Tribunal’s decisions on questions of law, disputes among parties
involved in the capital market concerning any civil matter arising under the Proclamation shall be
resolved by mediation first and then by arbitration. The decision of the arbitration panel shall be final
and binding on the parties.

Stakeholders came together to discuss and provide feedback on the

proposed draft directives and proposal that underpin the Capital
Market Roadmap leading to the establishment of full-fledged Capital
Markets in Ethiopia.

The consultation was organised in June 2022 by the National Bank of

Ethiopia's Capital Market Project Implementation Team (CMPIT).

The Roadmap has four pillars: market development, infrastructure

development, capacity development and policy reviews. A ten-year
implementation action plan accompanies the roadmap.

The CMPIT is currently working on several protocols and other

instruments that are critical for the operationalization of the capital
markets.

A well-developed and vibrant capital market can promote economic

growth. It can also play a key role in the efficient allocation of financial
resources to areas where they are needed most, generating the
highest return for firms, enabling risk sharing and facilitating the flow
of finance to more risky but high-return projects.

A robust capital market has several beneficial features for different

participants in the economy. Domestic capital markets provide an
alternative source of funding that can complement bank financing for a
company or entity in need of funding.

Capital markets can offer better pricing, longer maturities, and access
to a wider investor base. They can also offer to fund riskier activities
that would traditionally not be served by the banking sector and so
contribute significantly to innovation in an economy. While some
governments can access international capital markets, the
development of local capital markets can increase access to local
currency financing and help better manage foreign exchange risk and
inflation.

A vibrant capital market would also allow governments to finance

fiscal deficits without resorting to financial repression or foreign
borrowing. In addition, the capital market supports the conduct of
monetary policy through an enhanced monetary transmission
mechanism. Moreover, capital markets also promote national savings,
serving as alternative saving and financial investment vehicles for the
public.

Cognizant of the role of capital markets, the NBE issued the Capital
Markets Proclamation No. 1248/2021 in 2021 and established the
CMPIT to steer the operationalization of the Proclamation. A well-
developed capital market could help to provide a more reliable supply
of long-term funding to the private sector. The Government's effort in
this respect, could strengthen the economy’s resilience to shocks,
mitigate the risk posed by an overreliance on the bank-dominated
financial sector, and impose the allocation of resources.

The Capital Market Authority would supervise related activities of the

market. The Authority would set the minimum admission criteria and
conditions for enlisting in the exchange such as preparing the
prospectus upon enlisting.

Similarly, the issues of liquidity and transparency are very important to

take note of and establish as the market Roadmap is implemented.
According to Ms Martha Ibrahim, one of the presenters, capital
markets are based on trust.

UNDP is supporting the development of the capital market. This

included the provision of technical advisory support, facilitating
experience exchange visits to Kenya and Turkey, setting up the
CMPIT office, developing the regulatory frameworks and directives
and eventually setting up and operationalizing the Capital Market
Authority.

UNDP continues its partnership with the National Bank of Ethiopia to

promote access to innovative and inclusive finance through
establishing an innovative finance lab that would test, pilot, and scale
up innovative financial instruments. Various innovative financial
instruments are developed to ensure the inclusion of MSMEs and
other key players in the capital market ecosystem.
n 2021, the Ethiopian House of People’s Representatives voted into law a proclamation to build a
capital-markets system following the economic reforms initiated during the last few years. The
proclamation seeks to lay the legal framework for regulation and supervision of capital markets, as
well as set uniform requirements for issuers who desire to raise capital from public investors.

Capital Market Proclamation DOWNLOAD

1248/2021

What is Capital Markets?

The proclamation defines the term capital markets as a “market where financial securities such as
shares or equities, bonds, derivatives, or other related securities are bought and sold.” As per this
definition, the capital markets among others comprises of:

 Equity markets: these are capital markets where equity-based instruments, in the form of stock
or shares, are traded;
 Debt-instrument markets: these are markets where debt instruments, such as bonds and
loans, are traded; and
 Derivative markets: these are markets where derivatives are sold and bought. Derivatives are
contractual agreements that obligate parties to exchange assets or cash flows. The typical forms
of derivatives, that derive their value from another assets index or other investment, are the right
to options, forwards, futures and swaps.

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What are the types of Capital Markets?

There are two types of capital markets; primary and secondary markets.

Primary Market
The primary market is a capital market where new securities are issued. In this regard, the
proclamation identifies two forms of issuing new securities. The first is an initial public offering that
means an offer to the public of any securities or a company. The second way of issuing new securities
is through “private placement” which is a sale of securities to pre-selected investors and institutions
rather than on the open market.

Secondary Market
On the other hand, the secondary market can be defined as a market or markets where investors buy
previously issued securities from other investors, as opposed to the primary market where investors
buy new securities directly from the issuer or an intermediary. The proclamation recognizes both
securities exchange/stock exchange and over-the-counter markets.

The securities exchange means:

 “in relation to premises of a licensed securities exchange, the one place in those premises which
constitutes, maintains or provides a market or a facility by means of which: (a) offers to sell,
purchase or exchange securities are regularly made or accepted; (b) offers or invitations are
regularly made, being offers or invitations that are intended, or may reasonably be expected to
result, whether directly or indirectly, in the making or acceptance of offers to sell, purchase or
exchange securities; or (c) information is regularly provided concerning the prices at which or the
consideration for which, particular persons or particular classes of persons, propose, or may
reasonably be expected, to sell, purchase or exchange securities; or (d) clearing service for
securities traded in the exchange takes place.”

On the contrary, an over-the-counter market is “a market in which securities and/or derivatives are
traded by parties directly (face-to-face or using communication devices such as telephones and
networked computers) with each other rather than through a recognized exchange.