An Ethiopian Stock Exchange?

A picture of the burgeoning skyline in Addis Ababa’s financial district. Source: AddisBiz.com
A look inside the trading floor on the Ethiopian Commodity Exchange
A look inside the trading floor of the Ethiopian Commodity Exchange

The Pros

It provides a ready market for investors to buy and sell their shares.

Although I just stated the basic function of a stock market, this would fix a real problem we many Ethiopian investors face. As of now, if you’re interested in buying/selling shares of a company, unless you were present at the initial public offering of the company, you have no choice but to turn to predatory off-book brokers/agents or “ደላላ” who function at an inflated commission of sometimes up to 20% of the price of the stock.

It contributes to the country’s overall economic development

Many studies (like Nurudeen 2009) show that Econometrics can prove there is a direct causation relationship of a country’s general stock market development to its overall economic development. Simply put, the mere presence of a stock market can boost the country’s economy.

It provides protection for investors, both the buyers and the sellers

As aforementioned, the buyers and sellers of stocks right now are heavily prone to predatory business practices, because there is no set, government-regulated, standard pricing mechanism for the stocks. Buyers pay what the brokers ask and so do the sellers, leaving a huge inconsistency in the actual value of the stock.

It will improve our current accounting/auditing standards

As I’m writing this, the Ethiopian accounting and auditing sector is very lackluster, with most practices just being small offices with less than 10 employees. The large companies such as Ethiopian Airlines, MIDROC Group, East Africa Holdings etc, all hire firms from the U.K. and U.S.A, using precious foreign currency reserves in exchange. This problem could be curbed with the opening of an official stock exchange entity, making pragmatic accounting standards the norm.

It forces redistribution of stock ownership and access to profits

Almost all share companies that undergo IPO’s in Ethiopia are doing it to raise capital to begin operations. And in doing so, the minimum capital necessary to buy in is 100 shares (usually $100,000 ETB), which is very high given the average middle class Ethiopian makes that in a year. With a regulated stock exchange in the country, it gives access to a majority of the population a chance to partake in a solid company’s profits, bridging the insane wealth gap.

It helps attract more foreign investors and their foreign currency

The Ethiopian Birr is notorious for its inflation, losing more than half of its value (against the dollar) just in the past five years. Among many other reasons, this is due to a severe foreign currency shortage within the country, caused by the hoarding practices of the country’s wealthy, and the governments tight grip of the nations foreign currency trade. A stock exchange will bring foreign investors, which in-turn bring foreign currency.

The Cons

The lack of financial literacy within the broader public

Let alone financial literacy, with an adult literacy rate of just 51% and thats just Amharic, not even English(for comparison most European countries boast a 99.12% literacy rate) its unimaginable to think everyone would benefit when they cant even read to equip themselves to make good financial decisions. This issue is as a major obstacle to overcome.

The large scale macroeconomic and political instability

Even if we ignore the sky-high inflation and massive foreign currency shortages we face, Ethiopia is still a developing country (although World Bank estimates we will join lower middle class status in 10 years) and one with many problems. The ongoing civil-war, the ethnic tensions and clashes among the 80+ ethnic groups, and the upcoming elections within the country all are a massive threat to the sustainability of a stable stock exchange if it were to be created.

The lack of good governance and corruption within the country

An anonymous survey conducted by Alemayehu (2008) showed that most major firms are forced to pay bribes either in kind or in cash to effectively run their business, despite endless policies and public awareness campaigns of the government. Who is to say a stock exchange is immune to this behavior?

The low levels of corporate governance and legislature

The official Ethiopian corporate legislatures don’t have adequate provisions on governance related issues within the corporate environment, often times ambiguous and sometimes out-right vague, allowing for unethical and shady business practices by executives.

The lack of government commitment to the matter

Although in recent times, along with changes in administration and increasing pressure from both the domestic and international community, the government has been historically adamant against the formation of a stock exchange for reasons unknown to the general public. In one instance, even actively banning the efforts and arresting Ermias Amelga, an Ethiopian diaspora formerly a Wall Street investment banker, when he and his associates attempted to start an official Ethiopian Stock Exchange.

The family ownership structures within most qualified companies

Many, if not most of the companies financially equipped and qualified with the means for an initial public offering, are all family run enterprises who are simply unwilling to give up their portion of control and profits to the general public. This would leave a said stock exchange to only facilitate trading stocks of a handful of big banks and insurance companies, with little-to-no diversity.

In Conclusion

After seeing all the pros and cons, its clear to see that this a very complex matter, with many different factors at play. Personally, I think that until the pros start to outweigh the cons, or at least some of the cons start to become less of an obstacle, its best to prolong the opening of a stock exchange in Ethiopia until we are ready.

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The Culture | Ethiopia | Finance