For those of you haven’t read  my previous  three  articles, I discussed the  importance of the ecosystem approach for the Ethiopian Capital  Market to thrive, provided historical grasp about the genesis of  capital markets around the world and potential pitfalls capital markets harbour and pointed out that the Ethiopian Capital market at its early stage might suffer from the financial sector market concentration etc., and in the last edition  I pointed out the various regulatory risks and  how to mitigate them.

In this edition I will discuss – Financial Literacy and investor education. I will deep dive and explain whose  role is it and how can it be done at the national level. Who has the explicit mandate or is there such a thing?  What is the role of the Capital Market Authority’s role if any?

Within a fast-evolving  financial  landscape where  access to financial  services is made easier while more risks are being transferred to citizens the world over (this could be argued either way- in principle  this is the case in most  countries), financial  literacy has  become a key life skill for individuals  as well as micro and small businesses. Remember Small and Micro businesses are

the engine and source of employment for most economies.

Financial education can help enhance financial literacy by increasing financial knowledge, skills and attitudes. In turn, this can contribute to individuals’ (including vulnerable and low income) participation in financial,  economic and social  life as well as to their financial  well-being.  As a complement to financial inclusion and financial consumer protection, financial education is also important to restore confidence and trust in financial markets

Capital markets play a significant role in the economic development of a nation While the advent of capital market   in Ethiopia  brings many  opportunities to  access finance   and  increase economic activities-  democratise investor  participations and  stimulate growth  for it to thrive among  other  things  it requires financially  literate  and  educated investors.   Capital  markets facilitate the mobilization  of savings  from investors to businesses and  governments that  need capital. They also  provide a platform  for raising capital, capital markets enable businesses to expand, innovate, and create jobs, which in our case is critical to provide meaningful work to our growing and  young  population. Further,  they  offer  a  wide  range  of securities for investors, depending on their risk tolerance and investment goals and guide investors to put their money in investments with high returns, ensuring  money goes to projects with big growth potential. In a nutshell, capital markets are  indispensable in promoting  sustainable economic growth  and development. This is  only  fanciful  if the  wider  population has  no  knowledge  of the  basic functioning of the financial systems and the capital markets.

In Ethiopian context  with the advent  of the Capital  Market, the critical questions remain how educated (financially literate) and aware are citizens?

Financial literacy in Ethiopia is currently at a relatively low stage, even when compared with peers in Sub-Saharan Africa. This low level  of financial  literacy  negatively  influences the  level  of financial inclusion. Roughly, 82 percent of the unbanked adults reported not owning an account

due to lack of financial literacy or awareness. Low basic literacy and limited awareness of mobile internet, especially among  women,  are barriers  to meaningful access, usage, and control  over financial and digital financial services.

However,  efforts  are being made to improve this situation. The National  Bank of Ethiopia has developed a National  Financial  Education Strategy.  Additionally, the UN Capital  Development Fund (UNCDF) and  the  Ministry of Innovation and  Technology in Ethiopia  have  convened key stakeholders to deliberate on nationwide digital and financial literacy survey. This survey aims to measure Ethiopians’ financial and digital literacy levels and how it is utilized in financial matters. This was in February 2023, and no information whether the survey took place and the result if so.

Ethiopia’s goal is to ensure that 70% of its citizens are digitally literate and financially included by

2025. This highlights the recognition of digital and financial  literacy as crucial  to achieving this goal. There is no data or study  that  informs  us of how this grand plan is tracking  with only 12 months left. It suffices to say to attract retail investors (important for wider reach and financial inclusion)  increasing the  level of financial  literacy  is critical  in Ethiopia.  Again, knowing the baseline is critical to develop a national financial literacy and inclusion strategy.

Why this is important and how can we educate citizens and whose role it is?

Financial  literacy  plays  a  crucial  role  in the  functioning  of capital markets by empowering individuals  with the knowledge  and skills necessary to make informed  financial decisions. This understanding  fosters  greater   participation  in  financial   markets, as   individuals   are  better equipped to assess investment risks, evaluate the suitability of various investment options, and implement effective risk management strategies. It also provides a means in understanding how the economy works, that is, how to earn, spend, save, manage, and invest money. Works.

Moreover, financial  literacy  can  contribute to market  efficiency and  stability,  as it reduces the likelihood  of hasty  investment decisions and  susceptibility to  fraudulent schemes. It also promotes the use of financial instruments and can help reduce inequality by enabling individuals to take advantage of new investment opportunities. In essence, financial literacy not only benefits the individual investor but also enhances the overall health and vibrancy of capital markets.

The responsibility for educating citizens falls on multiple stakeholders. Governments often play a pivotal role through  public education systems and initiatives like the OECD recommendation on Financial  Literacy, which  emphasizes the  importance of financial  well-being.  Additionally, non-profit   organizations  and   financial   institutions  contribute  by  providing  resources  and programs to  enhance public  understanding of financial  concepts.  Schools are  increasingly incorporating financial literacy into their curricula to equip students with essential financial skills from a young age. Moreover, the private sector, including employers, can offer financial education as part of employee benefits. Ultimately, a collaborative effort from all these entities is necessary to improve financial literacy rates and promote economic stability and growth.

Similarly, investor education is a shared responsibility among various stakeholders, each playing a crucial role in enhancing financial literacy. Regulatory bodies like the Ethiopian Capital Market Authority have a key role to play in advancing  financial  literacy through investor education as part of their investor protection mission. Financial institutions often provide resources and tools to help educate investors about different types of investments and the risks associated with them.

Additionally, individual Companies CEOs and other executives, like Warren Buffett, have done a lot to educate investors. They often share information with investors and teach them  important concepts that  can  be  widely applied.  Furthermore, financial  Advisors and  Planners provide personalized advice and education to help investors make informed decisions. Moreover, many media outlets and publishing companies produce content aimed at educating investors. This can range  from news  articles and  blog posts to books  and  online  courses. In summary, investor education is a shared responsibility among various stakeholders, each playing a crucial role in enhancing financial literacy.

I thought this was my last piece, but couldn’t contain  both investor education and investor protection in one piece, so, I will conclude with the importance of investor protection, why it is important and what it takes the Capital Markets to do this. In short, investor protection indirectly promotes a vibrant capital market. Investors will freely enter the capital market in large numbers only when their interest is fully protected. This would bolster confidence and enables ordinary citizens to part their savings into the      various investment opportunities. Furthermore, investor protection helps  maintain the integrity of the market. It ensures that the

public has the necessary information to make informed investment decisions. Stay tuned…

Mengistu Woldemariam is a Senior consultant in business and finance.

Previously lecturer in corporate finance and accounting and currently works in consumer and investor protection. – Senior Program Manager

Writer could be contacted: Weldemariammengistu@gmail.com