Pooling Birr, Sharing Growth: What the New Collective Investment Schemes Directive Means for Ethiopia
Ethiopia now has the legal framework for mutual funds, money market funds, real estate funds and ETFs. The tools are new to us, but not to the world. Whether they work here depends on how quickly savers, companies, financial institutions and regulators prepare, argues Tamrat, a capital market development consultant.
In September 2026, the Ethiopian Capital Market Authority (ECMA) issued Directive No. 1150/2026 on the Operation of Collective Investment Schemes. It runs to 176 articles, and most business people will never read it. They should still pay attention. Of all the instruments issued since the Capital Market Proclamation No. 1248/2021, this one is likely to touch the most households.
The Proclamation created the regulator. The licensing and public offering directives created the intermediaries and the rules for selling securities. The Ethiopian Securities Exchange (ESX), launched in January 2025, created the trading floor. What was missing was the product most ordinary investors in the world actually use: the fund.
A civil servant in Hawassa, a coffee exporter in Jimma or a pension fund in Addis Abeba cannot easily build a diversified portfolio of Treasury bills, bank shares, bonds and buildings on their own. A collective investment scheme lets them buy a slice of one, managed by a licensed professional and guarded by an independent custodian. The new Directive makes that legally possible for the first time.
New to Ethiopia, Old to the World
The idea is simple. Many people pool their money into one portfolio. A licensed manager invests it according to a published policy. Each investor owns units in proportion to what they put in, and shares in the income, gains and losses. The value of each unit, the net asset value (NAV), is the market value of everything the fund owns, minus what it owes, divided by the number of units.
This is not a financial novelty. Historians usually trace the first such fund to Amsterdam in 1774, when a merchant pooled investors’ money to spread their risk across many bonds. London’s Foreign & Colonial Investment Trust followed in 1868 and still trades today. The first modern open-ended mutual fund, which lets investors buy and redeem at any time, appeared in Boston in 1924. Real estate investment trusts (REITs) began in the United States in 1960, and the first US exchange-traded fund (ETF) listed in 1993.
Today these vehicles are the backbone of household investing. According to the Investment Company
Institute, regulated open-ended funds worldwide held about US$84.9 trillion at the end of September 2025. Some US$12.7 trillion of that sat in money market funds, and ETFs held about US$18.1 trillion.
Three features explain this success, and the Ethiopian Directive keeps all three:
- Separation of roles. The manager (called the Operator) decides; an independent Custodian holds the assets and the cash; a Board with an independent majority oversees both on behalf of investors. No single party can both decide and moves the money.
- Transparency. Funds publish their NAV, holdings, fees and audited accounts, and must follow a written investment policy.
- Liquidity. Investors can usually redeem their units at NAV, or sell them on an exchange, rather than waiting for a buyer as with a private shareholding.
For Ethiopia, where savings are concentrated in bank deposits and real assets such as land, buildings and vehicles, this combination is genuinely new.
What Our Neighbors Have Learned
We do not need to look to Wall Street for evidence. The most instructive examples are on our own continent.
Kenya is the clearest case. Collective investment scheme assets grew from KSh56.6 billion in March 2018 to KSh679.6 billion at the end of September 2025, roughly a twelvefold increase in seven years. The market now counts 55 approved schemes running 234 funds. Money market funds hold about 59% of assets, down from over 90% in 2021, as investors have moved on to fixed-income and specialized funds. Government securities make up almost half of all holdings.
Uganda’s unit trust industry has grown at double-digit rates, passing Shs6 trillion (about US$1.7 billion), with funded investor accounts nearly doubling to more than 211,000. High government bond yields, investor education by the regulator and new fund manager licenses drove the growth.
South Africa shows what a mature market looks like. Its collective investment schemes held R4.16 trillion across 1,899 portfolios at the end of June 2025, with R146 billions of net inflows in the preceding year.
Nigeria’s mutual fund industry, meanwhile, has grown rapidly on the back of high money market yields and dollar-denominated funds.
| Market | Industry size | What drove growth |
| Kenya | KSh679.6 billion (Sept 2025), up from KSh56.6 billion (Mar 2018) | Money market funds sold through mobile platforms; Treasury yields; umbrella schemes |
| Uganda | Over Shs6 trillion; 211,000+ funded accounts | Bond yields; regulator-led investor education; new managers |
| South Africa | R4.16 trillion; 1,899 portfolios (June 2025) | Pension and retirement savings; deep equity market |
Four lessons stand out for Ethiopia:
- Money market funds come first. Simple funds holding Treasury bills, sold with low minimums, built the investor habit in Kenya and Uganda before riskier products followed.
- Distribution is everything. Growth followed when funds became available on mobile phones and through agents, not just in bank branches.
- Education and trust take years. Regulators that invested in public awareness and visible enforcement saw faster, safer growth.
- Institutions anchor the market. Pension funds and insurers provide the stable, long-term money that lets funds reach an efficient size.
What the Directive Allows
The Directive recognizes six types of scheme. Each has its own investment rules.
| Scheme type | What it invests in | Key rules |
| Money Market Fund | Treasury bills and other shortterm instruments | At least 80% of NAV in money market instruments; weighted average tenor of no more than 365 days; no more than 20% in one entity, except Federal Government instruments |
| Mutual Fund | Listed shares, bonds and other approved securities | Must spread risk; no more than 20% in one entity |
| Real Estate Investment Fund (REIF) | Income-generating buildings | At least 80% of NAV in income-generating real estate; at least 90% of distributable profit paid out every year; borrowing up to 40% of NAV |
| Exchange-Traded Fund (ETF) | The securities in an index or basket | Must be listed; at least 80% of NAV tracks the index; units created and redeemed through authorized participants and market makers |
| Alternative Investment Fund (AIF) | Private equity, infrastructure, private debt and more | Offered privately, not to the general public; complex strategies only for qualified investors |
| Special Designation Fund | Structures that fit no other category | Approved by ECMA case by case |
Three design choices deserve attention.
First, a new kind of company. Open-ended funds need capital that rises and falls every day as investors come and go. Ethiopia’s Commercial Code (Proclamation No. 1243/2021) knows only fixed-capital companies, whose capital changes through shareholder resolutions and registry filings. The Directive therefore introduces the Unit Investment Company, whose capital equals its NAV and changes with each unit issued or redeemed. Similar vehicles exist worldwide: the SICAV in Luxembourg and France, the OEIC in the United Kingdom and the VCC in Singapore. A Unit Investment Company must have at least five unitholders and a Rulebook approved by ECMA. The Rulebook makes the Operator and Custodian owe fiduciary duties to unitholders “as trustees.” It may also run several ring-fenced sub-funds under one umbrella.
Second, strong safeguards. Every scheme needs an ECMA-licensed Operator and an independent Custodian. Commercial banks can act as custodians, but only with a no-objection from the National Bank of Ethiopia (NBE) and an ECMA license. Boards must have at least five voting members, with an independent majority including the chair. The Operator may own no more than 10% of a scheme it runs, and must hold that stake for two years. Redemption proceeds must be paid within five business days. Suspending redemptions requires board and ECMA approval and may last no more than 28 business days without re-authorization.
Third, real penalties. Fines run from Birr 50,000 for minor breaches to Birr 3 million for serious ones, such as unlawful suspension of redemptions. Unauthorized advertising carries fines of 10% to 25% of the money raised. Repeat offenders can be blacklisted, licenses revoked and directors dismissed.
The Opportunities
The opportunities are spread across the whole economy, not confined to the financial sector.
For savers, funds offer what deposits cannot: diversification with small amounts, professional management, and access to Treasury bills, listed shares and income-producing property that individuals rarely reach on their own. A money market fund can give a salaried worker market-based returns on short-term savings, with redemption within days.
For companies, there are two sides. Corporate treasurers can place idle cash in money market funds instead of non-interest current accounts. Firms seeking capital gain a new class of buyer: funds will need shares and bonds to hold, which supports listings on ESX and corporate bond issues. Developers and owners of completed buildings can sell them into REIFs, recycling capital into new projects.
For banks, there are several new business lines: custody, distribution through branches and mobile platforms, and fund management through investment-bank subsidiaries. Since July 2024, NBE Directive SBB/92/2024 has allowed banks to invest in capital market subsidiaries with NBE approval. Funds will compete with deposits, but a bank that offers them keeps the customer relationship.
For insurers and reinsurers, funds solve a long-standing problem: matching long-term liabilities with long-term, diversified, income-producing assets. They can invest in schemes, anchor new funds with seed capital, or sponsor a licensed asset manager through a subsidiary or holding-company structure, subject to NBE approval.
For microfinance institutions, funds offer a low-cost product to distribute to clients and a place to manage surplus liquidity.
For professionals, lawyers, auditors, valuers, consultants and IT firms will be needed to structure schemes, draft Rulebooks and prospectuses, value assets, audit funds and run unit registries.
For the economy, the biggest prize is a domestic institutional investor base. Funds create steady demand for government securities, which deepens the bond market. They provide ready buyers for privatization offers and new listings. Through AIFs, they can channel patient capital into infrastructure, manufacturing, agribusiness and SMEs.
The Hard Questions
A good directive is necessary, but it is not sufficient. Several issues will decide whether funds take root here or remain on paper.
The legal fit with the Commercial Code. The Unit Investment Company rests on the Capital Market Proclamation’s power to provide for investment companies. The Directive says the Commercial Code applies “mutatis mutandis” where the Directive is silent. That leaves practical questions. How will the commercial registry record a company with no fixed capital? How will sub-funds, which have no separate legal personality, be treated in an insolvency? Lawyers will want clear answers before advising clients to launch.
Tax. In most markets, funds are “tax-transparent”: investors pay tax on their returns, but the fund itself does not pay a separate layer of tax. If income is taxed at fund level and again when distributed, funds will lose out against direct investment. Clear guidance from the Ministry of Finance on fund taxation, REIF distributions and VAT on management fees is urgent.
A thin market. ESX has only a handful of listed companies. Daily-dealing equity funds and ETFs need liquid shares and a reliable index. In the near term, most funds will hold government securities and deposits, as in Kenya’s early years.
Conflicts in group structures. When a bank owns the fund manager, distributes the fund and acts as custodian, conflicts are obvious. The Directive’s answer is strict: independent directors who are not affiliates of any professional party, arm’s-length related-party transactions and full disclosure. Groups must honor the spirit, not just the letter.
Skills and trust. Ethiopia has few experienced portfolio managers, fund accountants, valuers and compliance officers. Many citizens also remember informal savings schemes that failed. Funds must never be sold as “guaranteed” or as deposits; the Directive requires every advertisement to warn that values can fall as well as rise.
Sector rules. Banks, insurers, MFIs and pension funds are regulated by the NBE. Their investment limits and approval processes for holding fund units, or owning a fund manager, need to be clarified and aligned with the new Directive.
How to Prepare
The first funds will not appear overnight. Registration alone involves a 30-business-day ECMA review, restarting with each round of comments. Setting up and licensing a fund manager, appointing a custodian, building systems and constituting an independent board will realistically take 12 to 18 months. Those who start preparing now will be ready when the market opens.
Individual investors should learn the basics now: what NAV means, how fees reduce returns, and the difference between a fund and a deposit. When funds launch, read the Key Investor Information Document, check that the scheme and its Operator are registered with ECMA, and start with simple products such as money market funds.
Company boards and treasurers should review how idle cash is held and consider an investment policy that allows money market funds. Firms planning to raise capital should prepare for investor-grade governance: audited IFRS accounts, independent directors and regular disclosure. Funds will only buy what they can value and trust.
Banks should decide which role to play: custodian, distributor, fund manager through a subsidiary, or a combination. They should then engage the NBE and ECMA early. Custody requires a separate license and demonstrable independence from any group fund manager.
Insurers and reinsurers should assess how funds fit their asset-liability needs. Those wishing to sponsor a fund manager should consider their structure. Options include investing in a licensed manager, a joint venture with peers, or a holding company that owns both the insurer and a capital-markets subsidiary. Each needs NBE and ECMA approval.
Lawyers, auditors and consultants should build expertise now, from Rulebooks and custody agreements to valuation under IFRS and international valuation standards. Demand for these skills will exceed supply.
Policymakers can do several things to help the market start well:
- Clarify how the commercial registry will register Unit Investment Companies.
- Issue clear tax rules that keep funds tax-neutral relative to direct investment.
- Align NBE rules for banks, insurers, MFIs and pension funds investing in, or sponsoring, collective investment schemes.
- Develop the market infrastructure ETFs need: a reliable index, market makers and settlement links.
- Run a national investor-education campaign, in Amharic and other local languages, alongside visible enforcement.
A Market Built on Trust
Kenya’s fund industry took off only after years of patient groundwork in regulation, distribution and education. Ethiopia has the advantage of starting with a modern rulebook informed by others’ experience. It also has the disadvantage of starting late, with a thin market and untested legal plumbing.
The Directive is a door, not a destination. Whether ordinary Ethiopians walk through it will depend on the first few funds. If they are simple, honestly sold, well governed and promptly redeem when investors ask, trust will follow, and with it the long-term savings this economy needs. If the early funds over-promise or cut corners, the setback could last a decade.
The business and investing community should treat the next 12 to 18 months as preparation time. The
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