By Muluken Yewondwossen

The Ethiopian Capital Market Authority (ECMA) has announced its readiness to grant licenses to participants, marking a significant advancement in the long-awaited launch of the capital market. However, the establishment of subsidiaries by local retail banks, as permitted by a central bank directive, is still pending.

On Wednesday, February 7, the Director General of ECMA, Brook Taye, informed the media that the Authority will begin accepting applications from prospective actors starting tomorrow. Brook added that if all the necessary paperwork is submitted correctly, the licenses will be granted in less than a month.

The ECMA offers a range of licenses that service providers can apply for in order to participate in the upcoming capital market, which will be operated by the Ethiopian Securities Exchange (ESX). These licenses include securities brokers, investment advisers, operators of collective investment schemes, investment banks, securities dealers, custodians, market makers, credit rating agencies, securities appraisal firms, securities portfolio managers, and others, as listed in the ‘capital market service providers licensing and supervision 890/2024’.

Investment banks, as non-deposit taking financial institutions, are expected to be among the major participants in the securities market. Brook mentioned that three well-known multinational companies have expressed a strong desire to participate in the industry, but he refrained from disclosing their identities to protect their commercial interests. He also noted that two local retail banks are diligently preparing to apply for a license to actively engage in the alternative financial sector.

There is anticipation that a potential new law from the National Bank of Ethiopia (NBE) would support the endeavors of retail banks. Both the ECMA and NBE, which are separate regulatory bodies for the financial industry, have recently disclosed that discussions have taken place to provide retail financial institutions with more opportunities to operate in the upcoming secondary market.

The two regulatory bodies currently have laws in place that prohibit retail banks from participating in any capacity in the capital market or investment banking activities.

To address this, both parties have reached an agreement that the central bank should introduce legislation requiring local banks to establish subsidiary entities that would function as investment banks. This would enable local retail banks, who are potential sources of life for the capital market, to participate. However, the regulatory authority, the National Bank of Ethiopia (NBE), has not yet officially released the potential directive.

“On our end, we have made preparations to handle the license applications for securities exchange actors, including applications for an investment bank license from the Ethiopian Capital Market Authority (ECMA),” said Brook, the Director General of ECMA. He emphasized that the responsibility lies with the central bank, stating, “We are aware that the central bank is working on issuing the directive that would allow the formation of subsidiaries for local banks, but we cannot provide a specific timeline for when it will be issued.”

Investment banks operate as security brokers, dealers, and financial advisors. They also facilitate the issuance of securities by companies, governments, and other entities through underwriting. Additionally, they serve as intermediaries between securities issuers and the investing public, as well as assist in mergers and other company reorganizations.

Brook stated, “With respect to issuing licenses, the regulatory authority has taken another significant step, creating a favorable environment for the Ethiopian Securities Exchange (ESX) to commence its operations.” However, he noted that the readiness and decision to open the doors of the securities exchange ultimately lie with the ESX.

Industry insiders view the recent development by ECMA as a significant milestone for the launch of the new market, which Ethiopia has been without for approximately fifty years. Ethiopia is one of the few remaining nations without a capital market.

Capital has been unable to obtain further information from the National Bank of Ethiopia (NBE) at this time.

By Muluken Yewondwossen

The Ministry of Industry (MoI) has announced that recent changes to the retention directive will facilitate access to foreign currency for the industrial sector. The National Bank of Ethiopia (NBE), the country’s central bank, revised the foreign exchange surrender law in August of the prior year with the aim of promoting the effective utilization of hard currency by exporters.

Previously, banks were required to surrender 70 percent of their foreign exchange earnings to the NBE under the surrender law. However, this directive has been amended. Under the previous directive, exporters of goods and services, as well as recipients of inward remittances, were allowed to retain 20 percent of their export earnings in foreign currency indefinitely in a retention account. This was after deducting the compulsory 70 percent surrender and remitting the remaining percentage to the respective bank.

In August, the NBE revised the percentage, enabling exporters of products and services to retain 40 percent of their foreign exchange earnings. Local manufacturers have often expressed concerns about the insufficient availability of foreign currency, despite their ability to generate hard currency.

Melaku Alebel, the Minister of MoI, presented his six-month report to the Industry and Mining Standing Committee, stating that since the revision of the foreign currency retention directive, there has been an increase in the availability of hard currency. This availability is crucial for importing capital goods, components, and inputs. According to the minister, the manufacturing sector was projected to receive USD 338 million during the first half of the budget year. However, the actual supply amounted to USD 274 million, which also included funds for the import of new machinery. Melaku acknowledged that there are still limitations on the amount of hard currency that can be allocated for the import of inputs and spare parts, which affects the current operations of the industry.

To address the challenges faced by the industry sector, the Minister suggested considering additional options such as supplier credit and franco valuta schemes. Although specific figures were not provided, the Minister acknowledged that there has been improvement compared to the previous year’s performance due to the revision of the foreign currency surrender directive.

Regarding financing availability, heavy industries have been granted 23.7 billion birr in credit, an increase of 883 million birr compared to the same period in the previous year. However, the original plan was for 30 billion birr. As part of the Home Grown Economic Reform (HGER) II plan, the industry sector is expected to receive 24 percent of the overall loan provision, up from the previous position of 12 percent.

In terms of loan distribution, the manufacturing sector currently receives 13.8 percent of all loans. The Minister emphasized the need for improvement in this area and stated that discussions have been held with banks and other relevant bodies to address this issue. The manufacturing industry plays a crucial role in import substitution efforts, with a market share of 39.7 percent, which has increased by more than one percent compared to the end of the previous budget year. Import substitution efforts have reached nearly one billion dollars, achieving 90 percent of the target. The goal is for locally manufactured goods to capture 60 percent of the market share by the end of the ten-year growth plan.

The sector faces challenges such as internal conflicts, issues in the Red Sea region, and difficulties with Djibouti Customs. These factors have contributed to the obstacles encountered in improving the industry sector.