In December 2020 Ethiopia’s Council of Ministers approved a draft law that would enable the capital market. The draft was prepared by the National Bank of Ethiopia, the draft provides the legal framework for the formulation of the capital market, It’s very important for Ethiopia’s economic growth by increasing capital mobilization, financial innovation, and risk sharing in investment. Moreover last month, Pm Abiy appointed six board members for the Capital Market Authority, which is expected to come into operation soon.
Here in Ethiopia, There’s miss understanding of the terms (financial market, capital market, stock market, and money market), you know that many people believe that those all terms are the same however there’s a differences between them, let us see one by one:
Financial Market
A financial market is a marketplace where buyers and sellers can conduct transactions involving financial securities, commodities, currencies, and derivatives. Financial markets provide liquidity to investors by allowing them to trade their assets quickly and at market prices that reflect the true value of the underlying securities. Financial markets allow for the transfer of money between investors and enable the conversion of savings into investments. Financial markets include stock markets, bond markets, commodity markets, capital markets, and currency markets.
Capital Market
The capital market is a financial system that allows private and public institutions to buy and sell equity and debt instruments companies to raise long-term funds through the sale of securities such as stocks and bonds. It is made up of primary markets, where new issues are sold directly to investors, as well as secondary markets, where existing securities are bought and sold among investors. In other words, it facilitates the transfer of capital from investors to entities that need it.
Stock Market
The stock market is a collection of exchanges or Over-the-Counter markets (OTC) in which shares of publicly held companies are issued and traded. These exchanges make it possible for buyers and sellers to trade stocks openly and transparently. It is one of the most important sources of capital for companies, as it provides a way for companies to raise money to finance growth and expansion. Investors can also make money by trading stocks, either by buying low and selling high or by collecting dividends.
Money Market
What are the similarities?
All of these markets are related and focus on trading, investing, and managing money. The money market deals with short-term debt investments, the financial market deals with buying and selling securities, the stock market deals with buying and selling of stocks and other equities, while the capital market is where long-term debt or equity-backed securities are traded. All four markets are essential components of the global economy and help to generate liquidity in the financial system.
Ethiopia’s Trend on the Capital Market
Ethiopia had a stock market during the emperor’s era it’s known as “The Addis Ababa Share Dealing Group,” however it was destroyed after Communist, autocratic and military regime Derg came to power. Ever since the Ethiopian Stock market has ceased to exist as a standard institution. However, there is still a stock market during the Ethiopian Peoples Revolutionary Democratic Front (EPRDF) regime, but it was not centralized and also haven’t governing authority, in addition to that it doesn’t have a secondary market. Ethiopia has seen tremendous economic growth since 2004. This is due to the country’s focus on economic reform after the Derg regime fall, which has attracted increased investment from both domestic and foreign sources. The increasing presence of foreign investors has helped stimulate the development of new products and services, while also creating more efficient markets.
The formation of a capital market benefits for SMEs, entrepreneurs, and startups by;
1. Access to Capital: The capital markets provide entrepreneurs and startups with access to large amounts of capital quickly and at a low cost. This allows entrepreneurs and startups to finance their business operations, expand their production capacities, launch new products, and develop new markets without having to resort to traditional financing methods such as bank loans or venture capital investments.
2. Liquidity: Capital markets also provide SMEs, entrepreneurs, and startups with liquidity by providing them with an easier way to convert their company’s equity into cash in the form of shares. This makes it easier for entrepreneurs and startups to raise funds when needed, reducing their dependence on traditional financing sources such as loans or venture capital investments.
3. Valuation: By listing on the stock exchange, entrepreneurs and startups can also benefit from increased visibility and transparency, which can help them attract potential investors who are willing to pay a premium for their shares due to the increased liquidity in the market. This can help increase the valuation of the company’s equity, allowing the entrepreneur or startup to raise additional funds more easily if needed.
4. Exit Strategy: Finally, listing on a stock exchange provides entrepreneurs and startups with an easier way of exiting from their business when they want or need to do so. They can either sell their company’s shares on the public market or opt for a private sale of the entire company, which can provide them with greater control over how they exit from their business.
In General
The formulation of a capital market can provide several benefits to the country. Firstly, it can help to facilitate economic growth and development by providing access to long-term capital for businesses. This can enable businesses to invest in new projects and expand their operations. Secondly, the capital market can also provide access to financial resources for financing infrastructure projects, which may be necessary for economic development. Finally, the capital market can also act as a source of liquidity for Ethiopian companies, enabling them to raise funds quickly when they needed. All of these benefits could contribute to increased investment in Ethiopia and ultimately lead to economic growth.
In my opinion, it may have numerous advantages for Ethiopia specifically for the accumulation of capital through increasing the value of savings, also it adds value to the effective and efficient functioning of the country’s financial system, it creates competition among financial institutions such as private and government-owned banks, insurances. You know Capital markets are very important for a country’s economic growth and job creation they finance the economy, allocate risk, and support financial stability in the country. In the developed world capital market huge contribution to the country’s economic growth, as an example USA capital market funds over 70% of all economic activity in the USA, in terms of equity and debt financing of non-financial corporations. Also, it gives a big opportunity for Startup, small and medium-sized enterprises, you know it rises capital may be provided by venture capitalists, angel investors, banks, insurances, micro-finance or other financial institutions and is often a large sum of money that covers.
Yinebeb Bahru is a customer service officer at Awash Bank, and he’s passionate about technology, startups, innovation, Finance, research & development, and analysis writer. The writer can be reached at: Yinebeb251@gmail.com. The views expressed in this article don’t necessarily reflect the views of The Addis Insight.
