What will Africa’s 30th stock exchange bring to small businesses and young entrepreneurs?
The stock market in Ethiopia: Ethiopia is launching its own stock market as per the announcement made by the Ethiopian Ministry of Finance in May. Assuming this realization is imminent, in this article, we will try to understand what the stock market is really about and how it will help you grow your startups. Will this be beneficial to young entrepreneurs and small business owners in Ethiopia? Let’s discuss.
Following initial announcements made in 2020, the final agreement among the Ethiopian Ministry of Finance, FSD Africa and the Ethiopian Investment Holdings was signed on Wednesday, May 18, 2022. In a joint statement, the three parties announced the establishment of the Ethiopian Securities Exchange (ESX), the 30th in the continent. According to the Kenyan Wall Street, FSD Africa is to provide with technical support, legal advice and management of costs associated with getting the exchange operational.
H.E Mr. Ahmed Shide, Ministry of Finance, indicated that this step is taken with the aim to modernize the Ethiopian financial industry as a whole and provide investors and entrepreneurs with the chance to grow together. It is also reported that 50 companies, including banks and insurance companies, will be listed at the launch of the exchange.
To your surprise, Ethiopia had its own informal stock market in the 1956, which was the 2nd in the continent. A group of investors had launched the Addis Ababa Share Dealing Group and it was in place until the socialist DERG abolished it. The DERG regime killed the private sector and moved everything to the hands of the government. 3 decades in after the fall of DERG, Ethiopia is still struggling to build a formidable private sector that isn’t controlled by the government. The initiation of the Ethiopian Securities Exchange (ESX) is said to boost the private sector and aid in the privatization of state owned companies.
So what really is the stock market? And how will it work in Ethiopia? Well, we certainly don’t know what the rules and regulations regarding the market in Ethiopia are going to be like, but we can speculate based on other countries’ experiences.
To understand the stock market, first we have to know what an IPO, Initial Public Offering, is. When a company goes public, the company will put out initial offerings (shares or ownership tokens) for investors to buy. This has been a very common practice in Ethiopia. When new banks or share companies start, they often need huge capital to enter the market.
Especially with banks, they are required to deposit at least 5 billion ETB to be able to have a stake in the National Bank of Ethiopia (NBE) and start operating. That is why new banks have been seen selling shares to raise their capital. The shareholders will gain annual dividends in accordance with the company’s rules (dividends are optional in some companies), if the business is profitable. So, these initial shares put out by the company are called IPOs, and have been legal in the country. So what’s new about the ESX stock market?
Even though IPOs have been around for a while, secondary sell of shares by a shareholder to another interested party had not been legally possible prior to this announcement. The driving forces of the stock market are these secondary sells. If X initially buys 5 shares, from company A’s offerings, X is unable to sell those shares without a stock market. But with a stock market, Mr. X can sell the shares to Mr. Y and profit from the transaction.
The price of stocks is very dependent on the company’s success and the amount of dividends the company returns. It is a very volatile market. If company A’s revenues are astronomically increasing, the value of its shares will also be high, and purchasing company A shares from the stock market will be hard. In a nutshell, the stock market is a pool of secondary buyers and sellers that require zero to minimal regulations from the government. If the Ethiopian exchange market is realized, it would give the indication to the start of the liberalization of the country’s economy.
The start of this market in Ethiopia can be a good thing to small businesses and young entrepreneurs as well. It would enable small businesses to offer small percentage of ownerships in the form of initial offerings. It would enable the businesses to acquire capital and grow with it. Shareholders can either collect dividends or re-sell the shares on the stock market for profit, depending on the success of the company.
On paper, this all sounds exciting, but we all will have to wait and see how it will play out. Knowing the enormous challenges the country is facing, it would not be shocking if this does not play out as planned. If the market fails to integrate small businesses, it would be a slap on the face of young and aspiring entrepreneurs. Establishing the Ethiopian exchange market and maintaining it will take the country a great effort, as it is a gamble on the country’s future.