ST.

MARY’S UNIVERSITY SCHOOL OF GRADUATE STUDIES

DEPARTMENT OF MBA IN ACCOUNTING AND FINANCE

Course: - Financial Marketing and Institutions (MAF - 522)

Article review on “Prospects and Challenges for Developing Securities Markets in
Ethiopia: An Analytical Review”
Prepared by: -
Ledet Dagne Debela ID: - SGS/0235/2013A
Yosef Edegie Fentew ID: - SGS/0243/2013A
Million Mengesha Tadesse ID: - SGS/0247/2013A
Ayneabeba Girma G/Meskel ID: - SGS/0244/2013A
Dereje Feyera Legese ID: - SGS/0512/2013A
Section: - B

Submitted to: - Mohammed Seid (Ass. prof)

November 22, 2021

Addis Ababa
Table of Contents
1. Part 1.......................................................................................................................................................1

1.1. General information of the article...............................................................................................1

2. Part 2.......................................................................................................................................................1

2.1. Summary of the article.................................................................................................................1

3. Part 3...........................................................................................................................................................3

3.1. Analysis and Synthesis.....................................................................................................................3

3.1.1. Context and theoretical grounding..........................................................................................3

3.1.2. Discussion and critique about methodology.........................................................................4

4. Part 4............................................................................................................................................................5

4.1. Hypothesis Comparison....................................................................................................................5

5. Part 5............................................................................................................................................................6

5.1. Relevance and Applicability in Ethiopian context......................................................................6

6. Part 6............................................................................................................................................................7

6.1. Summary and Recommendations...................................................................................................7

7. Reference………...…….………………………………………………………………………..8

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 1. Part 1
1.1. General information of the article

Title of the article is ‘Prospects and Challenges for Developing Securities Markets in Ethiopia:
An Analytical Review’. It was written by an Ethiopian author namely Asrat Tessema (Ph.D.).
The articles published on R&D Management Journal Vol. 15, No 1,2003 and it was published by
Blackwell Publishing Ltd and it accessed since then.

2. Part 2
2.1. Summary of the article

The article analytical review of the prospects and challenges of developing securities markets in
Ethiopia has five parts. The first part explains socioeconomic theories Ethiopia from the fall of
communism and the emergence of capitalism, and mentioned that many countries around the
world are moving toward market-oriented economies and securities markets are springing up on
all continents around the globe. Securities markets have come to symbolize to many the essence
of capitalistic economic relations.

The prevalence of these problems reduces the level of investments, productivity of capital and
the volume of savings. Such market-determined financial prices and investment options, in turn,
attract more savings, creating a virtual circle of innovation and mobilization that contributes to
the overall efficiency of the financial system. The development of securities markets is usually
accompanied by increased reporting standards and requirements, which contribute to the
efficiency of the markets and their mobilizing and allocating functions.

Some of the costs inherent in securities markets as discussed in the literature include: During the
early stages of securities markets development, the supply of stocks and bonds is limited,
manipulation is relatively easy, investors are unsophisticated, underwriters and brokers are
inexperienced, and securities legislation often has loopholes. The institutions and individuals that
constitute the securities markets fall into the following categories.

The key environmental factors for the success of securities markets include sufficient demand for
and supply of securities. The existence of investment alternatives affects both the demand for and

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the supply of securities. To encourage development of healthy securities markets, legal
inducements that affect the supply and demand for securities are helpful.

In summary, despite the impetus to economic growth that the development of securities markets
can provide, the costs associated with such development can be substantial. The magnitude of
such costs and the capacity to manage them depend on a complex set of factors in many spheres.
The experience of a range of developing countries in instituting securities markets indicates that
their beneficial effects do not come automatically, and that cyclic phases of development are the
rule.

As a result, a worldwide movement exists to encourage development of securities markets in

developing countries and transitional economies of Eastern Europe, and countries of the former
Soviet Union. At the 6th Conference of African Finance Ministers in mid-September of 1997
held in Addis Ababa, the ACMF and the inter-governmental group of experts discussed financial
market development and integration in the African continent. This isolation of the Ethiopian
banking system from the international banking community has perhaps the most important and
far-reaching of the several consequences emanating from the restrictions upon foreign
investment imposed by the Ethiopian government. If a potential foreign investor is unable to get
information from his/her bank, he/she must rely upon the government's investment promoters
and other local sources which have interests which differ from those of the foreign investor.
Similarly, the restriction upon foreign insurance companies and upon foreign investment in
Ethiopian insurance companies also deprives the country of badly needed capital.

Developing securities markets in Ethiopia face several direct challenges: Low level of public
awareness about securities markets (the degree of awareness by potential investors of
investments in stocks and bonds affects demand for securities). The underdeveloped state of the
bond market due to the historical prominence of bank financing. Problems with the supply and
demand for securities at least initially (a reasonable number of companies whose shares are
publicly traded and a variety of individuals and institutional investors). When too few stocks and
bonds are available for purchase and trading, it may be difficult to attract investors who may
doubt the existence of a large enough market to insure liquidity. On the other hand, in a very low
per capita income country like Ethiopia and where investment funds are in short supply, demand
for stocks and bonds cannot be expected to be high. Absence of input by the business community

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in the formulation of economic policy by the government (There is no mechanism in place to
solicit input from the business community).

To sum up, one of the main challenges for developing countries like Ethiopia is to improve the
quality of financial intermediation and resource allocation to contribute to a more rapid rate of
economic growth. This suggests the need for flexibility in the choice of methods in economic
reform that must consider the unique features of a country, particularly in terms of the level of
economic development and administrative capacity. The successful development of securities
markets requires the existence of enough demand and supply of stocks. Demand for stocks
depends on the amount of capital available for investment in the hands of individuals and
institutions. The first and foremost task in increasing the demand for securities is to educate the
public about securities markets using the public media. Organize forums where the business
community 10 and the public can learn about the benefits and costs of investing in securities
markets. At the same time improve the political and legal environment to build the confidence
first of the domestic business community and then of the international investors. Broad
ownership of firms would give citizens a stake in the country's economy, thus reducing the
resistance generated by the discomfort of the layoffs due to privatization and the suspicion that
state enterprises are being sold to individuals or groups with political links to the ruling party.
This is important, because in many countries the development of the bond market precedes the
development of the equity markets. The dissemination of market information is another integral
part of securities markets development.

3. Part 3
3.1. Analysis and Synthesis
3.1.1. Context and theoretical grounding
The conceptual framework of the article explains the overall aim of the benefits and hurdles
aspects is to make article more meaningful, acceptable to the theoretical constructs in the
Prospects and Challenges for Developing Securities Markets in Ethiopia and ensures
generalizability based on theoretical framework.

The intent of the study was to understand and evaluate the challenges and benefit in the
formation and experiences of Securities Markets in Ethiopia.

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3.1.2. Discussion and critique about methodology
The first three section explains socioeconomic theories Ethiopia and gives a broad review of the
theoretical and conceptual models discussed by reviewing of the literatures based on this the
article indicates that the benefits of a well-functioning securities markets have as well as their
limitations, challenges and also the costs and environmental requirements associated with the
development well-established security market.

In addition, it tries to give high lights to how much market orientation of the economy is required
for securities markets to play a helpful role, and what significant considerations must be kept in
mind when we study the climate in which Ethiopian securities markets are evolving.

The format of financial income statements is designed to meet the needs of the target audience.
The target audience comprises the government, investors, among others. This research makes the
implicit assumption that the primary audience for income statements is investors, and it expands
on that assumption by looking at the relationship between earnings announcements and stock
price changes.

The article's major point is to identify and show challenges as low level of public awareness
about securities markets; lack of public confidence in share investment; lack of institutional
capacity to facilitate securities trading; underdeveloped state of the bond (debt) market; low level
of private sector development and a low level of market orientation in the economy; easy access
to loans by wealthy Ethiopians; problems with the supply and demand for securities at least
initially. There is neither the tradition nor the trust in share companies; due to the historical
prominence of bank financing; there is still government interference in the market; there is no
mechanism in place to solicit input from the business community as a cause for the challenges
stated above.

On the other side, states that many prospects (opportunities) for developing securities markets
exist in Ethiopia. The prospects are Ethiopia has considerable unexploited resources; one of the
largest potential markets in Africa; the economic liberalization which has taking place in
Ethiopia are quite encouraging; the privatization efforts going on would help with the supply
problems (government is withdrawing from profit making activities and is transferring state
owned enterprises into private ownership) particularly if a public offering of shares is used as the

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method of privatization; the existence of many profitable companies, which can potentially
benefit from floating shares to the public; the existence of institutions like the country‘s Pension
Fund, insurance companies, credit unions, etc., with large sums of money. If allowed to invest,
they would boost the demand for securities; the gradual improvements of the incentive packages
in the successive investment proclamations help attract new investors including Ethiopians with
foreign passports; the debate going on in academics, the business community at large and the
government circle is encouraging.

To sum up the article discussed the prospects for developing securities markets exist in Ethiopia:
Ethiopia has considerable unexploited resources. Agriculture plays a key role in the economy,
although the country still uses primitive technology and the climate is subject to recurrent
droughts due to irregular rain. The existence of many profitable companies, which can
potentially benefit from floating shares to the public. And as well the above benefits the writer
also mentioned the existed a problem like, the supply and demand for securities at least initially
(a reasonable number of companies whose shares are publicly traded and a variety of individuals
and institutional investors). When too few stocks and bonds are available for purchase and
trading, it may be difficult to attract investors who may doubt the existence of a large enough
market to insure liquidity. On the other hand, in a very low per capita income country like
Ethiopia and where investment funds are in short supply, demand for stocks and bonds cannot be
expected to be high.

4. Part 4
4.1. Hypothesis Comparison
In Dr. Asrat’s article “Prospects and Challenges for Developing Securities Markets in Ethiopia:
An Analytical Review”, he explores the ways in which securities markets in Ethiopia related
activities to assume in helping the countries growth, which is presented in contrast to how
scholars view the “pedagogical potential” of the market.

The research was described as an “umbrella project” consisting of two parts. The first part
examined the benefits perspectives who had limited experience with market (only some stated
the regulars).

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The second part explored challenges and costs of the market. The summary includes the article’s
purpose, methods, results, discussion, and citations necessary. This part emphasis on creating
demand for securities is educate the public about securities markets using the public media and
by lifting all the legal restrictions from institutional investors, and deals with some ideas of stock
market by comparing the present situation in Ethiopia.

And also, about the legal system, rights and responsibilities of the contracting parties and cost-
effective enforcement of covenants. legal restrictions from institutional investors like the largest
government pension fund, public and private insurance companies and credit unions so that they
can fully participate in the securities markets. And also, the use going public

Even though we agree on the points the article raise, it does not cover the whole area, in this
section, we add some aspects of the challenges as well as benefits

 Allowing foreign banks to operate in Ethiopia will bring both prospects and challenges to
the incumbent state-owned commercial and private banks in particular and the financial
sector in general. As evidenced from literature, foreign bank entry to the domestic market
will bring immense opportunity to the Ethiopian banking market, and create strong
competition challenge between foreign and domestic banks and within the domestic
banking institutions,
 Accordingly, allow/encourage merger of local credit loan institutions,
 The need for cybersecurity protection and education of professionals and
consumers/listed companies is needed,

5. Part 5
5.1. Relevance and Applicability in Ethiopian context
This article helps us to understand the useful meanings reflected in the security market. Besides,
it helps us to understand the benefits, challenges and the associated parts in establishing security
market adjustment in different way to measure the value of information needed.

According to recent observation and the current infrastructure, accounting and financial
regulatory bodies, educated people it is not difficult to imagine the applicability of Securities
Markets in Ethiopia, hopefully stock exchange market part of (stock is only one form of security)
the capital Markets starts in the end of this year or the coming year.

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6. Part 6
6.1. Summary and Recommendations
Establishing Security markets in a country is not a task that can be achieved over-night. It
requires careful planning and long-term orientation. By drawing information from primary and
secondary sources, this study points out the various issues to be considered for the development
of security markets.

Further the study weighs the benefits and costs of these markets to the economy as a whole and
to market participants, and assesses Ethiopian-specific opportunities and challenges. It lays out
institutions and infrastructures needed for security market development. Considering (i) current
growth in the number of share companies, (ii) need for infusing higher capital to various
economic sectors, and (iii)increased capacity to save due to higher economic growth, the article
recommended that the policymakers must seriously consider the launching of Security markets in
Ethiopia.

Finally, it is to be borne in mind that the launching of organized secondary markets must be
preceded by: (i) instituting a proper authority to regulate and monitor the security market
operations, and (ii) proclaiming well-drafted companies’ legislation that would streamline the
operations of share companies as well, and securities legislation to organize the dealings in
securities of all forms in the country.

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Reference

 Asrat Tessema, Ph.D. Paper presented at Ethiopia Forum: Challenges and Prospects for
Constitutional Democracy in Ethiopia International Center, Michigan State University
East Lansing, Michigan, March 22-24, 2019
 S.P Kannan's &Letenah Ejigu Wale, Bahir Dar University, PhD, Identifying
Opportunities, Challenges and Infrastructure Requirements for Establishing Secondary
Market in Ethiopia, December 2012

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