Ethiopia will soon have its own Capital Market Authority that will supervise and regulate a new financial market, where equities, bonds and financial derivatives will be transacted, according to a bill drafted by the National Bank of Ethiopia (NBE).

The bill is expected to be legislated before the end of 2020 and also proposes the launch of a secondary market in Ethiopia for the first time. A technical committee comprised of members from the central bank, the Ministry of Finance, the Office of the Attorney General and external advisors, has been working on the bill for the past year.

Having seven board directors, including the Minister of Finance, the Governor of the central bank, the Attorney General, three members representing the private sector and non-governmental institutions and a CEO, the Authority will report to the parliament. The parliament will appoint board directors from the private sector upon the recommendation of the Prime Minister. The directors have a three-year term with the possibility of a term extension.

The CEO and deputy CEO of the Authority, which each must have at least 10 years experience at a senior management level in law, finance, economics or management and have expertise in areas relating to money or capital markets or finance, will be appointed by the parliament on the recommendation of the Prime Minister.

The capital market will be established to support the development of the national economy by mobilising capital, promoting financial innovation, and sharing investment risks, according to the 63-page draft proclamation.

The Authority will regulate the listing and delisting of financial products including bonds and stocks on the trading platform, grant licenses for operation to securities brokers, securities dealers, investment advisers, fund managers, investment banks and collective investment schemes. It will also engage with the approval of operation as a securities exchange and derivatives exchange, among other duties.

The Authority will accord an exchange license to the establishment of the Ethiopian Securities Exchange, which provides the trading platform for financial products and will be established as a share company. The capital of the Ethiopian Securities Exchange is to be determined by the board members of the Authority.

The establishment of the Ethiopian Securities Exchange will have a share composition of no less than five percent and a maximum of 25pc to be allocated to the government. No less than 25pc and not more than 55pc will be allocated for corporations, capital market intermediaries, and international securities exchange operators. A minimum of 20pc and not more than 40pc of the shares will be offered to individuals with a maximum limit of five percent.

While the total shareholdings of international securities exchange operators and other foreign investors are not to exceed 25pc of the Exchange’s capital.

"The idea is to make the market predominantly owned by the private sector," said a source close to the case, "and the government to be a strategic partner and market maker in the process."

However, in the scenario where there might be insufficient demand from citizens, then the maximum limit on shareholding by corporations, capital market intermediaries, and international securities exchange operators can be increased up to 75pc.

In another scenario where there is no interest from citizens, corporations, capital market intermediaries, and international securities exchange operators, the maximum limit on government shareholding can be increased to 100pc.

The Ethiopian Securities Exchange Company will provide the trading platform for capital market products such as equities, debt securities, derivative instruments, units in a collective investment scheme, real estate investment trusts, currency exchange contracts and other products to be declared by the Authority's directive.

"It's likely that the market will kick off with stocks and bonds," said the same source, an individual close to the case. "The other financial market products are listed in order to give breathing space for a legal framework to be in place to be used at a later time."