Ethiopia’s long-awaited capital market is taking shape. Last week, officials unveiled two key draft directives for public consultation—one on Self-Regulatory Organisations (SROs) and another on the dematerialisation of securities—marking a noteworthy step towards the establishment of a fully functioning securities exchange.

The dematerialisation directive requires that all publicly offered securities be registered with a Central Securities Depository (CSD) before they can be traded. Once dematerialised, these securities are legally recognised and enforceable, with their ownership recorded electronically in the CSD’s database. This move signals the transition from physical certificates to digital records, making market transactions more efficient and transparent.

Officials at the Ethiopian Capital Market Authority (ECMA) reason that the shift to an electronic system will enhance investor protection by improving transparency and security. "Dematerialisation is essential for guaranteeing the safety and efficiency of market operations," said one official involved in the directive-making. "It'll grant the regulatory body more oversight, ensuring that all securities are monitored under a unified system."

The directive applies to all publicly offered securities, including those issued by state-owned enterprises (SOEs) and traded both domestically and abroad. These securities will have to be registered with the CSD, and only electronically registered securities will be eligible for trading once the capital market begins operations.

The CSD, which will be managed by the National Bank of Ethiopia (NBE) and built by the U.S.-based technology firm Motran, will store vital information such as shareholder identities, the number of securities issued, and other essential details. The official disclosed plans to eventually involve private sector firms as CSD providers, though for now, the central bank will serve as the sole operator.

Mistre Urge, deputy director of the CSD project at the central bank, said the system is nearly ready and will be launched alongside the capital market’s debut with a rulebook governing the CSD being finalised.

"We're in the final stages of preparation," he said.  The NBE has been ramping up its operational capacity through training programs and oversight improvements to ensure a smooth transition to electronic securities.

As the administrative body, the Authority will enforce penalties for violations, ranging from financial sanctions to blacklisting of service providers who fail to comply with CSD regulations. The new system will also introduce a Client Compensation Fund to protect investors from transaction failures between brokers and dealers, though this fund is still in the planning phase.

"Investor confidence is crucial," said Tilahun. "This fund will provide an added layer of protection."

The introduction of dematerialised securities comes as part of a broader effort to establish a fully functioning capital market. According to a recent study by the Authority, the equity market for state-owned enterprises could grow to 31 billion Br, while the debt market may expand to 338 billion Br by 2028. Private sector equity is expected to reach 15 billion Br, driven by increased investment opportunities and deeper financial markets. If the necessary reforms are implemented and political stability is maintained, the study projects that financial savings could rise to 1.5 trillion Br within the next five years.