The nascent capital market is inching toward maturity, with regulatory authorities introducing institutional mechanisms to insulate small investors from volatility and operational uncertainties often associated with early-stage market ecosystems.

A proposed Compensation Fund Regulation from the Ethiopian Capital Market Authority (ECMA) marks a new development shielding small investors from losses due to fraud or operational failures. A draft regulation, the Compensation Fund Regulation, would set a maximum payout of 100,000 Br for eligible investors who suffer financial harm while trading securities, a measure intended to boost confidence as the capital market infrastructure takes shape.

The Authority has licensed 15 capital market service providers, including investment banks, securities dealers, and investment advisors. Of these, eight are non-bank-affiliated investment advisors. Their combined subscribed capital exceeds 3.5 billion Br, with paid-up capital totalling nearly 1.5 billion Br, a sign that the capital market is expanding, even as regulatory oversight and investor protections evolve.

The regulation stipulates that the Authority may collect unclaimed dividends from shareholding companies and, if claimed later, pay them out to shareholders through the fund mechanism. The initial capital injection for the Compensation Fund Office will come from the government, though the draft omits any mention of the amount. Over time, contributions from regulated market participants will keep the fund solvent, with penalties for late payments to be specified in a forthcoming directive. The same directive is expected to detail the exact contribution formula.

The proposed regulation places the burden of funding the scheme on capital market service providers and the Securities Depository & Clearing Company, which will be required to contribute to the fund. The draft authors are determined to compensate investors for losses resulting from service providers' or the Exchanges' failure to meet contractual obligations. Investors who are entitled to dividends but do not receive them on time may claim compensation, as may those who lose money because their funds have not yet been credited to their account or because a provider collapses before a transaction is completed.

However, once the investment is fully transferred to the investor, the fund no longer covers losses.

The rules draw a sharp distinction between small investors and large institutional players.

Excluded from coverage are banks, insurance firms, microfinance institutions, savings and credit cooperatives, as well as collective investment vehicles, pension funds, capital market service providers, and domestic and foreign investors.

According to Sirak Solomon, a senior capital market advisor at ECMA, the rationale is plain.

“Large investors are expected to conduct proper due diligence before investing and are less likely to be defrauded,” he told Fortune. "These are responsible for their own investment decisions and should act carefully.”

The fund’s focus is to offer a backstop for small and retail investors whose savings are at higher risk. Even for small investors, the coverage is tightly defined.

“Compensation is only available if losses are suffered before the investor takes ownership of their assets,” Sirak said.

He stated that the scheme’s primary function is to safeguard client funds that are still vulnerable during the transaction process.

Market players who fail to make timely contributions to the fund will face fines, with details to be ironed out in the directive now under preparation. The contribution levels are not specified in the regulation, an omission that has drawn industry attention.