Liberalise Financial Sector Fast!

Jan 7 , 2023
By Asseged G. Medhin

In any free market economy, the financial system's role is crucial. It includes markets and intermediaries that help transfer financial and tangible assets and financial risks from one entity, place or point in time to another.

These transfers occur whenever someone exchanges one asset or financial contract for another. The assets and arrangements that people act on behalf of themselves or as a company include bonds, stocks, exchange-traded funds, currencies, and certain commodities. The buyer and the seller expect to be better off while voluntarily arranging their trades.

Regardless of the magnitude of the economy, all instruments undeniably fill the gap created in regular financial transactions and economic activities. We need the financial system across the stream of economic activity to save money for the future, borrow money for current use, raise equity capital, manage risks, exchange assets for immediate and future deliveries, and trade on the information.

Unfortunately, following the different economic reforms, including the existing one, the Ethiopian financial sector lacks the dynamism and courage to get into a more inclusive approach which would have been the leading sector in the continent. Insurers and bankers still stick to very few products and are almost traditional.

The population is a profound asset for economic development and is the base for many deposits and policyholders. Advancing the mindset of the institution at hand is very crucial. Crafting strategies for enhancing the domestic market from a significant base eventually introduce modern financial systems and products.

It is believed that an institute has to diversify itself reaching with new products and services. The financial sectors particularly must aggressively penetrate the regional market and strengthen their capital through an inclusive approach. It would be tough to merge and form strategic alliances when forging investors to get into the market.

The sector is old enough to trade with financial instruments in other African countries. The government has taken a crucial step in changing financial infrastructure, including issuing directives and proclamations and providing training. This indicates that the unenviable sector is about to be opened, implementing a capital or stock market that provides full benefits for every stakeholder in the system. Words like security, bonds, derivatives, common stock and news on daily stock exchanges markets will furnish financial statements. Liberalise the sector and fasten the pace.

The financial sector seems sound in terms of profitability, with most banks and insurers facilitating their customer needs and, based on their stringent criteria, working on their Return on Investment (ROI) that equates to aggregate savings.

People often have money they choose not to spend at the moment but to be available in the future. However, the impact of inflation will challenge the saving aspiration of people.

What other option do they have? What is bankers' orientation? Will they increase interest rates higher than changes in the inflation index? How about the new stock market towards these challenges? These issues should be addressed by introducing a different financial instrument.

To save money for the future, savers buy notes, certificates of deposit, bonds, stocks, mutual funds, or tangible assets such as real estate. These alternatives generally provide a better-expected rate of return than simply storing money. They seek a short-term benefit during an inflationary market to reduce the ever-declining purchasing power of money.

The sector shall provide these instruments so that savers sell these assets in the future to fund their expenditures. They enter into investment ventures as they commit their money to purchase bonds, stocks, mutual funds, and real estate in defending period. The system will allow them to invest and divest based on their choice. Such tools have a meaningful impact on economic development. It is better to apply this transformed financial system now.

In the modern financial system, borrowing helps customers to realise their objectives. The feature of modern economic systems is the principle of good faith and paving obstacles for the customer to be more productive and use loans to expand the business for long-term loyal customers. The systems allocate financial resources when required.

Our financial sector's contribution in terms of the allocation of financial help is highly tight and almost insignificant.

When governments do not have money to spend, they borrow. Likewise, companies can also obtain funds by selling ownership or equity interests. Banks and other investors provide those funds with money expecting to be repaid with interest for future disbursements, such as dividends and capital gains, as the ownership interest appreciates. Companies typically repay their borrowing with income generated in the future. In addition to borrowing, companies may raise funds by selling ownership interests.

Borrowers can borrow from lenders only if the lenders believe that they will be repaid. However, it is unlikely for the lenders to assume full repayment with interest. They will demand higher interest rates to cover their expected losses and compensate them for their discomfit experience. To lower borrowing costs, borrowers often pledge assets as collateral for their loans. If the borrowers do not repay their loans, the lenders can sell the collateral and use the proceeds to settle the loans. Such transactions will be more facilitated in the capital market that will not tie any asset.

Lenders often will not loan to borrowers who intend to invest in risky projects, especially if the borrowers cannot pledge other collateral. Investors may still be willing to supply capital for these complex projects when they believe they will likely produce valuable future cash flows. However, rather than lending money, they will contribute capital in exchange for project equity. The equity market is the one that will shape the financial sector. The Ethiopian market has been waiting for the capital and stock exchange markets to be implemented for a long time. Now is an antidote.

The other most crucial financial instrument is equity financing. Equity financing is common in most African countries. As long- and short-term investments, implementing the stock market can help the financial sector, bankers, and insurers raise equity capital.

Companies often raise money for projects by selling ownership interests such as corporate common stock or partnership interests. Although these equity instruments legally represent ownership in companies rather than loans, selling equity to raise capital is another way to move money from the future to the present. When shareholders or partners contribute capital to a company, the company obtains money in exchange for equity instruments that will be entitled to distributions in the future. Although the repayment is not scheduled as it would be for loans, equity instruments also represent potential claims on cash in the future.

It is better to think differently and enhance a more liberalized and inclusive approach to the financial system with diversified financial instruments.

PUBLISHED ON Jan 07,2023 [ VOL 23 , NO 1184]

Asseged G.Medhin, deputy CEO of Global Insurance Company.

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