Central Bank Moves to Erase Paper Bonds Betting on Digital Overhaul

Jun 8 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

Investors will soon find that physical paper certificates for government bonds and Central Bank securities are a relic of the past, replaced by electronic records stored securely online. The National Bank of Ethiopia (NBE) recently issued a draft directive introducing digital records, a step toward modernising the country's financial markets. Known as "dematerialisation," this electronic system seeks to streamline the issuance, ownership, and transfer of securities.

According to Central Bank officials, the new digital system will boost investors' confidence, bringing Ethiopia closer to international financial standards.

Governor Mamo Meheretu first announced his intention to introduce publicly available treasury bonds in March this year, broadening investment options domestically. The planned system, termed a Central Securities Depository (CSD), is designed to manage a diverse range of financial instruments, including private and government debt and equity markets, thereby ensuring transparency and stability.

The Ethiopian Investment Holdings (EIH) has invested seven billion Birr into the market.

The current market for treasury bills and bonds is substantial. As of June 2024, the total outstanding T-bills reached 447.8 billion Br, while the total outstanding T-bonds reached 99.2 billion Br. According to State Minister for Finance, Eyob Tekalegn (PhD), the average interest rate for T-bills last month was at 16.5pc, 2.1 percentage points above the inflationary index for April 2025.

The banking industry views the dematerialisation of bonds and T-bills in a positive light.

Tadesse Hatiya, CEO of Sidama Bank, stated that the planned dematerialisation of government securities would strengthen the collateral-based interbank lending.

The Ethiopian Securities Exchange (ESX) is also warming up to trade these securities through its Automated Trading System (ATS), allowing investors to buy and sell government bonds in a secondary market. Treasury bonds, exempt from taxation, offer investors periodic interest payments and return the face value at maturity.

ESX CEO, Tilahun E. Kassahun (PhD), believes that introducing liquidity to the securities market will expand the investor base. The ESX employs a hybrid market structure that combines a central limit order book with negotiation-based trading through requests for quotes, ensuring transparency and an efficient undertaking.

Investment banks have begun positioning themselves prominently within this evolving market. Recently, the Ethiopian Capital Market Authority (ECMA) licensed CBE Capital Investment Bank and Wegagen Capital Investment Bank.

CBE Capital has rapidly advanced its market position, starting operations in March with an initial capital of 100 million Br, anticipated to double upon obtaining a custodial license. It is owned by the state-owned Commercial Bank of Ethiopia (CBE), with Dalol Capital, controlled by Zemedeneh Negatu, holding a 30pc share. A CEO of CBE Capital, Zemedeneh argued that trading treasury bills and bonds through investment banks will mobilise critical resources for economic development.

"Many people save their money in deposits rather than investments," he said. "It'll help through the nation’s development."

According to Zemedeneh, the brokerage fees being charged at 1.6pc remain competitive, facilitating investor engagement.

Financial experts support the digital transition, anticipating it to ease the mobilisation of securities.

"The interest rate has grown above the inflation rate, making investment in the government deficit attractive," said Mered Fikireyohannes, CEO of Pragma Capital. "However, for sustained attractiveness, the policy rate must rise as mandatory government deficit purchases end."

He strongly advocates that institutional investors, such as pension funds, actively manage investments through professional advisory channels, cautioning that pension funds require urgent reforms.

"The government should stop considering the pension fund as the left pocket," he said. "There should be market-aligned pension growth."

For Ameha Tefera (PhD), a finance expert, engaging interest-free banks with government securities is complex. He pointed out challenges such as revenue taxation, suggesting a tailored approach would be better for integrating these banks within the broader financial system.

With the CSD registry under the NBE, investors will be required to proactively dematerialise existing physical securities, submitting them to CSD members along with the necessary documentation. Failure to comply with these guidelines could result in penalties ranging up to 10pc of the securities’ value for delayed submissions and five percent for misleading information.

Under the new directive, investors will open dedicated securities accounts, providing necessary identification such as national IDs or tax numbers. CSD members will enforce strict Know Your Customer (KYC) standards, verifying details before linking accounts to the system. The process ensures clear ownership rights and protects investors’ interests.

The electronic registry will maintain comprehensive records, issuing unique identifiers such as National Securities Identification Numbers (NSIN) and International Securities Identification Numbers (ISIN) to securities. The fungibility of electronically recorded securities, where similar securities are treated identically, will promote market liquidity and stability.

"The lending ability with T-bills or bonds would be a futuristic prediction by the NBE," said Tadesse of Sidama Bank. "It would improve our liquidity."

Investors bear responsibility for verifying the accuracy of their account information and responding promptly to notifications from the NBE. Violations such as unauthorised transfers or errors in dematerialisation processes will trigger immediate corrective action and potential legal repercussions.

PUBLISHED ON Jun 08,2025 [ VOL 26 , NO 1311]