Collective Investment Schemes Break Ground

Aug 23 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

Five fund types are set to define the financial ecosystem. Each of the public money market, mutual, real estate investment, alternative investment, and special designation schemes is designed with a unique investor profile in mind, whether for risk-averse savers or those seeking exposure to property and alternative assets. These funds will be managed by licensed custodians, property managers, and appraisers. Industry voices say this marks a decisive shift from informal, often risky individual investing to a system built around institutional accountability and transparency.

The Ethiopian Capital Market Authority (ECMA) has issued its first regulatory framework for collective investment schemes (CIS). Released for public consultation last week, the draft directive lays the groundwork for a regulated ecosystem of pooled investment vehicles, which have long been absent in the heavily bank-centric financial sector.

By laying out the first rules for pooled investments, the ECMA is opening the market to new instruments and service providers, from custodians to appraisers. While questions remain about capital thresholds and foreign participation, the directive signals the market’s intention to move beyond its traditional banking focus and develop a deeper and more diversified capital market.

Money Market, Mutual, Real Estate Investment, and Alternative Investment funds, as well as Special Designation Schemes, are designed to appeal to different investor groups, from those seeking low-risk savings options to more sophisticated investors looking for exposure to real estate or alternative assets.

Funds such as Public Money Market and Public Mutual are to be structured as share companies and listed, channelling savings into portfolios ranging from short-term and low-risk instruments to diversified holdings for retail investors. New to the domestic market, real estate investment funds will be required to use professional custodians, property managers, and appraisers to manage rental-based assets. Qualified investors can buy shares in alternative investment funds privately, which can take the form of private limited companies or limited partnerships.

Capital market authorities envision that the regulator will approve special designation schemes on a case-by-case basis, provided that full disclosure of risks is given.

The directive, observers say, represents a shift from the era of uncoordinated and often risky individual investing to a more structured marketplace.

“This directive allows for more serious investments,” said Debes Tukue, head of legal at Wegagen Capital Investment Bank.

He described it as “a warmer for the capital market,” offering investors a broader set of risk-adjusted options and giving service providers new revenue streams, even though only a limited number of licenses will be granted. Debes acknowledged that foreign investors have expressed interest but noted that current rules from the National Bank (NBE) and the Ethiopian Investment Commission bar them from participating in the securities exchange.

“The regulators have to triangulate their laws to enable foreigners to invest in the capital market,” he said.

Foreign investment is permitted in the draft directive, but the limitations are substantial. Any fund wishing to operate locally should be registered with ECMA and supply a letter of good standing from its home country's regulators. It has to maintain a registered office within Ethiopia, appoint an external auditor approved by ECMA, and ensure that at least one board member is a resident of Ethiopia. The fund’s shareholder register should also be maintained with an authorised central securities depository or licensed clearing company.

Foreign funds are held to the same governance and operational standards as local ones. They are required to appoint a licensed operator, establish custodial arrangements approved by the ECMA, and, in some cases, obtain indemnity insurance. The funds also face rigorous disclosure obligations around investment policy, performance, and risk management.

Zemedeneh Nigatu, CEO of CBE Capital Investment Bank, called the reforms “the vehicle of the capital market.” He disclosed his firm's keenness to apply for a custodial license as soon as applications opened.

“This will increase capital inflows and mobilise huge sums of assets,” said Zemedeneh, arguing that the framework “provides a clear distinction for CIS in regulation.”

The draft directive complies with a recent income tax amendment that exempts collective investment schemes and limited liability partnerships from corporate income tax. Instead, distributions to investors will be taxed through withholding at the investor level. Real estate and alternative funds are required to comply with governance rules, transparency standards, and capital adequacy requirements. However, precise minimum capital thresholds for schemes will be set by the Ethiopian Securities Exchange (ESX).

Girum Amaha, an economist and consultant, welcomed the new rules but sees gaps remaining in clarity. He pointed to the use of vague terms such as “diverse and complex” and cautioned that they could cause future legal disputes. He also urged higher capital requirements for real estate funds, warning that smaller funds would be too difficult for regulators to monitor.

“This will incentivise investors by earning more than inflation,” Girum told Fortune.

He took issue with the prohibition on mortgages and loans as assets for real estate funds, arguing that this may limit profitability. However, he acknowledged the directive would help create new markets for services such as appraisal, custody, and auditing.

To participate in an Alternative Investment Fund, investors should hold at least 25 million Br in assets, excluding their primary residence and car, or any higher threshold set by the authority. These funds, formed through Exempt Offers, are not subject to borrowing limits or listing requirements, providing managers with more flexibility while maintaining regulatory oversight.

PUBLISHED ON Aug 23,2025 [ VOL 26 , NO 1321]