The Capital Market May Be Too Shallow to Swim In. Beware.

Aug 23 , 2025.

Banks have a new obsession. After decades chasing deposits and, more recently, digital banking, they are scrambling to attach investment-banking arms to their franchises. The state-owned colossus, Commercial Bank of Ethiopia (CBE), is in the vanguard; Wegagen, Awash and Siinqee are not far behind.

Two novelties, the birth of the Ethiopian Securities Exchange (ESX), the country’s first organised capital market, and the creation in 2023 of the Ethiopian Capital Market Authority (ECMA), headed by Hana Teheklu, once a state prosecutor, have sparked the frenzy. The prospect of underwriting fees and advisory commissions can be tantalising. However, the dash for this glittering prize threatens to magnify the very fragilities regulators hope capital markets will soothe.

The domestic commercial banking industry has long been a cosy and inward-looking business. Lenders gather deposits, parcel out loans and harvest interest income fattened by double-digit inflation. Margins look handsome, masking thin capital and creaking risk controls. The new market promises a different model. In arranging share flotations, selling shares and shepherding mergers, a stream of fees is expected.

The National Bank of Ethiopia (NBE) requires that every bank maintain a paid-up capital of at least five billion Birr. Several of the 32 licensed banks have struggled to meet the threshold. Their troubles do not end there. According to the NBE’s latest sector report, non-performing loans average 4.1pc in 2023/24, inching toward the five percent ceiling. Many mid-tier financial institutions find themselves above the minimum eight percent capital-adequacy ratio, and liquidity scares have forced repeated taps of the Central Bank’s overdraft window.

Inflation, stuck at around 20pc year-on-year, gnaws at real earnings.

Even in robust economies, mixing deposit-taking and investment banking is a delicate task, prompting the international financial system to introduce Basel III’s stricter capital rules. A statutory “Chinese Wall” may look splendid on paper, but walls need bricklayers. Barely two years old, local regulators lack such muscle. ECMA's staff are green, and its mandate overlaps awkwardly with that of the NBE. The judiciary is slow, the auditor's camp is narrow on the ground, and enforcement is patchy.

Capital, however scarce, may prove easier to muster than talent. The country boasts fewer than 200 professionals with genuine experience in underwriting, corporate finance advisory, or securities law. Nigeria, by contrast, employs over 10,000 such folk, and Kenya, with half Ethiopia’s population, has thousands. Ethiopia is attempting to carve an industry from a talent pool scarcely larger than a single lecture hall.

That shortage could tempt banks to cut corners. Consider a hypothetical manufacturing firm that borrows heavily from its bank, then hires the bank’s investment affiliate to underwrite a bond, which retail clients are urged to buy. Should the firm default, the lender would swell the ranks of creditors and see its customers nursing losses. The risk of such triple exposure is not idle conjecture. It helped fell Wall Street titans 17 years ago.

Why, then, the stampede?

Partly, saturation. Private banks’ loan-to-deposit ratios exceed 80pc, leaving scant slack for expansion. Competition is fierce, with more than 30 banks vying for the same middle-class savers. Inflation erodes nominal profits. Investment banking appears to be a lucrative escape. Advisory fees on flotations or bond issues typically range from two to three percent of the deal value. A modest one-billion-Birr transaction could yield up to 30 million Br, a substantial sum when net interest income is under pressure.

Early movers also gain prestige and political sway. CBE, steward of 1.43 trillion Br in assets, relishes both. Smaller rivals fear being left behind.

Nonetheless, investment banking is not cheap. Underwriting a sizable federal bond or a share sale requires a strong balance sheet and a robust reputation. Prospective investors will doubt a lightly capitalised broker-dealer’s ability to honour obligations. Without consolidated supervision, a risky affiliate could channel profits to its parent while parking losses off balance-sheet, imperilling deposit-takers and, ultimately, taxpayers.

Overcrowding looms too. Kenya, whose market is among Africa’s most vibrant, licenses over 20 investment banks. Ethiopia, with a far smaller investor base and virtually no trading history, could soon match that tally. A glut of undercapitalised firms would slash fees, skimp on due diligence and hawk dubious instruments, all while chasing a thin pipeline of deals. Restructuring may come only after a scandal.

One remedy would be consortium models. Mid-tier banks could pool capital and talent, creating a handful of sturdy players capable of shouldering large mandates. The result could be deeper domestic markets and sturdier financial institutions able to compete regionally. Regulators could emulate such consolidations before missteps harden into crises. They can also raise the bar for entry, requiring investment affiliates to hold sizable capital that would weed out those who are not serious.

Making the capital subject to group-wide prudential ratios would prevent thinly capitalised subsidiaries from siphoning risk away from their parents’ regulatory perimeter. Hana's Authority should insist on robust governance, with independent directors having securities expertise, rigorous internal controls and transparent audit trails. Her team should coordinate this with the NBE to ensure consolidated supervision.

Training is equally urgent. Universities should incorporate securities analysis, corporate finance, and risk management into their business curricula to provide students with a comprehensive understanding of these key areas. Multilateral organisations can fund certification schemes and secondments abroad. Banks, if serious, should invest in apprentice programmes rather than poach scarce talent from one another. Without a pipeline of competent analysts, traders and lawyers, the industry will stumble.

For Hana, the learning curve will not doubt be steep. Headquartered on the Africa Avenue (Bole Road), she oversees a young regulatory body, and her staff is small. She needs both legal muscle and political backing to enforce arm’s-length rules. Unchecked lobbying could dilute standards before they have a chance to take root.

None of this is to deny the promise of capital market reform. A thriving ESX could finance infrastructure, broaden household savings, and provide companies with alternatives to bank loans. The next few years will reveal whether the Exchange becomes a conduit for productive investment or another field littered with casualties.

It is wise to remember that the national savings rate is low, pension funds have few local assets to invest in, and the state requires longer-term financing that banks cannot provide. A well-run Exchange could unlock dormant capital. But dreams should bow to reality. Capital is scarce, skills are scarcer, and oversight is embryonic. Racing headlong into risks replicates the fragilities already plaguing the commercial banking industry.

Banks’ ambition should be viewed as natural, but discipline may not be. The domestic financial sector, already struggling with bad loans and liquidity squeezes, cannot afford another arena where undercapitalised firms compete for thin fees. History offers a blunt lesson. In finance, speed without sturdiness ends badly. Whether policymakers heed it will determine whether today’s glitter becomes tomorrow’s grit. The choice lies with policymakers and regulators.

Policymakers can set higher capital floors for investment affiliates and apply consolidated supervision. Regulators can encourage mergers and consortium models to avoid a crowded field of minnows. They can also mount an aggressive and coordinated campaign to build skills, spanning universities, regulators and industry. If these conditions hold, banks' shift to investment banking could diversify revenue and deepen financial services. If they do not, the country may repeat Wall Street’s mistakes without sharing its prosperity.

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