Ethiopian banks need corporate-governance overhaul to make stock market work: Pragma

The country had an informal stock market in the late 1950s, which became official in 1965. The socialist revolution of 1974-75 led to the nationalisation of private businesses and the end of the exchange. That era now seems to be closing, with the Ethiopian Securities Exchange (ESX) starting roadshows to raise capital in May. The exchange is offering ownership of up to 75% to local and foreign private-sector investors.

Improved corporate governance will be needed if the market is to succeed, Fikireyohannes says. Banks, for example, will need “Chinese Walls” to ensure that information does not pass between departments in ways that create incentives for illegal or unethical conduct.  

“Corporate governance is not strong,” and the authorities know that it needs to be improved, he says. “The talent is there, but not the experience. The authorities agree that this needs to be addressed.”

The UK-based Chartered Institute for Securities and Investment has been training Ethiopian finance professionals and is working with authorities to develop regulatory exams. 

Still, banks “need to do more to prepare” by investing in the skills of their employees, Fikireyohannes says. “Some banks are doing the right preparation in terms of human capital. Others are lagging behind.”

Consolidation in the banking sector may also be needed. The country has about 32 banks, but some have balance sheets which are too small to be viable in the long term, he says. 

Pension funds, meanwhile, need to develop their asset-management capabilities, and education to improve public financial literacy is essential, Fikireyohannes adds.

High-tech focus

Pragma advises and carries out capital operations for domestic and foreign investors in Ethiopia. Among current projects is a $50m equity and debt fundraising for a factory, which will supply bamboo for new housing units to be built as part of the project to construct a new national palace in Addis Ababa.

The firm is applying for stockbroking and investment-banking licences for the capital market. The planned market will “create the necessary pipelines for capital formation” in Ethiopia, Fikireyohannes says. Pension funds, previously restricted to investing in government securities, will have a new range of investments to choose from.

Ethiopia’s ratio of overall investment to GDP is now at about 25%, versus a 10-year average of 32%-33%, Fikireyohannes says. A return to a range of 30% to 35% would be “reasonable”, he adds. 

Foreign investors in Ethiopia should choose their sectors in light of government priorities in the home-grown economic reform agenda, he argues. Agriculture, tourism, information and communications technology, mining and energy are all priority sectors, he adds.

Investment interest among Pragma’s clients is focused on high-tech sectors such as diagnostics and medical imaging. A recent change is the emergence of interest in treating non-communicable diseases such as diabetes and cancer, Fikireyohannes says. “These are now major culprits in developing countries.”

He’s also optimistic on the outlook for Ethiopian property in a context of inflation. People need a real asset to protect their savings. “It’s a no brainer.”