Unlocking Ethiopia’s Capital Markets: Strategic Insights and Lessons for Local Banks

January 2025 marked a key milestone in Ethiopia's capital market development, as the Ethiopian Securities Exchange (ESX) officially launched, in the presence of the highest official in the nation. Banks had emerged as early investors when the Exchange raised capital, signaling initial optimism. Fast forward now, when it is time to play a leading role in the market, they seem to be taking a cautious approach with limited engagement thus far. A critical question arises: How can Ethiopian banks strategically position themselves to build a robust and competitive capital market ecosystem?

Banks are indispensable to capital market ecosystems, often playing one or more of a number of multifaceted roles such as primary underwriting & distribution of securities, a whole range of advisory services to issuers of debt & equity securities, financial engineering, market-making, interbank trading & sales, prime brokerage, institutional & retail brokerage (as principal or agent) of securities, bridging & warehousing, custodial, agency & trust services, and investment management. Given Ethiopia's relatively late entry into capital markets, substantial lessons can be drawn from countries like Kenya, India, Nigeria, China, and Singapore, to support the market growth.

Kenya offers a regional perspective, having developed a banking sector that effectively supports capital market expansion. In 2024, Kenyan banks increased their investment in government securities by approximately KES 410 billion (USD 3.17 billion), bringing their total holdings to about KES 2.497 trillion (USD 19.3 billion). This demonstrates their critical role in stabilizing and deepening the bond market.

Source: Central Bank of Kenya (CBK), December 2024 Monthly Economic Indicators

Between 2020 and 2024, Indian banks, through digital investment platforms and investor education campaigns, have significantly enhanced retail investor participation, with Demat accounts growing at an approximate CAGR of 39%.

Between 2019 and 2024, Nigeria's capital market experienced significant growth, with the Nigerian Exchange Group's market capitalization increasing from approximately ₦12.79 trillion to ₦62.76 trillion. This represents a compound annual growth rate (CAGR) of about 38.5%. In USD terms, using an average exchange rate of ₦460 to USD 1 over this period, the market capitalization grew from approximately $27.8 billion to $136.4 billion.

This remarkable expansion is attributed to collaborative efforts among the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX), which have collectively enhanced market stability and bolstered investor confidence. Notably, the CBN's banking sector recapitalization initiatives have played a pivotal role in attracting increased investments into banking stocks.

China illustrates the transformative potential of both state-owned and private banks in market expansion. Through strategic investments and innovative financial products, Chinese banks have significantly contributed to the development and diversification of the country's capital markets, even as stock market growth has experienced fluctuations between 2018 and 2023.

In Singapore, a robust regulatory framework demonstrated how seamless integration between banking and capital markets can foster substantial financial sector advancement. Singaporean banks have thrived due to transparent governance, stringent compliance standards, and a robust regulatory environment that has attracted significant foreign direct investment (FDI), with financial services contributing nearly 14% to Singapore’s GDP in 2023.

Source: Shanghai Composite Index annual returns, Nigerian Stock Exchange All-Share Index annual returns, Bombay Stock Exchange Sensitive Index

Ethiopia, by contrast, faces a number of structural and operational hurdles in building a comparable ecosystem. These include a narrow financial product base dominated by short-term government instruments, underdeveloped institutional investment capacity, low public awareness of capital markets, and regulatory fragmentation. Furthermore, banks often lack the internal capacity for capital market services such as underwriting, corporate advisory, and wealth management. The dominance of state-owned banks further narrows innovation and risk-taking in developing diversified capital market services.

To address these challenges and harness the potential of capital markets, banks must take a more proactive role. This calls for a coordinated roadmap aligned with the broader market development agenda.

A Roadmap for Ethiopian Banks

The strategic roadmap for Ethiopian banks can be summarized as follows:

1. Diversify Investment Offerings – Move beyond government securities by supporting corporate bonds, infrastructure bonds and structured financial products tailored for domestic investors.
2. Educate and Onboard Retail Investors – Launch large-scale financial literacy and awareness campaigns. Leverage mobile platforms and digital onboarding tools to bring in first-time investors.
3. Develop Advisory & Underwriting Capacity – Build or partner with investment arms focused on initial public offerings (IPOs), private placements, and SME listings.
4. Collaborate with Regulators – Work with regulatory bodies to co-develop frameworks that reduce barriers, streamline disclosures, and enhance investor protection.

Risk Awareness

Beyond the future requirements of Basel II and III central banking regulatory frameworks, as banks deepen engagement in capital markets and transition their business models to remain relevant (buy & hold to originate & distribute), they must develop robust trading & investment risk management frameworks. Potential pitfalls include over-concentration in specific asset classes, market volatility, low liquidity in new instruments, and reputational risks from failed offerings or poor governance of listed entities. Risk-based pricing, due diligence, and improved transparency are key to maintaining long-term stability and investor confidence.

Conclusion

Ethiopian banks stand to significantly benefit by strategically adopting international best practices. Drawing from Kenya’s bond market strategies, India’s investor engagement initiatives, Nigeria’s integrated regulatory environment, China’s innovative banking approaches, and Singapore’s rigorous regulatory frameworks, Ethiopian banks can chart a clear roadmap. With a focus on investor education, strategic diversification, regulatory alignment, digital innovation, and risk & distribution-conscious product development, banks can build a vibrant and resilient capital market ecosystem; one that accelerates economic transformation and secures Ethiopia’s place as a financial hub in East Africa and beyond.

The above article is part of a series of six commentaries written as part of a collaboration between Zuri Capital and Shega Media and Technology PLC. Reflections on Ethiopia's evolving financial ecosystem pertaining to key developments in banking, capital markets and economic policy will be covered in the series. Zuri Capital, formerly known as RiseAddis Investment Advisors, has been providing world-class corporate finance, transaction, and capital market advisory services for the past three years.