The Ethiopian Capital Market Authority (ECMA) has paved the way for innovative financial firms to establish robo-advisory services, offering automated investment management and algorithmic financial advice to retail investors.
Enabled through its regulatory framework and licensing directive passed into law in early 2024, the move aims to democratize finance and mobilize capital in the country.
Among the 15 introduced licenses, Securities Robo-Advisors are digital platforms that utilize algorithms and AI tools to automate investment processes, making them ideal for individuals with limited financial experience or smaller investment amounts.
“Our primary goal is to create a framework for businesses and individuals to actively participate in the Ethiopian stock market,” Sirak Solomon, Senior Legal Advisor at the ECMA, told Shega. “By establishing a licensing system for robo-advisory services, we’re fostering inclusive access to finance for everyday investors.”
Traditionally, investment expertise has been a luxury reserved for high-net-worth individuals. For retail investors starting with smaller sums, the cost of hiring a financial advisor can easily outweigh any potential gains, according to Sirak.
“This is where robo-advisors come in. By offering automated, algorithm-driven investment services at minimal fees, they can benefit a wider range of people to participate in the Ethiopian stock market. This aligns perfectly with our goal of democratizing investing and making it accessible to everyone,” Sirak added.
A typical robo-advisor asks questions about your financial situation and future goals through an online survey. It then uses the data to offer advice and automatically invest for you.
Robo-advisors have experienced explosive growth since their introduction in 2008. As of December 2023, the largest robo-advisor by assets under management (AUM) was Vanguard Digital Advisor, with $289 billion.
Furthermore, AI has accelerated the evolution of robo-advisory. JPMorgan, one of the world’s biggest financial institutions, has stated it is developing a ChatGPT-like artificial intelligence service for investors called IndexGPT.
To qualify for a Robo-Advisor license under ECMA, applicants must demonstrate robust technological capabilities for delivering digital investment advisory services. The capital market licensing directive also states that the algorithms utilized by the platform must align with pre-defined investment strategies disclosed to clients and be commensurate with each investor’s risk profile.
In addition, only organizations with a Robo-Advisor license can provide automated investment advisory services via digital channels.
The introduction of Robo-advisor licensing, alongside Digital Sub Broker and Crowdfunding platforms, creates new space for innovative financial firms.
Sirak, who led the development of the regulatory framework, says the ECMA’s focus is on creating a robust framework for the entire financial ecosystem. This includes acknowledging the potential risks associated with digital financial services and implementing mitigation mechanisms.
ECMA is the co-owner of Ethiopia’s Regulatory Sandbox, which will allow innovative firms to test their products and services in a controlled environment before market launch.
Launched in February 2024, the Sandbox facilitates testing within the live market alongside real consumers under time-bound conditions while ensuring appropriate consumer safeguards are in place.
Alongside the new regulations, the ECMA is establishing the necessary infrastructure to officially launch the Ethiopian stock market in September 2024.
The first primary offering on Ethiopia’s securities exchange will be the listing of Ethio Telecom’s 10-percent stake.
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In our initial report, we included inaccurate information regarding the number of companies to be listed on the exchange. We have since removed this information after discovering the error.
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