Analysis of Ethiopia’s Legal Framework for its Fitness to Support a Bond Market

(by Gemechu Merera Fana)

1, Introduction

The establishment and growth of a robust bond market can be a vital catalyst for economic development and financial stability in any nation. Bond markets provide a platform for governments, corporations, and other entities to raise capital, diversify their funding sources, and promote investment opportunities. Ethiopia, as one of Africa’s most populous and rapidly developing countries, has recognized the significance of expanding its financial infrastructure to include a well-functioning bond market. This article embarks on a comprehensive analysis of Ethiopia’s legal framework to evaluate its suitability in supporting the development and sustainability of a bond market.

Ethiopia’s recent economic reforms and efforts to liberalize its financial sector have garnered considerable attention on the global stage. These changes have spurred the nation’s interest in fostering a dynamic bond market that can drive economic growth, infrastructure development, and private sector expansion. However, the establishment of a bond market demands a comprehensive legal and regulatory framework that ensures investor protection, market integrity, transparency, and efficient operations.

This article will critically examine Ethiopia’s legal framework, dissecting its existing laws, regulations, and policies that pertain to bond issuance and trading. The analysis will focus on the adequacy and coherence of these legal provisions in fostering a conducive environment for bond market development. Furthermore, it will consider the alignment of Ethiopia’s legal framework with international best practices and standards, aiming to identify areas of improvement and potential challenges. To achieve the element of comparison, the paper generally delves into introducing what bond market is, how bond markets operate, what the importance of such markets is, how and where a bond is sold and bought and other related issues.

Ultimately, beyond its purpose as a term paper done as partial fulfillment of the given course, this article seeks to contribute to the ongoing discourse surrounding Ethiopia’s financial sector development by offering a comprehensive evaluation of its legal framework’s readiness to support the establishment of a vibrant and sustainable bond market. The findings and insights derived from this analysis may prove invaluable to policymakers, regulators, investors, and other stakeholders as Ethiopia continues on its path towards economic modernization and financial market expansion.

What is a Bond Market?

A bond is a legally binding financial instrument that represents a debt obligation. It is a formal contract between the issuer (which can be a government, corporation, or other entity) and the bondholder, where the issuer agrees to pay the bondholder a specified amount of money at a predetermined future date, known as the bond’s maturity date. In the meantime, the bondholder typically receives periodic interest payments, which are based on the bond’s interest rate, also known as the coupon rate.

Bonds are often used to raise capital for various purposes, and they are considered a relatively low-risk investment compared to stocks. They are frequently traded in financial markets, and their value can fluctuate based on changes in interest rates and the creditworthiness of the issuer.

Thus, a bond market is a financial market where bonds are traded. Bonds are debt securities issued by governments, corporations, and other organizations to raise money. When you buy a bond, you are lending money to the issuer and they agree to pay you back with interest over a certain period of time.

 Workeneh Alemnew, Debentures and Bonds Under Ethiopian Law, The International Journal of Ethiopian Legal Studies, Vol. 2:1, 2017, p 11

Types of Bonds

There are many different types of bonds, each with its own set of risks and rewards. Some of the most common types of bonds include:

  • Government bonds: Government bonds are issued by governments and are considered to be one of the safest investments available. They typically offer lower interest rates than other types of bonds, but they also have lower risk. A good example for this is the government treasury bills/bonds that Ethiopian government posts.
  • Corporate bonds: Corporate bonds are issued by corporations and are considered to be more risky than government bonds. They typically offer higher interest rates than government bonds, but they also have a higher risk of default.
  • Municipal bonds: Municipal bonds are issued by local governments and are usually exempted from federal income taxes. They typically offer lower interest rates than other types of bonds, and they are usually issued to finance specific projects, such as schools, roads, and hospitals.

How Bond Markets Work

Bond markets can be a good investment for investors who are looking for a steady stream of income. Bonds typically offer higher interest rates than savings accounts or money market funds, and they are considered to be less risky than stocks. However, it is important to remember that all investments carry some degree of risk. Before investing in bonds, it is important to do research and understand the risks involved.

Bond markets are typically organized into two main types: the primary market and the secondary market.

  • The primary market is where new bonds are issued. When a government or corporation wants to raise money, they will sell bonds in the primary market. Investors who buy bonds in the primary market are essentially lending money to the issuer.
  • The secondary market is where existing bonds are traded. Once a bond has been issued, it can be traded between investors in the secondary market. This allows investors to buy and sell bonds without having to go through the issuer.

The importance of secondary markets, however, is nothing like its name indicates. As previously mentioned, investors trade securities amongst themselves in the secondary market once these securities have been initially offered on the primary market. Consequently, many individuals commonly refer to the secondary market as the stock market.

The term “secondary” in reference to transactions within this market arises from the fact that they are one level removed from the initial transaction that led to the creation of the securities in question. For instance, a financial institution originates a mortgage for a consumer, which gives rise to the mortgage security. The bank can subsequently sell this security to actors in a secondary transaction on the secondary market.

The secondary market itself also comprises Stock Markets and Over-The-Counter Markets. The stock market comprises centralized exchanges where purchasers and vendors convene to engage in the trading of stocks and various assets. Interaction between parties, whether in a physical or any other form, is absent. Electronic trading predominates. Traders are obligated to adhere to the rules and regulations established by the relevant regulatory authorities. On the other hand, the over-the-counter (OTC) market deals with the exchange of stocks, bonds, and other financial assets. Unlike centralized exchanges, OTC trades transpire within broker-dealer networks, meaning these assets aren’t traded on a formal exchange. Typically, OTC stocks belong to smaller companies that don’t meet listing standards. As new financial products emerge, the count of secondary markets tends to grow. Assets like mortgages, for instance, can have multiple secondary markets.

Rationale for Domestic Bond Market

Since the Asian financial crisis of 1997-98, there has been a growing emphasis on understanding the roles played by the banking sector and the capital market within developing economies. Often, when present, the domestic bond market is found to be less mature, lacking both in breadth and depth when compared to the banking system and the equity market. In light of the lessons learned from the crisis, numerous experts and studies have advocated for the development of the domestic bond market as an additional source of debt financing. This applies not only to economies that were affected by financial crises but extends to all emerging markets where deficiencies exist in terms of the range of debt financing options available. 

The Emerging Markets Committee of the International Organization of Securities Commissions (hereinafter the EMCIOSC) identified 6 rationale for the importance and establishment of domestic bond markets, namely: being an alternative source of domestic debt finance, lower cost of capital, reducing risks associated with maturity and currency mismatch, broadening of capital markets, efficient pricing of credit risk, and promoting financial stability. Here is a short explanation of each;

A. Alternative Source of Domestic Debt Finance:

It is contended that an excessive reliance on bank loans as a primary source of debt financing exposes an economy to the vulnerability of a banking system failure. This implies that a banking crisis can swiftly and detrimentally impact economic activity, as businesses would

Investopedia, What Is the Secondary Market? How It Works and Pricing,
https://www.investopedia.com/terms/s/secondarymarket.asp last accessed on July 25th 2023

The Emerging Markets Committee of the International Organization of Securities Commissions, The Development of Corporate Bond Markets in Emerging Market Countries, May 2000, p 3

 The EMCIOSC, Note 3, pp 3-6

encounter credit constraints, compelling them to curtail investment, ultimately resulting in reduced aggregate demand due to the multiplier effect. Having a robust domestic capital market, especially a well-functioning bond market, would provide corporations with an alternative avenue for securing debt capital in situations where banks are unable to do so, thus mitigating the potential adverse consequences of a bank credit crunch on the economy. Furthermore, proponents argue that a bond market can expedite the resolution of a banking crisis by facilitating the recapitalization of banks’ balance sheets through securitization, involving the issuance of bonds backed by non-performing loans.

B. Lower Cost of Capital:

Companies can face higher financing expenses when utilizing bank loans as opposed to bond financing. Banks impose administrative charges related to loan arrangement, borrower information processing, and monitoring. A domestic corporate bond market provides a means for companies to diminish their financing costs in two primary ways. Firstly, it permits corporations to borrow directly from investors via bond issuance, bypassing the extensive intermediary role of commercial banks (known as disintermediation).

While companies still engage underwriters, brokers, and dealers to raise debt capital, competition among these intermediaries tends to be more robust than that among commercial banks, thereby driving down their intermediary costs. This results in lower debt financing expenses for borrowing firms. Corporate bond markets can aid borrowers in reducing their financing expenses through two key mechanisms. Initially, they enable bank disintermediation by offering direct access to investors, eliminating the need for an intermediary and its associated costs. Additionally, by issuing corporate bonds, firms can tailor their asset and liability structures to mitigate the risks of maturity and currency mismatches on their balance sheets, consequently lowering their overall cost of capital.

C. Reducing Risks Associated with Maturity and Currency Mismatch

The issue of information asymmetry between lenders and borrowers often forces banks to rely on short-term credit to reduce the window in which opportunistic borrowers can take advantage of lenders without defaulting. Consequently, corporate borrowers engaged in long-term investments may struggle to align their long-term cash flows from these investments with the short-term cash outflows from bank loans, particularly in a bank-dependent financial system. This maturity mismatch can pose a threat to corporate solvency when long-term investment returns fail to materialize in time to cover short-term obligations stemming from bank loans. To avoid this dilemma, firms may shy away from long-term investments and entrepreneurial endeavors, potentially leading to a decline in the economy’s overall productive capacity, considering the inherently long-term nature of most capital investments.

Corporate bond markets offer a solution to this issue. For example, if a company notices an extension in the maturity of its assets, it can issue corporate bonds with corresponding or longer maturities and use the funds from the issuance to retire shorter-term debts, such as short-term bank loans. Moreover, the presence of a local corporate bond market enables firms with revenues primarily in domestic currency to issue bonds denominated in local currency, thereby alleviating currency mismatch issues by matching the currencies of their cash inflows and outflows.

D. Broadening of Capital Markets

In the absence of a well-functioning bond market, savers have limited investment options, often resorting to substitutes like bank deposits and, to a lesser extent, equities. In extreme cases, they might turn to non-financial assets like real estate, reducing the pool of savings available for productive investments and potentially leading to reduced economic well-being over time. Conversely, an active and efficient bond market diversifies the range of assets available to savers, aligning better with their risk preferences and enabling more optimized asset allocation. Furthermore, a robust bond market aids financial institutions in managing the maturity structure of their balance sheets, particularly for those with long-term liabilities like life insurance companies and pension funds, which could otherwise pass on higher premiums to policyholders due to maturity mismatch risks.

E. Efficient Pricing of Credit Risk

In economies lacking a bond market, bank-set interest rates might not be determined through competitive forces and therefore may not represent the true cost of capital. This can occur due to potential rate collusion or government-mandated rate fixing by banks. Additionally, it’s argued that banks might not evaluate credit risk as effectively as bond investors. This absence of a clear indicator for the cost of capital could lead to inefficient capital allocation by businesses, ultimately diminishing long-term economic well-being. Conversely, a well-functioning bond market promotes the efficient pricing of credit risk by factoring in the expectations of all market participants into bond prices. In essence, through the use of price signals, a developed bond market ensures that firms base their investment decisions on an accurate cost of capital, fostering an efficient allocation of capital in the economy.

F. Promoting Financial Stability

In the absence of a corporate bond market, a significant portion of corporate debt financing relies on the banking sector. However, this places banks at significant risk due to the mismatch between short-term, liquid assets (like deposits) and relatively illiquid long-term assets (such as loans). Banks cannot easily shift credit risk to depositors, and their asymmetric and highly specific borrower information compounds this challenge. Furthermore, in emerging markets, where a few banks dominate lending, there’s a concentration of credit risk within the banking sector, elevating systemic risk in economies heavily reliant on bank loans. A bond market contributes to financial stability by diversifying the financial system. For example, as numerous public investors participate in new corporate bond issuances, it spreads the burden of credit risks across various investors, thereby reducing the credit risks borne by the banking sector.

2, Evaluation of Ethiopia’s Legal Framework

Stating the introduction of a stock market in Ethiopia could have a positive impact on the economy, pointing out that creating a legal framework to accommodate a stock market in Ethiopia is a pertinent matter in order to align with global trends, and emphasizing on the importance of timely action, especially in light of the current demand for stock trading, as evidenced by the activity in over-the-counter markets, Chewaka writes “Ethiopia lacks the institutional and legal frameworks that regulate the market for stock exchange, and in effect, the  current stock trading activity may grow into a largely unregulated space in which everyone speculates and plays for short-term gains.”

The widespread belief about the vitality of stock markets’ potential to be powerful engines of economic growth in developing countries like Ethiopia and the capability of efficient stock market to provide the public with investment opportunities and mobilizing savings as well as international capital for successful corporate financing is further stated by John Fagan. “As far as Government Bond is concerned, the Imperial government attempted to issue bonds as per the 1961 and 1969 Proclamations that were enacted to provide and regulate the issuance of government bonds”. These proclamations enacted in the aforementioned years are the Government Bonds Proclamation No 172/1961, and Government Bonds Proclamation No 262/1969 respectively.

Solomon asserts that, during the Imperial Regime, Ethiopia briefly had a formal securities market to its effect the aforementioned two legislations were passed concerning government bonds. These laws

 Jetu Edosa Chewaka, Legal Aspects of Stock Market Development in Ethiopia: Comments on Challenges and Prospects, MIZAN LAW REVIEW, Vol. 8, No.2 December 2014, p 439
 John Fagan, The Role of Securities Regulation in the Development of the Thai Stock Market, Thailand Law Forum, http://thailawforum.com/articles/faganstock.html , last accessed on July 29, 2023
 Workeneh, Note 1, p 6
 The full citation: Government Bonds Proclamation No 172/1961, Negarit Gazeta, Year 20, No. 11 and Government Bonds Proclamation No 262/1969, Negarit Gazeta, Year 28, No. 12

aimed to support government development projects and stimulate the securities market of that era. To comply with the Commercial Code, numerous business organizations were required to register with the Imperial Ethiopian Ministry of Commerce and Industry before and after the enactment of these laws. However, it’s worth noting that three share companies, namely the Sabean Utility Corporation S.C., the Ras Hotels S.C., and the General Ethiopian Transport S.C., were established in 1942, 1948, and 1950, respectively, but they didn’t offer shares to the public at that time. The first instances of public share offerings in the country occurred later when the Ethiopian Abattoirs S.C. initiated one in 1956, followed by the Bottling Company of Ethiopia in 1957 and the Indo-Ethiopian Textiles S.C. in 1958. Importantly, these public offerings took place in the absence of a formal securities market.

During the Imperial period, Ethiopia established institutions related to the stock market, including the “Addis Ababa Share Dealing Group.” However, with the transition to a command economy after the Imperial regime ended, the stock market was eliminated. Since that time, aside from the Commodities Market Exchange designed for trading agricultural products under the current government, there haven’t been any legally established stock markets for trading stocks. Instead, there has been fragmented and unregulated stock trading occurring in a dealer market. Moreover, writes Jetu E. Chewaka, “financial institutions such as Addis Ababa Bank, the Commercial Bank of Ethiopia and the Ethiopian Investment Corporation played an intermediary
role in transferring and delivery of traded shares in the form of over-the-counter share dealing services.” The name “Bond” however is most known to the Ethiopian people in relation to the bond the government issued and sold to finance the Great Ethiopian Renaissance Dam (GERD).

 Solomon Abay Yimer, Financial market development, policy and regulation: the international Experience and Ethiopia’s need for further reform, 2011, [Thesis, fully internal, Universiteit van Amsterdam], pp 128-129 
 Jetu Edosa Chewaka, Note 5, p 440
 Jetu Edosa Chewaka, Note 5, p 443

Apart from the historical background, to analyze whether Ethiopia currently has the proper and fit legal framework to support a bond market we need to know what the requisite legal framework to support any bond market is. The following part will deal with what’s required and we’ll get back to Ethiopia.

The Requisite Legal Framework to Support a Bond Market

The common legal framework needed to support a bond market typically includes the following elements:

  • Securities laws: Securities laws regulate the issuance and trading of securities, including bonds. These laws typically require issuers to provide investors with certain information about the bonds they are offering, and they also establish rules for the trading of bonds.
  • Banking laws: Banking laws regulate the activities of banks and other financial institutions. These laws typically require banks to hold certain levels of capital and to maintain certain liquidity standards. They also establish rules for the lending of money by banks.
  • Contract law: Contract law governs the formation and enforcement of contracts, including contracts for the sale and purchase of bonds. Contract law typically provides investors with certain rights and remedies in the event that the issuer of a bond defaults on its obligations.
  • Settlement laws: Settlement laws govern the process of settling trades in bonds. These laws typically require clearinghouses to act as intermediaries between buyers and sellers of bonds, and they also establish rules for the transfer of ownership of bonds.
  • Anti-money laundering laws: Anti-money laundering laws are designed to prevent the use of the financial system for criminal purposes. These laws typically require financial institutions to conduct customer due diligence and to report suspicious activity.
  • Tax Laws: How, who and when is the tax regime applied to bond markets and its actors? Tax laws should settle the issue before hand. Taxation for fixed-income securities in different countries varies. It covers issuers, market intermediaries (approved bond intermediaries), and investors.

The specific legal framework needed to support a bond market will vary depending on the country or jurisdiction in question. However, the elements listed above are typically common to most bond markets. In addition to the legal framework, a well-functioning bond market also requires the presence of a number of other factors, including:

  • A strong financial infrastructure: A strong financial infrastructure includes well-functioning institutions such as clearinghouses, settlement agents, and custodians. These institutions play an important role in the smooth functioning of the bond market by facilitating the transfer of ownership of bonds and by providing investors with a safe place to hold their investments.
  • A liquid market: A liquid market is one where bonds can be bought and sold easily and quickly. Liquidity is important for investors because it allows them to buy and sell bonds quickly and easily, without having to worry about incurring large losses.
  • Transparency: Transparency is important for investors because it allows them to make informed investment decisions. Transparency is achieved by requiring issuers to provide investors with certain information about the bonds they are offering, and by establishing rules for the disclosure of information by market participants.
  • Accountability: Accountability is important for investors because it ensures that they will be able to recover their investments in the event that an issuer defaults. Accountability is achieved by requiring issuers to have adequate financial resources and by establishing rules for the enforcement of contracts.

The presence of these factors can help to create a stable and efficient bond market that can provide investors with a variety of investment options and that can help to promote economic growth.

Ethiopia’s Legal Framework for Bond Markets

“An effective regulatory and supervision framework for the bond market, intermediaries, institutional investors, and other market participants is required to foster the development of robust bond markets.” Such framework must ensure sufficient safeguards for investors and promote responsible business behavior or ethical codes that mitigate systemic risks. Achieving this entails well-defined market regulations, a significant level of transparency, and rigorous prudential guidelines and governance principles that acknowledge the significance of fiduciary duties. The writer also indicates that market structure (which includes the availability of rating agencies, trading platforms, clearing and settlement systems, audit and accounting standards), taxation, foreign exchange regulations are the most important factors to count in.

Currrently, Ethiopia lacks specific legislation for governing the exchange of securities in general and bonds in particular. The only potential legal framework that might address this matter is the 2021 Commercial Code, which serves as the fundamental legal document regulating the establishment and operation of businesses. In the absence of the future enactment of the proposed Capital Market legislation, which is intended to oversee stock trading in Ethiopia, we can identify two key elements related to stock trading in Ethiopia. Firstly, there are the legal aspects concerning the trading of ownership shares in companies, and secondly, there are the legal structures that oversee the stock market. It’s noteworthy that the 2021 Commercial Code recognizes shares of companies as tradeable financial instruments, regardless of the existence of a formalized stock market in Ethiopia.

The 2021 Commercial Code, just like its predecessor, recognizes company shares as tradable financial instruments, regardless of the presence of a formalized stock market in Ethiopia. Consequently, it is essential to carefully examine certain legal facets of stock trading as governed by the Commercial Code. One fundamental aspect of a

 Ismail Dalla, Harmonization of Bond Market Rules and Regulations in Selected APEC Economies, Asian Development Bank, 2003, p 8
 Ismail Dalla, Note 11, p 8

company during its operations is the characteristic of share transferability. Enabling the transfer of shares ensures the company’s continuity, typically over an extended duration. While shares represent a type of transferable financial instrument, possessing them within a company doesn’t inherently grant tangible property rights. The Commercial Code provides that “every share shall confer a right to participate in the annual net profits and to a share in the net proceeds on a winding-up.” Hence, the only tangible rights to property that result from stock ownership exist in the event of a company’s dissolution and liquidation. Hence shares in a company have no intrinsic value in themselves but represent rights in ownership whose value depends on the financial condition, and the profitability or future prospects of the corporation who issued the stock.

Ethiopian Commercial Law recognizes two types of shares. The first, and more prevalent, is registered shares, which are held in the shareholder’s name. The second type is bearer shares. Bearer shares, as the name suggests, can be transferred through simple delivery of the share certificate. Consequently, unless there is evidence to the contrary, holder of bearer shares is considered the owner for purposes such as receiving dividends, redemption, and participating in general meetings. However, the recognition of bearer shares is only extended to shares issued before ethe coming into effect of the Commercial code, hence bearer shares in Ethiopia is prohibited by law. The Banking Business Proclamation No. 592/2008 too provides that only registered shares can be transferred, and any transfer not recorded in the share register is considered invalid.

Jetu Edosa Chewaka, Note 5, p 448
 Federal Negarit Gazette of the Federal Democratic Republic of Ethiopia, Commercial Code of Ethiopia Proclamation No. 1243/2021, 7th Year No. 23, Addis Ababa, 2021, hereinafter referred to as “the Commercial Code”, Article 291 (1)
 Ratner, D. (1980), Securities Regulation Material for a Basic Course, (USA: West Publishing Co, 2nd Ed.), p. 1.
 Commercial Code, Note 15, Article 267

We had to discuss about the transfer of shares because the regulatory framework will not be different for both, at most the provisions will apply mutatis mutandis.  It has to be noted, however, the Commercial Code doesn’t mention the term “bond” or “bonds” anywhere in the code. The following are the diagnosis and recommendations of the financial markets in Ethiopia highlighted by Solomon Yimer:

  • The country needs to formulate the market and its regulatory framework based on the exchange-as-firm model, following the global trend. This approach should harmonize the market structure with the existing banking, insurance, and microfinance sectors, while aligning regulations with international standards to leverage regulatory expertise and attract foreign investments in the long term.
  • It needs to preserve the exchange-as-public-market model and the grounds for regulating market failures as it is crucial to allow for the establishment of a limited number of exchanges and regulate potential harms associated with profit motives. This strategy should initially involve a single national exchange in the capital city to focus on market and regulatory capacity development at the outset. As regulatory capacity and the securities and investment sectors grow, creating competing regional exchanges should be considered to promote decentralization and achieve balanced economic development. Additionally, structuring the securities market to cater separately to primary and secondary trading, government and private securities, and debt and equity securities is essential, as demonstrated by international best practices.
  • There is a need to enhance the existing company law by making it more comprehensive. This involves establishing regulations for the different types of securities within share companies, with the aim of improving corporate financing, governance, as well as accounting and auditing practices. Simultaneously, it is essential to remove the current regulations that act as deterrents to the issuance and trading of securities. These include restrictions on portfolio investments by banks, insurers, and microfinance institutions, along with the National Bank of Ethiopia’s requirement for securities trading to occur through the subsidiary companies of banks.

Furthermore, the existence of a mandatory registration system for bonds needs regulation to foster well-functioning and dependable bond markets. A mandatory registration system is a crucial regulation in bond markets for several important reasons and Ethiopia lacks this whole regulatory system. Few of the reasons that dictate the need for this system are:

  • Investor Protection: Registration ensures that the ownership of bonds is recorded, which protects the interests of bondholders. It provides legal evidence of ownership and helps prevent fraud or disputes over ownership rights.
  • Transparency: A registration system enhances transparency in the bond market. It allows investors to know who holds a particular bond, which promotes trust and confidence in the market. Transparency is essential for efficient price discovery.
  • Risk Mitigation: Registration systems help mitigate risk. For example, in the event of a lost or stolen bond certificate, a registered owner can have it replaced without losing their investment. This reduces the risk of loss associated with physical certificates.
  • Facilitating Trading: In many modern bond markets, trading occurs electronically, and a registration system is a prerequisite for such trading. It enables the smooth transfer of ownership between buyers and sellers, ensuring the legal transfer of rights and obligations.
  • Issuer Accountability: Registration systems provide a record of bond ownership, making it easier for issuers to communicate with bondholders. This is important for matters such as interest payments and communicating corporate actions.
  • Taxation and Reporting: A registration system aids tax authorities in tracking the ownership of bonds and assessing the tax liabilities of bondholders. It also helps in regulatory reporting and compliance.
  • Market Integrity: By maintaining accurate and up-to-date records of bond ownership, a registration system helps prevent market abuses and illegal activities like money laundering.
  • Market Development: Having a registration system in place can attract a broader range of investors, including institutional investors and foreign investors. This can stimulate the development of the bond market by increasing liquidity.
  • Conflict Resolution: In cases of disputes or questions regarding bond ownership, a registration system provides an official record to resolve conflicts or discrepancies.

A mandatory registration system is a fundamental regulation in bond markets that serves to protect investors, ensure market integrity, and facilitate efficient trading and market development. It is a cornerstone of modern bond market infrastructure.

3, Conclusion

To sum up, Ethiopia has embarked on a promising journey towards establishing a capital market in general and bond market in particular, recognizing its potential as a catalyst for economic development and financial stability in this rapidly growing nation. The country’s recent economic reforms and liberalization efforts have drawn international attention and have highlighted the desire to develop a dynamic bond market to drive economic growth, infrastructure development, and private sector expansion. However, while the intention is clear, the existing legal framework raises concerns about its ability to effectively support and regulate this emerging market.

A comprehensive analysis of Ethiopia’s current legal framework reveals several challenges and gaps that must be addressed for the bond market to thrive effectively. This framework is essential to ensure investor protection, market integrity, transparency, and operational efficiency. Without the necessary legal underpinnings, the potential benefits of a bond market may remain unrealized, and the market itself might become a largely unregulated space susceptible to speculation and short-term gains.

Despite Ethiopia’s historical attempts at establishing a securities market, the absence of comprehensive regulations and a formal stock exchange has resulted in fragmented and unregulated stock trading, particularly in the form of over-the-counter markets. To transition to a well-functioning bond market, the nation needs to develop a robust legal framework encompassing securities laws, banking laws, contract law, settlement laws, anti-money laundering regulations, and tax laws.

Moreover, it’s imperative to establish a well-functioning financial infrastructure, enhance market transparency, and enforce accountability to protect investors and promote responsible business conduct. A liquid and well-regulated market is essential for fostering investment opportunities and mobilizing savings and international capital for corporate financing.

To bridge the gap between the current state of Ethiopian financial markets and the desired bond market, several critical steps must be taken:

  1. Regulatory Framework: The country needs to create a regulatory framework that is in line with international standards and follows the exchange-as-firm model. This framework should be comprehensive, covering various aspects such as market regulations, transparency, and the protection of investor rights.
  2. Market Structure: Ethiopia should aim to make its market structure consistent with existing financial sectors such as banking, insurance, and microfinance. This alignment will facilitate the seamless integration of a bond market into the broader financial landscape.
  3. Registration System: A mandatory registration system for bonds is crucial. It offers transparency, risk mitigation, and protection for investors. It also enables efficient trading and allows the issuance of bonds to be properly regulated and monitored.
  4. Taxation and Reporting: Clear taxation guidelines for bonds must be established, along with robust reporting requirements. This clarity will promote trust and transparency within the market.
  5. Market Development: Ethiopia should focus on building market capacity by initially concentrating efforts on a single national exchange in the capital city. This approach will allow for a gradual expansion as regulatory capacity and the securities and investment sectors grow.
  6. Issuer Accountability: Issuers must be held accountable, ensuring that they have the financial capacity to meet their obligations. Adequate regulatory oversight is necessary to enforce contracts in case of defaults.
  7. Legal Framework for Bonds: A dedicated legal framework for bonds should be developed, acknowledging their unique characteristics and trading requirements. This framework will lay the foundation for a robust bond market.

In conclusion, while Ethiopia’s aspirations to establish a bond market are commendable, the existing legal framework raises significant concerns about its readiness. However, with strategic reforms, legislative enhancements, and a concerted effort to align with international best practices, Ethiopia has the potential to create a thriving bond market that contributes to economic development and financial stability in the long term. The journey has begun, and it is crucial that the nation continues on this path with a strong commitment to creating a supportive legal framework to unlock the full potential of its bond market.