The Role of Capital Markets in Ethiopia’s Economic Transformation

For the past five decades, banks have been a one-stop shop for Ethiopian businesses to get financing. Before this, Ethiopia had a short-lived stock market in the 1960s and early 1970s called the Share Dealing Group, which operated under the imperial regime. Following the Derg regime, the financial system that followed consolidated almost entirely around banks, leaving no room for anything else.

Ethiopia lacked a well-established framework for allocating equity and capital to the private sector, and, without an interbank market, the banks were, in effect, hobbled. For a very long time, Ethiopia lacked a deep and broad mechanism for fair capital and liquidity allocation to the private sector, and in the absence of an interbank trading platform where banks can lend to each other, they couldn’t do that.

The natural outcome of this was high interest rates for borrowers and inefficient liquidity management by banks, which held back businesses, especially small and medium enterprises (SMEs). They regularly faced borrowing rates reaching as high as 23% by late 2024, effectively restricting any prospect of long-term investment plans for most firms not employed by the state.

Compare this to most developed capital markets, where a company can finance not only through banks, but also through bonds, equity, venture capital, private equity, and pension funds. But for Ethiopia. Every road, power plant, manufacturing facility, and every SME growth story had to get to a market through that one narrow pipe.

In January 2025, that changed.

In reality, a bank-only system was never going to be enough for a developing country like Ethiopia. Banks are naturally designed for short-term lending and avoid financing long-term investments. The kind that truly transforms an economy, such as roads, power plants, manufacturing facilities, and agro-processing complexes. In an economy entirely driven by banks, shortages of long-term capital and high structural rates are inevitable.

Capital markets are designed to solve a different problem for every participant in the economy. For a government, they are a way not to rely on foreign aid or short-term borrowings. For firms operating in the market, they are the path to selling their equity and maintaining financial health. For households and individuals, they offer the opportunity for their money to work and generate growth for the economy.

The theory is simple: mobilize savings that sit idle in household accounts and direct them to productive investment. They offer an alternative to bank lending, something that becomes particularly important for SMEs that might be too risky for banks. They provide the necessary channels for funding infrastructure without having to depend entirely on the government budget or foreign loans.

They enforce stronger corporate governance and greater financial disclosure by listed companies that want access to capital. They give ordinary Ethiopians, not just savers with bank accounts, a chance to participate in national growth. And they provide foreign investors with a clear, transparent, and regulated gateway into a local economy.

And Ethiopia is now testing this theory, in real time.

The foundations of this new chapter have been laid over the last few years. Capital market development was built into the Government of Ethiopia’s Home-Grown Economic Reform Program, and the Capital Markets Proclamation No. 1248/2021 established the Ethiopian Capital Market Authority (ECMA) as the regulator for this sector.

Then, on January 10, 2025, at the opening of the Ethiopian Securities Exchange (ESX), Prime Minister Abiy Ahmed rang the opening bell, signaling the formal commencement of securities trading. The Ethiopian Investment Holdings (the sovereign wealth fund) had partnered with the Ministry of Finance and FSD Africa to establish the exchange.

Wegagen Bank became the first company listed on day one and was soon followed by Gadaa Bank in June. Each listing represents real capital raised outside the banking system, supporting branch expansion, SME lending, and job creation without adding to the country’s already strained public debt.

The Ethio Telecom IPO in April told a more nuanced story than the headlines suggested. On one side, it brought together 47000 investors, introducing the idea of ownership in Ethiopia’s largest companies into the lives of tens of thousands of ordinary citizens.

On the other, the offering raised only 3.2 billion birr against a 30 billion birr target, an underwhelming performance driven by weak investment culture and structural constraints such as excluding institutional investors and limiting participation to Ethiopian citizens only.

Although liquidity in immature markets has always presented problems, it was not immediately zero there either. Since its interbank trading pilot in October 2024, the ESX has registered ETB 135 billion in trades, confirming that the infrastructure is operational.

There has also been a significant appetite from outside. ESX’s pre-launch equity raise attracted ETB1.51 billion – nearly a threefold increase on its target of ETB400 million – from local and international investors, including FSD Africa, Trade and Development Bank Group, and Nigeria’s NGX Group. As of early 2026, ECMA was reviewing prospectuses for 66 potential listings, with a number of significant banks, including Awash, Dashen, and Bank of Abyssinia, planning future listings.

But progress doesn’t mean the problem is solved. Ethiopia’s capital market is still in its earliest stage of development.

Most of the population outside a small segment of financially literate professionals has no real knowledge of or access to the capital market, a gap ECMA has tried to close through regional roadshows, though awareness is still biased heavily towards urban cities. But this market isn’t meant to be the preserve of the elite. It’s for the farmer waiting on next month’s harvest. It’s for the student about to enter the workforce. It’s for the countless business owners operating across the country, far from Addis Ababa’s financial center.

There is also the liquidity issue. An exchange with a few listed banks and one telecom company listing today doesn’t make for a truly deep, active market; rather, it’s an encouraging opening move. But if volumes and turnover are low, price discovery will fail, and the exchange’s purpose would be undermined if the listed banks only traded and did not transact.

The structural concentration of early listings in the financial services sector is another concern: ECMA’s strategy is to bootstrap by listing banks that are typically profitable and audited, with the expectation that bank subsidiaries and eventually non-bank competitors will follow onto the exchange.

But ultimately, you need to see listings of manufacturing, technology, and infrastructure companies to really build a dynamic and diversified capital market. As it stands, the market is still largely banks listing alongside their fellow banks. A success in getting it right also delivers a payoff of deeper capital markets with greater private investment and higher rates of productivity growth.

What the next five to ten years need to look like is more listings of non-financial companies than of financial institutions. More trading volume in equities by the general public over time, rather than just participation in a large, initial public offering. Stronger regulatory enforcement, not behind market development but leading it. Financial literacy programs reaching beyond Addis Ababa’s educated elite into rural and semi-rural Ethiopia.

Policy priorities naturally flow from this. ECMA should continue building enforcement capacity ahead of market development. Financial literacy campaigns need to reach beyond Addis Ababa’s educated middle class. The parallel liberalization moves currently underway, including welcoming foreign banks into the market and floating the birr, have to proceed. Because a capital market embedded in an isolated and malfunctioning financial system will always underperform.

If Ethiopia gets this right, businesses will be able to access long-term financing, and infrastructure projects will be financed by Ethiopian pensions rather than foreign debt. A generation of Ethiopians will view investment not as a concept restricted to outsiders and banks, but as an active choice they can and should make with their own savings.

It took half a century to start building the bridge. The next decade is the test of whether it actually reaches its destination.