Dr. Brook was born and raised in Addis Ababa, he spent his formative years in Ethiopia until the age of 19. His educational and professional journey has taken him across various countries until he returned to Ethiopia six years ago to serve his country as a Senior Advisor to The Ministry of Finance in 2018, and currently he holds the position of Director General at the Ethiopian Capital Markets Authority.

What is Capital Market?

Dr. Brook explained the Capital Market as a marketplace where people engage in buying and selling shares like debts and company stocks. It is divided into two main sections, one dedicated to buying and selling shares called Equity Market, and the other to managing debts, Debt Market.

Imagine a group of owners of a company decides to sell 25% of their ownership to secure funds for expanding their company, they would head to the Equity Market to find buyers for these shares or on the other hand, suppose you want to expand your company without selling any ownership, you may create a debt document, essentially for borrowing money from multiple investors simultaneously and you will be committed to repay the borrowed funds either over time or in a lump sum, this is known as the Debt Market.

The establishment of the Capital Market Authority is a crucial step in overseeing the capital-raising process and addressing challenges related to fragmented transaction costs.

Dr. Brook outlined the importance of a comprehensive framework and prospectus for anyone intending to sell shares in the market, this document (prospectus) is vital as it should clearly detail how the funds raised will be utilized to inform investors or potential buyers of the shares. The Ethiopian Capital Markets Authority requires sellers to:

• Assist investors in obtaining necessary details
• Disclose all relevant share information before any share purchases
• Submit an investment press release to the Capital Market Authority before fundraising
• Provide detailed information on individuals involved, investment specifics, and potential legal issues.

This commitment to transparency nurtures a fair and well-informed investment environment, and non-compliance may lead to severe penalties, ensuring heightened accountability and safeguarding investor interests.

Introducing Innovative Products

Dr. Brook envisions introducing innovative products to the capital market, exemplified by the concept of a product called Factoring. Imagine a scenario where a prominent company in Ethiopia offers a 90-day check option for small and medium-sized companies for the services the company receives from them, but small and medium company owners may struggle to maintain their supply chain as they aren't getting paid for months. Factoring addresses this issue by collecting all the check debts and selling them to financial institutions, which can then aggregate these debt obligations to a total worth of 5 or 6 billion Ethiopian birr, subsequently listed for various potential buyers in the market to purchase these debt checks.

Trading Platforms

There are essentially two types of trading in the capital market:

1. OTC: Non-listed companies engage in buying and selling through brokers via price discovery mechanisms.

2. Automated System: This is the main trading platform that dynamically caters to the needs of both sellers and buyers, adjusting based on the quoted price of any share destined for listing.

Business Readiness for The Capital Market

Companies looking to enter the capital market should prepare themselves through a system known as IPO readiness, which can be facilitated through firms or advisory teams possessing the expertise to tailor the process to the company's specific needs.

Concerning new share established companies, a comprehensive prospectus is a necessity. This document must outline the feasibility study, identify the responsible party, evaluate their knowledge base, determine the valuation, and ascertain the overall worthiness of the venture.

Dr. Brook stresses that even existing companies require a prospectus to ensure investors are well-informed before engaging in any transactions. There is also an alternative avenue known as listing by introduction, which caters to existing companies seeking to sell their pre-existing shares. Unlike a new share issue, this process doesn't involve creating new shares but demands adherence to specific disclosure requirements for listing with the market value determined by prevailing market forces.

Regarding share acquisition, Dr. Brook underscores the tightly regulated process, where access is granted solely through a licensed broker sanctioned by the authority. He notes that buyers are barred from direct system access and brokers are prohibited from self-purchasing unless they operate as dealers while acquired shares are exclusively deposited into the buyer's Central Security Depository (CSD).

Preparing a business for participation in the capital market demands meticulous attention to several key aspects. This includes:

• Automated and Clear Financial Actions: Ensure that every financial transaction is systematically defined and transparent which aims to reduce the scope for discrepancies.
• Crystal-Clear Business Strategy: Define your business strategy with utmost clarity. A well-defined strategy serves as a guiding light for investors, instilling confidence in your venture.
• Transparent Utilization of Funds: Clearly articulate how you intend to utilize the funds acquired, as investors seek transparency regarding the purpose and potential returns on their investment.
• Ongoing Financial Reporting Obligations: Once your company is listed, there is a mandatory quarterly reporting obligation for the authority.
• Empower Your Team: Empower your workforce to enhance operational efficiency. A skilled team is an invaluable asset in navigating the complexities of the capital market.
• Strategic Outsourcing: Consider outsourcing certain aspects of your strategy to specialized advisory and consulting service companies. This ensures that your approach aligns with the specific needs of your sector, optimizing overall performance and compliance.

Following the resumption of the public offer directive, new companies entering the market will exclusively possess electronic share certificates, eliminating traditional paper certificates. This shift aims to enhance the efficiency of the overall buying and selling system, encompassing government and corporate securities.

The evolving landscape of the capital market will introduce 15 new licensees, including brokerage firms, dealers, and investment banks. Dr. Brook clarifies that these investment banks differ from traditional banks because they are Non-Deposit Taking Banks and their role includes offering advice, providing investment counsel, and listing share companies.

Opportunities for The Diaspora

There is a streamlined process for diaspora individuals looking to invest in the Ethiopian Capital Market, where an investment can be made within seconds through a single mobile application with the guidance of their broker, and this framework opens doors for the diaspora to contribute to Ethiopia's economic growth and participate in the opportunities presented by the dynamic capital markets arena.

It's necessary to be mindful of the regulatory landscape and restrictions imposed on foreign investors, ensuring alignment with the priorities set by Ethiopian governmental policies rather than solely relying on guidance from the Capital Market Authority.

Early Adopters

In the initial phases of The Ethiopian Capital Market evolution, several key players may step into the arena. Let's take a look at who they are:

• Pension Funds: Emerging as institutional investors, pension funds may play a pivotal role in shaping the landscape of the Ethiopian Capital Markets.

• Retail Investors: Individuals entering the market through diverse distribution channels form a crucial segment, and their participation adds dynamism and diversity to the investor base.
• Banks: May establish their presence through dedicated branches and distribution outlets, thereby fostering market liquidity and accessibility.
• Insurance Entities: Venturing into the capital market, insurance entities bring a new dimension to investment avenues. This adds a layer of risk management expertise to the market.
• Collective Investment Scheme: Managed by professional fund managers, collective investment schemes offer a structured investment approach to enhance market sophistication.
• Real Estate Investment Trusts (REITs): Focusing on generating revenue from rents and selling, REITs contribute to market diversification.

Dr. Brook envisions a promising future for the capital market, anticipating the involvement of government entities and corporate companies, particularly in debt market services, which could lead to the emergence of 4 or 5 substantial entities. He concludes, "Understanding the capital market isn't complicated, it thrives through active engagement, practical experience, and acquired knowledge."

The Capital Market Authority has identified 4 types of taxes, and they are refining their implementation of tax structures to create a transparent and sustainable financial ecosystem.

Life Wisdom

Dr. Brook shares valuable life lessons learned from his journey as he recounts a setback from more than two decades ago—failing the 12th-grade Ethiopian Higher Education Entrance Examination. Drawing from his own experience of facing failures, he encourages viewing failure not as an end but as an opportunity to learn and reshape the path.

Reflecting on the profound advice shared by Professor Mesfin Woldemariam during his graduation as a gold medalist, Dr. Brook urges young people not to drift aimlessly like a leaf in the wind, but to take charge of their life direction, emphasizing that life is a limitless journey waiting to be explored.

P.S. Starting from Feb 12, 2024, The Ethiopian Capital Markets Authority will grant licenses for the market participants.

Thanks for reading! If you want to learn more about the newly emerging Ethiopian Capital Markets, Click Here to watch our full interview with Dr. Brook.