Analysis of the Need for Stock Market in Ethiopia

Abstract

Private sector participation and performance in the Ethiopian economy is weak. This is due to insufficient access of financial resources to the private sector. The credit market in the country has been overwhelmingly dominated by state-owned banks whose lending efforts have been dedicated to expanding public infrastructure projects and state owned enterprises as a matter of policy. The current government reform initiative by the name ‘Home-grown Economic Reform’ is expected to bring some adjustments in the financial system so that the private sector can have better choice for its long term investment needs with the introduction of market-based financial access. This study employed desk review of secondary data with content analysis of appropriate conceptual and empirical literature. Analysis of establishing stock market as a major alternative to bank based system is conducted using two models: business growth life cycle model and the financial structure model. The models are thought to explain the potential contribution of the development of equity market as a complement to the credit market in the financial structure of the country given the early stage of growth of the economy. The findings shown that establishing and developing stock market is strongly recommended to complement bank services and as an alternative financial access system both to investors and entrepreneurs. Issues to be considered in the process of establishing a stock market are provided as a way forward.