Share Companies & Stock Market in Ethiopia:Risks and Opportunities

Yared Haile Mariam (MSc, MPhil, MBA)University of BathMaster of Business AdministrationSchool of Management

© 2012 YHM Consulting

Attention is drawn to the fact that copyright on this project rests with its author. This copy of the project has been supplied on the condition that anyone who consults it is understood to recognise that its copyright rests with its author and that no quotation from the project and no information derived from it may be published without the prior consent of the author.

Cover Design: Aychew Design WorksTM, Addis Ababa Ethiopia

CONTENTS

Abbreviations iTables and Figures iiLists of Tables iiLists of Figures ii1.Research Purpose 31.1.Management Issues 31.2.Value of the work 32.0 Introduction 43 Literature Review 53.2 History of Joint-Stock company 53.2 Modern day Stock Markets 83.3 The Equity Market in Africa 93.4 Stock Market Bubbles and Crashes 123.5 History of Share Companies in Ethiopia 134 Ethiopia 164.1 Introduction 164.2 Ethiopia: The country 164.3 Ethiopia: Political 184.4 Ethiopia: Economy 194.5 Ethiopia’s Commercial Code 214.6 Opportunities for Joint-Stock Companies 235. Methodology 435.1 Methods 435.2 Data Selection 435.2.1 Regulatory bodies 445.2.2 Share Promoters and Board Members 455.2.3 Shareholders 455.3 Data Gathering 505.3.1 Interviews 505.3.2 Methods of Date Collection 505.3.3 Level of Response 516. Result and Discussions 546.1 Reasons for increasing the number of share companies 546.1.1 The driving forces for increasing the number of share companies 556.1.1.1 Profit: 556.1.1.2 Change of the economic and political systems 566.1.1.3 Inflation, the lack of financial institution and economic growth 586.1.1.4 Element of exaggerated marketing 596.1.1.5 Economy of Scale: the need for pooling capital 596.1.1.6 Social Capital 606.1.2 Conclusions for growth of share companies 606.2 Shareholders Views 616.3 Challenges from launching Share Companies in Ethiopia 646.3.1 The law, regulations and institutions 66

6.3.1.1 The commercial code is outdated: 666.3.1.2 Instability of the law: 676.3.1.3 System, red tape and bureaucracy: 686.3.1.4 Cost: 706.3.1.5 Malpractice: 706.4 What are the management challenges? 716.4.1 Management Know how 716.4.2 Business environment 726.4.2.1 Lack of national standards 736.4.3 Capacity 746.4.4 Principal –Agent power imbalance 746.4.5 Mismanagement 756.5 Commercial code of Ethiopia 786.5.1 Shortcoming of the Ethiopian Commercial Code 786.5.1.1 Lack of Standard for Initial Public offering (IPO) 846.5.1.2 Lack of Disclosure Conflict of Interest 846.5.2 Share transfer and amendments 866.5.3 Arbitrary Private vs. Public Company Divide 866.5.4 Lack of Provision for Subsidiaries and group holdings 876.5.5 Lack of intangibles and goodwill valuations 876.5.6 Lack of regulatory bodies 876.6 Conflict of Interest 886.7 Does Ethiopia need a stock-market? 886.7.1 Profitable and loss making companies 906.7.2 Profitable Share Companies 906.7.3 Failed Share Companies 916.7.4 Causes of failure 916.8 Initial Public Offering Document: 926.8.1 How informative was the IPO document? 936.9 Risks 94 6.9.1 Regulatory risks 946.9.2 Financial risks 956.9.3 Operational risks 956.9.4 Risk mitigation measures 966.9.4.1 Regulatory risk mitigation measures 966.10 Benefits to Share Company promoters and directors 1017. CONCLUSIONS 102LIMITATION TO THE RESULTS 105FURTHER WORKS 105REFERENCES 106APPENDICES 113A: Interview questionnaires’ for regulatory bodies, lawyers and academics 113B: For share promoters, board members and entrepreneurs 115C: Questionnaires for shareholders 119

i

AGM: Annual General MeetingASCE: Abuja Securities and Commodities Exchange BVMAC: Bourse Régionale des Valeurs Mobilières d’Afrique CentraleBRVM: Bourse Regionale des Valeurs, Mobilieres BSE: Botswana Stock ExchangeBVC: Bolsa de Valores de Cabo Verde BVM: Bolsa de Valores de MocambiqueBVMT: Bourse de Tunis CIA: Central Intelligence AgencyCSA: Central Statistic Agencies, EthiopiaDSE: Dar-Es-Salaam Stock Exchange DSX: Douala Stock Exchange EGX: Egyptian Exchange FDI: Foreign Direct InvestmentGDP: Gross Domestic ProductsGNI: Gross National IncomeGNO: Gross National OutputGSE: Ghana Stock Exchange IPO: Initial Public OfferingJSE: Johannesburg Stock Exchange KSE: Khartoum Stock Exchange LSM: Libyan Stock Market LuSE: Lusaka Stock ExchangeMSE: Malawi Stock ExchangeNSE: Nairobi Stock Exchange PPP: Purchasing Power ParityRSE: Rwanda Stock Exchange SEM: Stock Exchange of Mauritius SGBV: Algiers StockSTRATE : Central Securities Depository (CSD) for the electronic settlement of all financial instruments in South Africa)SSX: Swaziland Stock Exchange SX: Namibian Stock Exchange USE: Uganda Securities Exchange UNDP: United Nation Development ProgramVOC: United Dutch Chartered East Indian Company Exchange ZAMACE: Agricultural commodity Exchange of Zambia ZSE: Zimbabwe Stock Exchange

ABBRIVATIONS

ii

LISTS OF TABLES

Table 1. African Stock Exchanges

Table 2. Historical bubbles

Table 3. Ethiopian Development Index

Table 4. Top 10 fast growing economies in 2005-2009

Table 5. Example of Interview questions

Table 6. Descriptions of interviewees

Table 7. Reasons for growth of share companies

Table 8. Shareholders response to the question why they bought

shares

Table 9. Response to “what are the main challenges for setting-up a

share company?”

Table 10. Response to “what are the management challenges?”

Table 11. Shortcoming of the 1960 commercial code

Table 12. Is time to start-up a stock market?

Table 13. Risk associated with Ethiopian Share Companies

Table 14. Risk mitigating measures

LISTS OF FIGURES

Graph 1. Map of Ethiopia

TABLES AND FIGURES

1.1. Management issues

The key management issues addressed by this research are to explore the state of the shareholding companies in Ethiopia; to understand the current regulatory systems and regulations; and to understand the risks associated with the current legal and regulatory frameworks. Based on these understandings the author hopes to draw lessons in comparison with the experience of other countries to create a better management system to minimise risk and protect the interests of all stakeholders, (shareholders, managers and promoters and regulatory bodies).

1.2. Value of the work

It hoped that this work would have value to four key groups of stakeholders:

1. For investors: For investors this work is expected to give an overview of the state of Ethiopia’s share companies in comparison with emerging and develop markets. The author hopes this would give some insights about the nature of share companies in Ethiopia and the risks associated with them.

2. For entrepreneurs and promoters: This work hopes to identify some of the areas that have conflicts of interests and risks associated under the current legal system. Experience of the developed world shows that equity investments are full of risk. The world has seen boom and bust driven by greed and fear. Any failure in one badly managed share company in Ethiopia may lead to panic in all share companies that will affect confidence and growth of the sector. Hence, by reading this research entrepreneurs and promoters are expected to get some insight to give attention to details and avoid potential pitfalls of equity investment.

Research Purpose

4 Research Purpose

3. For regulatory bodies: Though the legal framework for setting up has been around since 1960, the process of setting up share companies and trading in shares were interrupted between 1974-1991 during nationalisation of the economy by the left-wing military government. Now share companies are fast growing. According to the Ministry of Trade date (The Ethiopian Herald, 1 March, 2012) there are 496 share companies with paid up capital of over 27 billion birr (1.5 billion USD), which is about 4.7% GDP. Furthermore, currently 42 companies are selling shares in order to raise the necessary capital to start operating. Some of these companies may give good return to shareholders and tax revenue to the government but some may go down destroying shareholders wealth and confidence in share companies. Hence, the research tries to identify the shortcomings of the 1960 commercial law and propose solutions where the law needs updating in order to reduce potential risks.

4. For academics: This work is exploratory and it hopes to give an overview of the Ethiopian share company laws, the size and shape of share companies, and the relationship between investors, promoters, and regulatory bodies. It is hoped that this could help to give some data for further study of the sector to create a better understanding for the emergence of a thriving equity market.

This research is exploratory; it seeks to find out the state of Ethiopian share companies. To achieve that goal an inductive research method is used. It is because an inductive method allows collection of data without predetermined theoretical formworks. It helps to explore, and find patterns from the data to develop a theoretical framework and explain the data.

Literature reviews on Ethiopian share companies are few. Tessema (2003) assesses “Prospects and Challenges for Developing Securities Markets in Ethiopia” and few publications on the Ethiopian Law Journal (Gebremeskel, 2010; Seifu, 2010). These papers in Mizan Law Journal are discussing the commercial law rather than economic and management aspects of share companies. There are no complete overviews of the economic and management aspect of the share companies. As a result, it was found necessary to explore the state of Ethiopian share companies to set some foundation for future works.

The research explores the state of the Ethiopian share companies by interviewing the main players in the field, such as regulatory bodies, (lawyers and academics), boards of directors, share company promoters, and shareholders.

The questions were designed to explore the state of Ethiopian share companies, the law, regulatory systems, management challenges and risks under the current system. It is also tries to understand why shareholders buy shares, and whether shareholders get fully informed about the risks associated with buying shares.

Share companies are relatively a new phenomenon in Ethiopia. There are many upside opportunities and downside risks. Understanding the risk is part of developing a risk mitigation mechanism. However, before exploring the state of Ethiopia’s companies, it was found necessary to provide background information

Introduction

6 Introduction

about share companies. In chapter 3, a brief history of share companies, and the state of share companies in the developed and developing countries context was reviewed. The review has given special emphasis on share market development in Africa to have a better comparison with that of Ethiopia.

Share companies exist within geo-political boundaries and are not free from legal, political and economic policies of a country. That is why before discussing the state of Ethiopian share companies, it was necessary to set the scene of the state of Ethiopia, its economy, political system and the laws governing share companies. This is done for two reasons; first, businesses operate under the legal jurisdiction of a country and the law of the land as well as the political system either enhancing or reducing the role of private investment in a country. Without giving this information, it would be superficial to make a judgement why there is or there is not a developed market. Second, Ethiopia suffers from an image problem. Without giving an objective assessment of the state of development, the discussion will be heavily dependent on readers’ prior positive or negative perceptions of the country which often leads to the wrong conclusion or a lack of interest.

Ethiopia has gone through three phases since enacting a law to promote and regulate the setting-up of share companies. The first was from 1960 to 1974 where share companies were flourishing and where share were traded (Tessema, 2003). That was before the “Socialist Revolution”. The second is from 1974 to 1991 where there were no major private share companies, due to blanket nationalisation of the economy. But after 1991, following a change of government, there was a resurgence of share companies, which is the primary focus of this research. Hence, the political, economic reality and the legal frameworks are reviewed in chapter 4 in order to provide a full picture and answer why the market is not developed.

In chapter 5, methodology of the research and how this research was conducted will be presented. In chapter 6, the data collected through interviews were presented to be analysed and discussed. Finally, conclusions drawn from the research are discussed.

The purpose of this literature review is fourfold: firstly, it seeks to define the wider context of what a share company is and its historical perspective. Secondly, it aims to draw lesson from the experience of well-developed as well as emerging African Stock Markets. Thirdly, it reviews the boom and bust cycle of share companies to highlight not only the opportunities but also the risks associated with it. Finally it provides the background information about the African stock market to have a clear perspective of the state of Ethiopian share companies which will then be discussed in subsequent chapters.

3.2 History of Joint-Stock company

The author thinks that a modern day joint-stock company, where individuals pool their resources to engage in economic activity and share the benefits, appears to be as old as human progress itself. However, the literature is full of claims where the first joint-stock company was invented. For example, Niall Ferguson (2008, p.127) in a book entitled “The Ascent of Money” calls the joint-stock company “the single greatest Dutch invention”. He states, that “in the modern legal form, it came in to existence in Holland in 1600 to create an economy of scale by merging six “fledging East Indian Companies operation out of the major Dutch ports” to compete against the Spanish and Portuguese spice traders in Asia trade”. He states “[t]he result was the United Dutch Chartered East Indian Company or VOC for short, formally chartered in 1602 to enjoy a monopoly on all Dutch trade east of the Cape of Good Hope and west of straits of Magellan”

Similarly Valdez and Molyneux (2010, p.158), attribute “the first modern shareholding enterprise” to Belgium. Valdez and Molyneux state that “the origin of modern-day stock exchanges are generally ascribed to 13th century commodity traders in Bruges, Belgium, who met in the house of man named

Literature Review

8 Literature Review

Van der Burse in 1309” and “the institution become known as the “Bruges Bourse”. Valdez also says at the same time “Italian merchants in Genoa, Florence and Verone traded government securities”.

These two cases of Holland and Belgium may be a recorded history of an emergence of legal frameworks but it would be counter intuitive to accept it as a new invention. The reason is that the history of cooperatives and communal enterprises could be as old as human history itself. Human progress and evolution have always been a communal effort. Individuals have to pool their resources in communal ventures to create communal enterprises where individuals would contribute their resources and share the benefits.

It is natural to expect that a person who contributed his sharp tool to a hunting expedition would expect a meal out of it. The modern day business equivalent of “sharing benefits” after investing resource is probably the “dividend”. Hence, it is fair to imagine that the hunter gatherers of 10,000 years ago had to pool their tools and resources to invest in common expedition, in the same way as the East Indian Dutch Company has to pool its resources to control the trade routes to Asia. The transition from hunter gatherers to an agricultural and pastoralist community may have also demand joint efforts. “Live-stocks” have to be managed jointly to protect them from wild animals or herd them to the next grazing land or watering ponds. The “forest gardens” too have to be protected from competing species. Still today, many nomadic communities operate on the principle of joint stock enterprise to protect their cattle and share the milk and meat. Hence without diminishing the contribution of Holland and Belgium, it is fair to say that what had happened in Belgium or Holland was coming up with a modern legal framework for an old practice. Nevertheless, particularly the contribution of the Dutch to the emergence of share companies in the present form, which has been copied all over the world, is huge. In fact, according to Shiller (2011) most of the financial innovation and concepts like short selling, corporate logo and brokers happened in Amsterdam between 1602 and 1609.

Share companies are now an effective way of allocating resources in to a productive sector to create jobs and wealth. Public share companies are often traded on the public market where it becomes easier to raise capital or create liquidity. Tessema (2003) argue stating that stock markets can have a positive effect on growth.

Yartey and Adjasi (2007) point out the benefits of a stock market in accelerating “growth by providing a boost to domestic savings and increasing the quantity and the quality of investment”. They state that this happen because stock markets “provide an avenue for growing companies to raise capital at lower cost”. In addition, “companies in countries with developed stock markets are less dependent on bank financing, which can reduce the risk of a credit crunch”

“Theoretically” the stock market can also create a better management system since “the threat of takeover is expected to provide management with an

Literature Review 9

incentive to maximize firm value”( Yartely and Adjasi, 2007). Hence, creating a company that is shared by a number of shareholders and that can be traded easily as an important institution for economic development.

Niall Ferguson (2008, p.120) described share companies as “one of the most fundamental institutions of the modern world”. Because, he states, it “enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized”. He attributes the success of share companies to its two features. Those are “join-stock” and “limited-liability”. It is a “joint-stock because the company’s capital was jointly owned by multiple investors; limited-liability because the separate existence of the company as a legal “person” protected the investors from losing all their wealth if the venture failed”. Though both modern day features of a joint–stock company were in the United Dutch Chartered East Indian Company (VOC) charter, limited liability was not extended to all companies. In fact the concept of limited liability came in to prominence after 200 years in 1811, in New York. In New York this limited liability status was extended to all share companies making New York an attractive place for investment compared to Massachusetts, where they passed a corporate law which made shareholders liable beyond the money they invested (Shiller, 2011).

The success of the joint stock companies is also related to its ready convertibility of shares into cash. Under normal circumstances shares are liquid and can be traded to be converted into cash. According to Ferguson, the first trading place for shares came into existence by necessity and was not by design. Ferguson (2008, p.120) states that when the first United Dutch Chartered East Indian company was created, its charter had a provision where “investors would be entitled to withdraw the money at the end of just ten years but in 1612, when shareholders want to withdraw their capital, the company did not dissolve”. Hence, Ferguson states, (2008, p.131), “[I]n 1612 it was announced that the VOC would not be liquidated, as originally planned. This meant that any shareholder who wanted their cash back had no alternative but sell their share to another investor”. That is where “the stock market was born”. However, Shiller (2011) in a Yale University lecture put the date earlier than 1612. In fact Shiller narrates the story about the banning of short selling in Amsterdam from 1609-11 implying that VOC shares were traded before 1612. In Amsterdam, VOC shares were first traded in open market before the first in house trading place was built.

It is also at the same time that the modern concept of corporate governance, the right to appoint directors for a fixed term, the right to appoint auditors to reduce principal-agency effect emerged and was institutionalised. Ferguson (2008, P.132) states it is this “period saw the foundation (in 1609) of the Amsterdam Exchange Bank, since a stock market cannot readily function without an effective monetary system. Once the Dutch bankers started to accept VOC shares as collateral for loans, the link between the stock market and the supply of credit began to be forged”. This statement of Ferguson in effect supports Shiller’s narration that shares were traded well before 1612.

10 Literature Review

3.2 Modern Day Stock Markets

Modern day stock markets are vital institution of economic activities in the developed world. Without the stock-market, new innovation and technologies would have taken many years to come onto the market. The IT, digital revolution, biotech and green technologies that are expected to create new jobs and wealth depended on the stock-market to raise capital and bring new ideas from the drawing board to the mass market.

The stock-market is an institution for the effective allocation of resources to productive sectors. A shift of resources from less profitable to profitable sectors is almost instantaneous. When bad news about future profitability of a company reaches the market the resource moves from the less profitable to the profitable sector in a few seconds adjusting the stock value to future earnings and cash flows. Nowadays the efficient market theory has been in question as result of repeated boom and busts (Brunnermeier, April 8-1, 2011, Siegel, April 8-11, Shiller, 2000 , Hagstrom, 1999). Nevertheless in most cases, Shiller (2011) argues the market is efficient in pricing available information.

The stock-market has also transcended geopolitical boundaries. An individual living in one corner of a country could invest and allocate resources in a faraway land using modern technology. Resource flows easily not only from a company to another within one geopolitical region but across boundaries where a higher return could be achieved. This allows the most productive sectors to have access to resources from a wide range of groups.

At the same time this integration of the global stock-market and financial sector has reduced the long held view of reducing risks through diversification of portfolio. A good example is the crisis in the sub-prime mortgage in the US that created a contagious effect across the globe forcing banks and institutions to fail or seek a bailout. Supposedly unrelated and diversified industries went down as a result of the credit crunch all over the world putting into question the strategy of portfolio diversification to reduce risks (Fragnière, 2012)

In addition to the 2008 financial sector crisis, even in the 1990s crises in Russian, Argentina and Asian had proven to be contagious and were felt far and wide. The frequency of the crisis has also increased due to this interconnection of economies beyond geographic boundaries. That is why for example, sovereign debt crisis of Greece, is feared to have contagious effect on other European countries.

Despite this high profile crisis in the market, there is no a more efficient way of allocating resources than the stock-market. The market is good because it brings together entrepreneurs with new ideas, investors with resources, and professionals with management skills, to build companies and create economies of scale to reach a wider market in a short period of time. It also believed to align the “interest of managers and shareholder” (Rayton and Cheng,

Literature Review 11

2009) to share risk and rewards. As a result the stock-market has been accepted in most countries as an effective way of allocating resources. Out of the 193 countries recognised by members of the UN (UN, 2012); around 150 of them have a stock market (UN, 2012). Some of the countries have a joint stock market. For example 8 West Africa countries (Benin, Burkina-Faso, Cote d’Ivoir, Guinee-Bissau, Mali, Niger, Senegal, and Togo) and 6 Central Africa countries (Central African Republic, Chad, Congo, Equatorial Guinea and Gabon) have a common stock exchange (African stock market, 2012 and ASE, 2012). In Africa alone out of 54 countries about 33 of them have stock exchanges.

3.3 The Equity Market in Africa

Africa has a population of one billion, which is about 16% the world population, but accounts for 3.6 per cent of Global GDP (Guest and McDonald, 2007). Grey and Bythewood (2008)) state that “Historically, capital markets have not played a significant role in financing the development of the African economy. Today, however, African governments are focusing on the importance of moving toward more market-oriented economies and developing the financial market infrastructure to mobilize funds from both the private and public sectors”. As a result out of 54 African countries 33 of them have created stock markets. This is a new development.

The number of countries with stock markets in Africa before the 1990s was 6, but now it is 33. As shown in Table 1, the oldest African stock-market was established 1883 in Egypt followed by the Johannesburg stock exchange, South-Africa in 1887, and Casablanca in Morocco in 1929. After 30 more years, the stock markets in Kenya, Nigeria and Tunisia opened for trading in the 1950s and 1960s. But it is in the last 20 years that most African countries have established a stock market.

Though the link between setting-up the stock market and economic development is still debated a paper published by Yartey and Adjasi (2007 p.11) attributed the stock markets to “have contributed to the financing of the growth of large corporation in certain African countries”. Corporate financing patterns in certain African countries suggest that stock markets are an important source of finance. As evidence Yartely and Adjasi show that about 12% of asset growth of listed companies in Ghana, 18 %t in South Africa, 7.8% in Zimbabwe and 9% in Mauritius were financed by the stock market in the 1990s.

Furthermore according to Yartey and Adjasi (2007 p.11) “[w]ith the exception of South Africa, most African stock markets doubled their market capitalization between 1992 and 2002”.

Despite increasing number of stock market, Yartey and Adjasi (2007) list a number of limitations of African stock markets, such as the numbers of listed companies are few and the volume of trading is low. The time it takes to complete the deal takes often few days in some markets due to a lack of electronic trading.

12 Literature Review

The regulatory system is not strong and there are serious informational and disclosure deficiencies.

Table 1. African Stock ExchangesNo Countries Stock Exchanges Est.

(Year)1 Algeria Algiers Stock Exchange (SGBV) 19972 Botswana Botswana Stock Exchange (BSE) 19893 Cameroon Douala Stock Exchange (DSX) 20014 Cape Verde Bolsa de Valores de Cabo Verde (BVC) 2005 5 Central Africa Bourse Régionale des Valeurs Mobilières d’Afrique Centrale,

(BVMAC) serves the Central African Republic, Chad, Congo, Equatorial Guinea and Gabon.

2003

6 Egypt Egyptian Exchange (EGX) 18837 Ghana Ghana Stock Exchange (GSE) 19908 Kenya Nairobi Stock Exchange (NSE) 19549 Libya Libyan Stock Market (LSM) 200710 Malawi Malawi Stock Exchange (MSE) 199511 Mauritius Stock Exchange of Mauritius (SEM) 198812 Morocco Casablanca Stock Exchange (Bourse de Casablanca) 1929

13 Mozambique Bolsa de Valores de Moçambique (BVM) 1999

14 Namibia Namibian Stock Exchange (NSX) 1992Nigeria 1. Abuja Securities and Commodities Exchange (ASCE)

2. Nigerian Stock Exchange19981960

15 Rwanda Rwanda Stock Exchange (RSE) 201116 Sierra Leone Sierra Leone Stock Exchange 2012 17 South Africa Johannesburg Stock Exchange (JSE) 188718 Sudan Khartoum Stock Exchange (KSE) 19 Swaziland Swaziland Stock Exchange (SSX) 199020 Tanzania Dar-Es-Salaam Stock Exchange (DSE) 199821 Tunisia Bourse de Tunis (BVMT) 196922 Uganda Uganda Securities Exchange (USE) 199723 West Africa Bourse Regionale des Valeurs, Mobilieres (BRVM)- Regional

Stock Exchange for West Africa Countries (Benin, Burkine-Faso, Cote d’Ivoir, Guinee-Bissau, Mali, Niger, Senegal, and Togo)

1998

24 Zambia 1. Lusaka Stock Exchange (LuSE)2. Agricultural commodity Exchange of Zambia (ZAMACE)

19942007

25 Zimbabwe Zimbabwe Stock Exchange (ZSE) 1993

Source: African stock market and ASEA (2012) but the author added the missing countries and dates from various resources

Literature Review 13

The countries with a stock market in Table 1, is an indication of the perception of the stock market as an efficient way of mobilising resources and encouraging saving. However this has not happened yet in Ethiopia and Ethiopia is one of the few countries without the stock market. Despite the negative image the country suffers, the absence of the stock market cannot be explained with its economic development. It may have to do with the political elite lingering Marxist view of the stock market as “Casino”. Ethiopia is the second most populous country with 85 million people and the 11th biggest economy in Africa and the 9th in terms of GDP purchasing power parity (PPP) (CIA fact book, 2012). In 2011, the service industry accounts for 46% of total GDP, which is based on some of the big institutions like Ethiopian Airlines, shipping lines, telecommunication, power generation, and the hotel and tourism industry. However, it appears that the government does not seem to be in a rush to set-up a stock-market.

3.4 Stock Market Bubbles and Crashes

In the previous sections the benefits of share companies and the stock market were discussed, but share companies and the stock market are not without risks. As wealth is created in the stock-market, wealth can also be destroyed when the bubble bursts. That is why it is important to be aware of the risks associated with the stock-market.

Shiller (2000, p. 5) define bubbles as “an unsustainable increase in prices brought on by investor’s buying behaviour rather than by genuine, fundamental information about value.” The problem is that, according to Kindleberger and Aliber’s (2005, pp.11-12) bubble “cannot be recognised until after the event, because to qualify it must “implode”. Talen (2007), in a book entitled The Black Swan goes as far as saying there is no point in predicting low probability high impact risks, like the credit crunch, or September 11th etc. that have impacted the stock market. Due to “irrational exuberance”, the world has had many major bubbles and stock market crashes. Kindleberger & Aliber, (2005, p. 8) Kindleberge summarised historic bubbles up until 2005 as shown in table 2.

Table 2: Historic Bubbles Year Bubble 1636 The Dutch Tulip Bulb Bubble 1720 The South Sea Bubble 1720 The Mississippi Bubble 1927 – 29 The late 1920s stock price bubble 1970s The surge in bank loans to Mexico and other countries in the 1970s 1985-89 The bubble in real estate and stocks in Japan 1985-89 The bubble in real estate and stocks in Finland, Norway and Sweden

14 Literature Review

1992-97 The bubble in real estate and stocks in Thailand, Malaysia, Indonesia and several other Asian countries

1990-93 The surge of foreign investment in Mexico 1995-2000 The bubble in over-the-counter stocks in the United States 2002 Dot com bubble2007 Sub-prime mortgage and the credit Crunch in the financial sector

Hence, the market is not only creating opportunities but is also about risks. That is why the development of share companies as well as the stock market in Ethiopia needs a good understanding of the opportunities as well as the risks. If the risks are fully understood, it is possible to reduce the impact, though proper risk management and risk mitigation measures.

However, Shiller (2011) argues stating that current maker crises do not call into question of the basic principles of finance to compares the financial crisis with that of a plane crash. He said “Aeroplanes crash from time to time and you must know that when you get on one but that doesn’t mean we shouldn’t have aeroplanes”

In the balance of probability the stock-market has been an instrument for creation of wealth and prosperity and it is difficult to have a modern economy and liquidity without the stock market. Entrepreneurs depend on bringing new ideas and innovation into the market by sharing risks and opportunities with investors. Explosion of the digital world, IT, biotechnology and communication technology were heavily dependent on the equity market for its growth and expansion.

3.5 History of Share Companies in Ethiopia

Ethiopia has share companies but no stock market. It is among the minority states in Africa without a stock market but it has growing share companies, which will be discussed in detail in following sections. In fact, share companies may have existed in a traditional form in Ethiopia for a longer time than the record shows, but it was in 1933 that a law entitled the “Bankruptcy Law and the Company Law” and “1960 Ethiopian Commercial Code” (Proclamation No. 166 OF 1960) included in the legal book. It is not clear when the first share company was formed in Ethiopia, but there is a record of the Bank of Abyssinia that was registered in 1906. Evidence shows that Bank of Abyssinia shares were sold in Addis Ababa, New York, Paris, London and Vienna (Bank of Abyssinia, 2012).

Between 1960 and 1974, share companies were actively engaged in the banking, manufacturing, agricultural, hospitality, and service industries. According to Tesemma (2003) there were also emerging stock trading and matching services. He states “The stock market was administered by the National Bank of

Literature Review 15

Ethiopia (the equivalent of the Federal Reserve Board in the United States). The government through the National Bank tried to improve resource mobilization by establishing a share-dealing group that brought together buyers and sellers to participate in an auction process”. Tesemma quoting J.D. Von Pischke (1968) also states “the bank laid out rudimentary rules and regulations… and the stock market was moderately successful in its pioneering efforts to provide an organized market for companies whose shares were relatively widely held. Workable trading practices and standards had been developed, and a fairly smoothly operating market mechanism had been created”

However, that came to an abrupt end with the coming of the military government which adopted a socialist economy to nationalise the major economic sectors. The commercial code was suspended till just before the collapse of the military government (Gebremeskel, 2010). Nationalisation and the wholesale control of the economy, coupled with ideological condemnation of wealth stopped the process of creating share companies.

The major economic sectors, which require pooling up of resources to set-up companies, were closed for the private sector. All of the financial sector; banks, insurances, manufacturing, commercial farming, hospitality services, transportation, education, and health services were nationalised to be dominated by the state owned enterprises with the exclusion of the private sector. This led to the drying up of local and foreign direct investment. Further nationalised commercial farms and other sectors either collapsed due to miss-management or end-up being loss making to contribute to the collapse of the economy and leading to a shortage of supplies, rationing, civil war, famine and a humanitarian crisis.

Particularly the military government proclamation banning wage labour from working on a farm (Keller, 1988, p.194; Demissie, 2008) reduced the state of farming in Ethiopia to subsistence farming, where one is allowed to own a land that one could cultivate himself without hired labour. This naïve understanding of Marxism view of “exploitation” by semi-educated Ethiopia’s leftist movement, made hundreds of thousands of migrant surplus labour out of the productive activities. The alternative occupation left for this unemployed labour was to join liberation fronts and fight, which paradoxically, brought an end to the regime (Henze, April 1990)

The military government came to an end with the collapse of the Eastern bloc in the late 1980s and the internal civil war waged by various rebel groups. Though the rebel groups were also various shades of a Marxist-Leninist organisation and far from advocates of a free-market economy, they captured power after the collapse of the communist bloc. As a result, they were left with no option but to work with the World Bank and IMF to accept a half-way market economy and open the economy to the private sector. It is a half-way market economy because the government claim to follow “revolutionary democracy” and define itself as a “developmental state” where the state takes a major role in the economy.

16 Literature Review

Despite this political rhetoric a number of measures were taken to open the market for the private sector. Since 1992 there were many reformations to move the policy from a socialist economy. These laws were designed to encourage investment (Proclamation No 15/1992 and Proclamation No. 37/1996), restructure government enterprises (Proclamation No. 25/1992), and amend the Income Tax law, (Proclamation No 30/1992) etc.

In 1994, the banking sector was opened for private investment (Proclamation No. 84/1994, and Proclamation No. 146/1998), mining, (Proclamation No. 52/1993 and Proclamation No. 22/1996), a privatization agency was created to transfer government owned enterprises into the private sector (Proclamation No. 87/1994).

All these laws began to open the country for investment. The banking sector, manufacturing, agriculture, service industry, education and others were gradually opened up for private investment. This, in effect, creates a resurgence of share companies. Particularly, in the last 8 years the government also professed to follow a “developmental state strategy”, which encouraged the private sector with loans, tax holidays and the simplifying of bureaucracy.

These changes led to an increase in the formation of share companies. This resurgence of share companies has created new jobs and wealth for shareholders, particularly in the banking sector and in tax revenue to the government. However, the sectors have not yet fully been investigated. The state of share companies, the challenges of start-up, “principal-agent” relationship, and risk under the current company law are not investigated.

The paradox is despite all the above proclamations and reformation to open up the economy for the private sector, the commercial code governing all these economic activities has not been updated in the last 52 years. The commercial code was created in 1960 long before many of the financial innovations and technologies. This will be explored further when the limitations of the commercial code are discussed.

4.1 Introduction

One of the challenges to discussing the share company in the Ethiopian case is not only that there are no published materials but also the media perception of the country often hinders a proper analysis. To argue the need of setting a modern law to encourage companies as well as the emergence of the stock market needs a balanced assessment of the country and an explanation why the country is ready for a better regulated stock market. To that end background information about the country, political process, the state of economy and the law are reviewed in the following section.

4.2 Ethiopia: The country

Ethiopian is one of the least developed countries in the world. According to the International Human Develop Index UNDP 2011, it is among the least developed countries with 39% of the population living on under $1.25 USD PPP per day. Its GDP is around 32 billion dollars, GNI per PPP terms with 970 USD and Multidimensional Poverty Index (%) 0.562 (UNDP Human Development Index, 2011). According to the Ethiopian Central Statistical Agency, 2012, the population is estimated to be around 85 million, which makes Ethiopia the second most populous country in Africa and the 14th most populous country in the world. The population is predominantly young and 48 per cent of the population is under 15 (CSA, 2007). The fact that 35% of the people are living below the poverty line means that 65% of them, about 55 million, are on the other end of the bell curve distribution. These people can pool resources to engage in productive economy activity.

Ethiopia

18 Ethiopia

Table 3. Ethiopia’s Development Indicators

2000 2005 2008 2009 2010Population, total (millions) 65.58 74.26 79.45 81.19 82.95Population growth (annual %) 2.6 2.4 2.2 2.2 2.1Surface area (sq. km) (thousands) 1,104.3 1,104.3 1,104.3 1,104.3 1,104.3GNI, Atlas method (current US$) (billions)

8.39 12.20 22.78 28.57 32.41

GNI per capita, Atlas method (current US$)

130 160 290 350 390

GNI, PPP (current international $) (billions)

30.43 47.10 70.26 77.67 86.09

GNI per capita, PPP (current international $)

460 630 880 960 1,040

PeopleLife expectancy at birth, total (years) 52 55 57 58 ..Fertility rate, total (births per woman)

6.1 5.1 4.5 4.4 ..

Ratio of girls to boys in primary and secondary education (%)

65 77 85 88 89

EnvironmentForest area (sq. km) (thousands) 137.1 130.0 .. .. 123.0Agricultural land (% of land area) 30.7 33.7 34.5 35.0 ..Energy use (kg of oil equivalent per capita)

284 289 399 402 ..

Table 2: show economic indicators of the country. For example, GDP had been growing by 10% for some time, the public sector according to Access Capital Research (Dec 2011) account for 46% and GNO per capita (ppp) is $1040 (UNDP, 2010).

As shown in Graph 1: geographically it is found in East Africa, neighbouring in the west Sudan and South Sudan; in the South Kenya; and in the south-east Somalia. In the east, it neighbours Djibouti and in the north-east Eritrea. It is a fairly large country with a land mass of 432, 310 square miles which is equivalent to the combined area of UK, France and Germany (Infoplease website, 2012) Graph 1. Map of Ethiopia, (source Inforplease):

Ethiopia 19

Electric power consumption (kWh per capita)

23 34 43 46 ..

EconomyGDP (current US$) (billions) 8.18 12.31 26.64 31.96 29.72GDP growth (annual %) 6.1 11.8 10.8 8.8 10.1Inflation, GDP deflator (annual %) 6.9 9.9 30.3 24.2 3.8Agriculture, value added (% of GDP) 50 47 44 51 48Industry, value added (% of GDP) 12 13 13 11 14Services, etc., value added (% of GDP) 38 40 43 38 38Exports of goods and services (% of GDP)

12 15 11 11 11

Imports of goods and services (% of GDP)

24 35 31 29 32

Gross capital formation (% of GDP) 20 23 20 22 21Source: World Development Indicators database, 2010

4.3 Ethiopia: Political

The country has had more than a 3000 year history of state formation and it was the only surviving independent country during colonisation and the scramble for Africa. Though the country remained independent, it was not without huge cost and sacrifices.

The long struggle for survival had shaped not only the country but also the way of life and mind-set of the people. With start of the Axum empire decline, probably from the 7th century as result of loss the Red Sea trade route to emerging Islamic powers. From the 11 century the power moved more inland however from the 16th century onwards the central government collapsed opening the door for power struggle between regional nobilities.

Despite a continuous united front against invading armies, power rivalry between regional nobilities and princes was rife and this was often settled on the battlefield. According to Kebede (1999, p.150), this created a society where social mobility was open for anyone who might raise arms. This, in effect, has created able military leaders who are capable of defending the country from foreign invasion, while creating instability within the country. Further, Kebede (1999, p.120) states “[I]t is not exaggeration to say that Ethiopia owes its survival to this system of competition which produced emperors capable of gaining the allegiance of regional powers and of successfully defending the country. Emperors were themselves warriors; they led their own army and fought battles: these were not left to their generals.” Nevertheless this rivalry and social mobility based on power had been a problem to create a stable and an emerging democratic society even in the 21st Century.The modern day Ethiopia was not also immune from the same social upheavals.

20 Ethiopia

Particularly, the last 40 years have been turbulent. In 1974, the old Kingdom was overthrown by the military junta that had taken the country into a pseudo-Marxist dictatorship plunging the country deeper into internal conflicts, political persecutions, civil war and famine. When the military junta was overthrown by an ethnic based liberation front in 1991, one of the provinces, Eritrea, declared independence to create the current geopolitical structure, and leaving Ethiopia with no access to the sea.

This supposedly amicable separation with Eritrea did not bring the conflict to a natural conclusion. Still, the new born Eritrea and Ethiopia went to war in 1998, which led to loss of life and destruction. And yet, 14 years after the conflict the two countries have not reached on amicable conclusion to resolve the border dispute and avoid future conflicts. In the east, the state of Somalia collapsed more than 20 years ago to create instability and terrorist threats. Sudan went through a painful break-up and the threat of conflict still continues between North and South Sudan affecting the region’s peace and economic stability (The Guardian, May 2, 2012).

Despite this regional instability Ethiopia has been relatively stable to experiment with limited political and economic liberalisation. At least, in principle, it is a multi-party state where political parties have the right to register and take part in the national political process. In practice, many argue that it is not a multi-party system with a level playing field between the opposition political parties (The Guardian, 26 May, 2010). Particularly, the ruling party controlling the parliament with a 2/3 majority in the 2005 election to a 99.6% control of the parliament seats in the 2010 election has put doubt about the existence of a level playing field for multi-party competition.

There is a prevailing fear that the fact that one particular view dominates the legislative body could not be healthy and may lead to groupthink and conformity to the dominant view. Differences help the coming up with better legislation and efficient implementation processes. On the contrary, conformity hinders growth. In the words of J.F. Kennedy, “Conformity is the jailer of freedom and the enemy of growth”. This could compromise the quality of legislation that passes without sufficient criticism or challenges and the birth of a democratic society. Furthermore, the fact that the ruling party controls most of the power has made it difficult to have a clear distinction between legislative, executive and civil service. Gudina (2011) describe this as “fusion of party and state”. This has been blamed for the lack of a level playing field.

Traditionally there was no real separation of power in Ethiopia. Even the word “government”, (“Mengist” in Amharic) is not clearly defined. Though the constitution has legislative, judiciary and executive bodies, the Amharic word “Mengist”, “the government” is quite often used by all the three parts of the state to address themselves as “mengist”. Hence, this perception of dominance of all sectors by the ruling party is standing on a century old “power distance”

Ethiopia 21

between the people and authorities, hindering the development of competitive multi-party democracy. According to Hofstede (2006), Power Distance is “the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally”

4.4 Ethiopia: Economy

On the economic aspect, there has been lots of economic liberalisation. Restriction on the private sector to take part in the national economy was lifted after the fall of the military regime in 1991. Since then, most of the nationalised industries have been privatised through the bidding process to be transferred into the hands of domestic or foreign investors. But that does not mean that the role of the state is reduced. In fact, the economy is still dominated by huge state investment in various sectors, particularly in energy, infrastructure, transportation, telecommunications, education and manufacturing.

According to an Access Capital Research 2011/2012 report (Dec.2011), Ethiopia’s government capital expenditure accounts for 59% of the total investment in the country, dwarfing the private sector. This capital expenditure puts Ethiopia at the top in Africa. The average state role for Africa is about 25%. The state capital expenditure in Kenya is 32%, Ghana 30%, Nigeria 25% and South Africa 2.5%. Hence the role of the state in the economy is still huge despite attempts to privatise some of the government’s own businesses.

Furthermore, despite some of the liberalisation measures the state is the only landlord over the whole land of the country and the private sector can only lease land to do business. Almost all service provisions like telecommunication, power generation, air transport are exclusively in the hands of the government.

Nevertheless some of the sectors that have been liberalised, like the banking sector, and have been going through fast transformation. In the last 15 years about 14 private banks have been established and 14 were under formation (NBE, 2012). With the establishment of private banks and private insurance companies significant changes and innovation have been injected into the banking sector setting the groundwork for better customer service and competition.

The other sector being opened is farming. Particularly lifting government control of the national Grain Board and allowing the farmers to sell their products on a free market has made farmers be in control of their product, though it has a long way to go to change their lives.

Furthermore, liberalisation of the system on commercial farming has made the country an attractive destination for companies who want to engage in big commercial farms. So far, most of inward Foreign Direct Investment has come mainly from India, the Kingdom of Saudi Arabia, Egypt, Israel and the Netherlands. The Federal state has made more than 3 million hectares of land

22 Ethiopia

available for leasing and some companies like Karuturi, an Indian company, have secured around 300,000 hectares of land, the size of Luxemburg, which triggered the global “land grab” debate and global campaigns against land grabs by organisation like the Oakland Institute (Oakland Institute, 2012, the Guardian, April 23, 2012) in the west. Over all, about 23 companies have received land to start cultivation. However due to the absence of a stock-market in Ethiopia, companies investing in Ethiopia cannot easily raise capital from the local markets to share risks and benefits, which then increases the political risk for investors by not making the locals share the risk and the opportunity.

Liberalisation in the real estate area is also the biggest area that has seen growth. This sector has created a significant contribution to the economy while encouraging investment in cement and other building material production.

Particularly, since 2003, the economy has turned the corner to grow at a much higher rate. Particularly from 2005 onwards the economy has been growing by around 10% (IMF, 2012) and there is no question that this growth has had a visible impact on the economy and the growth of urbanisation.

Now, Ethiopia has become one of the fastest growing economies in line with China, India and other fast growing economies (IMF, 2012, The Economist, May 12, 2012). And yet the economic structure is still agricultural based. Macroeconomic data shows agriculture employs about 85% of the population and contributes around 41% to the GDP. The service industry contributes 46.6% of the GDP. This is relatively higher and heavily dependent on very good service like Ethiopian Airlines, shipping lines, hotels and the growth of construction. Industry and mining account for 13.4 % of GDP (Access Capital Research, Dec 2011).

Table 4. Top 10 Fastest-Growing Economies in 2005-09.Ranking Country Real GDP Growth (per cent change)1 Angola 14.372 Afghanistan 12.93 Ethiopia 11.44 China, People’s Republic 11.45 Myanmar 9.46 Uganda 8.37 Uzbekistan 8.28 India 8.29 Rwanda 7.910 Sudan 7.8

Source: IMF, World Economic Outlook. Note: Excluding countries with population less than 9 million

This liberalisation coupled with a higher growth rate has made the country attractive for investment. This takes us to the central aim of this dissertation.

Ethiopia 23

That is, the mobilisation of capital for private or public investment and how that is often achieved through shares, bonds and other offerings to the public.

Since 1992 liberalisation, particularly in the last 10 years, a number of share companies were formed to capture emerging business opportunities. Domestic investors were pooling resources through share-offerings to create a significant part of the 496 share companies registered, with paid-up capital of 27 billion birr (1.5 billion USD), which is estimated to be around 4.7% GDP (Ministry of Trade, March 2012). According to Ministry of Trade information there are also about 42 companies who are currently selling shares to the public. Some of them are aiming to raise up to a billion birr (55 million USD).

4.5 Ethiopia’s Commercial Code

Ethiopian commercial law is known as “The Commercial Code Proclamation of, 1960. (Proclamation No. 166 of 1960, May 5, 1960)This commercial code has 255 pages, 6 main titles, and 1182 articles and many thousand sub articles. It appears that the document was prepared meticulously in 1960 to create a solid foundation for conducting modern businesses and it has proved to be effective in the last 52 years. In the Preface, the Emperor Haile-Selassie sums up the objective of the commercial code.

“The commercial life of Ethiopia has expanded, increasing numbers of Ethiopian and foreign companies have been formed and registered, and more complex methods of transacting business have been developed in recent years Recognising the impetus which a modern Code regulating the constitution and activities of all business organisations could give to the further growth of trade and commerce, We directed the Codification Commission created by US to prepare a modern Commercial Code which would serve for the present day as well as provide a solid foundation for the further refinement of laws treating of these subjects”.

The commercial code had all the elements of a modern commercial code in the 1960s, which is useful even now. Some of the examples are given below.

The commercial code has articles about how share companies can be formed, rules about share shareholders’ meetings, agenda setting, proxy, chairman, voting rights, conflicts of interest (very limited), minutes, quorum, effect of resolution, rights to inspect documents etc. It also give details about debentures, premium bonds but the bonds can only be issued by the government. It also has articles about what needs to be done in the event of bankruptcy of the Debtor Company etc. (articles 429- 444)

Chapter 6, articles 452- 462 gives detailed guidelines about accounts of companies and how it should be managed. Chapter 7 addresses how the amendment to the memorandum or articles of association can be achieved. Articles 462- 494 set the rule for the right of withdrawal from the company but have no provision for secondary market. In fact, it requires 2/3 of the shareholders’ approval if the

24 Ethiopia

share is to be transferred to any other rather than the current shareholder. It has articles about the increase of Capital Procedure but it often requires unanimity. It has articles about delegation of powers to directors, conditions for the issue of new shares and a preferred right of subscription etc. Articles 495-509 give a detailed framework for grounds for dissolution, appointment and removal of liquidators, survival of the company during winding-up, bankruptcy and winding-up, duties and liability of liquidators, powers of liquidators, prohibition from distributing assets among members before full payment of debts etc. Articles 521-524 address issues about share register but the share registration producer is very cumbersome and has been a challenge in the modern business world.

Articles 525-538 set the rule for the appointment of managers, dismissal of managers, powers of managers, manager’s remuneration, liability of managers, modification of the articles of association, right to inspect documents and auditors. However it has no provision for disclosure of interest by the managers and directors. Article 539-543 addresses issues related to accounts. Articles 544- 554, relate to conversion into a private limited company, conversion of a private limited company into a company limited by shares, and amalgamation (merger).

Articles 555- 560, gives guidance about how firms incorporated abroad and have their head office in Ethiopia, and firms incorporated abroad having a subsidiary office or branches in Ethiopia etc. However, the state of subsidiaries and group holdings are not clear.

Over all the commercial code was a well drafted law at the time and happened to be useful in the last 52 years. But since the 1960s the world has moved and things that had never existed in the 1960s are often the main driving forces of businesses. The internet, e-commerce, globalisation are shaping today’s business while national barriers are coming down bringing global competition close to home. As a result the law has many shortcomings, by virtue of its age, to serve the interests of businesses of today and the future. This is a central part of this project. As a result the questions asked during the interview and data collection were: what are the main problems or shortcomings of the 1960 commercial code? Are there sufficient safeguards in the commercial code to avoid or resolve conflicts of interest between promoters and shareholders? What changes and improvement do you recommend for the 1960s commercial code? These questions were answered by regulatory bodies, lawyers and academics which will be presented in the data analysis and discussion sections.

4.6 Opportunities for Joint-Stock Companies

Resources, human capital and financial capital are important for development. The third world companies, particularly the sub-Saharan African countries have some natural (Africa is one fifth of the world land mass) and human capital but often lack the financial capital needed to develop their natural resources in order to bring about economic progress. Tessema (2003) states that developing

Ethiopia 25

countries have high unemployment rates but “an acute shortage of capital”. He further states that the “shortage of capital is a major constraint in the realisation of economic development”. Ethiopia is not an exception. Ethiopia for example, has the land mass of Germany, France and UK combined and 85 million people but its GDP is less than a third of the Apple Corporation - 118 billion revenue in 2011 (Annual Report, 2011). It has only cultivated about 40% of cultivatable land and has a big opportunity for the expansion of agriculture (Worldstat, 2012). The country is a source of many international rivers, including the Nile. It has the second highest potential for hydro-electric power generation in Africa, with 48,000 MW of hydroelectric power but currently it has only 2,800 MW of electricity and is expected to generate 10,000 MW in the coming 5 years (ADB Yearbook, 2012)

The countries estimated mineral resource is not yet known but one can cite what is being discovered after liberalisation of the sectors. Foreign direct investment allowed the mining sector to grow by 21.4% in 2008 and 12.8% in 2009 (ADB, 2010). In the short time of liberalisation of the economy huge reserves of potash that are expected to generate more than a billion dollars per year have been developed by companies from Australia, Canada, India and China (Reuters, Oct.18, 2011). The discovery of gold reserves in various parts of the country is a regular stock market briefing of many companies operating in Ethiopia (Bloomberg, Mar 15, 2012). Ethiopia has already made about 3 million hectares of land available for commercial farming and it has been leased for foreign and domestic investors.

In addition the country has a diverse climatic condition from being hot in the lowlands to a temperate zone on the mountains. The climate goes from the driest desert region in the East to the tropical rainforest region in the South West. It is also believed to be a country of biodiversity (Dereje, 2010). Addis Ababa, Ethiopia has been a seat of the African Union and the seats of Economic Commission for Africa and many international organisation attracting business travellers and tourists.

The country has a rich, long history which attracts tourists. The 2000 year site of Civilisation in Axum and remaining obelisks, the Lalebela rock hewn churches, Gondor Castles, the Semen Mountain for climbers, monasteries over the Lake Tana, Walled Town of Harrar and many rift valley lakes for holidays and bird watching. Its national parks in the North, East and South teem with rare wildlife and attract tourists.

But none of these natural resources are well developed or easily accessible to the outside world primarily for lack of financial resources. The infrastructure is not well developed. It needs huge investment to make these sites accessible through land and air transport. It needs modern facilities like hotels and other service provisions to cater for all types of tourists, rather than the current travellers who are really keen to see historical sites for academic or adventure seekers. The cost and the trouble of reaching those places often prohibit the mass tourist market.

26 Ethiopia

Human resource in the country is high. According to a recent population census, the population is estimated to be around 85 million and 49% of the population are under 15 years old. There has been significant progress in the last 10 years to expand education. Now primary education enrolment is 78% (MoFED, 2010) and university education has increased from 78,232 in 2004/2005 to 185,788 in 2009/10 in public universities. This growth was achieved with limited resources. All the above natural and human resources could have been developed better if the financial capital was readily available to invest. One of the means of achieving this is creating a 21st century commercial code and institutions like the stock market for cost effective mobilisation of resources to productive sectors.

The pooling of resources through share companies is the most efficient way that is visible for the private sector to take part in the development of these resources. Share companies are growing but it has to be encouraged and regulated so that the effort to set-up a share company, the risks associated with share companies and the transaction costs could be reduced.

5.1 Methods

Research according to Saunders et al (2009, p.5) is defined as “something that people undertake in order to find out things in a systematic way, thereby increasing their knowledge”. This systematic process may include describing, explaining, understanding, criticising and analysing. The aim of this research is to find out and explore the state of Ethiopian share holding companies. To achieve this goal the right research methods have to be employed. If not, the validity of the research will be under question.

Hence, it is vital to give a great deal of effort in the design of the research methods to ensure that there is a clear logical relationship between the aim of the research, data collection and outcome of the research.

Therefore, in this research a number of research methods were considered before selecting the right one. Research methods could be qualitative or quantitative. Qualitative research explains how it may be useful for exploring “why” and quantitative methods “how many” (Milena, Dainora and Alin, 2008). Furthermore, Saunders et al (2007, pp.133) state “An exploratory study is a valuable means of finding out ‘what is happening; to seek new insights; to ask questions and to assess phenomena in a new light’. Since the aim of this research is an exploratory quantitative approach using interviews was considered appropriate.

5.2 Data Selection

The aim of this research is to find the state of shareholding companies, regulation, regulatory frameworks and risks associated with it. In the process there are three players. The first are those who set the rules, monitor or explain

Methodology

28 Methodology

them. These people are categorised as regulatory bodies. In the second there are entrepreneurs, share promoters and directors. These people use the legal framework to set-up an enterprise and run it for commercial gain. These people are defined as promoters. In the third category there are shareholders who buy shares in a company. The shareholders invest their money for future gain by placing their trust in the legal system and the ability of promoters to deliver economic returns. Hence, for these three groups three sets of interview questions were designed.

5.2.1 Regulatory bodies

Under regulatory bodies there are government officials, lawyers and academics that have an active interest in the wellbeing of the share companies. The regulatory bodies have responsibility and oversight in the implementation of the law and the monitoring of share companies. Lawyers, by virtue of their business, represent the share companies. Hence, they are expected to understand the law of the country and its shortcomings. As practitioners, they are expected to be better suited to critically assess not only the law but also problems associated with its implementation. Academics also have an interest in the subject and they are better suited to discuss the Ethiopian situation in comparison with other countries and with theoretical frameworks. Hence, for this reason, in addition to general questions, the interviewees were focused on the 1960 Ethiopian commercial code, its shortcomings and the risks associated with it.

In addition to regulatory issues, general personal data of the interviewee, such as age, experience, sector working, in what capacity they get involved in share companies were asked. Furthermore, whether they own shares or not was asked to make sure that they do not have a conflict of interest in answering some of the questions.

5.2.2 Share Promoters and Board Members

In the second category share promoters, board members and entrepreneurs who launched share companies were interviewed. This group have a vested interest in making a success out of share companies. Hence, they are better suited to answer questions such as the challenges associated with setting up of share companies, the regulatory hurdles, and challenges of running a share company, conflicts of interest and risks associated under current regulatory frameworks. They are also better suited to share examples of success and failures of share companies. To get a complete picture, share promoters of the banking sector, real estate and manufacturing were interviewed. Some of the interviewees have successfully launched share companies to raise sufficient funds to start up real estate, banking and other businesses. Some of the interviewees are in the process of raising funds to start a business. They express the challenges and hopes associated with a business start-up. Not to create a completely rosy picture, a promoter of one failed start-up bank was interviewed. The bank had

Methodology 29

raised more than 75 million birr, which is 4.2 million USD but due to unexpected changes of the law the company has to dissolve and return the money to shareholders. This is expected to highlight the challenges. The range of capital raised for these share companies ranges from 75 million Ethiopian birr to 450 million birr (4.2 million USD to 26 million USD)

5.2.3 Shareholders

In the third category shareholders were interviewed. The shareholders were not subjected to an analysis of the commercial code or asked to give recommendations to improve it. As a result, the interview questions were designed to explore why they bought shares, what motivated them and whether they were fully informed the risk associated with buying shares. Furthermore, general questions about their age, education standard, how much they invested, and the sectors invested in were asked.

The interview questions are given in table 5.

The questions are divided into four sections. In the first part the questions were collecting personal details like age, education level, experience and the role in share companies. These questions were designed to establish the credentials of the interviewee. This data is given in Table 6.

Interviewees were also asked whether they own shares in Ethiopia. This is designed to identify any potential conflict of interest. For example, if a regulatory authority owns a share in a certain company his ownership of the company may come into conflict with his role as regulator. However there is no law in Ethiopia which prohibits regulators from owning shares or required to disclose his/her interested.

Promoters too were asked if they owned shares in a company that they were promoting. Not owning a share in a company they promote may have indicated a lack of confidence that could have led to the “principal-Agent” problem: where one is taking all the risk and the others share the benefits.

The second part of the question is about the country and state of share companies. These questions are what are the driving factors for an increasing number of companies and why investors currently buy shares.

These questions were designed to understand why now, what has changed in the law, economic reality or the public perception of share companies.

The third sets of questions are about challenges. These questions were designed to understand the challenges of setting up share companies in Ethiopia, what are the challenges in running them, what are the management challenges, what are the shortcomings of the 1960 Ethiopian commercial codes, whether there is sufficient protection in the law to avoid conflict of interest between directors

30 Methodology

and share-holders (principal-Agent). It also asks questions about liquidity of shares and whether the shareholders, regulatory bodies or promoters think that Ethiopia needs to set-up a stock market. There are also questions asking their opinion about what they think of the recent resurgence of share companies and whether they see it as a positive development or a high risk. Finally are questions asking of examples of share companies that they know to be successful, and companies that failed destroying shareholders’ values.

Analysing this data is expected to reveal a snapshot of the state of share companies in Ethiopia, including the challenges and opportunities.

In the fourth part, the questions are focused on the Initial Public Offerings document. This research wants to establish why people bought shares, what the companies offered to persuade buyers, and whether there is a minimum standard for IPO document preparation. These questions were designed to understand whether there is an element of risk associated with miss-selling.

The last part is about risk and it asks 3 questions. First; what are the risks? It is expected reveal that the perception of risk by regulatory bodies, shareholders and directors. The other question is whether the company prospectus or IPO sufficiently provides information about risks in investing in particular company. Once these risks are established the last question asks the interviewee to recommend a solution to reduce risk.

Table 5. Example of the interview questions

Organisation

1 Name 2 Age Telephone 3 Sex e-mail

4 Education High School Degree Post

Graduate

5 Work experience (No of years)

6The sector you are working in a sector (Such as banking, manufacturing, etc.)

7 Position

8 Role in the S.C company as Board/Director/Promoter

Shareholder Regulatory/academics/Lawyer

9 Do you own shares in Ethiopia Yes No 10 If you own shares, what is the amount invested?

11 How do you describe yourself and your experience in relation to share companies?

Methodology 31

General

12 What do you think the main driving factors for increasing number of share companies in Ethiopia in the last few years?

13What do you think the main factors that led investors to buy shares in one company and avoiding another? (i.e. return on investment, confidence in promoters, experimenting, peer recommendation, sector of the business etc.)

Challenges

14 What are the biggest challenges for launching S.C in Ethiopia?

15 What are the biggest management issues?

16 What are the main problems or short-comings of the 1960 commercial code in dealing with growing S.C and what are your recommendation for improvement?

17 Are there sufficient safeguard to avoid or resolve conflict of interest between promoters and the shareholders’ interest in the 1960 commercial code?

18 Do you think it is time to set-up a stock-market in Ethiopia?

19

Trade Ministry Regulation and Licencing office data shows there are 496 share companies with paid up capital of over 27 billion birr (1.5 billion USD); most of the companies were formed in the last 10 years, what is your view about increasing number of share companies?

20 Can you give examples of profitable share companies and anther examples of companies that failed?

21 What do you thinks the main cause(s) of companies’ failure?

Initial Public Offering Documents,Document Preparation for IPO

22 How informative was the prospectus for floating shares to the public (i.e. initial public offering)?

23

Is there a minimum standard for publication of prospectus in Ethiopia? What information it must provide to perspective buyers? Do you think it need provide information such as disclosure of conflicts of interests, return on investment, balance sheets, when the company is going to breakeven, sales forecast, etc.?.

24 Are there legal restrictions on benefits of promoters and board members in view of new directives issued by banking regulation?

25 What is your view about absence of a stock market in Ethiopia?

32 Methodology

RISKS

26 What are the potential risks associated with this S.C?

27 Do you think shareholders often get fully informed about the risk in the prospectus

Yes No

28 What would you recommend to reduce risks?

5.3 Data Gathering

5.3.1 Interviews

Interviews were used to explore the state of Ethiopian share companies. Quoting Kahan and Cannell, (1957), Saunders et al (2007) describe “An interview is a purposeful discussion between two or more people. The use of interviews can help you to gather valid and reliable data that are relevant to your research question(s) and objectives”

As shown in table 5, the questions asked were “semi-structured” and the interviewees were allowed to go beyond the question to bring related issues and relevant examples.

5.3.2 Methods of Date Collection

The interviews were conducted face-to-face with 16 out of 18 interviewed. Only one CEO of a start-up bank and one shareholder replied in writing. Prior to starting of the interview, a printed version of the questions and the purpose and values of research, printed in chapter 1 was given to interviewee to get consent. This was done not only to make clear the objective of the research but also to give confidence that the interview is academic, ethical and could be beneficial to them.

Upon getting permission to continue with the interview the questions were asked and notes were taken. The answers were transcribed in a standard format at a later date.

5.3.3 Level of Response

Over all about 20 people were approached for interview. The response level was 90%. Only one regulatory official and one bank director did not take part interview after agreeing to take part. The regulatory authority expressed his willingness to take part but he never allocated time for the interview. The bank director was willing but travelled out of the country and the interview could not be carried out. This put the response level at around 90%. The list of participants’ names, organisation, background and role is given in table 6

Methodology 33

Table 6. List of interview participants

Interviewee Organisation Background/education

Year of experience Age

Regulatory bodies

1Banking Supervision Director

National Bank of Ethiopia

International Finance, MA 15 years 43

2 Prof of Law, tax and international trade University PhD, LLB, LLM 35 years 65

3 Senior Lecturer University Law Faculty LLB, LLM 15 years 38

4 Director of Legal Affairs Investment Office LLB 15 years 43

5 Attorney at Law, Attorney at Law, private practice LLB, LLM 22 years 45

6 Founder and Managing Director Media High School 20 40

7 Senior Researcher Equity Research MA Economics 10 years 35

Share company promoters

8 CEO and Board Chairman

Real Estate, Investment capital and Bank

MBA 28 56

9 CEO Manufacturing BEng 20 years 4410 Interim Bank CEO Bank BA 30 years 4811 Principal Expert Insurance, bank BA 13 years 34

12 Managing Director Marketing and consulting BA 20 years 48

13 Board Chairman and Lecturer

Board Chairman of Bank, Lecturer PhD 31 years 56

Shareholders

14 Managing Director, Energy Consulting Energy MSc 22 45

15 Deputy General Manager Manufacturing MSc 10 52

16 Medical Doctor Hospital MD 13 3717 Manager Hospitality, Retail 20 years 4018 Director Trade MA 23 years 43

The interviews were conducted in a free and engaging environment. All interviewees conducted the interviews freely and gave sufficient time to answer or explain the questions. The interview lasted between 45 minutes and 2 hrs. Due to the nature of the questions a shorter time was spent with shareholders

34 Methodology

and the longest with regulatory bodies. Out of the 20 interviewees 7 of them were regulatory, 6 were share promoters and directors and 5 of them were shareholders. With exception of two interviewees all have at list first degree from local of oversees university.

Regrettably 16 out of the 18 interviewee were men. This may reflect the ration of power in the society. The two female interviewed one is a medical doctor by profession and shareholder and the other one is an interim CEO of a bank. In Ethiopia the “gender balance“ of board members and regulatory authorities is close to what used to be in UK and in Norway as “white, male and middle aged” before the threat of affirmative action began to shift the balance (Grosvold, Brammer and Rayton, 2007). In Ethiopia of course, it is “black, male and early middle aged” and there are very few female. Hence, though it wasn’t by design, the sample fairly reflects the reality on the ground, including the gender imbalance.

6.1 Reasons for increasing the number of share companies

Under the “general” category two questions were asked. The questions are: “what are the main driving factors for increasing the number of share companies in Ethiopia?”, and “what are the main factors that led investors to buy shares?”

These two questions were designed to get information about the macroeconomic environment as well as individuals’ motivation for investing in shares as opposed to other asset classes. From the first question the author expected to extract information about the macroeconomic environment, the collective perception of share companies, and change in the legal, political and economic environments. This question was based on the assumption that there is an increase in the number of share companies, which is confirmed by Ministry of Trade data.

The process of share company formation was interrupted during the socialist revolution from 1974 to 1991. In the last 20 years, however, many share companies have been created. Hence, this question was designed to capture what has changed. That by itself may not give a full picture without understanding what is driving individuals to invest. Hence, this question was complemented by asking the shareholders their reasoning for investing in share companies. The responses are summarised in Table 7.

6.1.1 The driving forces for increasing the number of share companies

6.1.1.1 Profit:

It is not surprising that the prime purpose of commercial business is profit, and profit was mentioned by 4 out of 6 regulatory bodies and 4 out of the 5

Results and Discussions

36 Results and Discussions

shareholders (tables 7 and 8). Interestingly, none of the share promoters and directors of share companies mentioned profit as the main driving force for the resurgence of share companies. This may be because the directors want to be perceived as being motivated by some higher social values than profit.

Nevertheless, explaining in detail, a director of a regulatory body, said “the banking sector is lucrative”. That may have encouraged investing in share companies. He justified this by saying that it is a start-up industry and the competition is limited since the sector is not yet open to foreign investment. Though there are 17 banks in the country, less than 10% of the society has access to banking (Access Capital Research, 2011). For example, return on Equity for 2011 for the private sector earning per share was 40.7% (Access Capital Research, 2011). Earnings per share for the Dashen Bank in 2011 was 75%. According to one regulator interviewed, limited access to banking has created almost a “monopolistic” situation to make the sector profitable. Out of the 17 banks, the three big banks are owned by the government and the rest are private banks that have started operations in the last 15 years.

Though they agree that profit is motive, the lawyers’ and academicians’ emphasis was more on the political and economic changes as a trigger for the resurgence of share companies.

6.1.1.2 Change of the economic and political systems

“Economic liberalisation” and “government policy” have been mentioned by most of the directors and some of the lawyers. Explaining the point, a lawyer attributes a change of government policy from “socialist” to “market oriented” as a major factor for the resurgence of share companies. However, he qualified the “free market” economy in relative terms”, since the Ethiopian economy is not free in a liberal economic sense. Most of the economies are still under government monopoly and the involvement of the government in the economy is huge. Nevertheless, he said, the overthrow of the military government led to a change of policy and these changes created opportunities for a need to aggregate resources in order to capture bigger opportunities. Another interviewee said the: “fading memory of nationalisation of the economy in the 1970s“, and the “guarantee to private property and repatriation of profit” to have contributed to the increasing numbers of foreign direct investment (FDI).

Results and Discussions 37

Table 7. What are the reasons for growth of share companies?Regulatory bodies Share promoters and

directors

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

or

CEO

, fou

nder

, Rea

l Es

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

e

Inte

rim C

EO, B

ank

Tota

l Res

pons

e

Profit

Profit √ √ √ √ 4

Security- future earning √ 1Policy

Economic liberalisation/ Gov-ernment policy

√ √ √ √ √ √ √ 7

Government encouragement/ incentives tax/loan

√ √ 2

Guarantee to private property and repatriation

√ 1

Inflation and MacroeconomicInflation √ √ √ 3Lack of finance √ √ 2Macroeconomic √ √ 2

Marketing

Heavy advertisement √ √ √ 3Economy of Scale

Start-up capital is high need to aggregate resources

√ √

√ 3Business require knowledge/ Principal agent separation

√ √ 2

Social CapitalSocial capital: Regional and ethnic affiliations/ Social capital/Trust/peer recommen-dations/social standing/confi-dence in promoters

√ √ √ 3

Copycat /Increasing awareness √ √ √ √ 4Outside influence, access to information

√ 2

Professionals involvement/Shift of the perception

√ √ 2

38 Results and Discussions

6.1.1.3 Inflation, the lack of financial institution and economic growth

Inflation, the lack of financial institutions and economic growth have been grouped together to be discussed in one theme. These factors have push and pull factors on investors. Inflation, for example, is pushing savers to put their money into shares rather than saving it in a bank. At the same time, the lack of financial institutions is forcing share promoters to use “heavy tactics” to pull capital into share companies.

Currently, Ethiopian inflation is the second highest in Africa at around 32% (CSA, 2012). This inflation had created a negative interest rate. According to one interviewee, “inflation is eating savings”, and “fear of inflation”, is driving people to put money even into high risk investments rather than keeping it in the bank.

Two CEOs said “lack of financial” institutions in the country makes share offerings and loans as the only two instruments in the country. Currently the law does not allow bond financing of private companies or the country have no venture capitals, private fund management companies or private pension fund companies. As a result those who want to start-up a company have to look into selling of shares.

As a third factor economic growth was mentioned. Ethiopia’s economy has grown by more than 10 per cent in the last 7 years (MoFED, 2010). Particularly in the banking and insurance sector which give returns above the inflation rate has made shares attractive investment.

6.1.1.4 Element of exaggerated marketing

Exaggerations and hard selling tactics were mentioned as a reason for the pushing of shares into the hands of shareholders and the growth of share companies. This is particularly mentioned by three of the people who were interviewed as regulators but none of the directors and share promoters made reference to it. For the lawyers it is a concern, but for promoters this may be perceived as an unavoidable consequence of lack of regulation and alternative financial institutions.

6.1.1.5 Economy of Scale: the need for pooling capital

The purpose of share companies is to be able to pool resources in order to create an economy of scale and it is not a surprise that this has been mentioned. The opening up of big business opportunities in the country has made it very difficult for the old system of sole traders or private limited companies to be dominant company structures. The sectors opened for investments like banking, manufacturing, mining and commercial farming require the pooling of resources and knowledge making share companies a preferred modus operandi. This is, in fact, the reason for the emergence of the concept of a joint-stock company in the 1600s and it is not a surprise that the interviewees reaffirmed that. In addition,

Results and Discussions 39

the scale of investment created the need for the separation of “principal” and “agent”, which is often served best by share company arrangement.

6.1.1.6 Social Capital

The other observation made by interviewees is the role of social capital, ethnic affiliation, copying one another, increasing awareness, and the involvement of professionals. Without investors buying shares, change of the government policy, the heavy marketing tactics or GDP growth would not have made a difference. To buy shares, investors have to be convinced. Trust is an important part of business, because it reduces transaction costs (Dyer and Chu, 2003). One interviewee stated that individual buying patterns may have been swayed by “social capital”, “ethnic and regional affiliations”; or by “high social standing of share promoters”. As a good example he points out that some of the banks are perceived to be predominantly associated with one ethnic group. He cited, as an example that the majority of the shareholders of Awash Bank are from the “Oromo ethnic group, Wegagan for Tigray, and Abyssinia bank with Amhara”. So the selling of shares is not clearly on the basis of return on investment and it may have to do with relationships, affiliations, and social standing. All of these can all be summed up as trust.

6.1.2 Conclusions for growth of share companies

Overall this notable growth in share companies could be explained as an inter-connected chain of events. As highlighted by the interviewees, the change of government triggered the change of political and economic policies. Particularly, the end of socialism and the removal of the socialistic, economic policy opened the way for a mixed economy or what Geda calls a “market oriented” (2001) policy which led to the liberalisation of various sectors. This in return opened opportunities that are beyond the resources of sole and private limited companies. Hence resources have to be pooled together in order to capture big opportunities, which led to the popularity of share companies, creating a condition for professionals and entrepreneurs to get involved in the setting up of share companies.

Of course, the fear of inflation, the need for “principal and agent” separation, awareness, outside influences, and “copy-cat” share set-ups may have contributed to the resurgence of share companies. Social capital may have played a bigger role to create trust and the transaction to take place.

These chains of event are the most likely explanation for the growth of share companies in Ethiopia. However, further empirical work is needed to see if there is causal relationship between these chains of events.

6.2 Shareholders Views

Shareholders were asked to rank the reason for buying shares, their level of

40 Results and Discussions

investment, the sector they invested in, and whether they have been paid dividends. The results are given in Table 8.

A six point ranking was used for the reason of buying shares. Six points, of which three are economic and the rest are social. The ranking was “1” for the most important and “6” for the least important. There numbers were added together to rank the total response of the shareholders to clearly rank which one is the most important.

As shown in Table 8, most of the shareholders bought shares primarily for “profit” or “potential return on investment”. Overall economic factors like, profit, market size of the sector, company growth potential come in the top 3 ranking. Social factors like confidence in promoters, peer recommendation were ranked in the last 3.

As shown in table 7 and 8, both shareholders and regulatory bodies agree that profit is a motivating factor. But, interestingly, the regulatory bodies emphasised social capital as a factor in determining shareholders’ buying decisions. This shows regulators’ view of shareholders, and the shareholders view of themselves as being different. The shareholders see themselves to have bought shares on cold economical and rational factors like profit, while directors’ emphasised the influence of social factors.

However, the sample size of shareholders is too small to discount the regulators view. Furthermore, the investment of the three out of the five shareholders’ investment is above half a million Birr, which is around 27,000 USD. This kind of money could not be invested in Ethiopia as an “experiment” or to follow “peer recommendations”. This may make the view of these investors as less representative of the majority of shareholders. To get a clear picture a further quantitative survey that can be tested through statistical methods is needed.

The sectors these shareholders invested in are banking and insurance, real estate, hospitals and hotels.

Those who invested in the banking sector have received dividends but the other sectors have not yet received a dividend.

Results and Discussions 41

Table 8. Shareholders response to the question why they bought shares R

easo

n

Shar

ehol

der 1

Shar

ehol

der 2

Shar

ehol

der 3

Shar

ehol

der 4

Shar

ehol

der 5

Tota

l

Profit/ROI 1 3 1 1 1 7Company growth potential

3 1 4 2 2 10

Market size of the sector

4 2 2 3 3 14

Confidence in promoters

2 4 3 6 5 20

Peer recommendation

5 6 5 4 6 26

Experimenting 6 5 6 5 4 26

Investment capital (birr)

10 million birr

25 K 560K 1.2 million

30K

Sector invested Bank, Insurance, real estate

Real estate

Hospital and Hotel

Bank Bank

Dividend received so far

Yes, Banks,No, real estate

No No Yes Yes

6.3 Challenges from launching Share Companies in Ethiopia

Under “challenges” eight questions were asked. The first question was “what are the biggest challenges for launching a Share Company in Ethiopia?

The response of regulatory bodies and directors is summarised in table 9. Broadly, the issues can be classified into four groups. The first is a problem related to “the law, regulation and institutions”.

The second one is related to “implementation or system” such as “red tape, unpredictability of the law, bureaucracy, and cumbersome procedure”.

In the third part, it is about the “cost”, such as “absence of market for raising capital, challenges of selling shares, high transaction costs, high commission costs” etc.

The last category is considered as malpractice related to the management, such as “conflict of interest, cronyism, failure to work as a team, credible business plan, excessive benefits and lack of knowledge and experience”.

42 Results and Discussions

Table 9. What are the main challenges for setting up a share company in Ethiopia?

Regulatory bodies Share promoters and directors

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s Eq

uity

rese

arch

er

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

or

CEO

, fou

nder

, Rea

l Est

.

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

eIn

terim

CEO

, Ban

k

Tota

l

The LawLack of: clarity of the law, bankruptcy and liquidation/ outdated law

√ √ √ √ √ √ 6

No/Lack of regulatory body/lack of institution

√ √ √ √ √ √ 6

Instability of the law/regulatory risk/ Fear of the system

√ √ √ 3

Lack of valuation of company/No rating agency

√ √ √ √ 4

SystemLack of trust /Red tape/Bureaucracy

√ √ √ 3

Outdated share registration system / Bureaucracy/High transaction cost

√ √ √ √ 4

CostRaising the capital/no market for selling/no long-term financing

√ √ √ √ 4

High transaction cost/Operational cost/ and venture capital cost

√ √ 2

MalpracticeConflict between promoters/ cronyism/ working in a team/ socialist mind-set

√ √ 2

Results and Discussions 43

Wining the confidence of shareholders,/ trust

√ 1

Credible business forecast/ lack of knowledge

√ √ 2

Overcrowding in the market, negative publicity

√ 1

Excessive benefits, conflict of interest and lack of accountability

√ 1

6.3.1 The law, regulations and institutions

6.3.1.1 The commercial code is outdated:

As shown in table 9, 9 out of the 13 regulators and directors interviewed consider the law to be one of the challenges. They say it is “outdated”, it “has no bankruptcy and liquidation provisions”, it has “no provision for regulatory authority”; it has “no provision for valuation of contribution in kind”. It has “no provision for valuation of intangibles”, such as intellectual properties, brand and goodwill.

One interviewee stated that the inability to value intangibles makes it difficult to recapitalise a company or sell to exit. This will remain an obstacle for the emergence of a knowledge based economy and innovation. Having a stock market would have made it easier to value intangibles since the difference between the company asset and market capitalisation reflects future earning potential, which include the values of intangibles and brands.

On the other side, one of the directors does not see the law as a hindrance or a challenge for start-up share companies. Even though he agrees that the law needs updating, his fear is that the law is too loose to open the way for everyone to jump on the share company bandwagon. As a result, in his words, the share market has turned into “the Wild West”, where everyone can jump on the bandwagon in the absence of legal oversight and regulatory body. In his view, yes, the law is outdated, but, it was not a hindrance. Another CEO also expressed his concern by saying that this has led to “overcrowding” making it difficult for good companies to raise capital.

6.3.1.2 Instability of the law: The other point that came as an issue during the interview was the instability of the law and the regulatory system. Share promoters and buyers fear that the system and the law are not predictable; as a good example of this, one director, pointed to the 2011 banking regulations. At that time there were 14 companies actively raising capital to open banks. Some of the companies had raised more

44 Results and Discussions

than what was required by law and were waiting for shareholder meetings or preparing the paperwork’s needed to apply for a licence. However, the bank regulator raised the start-up capital from 75 million birr to 500 million birr, which is a 670% increase and, furthermore, this directive was implemented without a grace period. According to the interviewee, the directive was announced on a Friday with effective implementation of the regulation on the following Monday. This did not only show how unpredictable the regulatory bodies are but also a century old “power distance” between the authorities and the people is still remains a challenge. Hofstede (2006), defines “power distance” as “the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally”

As a result, about 14 banks that were under formation have been struggling to raise the 500 million birr mark. Two of the start-up banks have already given up and asked permission from the bank regulators to liquidate. The problem is, if a decision is made to abandon the plan, all the administrative and promotion costs will be sunk and shareholders will not get the full amount of the money they invested.

On a similar line, one interviewee said that even though he agrees that the law needed to be updated, he is anxious about what would replace it. He said the mind-set at the moment is more about control than enabling business. As a good example, he said, he supported the banning of the use of mobile phones while driving, however, when the law came out, it also banned using hand free phones or Bluetooth, totally making the purpose of the invention of mobile phones irrelevant. Mobile phones originally came out as car phones, with the aim of helping people use their time efficiently: phoning while on the road, but in Ethiopia, one has to be at home or in the office to use a mobile. This kind of overzealous over-regulation might halt the growth potential of share companies in Ethiopia.

6.3.1.3 System, red tape and bureaucracy:

Shareholders mentioned “red tape”, “bureaucracy”, and “lack of institutions” as a challenge for a new start-up of share companies. It is not only the law that was outdated but also the system which needed to be dragged into the 21 century.

For example, there is no notary service under the current law. For a signature to be of any value in Ethiopia, one has to go to a document authentication authority and sign in front of a government authority. As a result, according to one CEO, 13,000 of its shareholders have to go to an authentication office, line-up and sign in the book, one after the other. If one person cannot make it, it does not matter whether a thousand have already signed and the company cannot then be registered and start operating.

Companies’ memorandum of understanding and amendment to the article

Results and Discussions 45

of association has to also be signed. Without exaggeration, it is not clear, how the Dutch did it in the 16th century, but the Ethiopian system appears too cumbersome and outdated. This, in effect, is a huge cost and a big challenge.

To facilitate a quick signing, companies often pay the overtime wages of the authenticating authorities to bring the book to their office over the weekend to facilitate the official signing process in the start-up company’s premises. That is why; it is not only the law but also the system that needs updating by adopting a modern technology based registration system and the delegation of authority.

An implication of this cumbersome procedure is that share promoters do not issue shares of lower values. For some time, the author was wondering why all shares in Ethiopia were issued at 1000 birr ($57 USD) per share nominal value and most companies demand at list the buying of 5 shares, which is 5000 birr or about 300 dollars. This is big money in a country where the GDI per capita is 390 dollars (World Bank, 2010).

It is only when this cumbersome procedures become apparent during this research that the authored realised the reason behind 5000 birr minimum purchase. This may be designed to reduce administration costs and reduce the number of shareholders that have to line-up and sign over a number of days or weeks.

At the moment no law office in Ethiopia is empowered under the law to do document authentication or notary services. Unless something is done to simplify these cumbersome procedures it will create an adverse selection of shareholders. In a country where 35% of society is living below $1.5 dollars a day ($1:17.50 birr), the low income investors would be adversely excluded from buying stocks. That is why there is a need for the setting-up of a stock-market and institutions around it that can create an efficient system to reduce transaction costs.

Bureaucratic red tape, in leasing land, getting permission to build a factory was also mentioned as the main challenges for start-up. However these problems are not typical of share companies. It affects all companies including sole traders.

6.3.1.4 Cost:

Under “cost”; “lack of institutions to raise funds” like, venture capital, angels investing, pension fund managers, and private equity investments do not exist in Ethiopia. The options available today are equity or loan. Furthermore, selling shares is conducted not through banks and underwriter financial institutions but using a salesperson through networking or media advertisement. All this contributes to high start-up costs and long start-up times, which is regarded as a challenge for start-ups.

46 Results and Discussions

6.3.1.5 Malpractice: The last challenge raised by interviewees was “malpractice”. There is not a regulatory body or a law to resolve disputes. Hence, when a board of directors gets into conflict things could be left at a stand-still which is a cost for shareholders. An element of “cronyism” was raised where founders bring incompetent friends and families onto the board. “Lack of knowledge” and “lack of professional people” were also mentioned. Under this “negative publicity”, overcrowding of the market by everyone and “inadequate business plans” have also been mentioned as challenges for setting up a share company.

The interviewees have also highlighted the lack of a “clear accounting system, excessive benefits of founders, lack of corporate governance, conflict of interest, and other malpractices” by the founder and board members to be a challenge for the starting-up of a share company by affecting investors’ confidence.

6.4 What are the management challenges?

Another question asked was, “what are the biggest management issues? This question was answered by all interviewees and the result is summarised in table 10.Answer to ‘what are the biggest management challenges?’ are quite diverse, however, they were grouped into four main themes, such as “management knowhow, lack of national standards, capacity and principal-agent conflicts.

6.4.1 Management Knowhow

The results in table 8 shows, with the exception of two CEOs, all directors and CEOs emphasise the lack of entrepreneurship skills, the lack of management skills, the lack of vision, and of incompetence to be main challenges. Overall, there is an overwhelming perception that there is a big challenge to find managers with good management skills, knowledge, and competence.

One regulatory body argues, of course, that the level of management training has been increasing with an increasing number of universities in the country (from 3 twenties years ago to more than 33 universities today). However, he argued that this training does not prepare graduate students for management roles. A lack of on-the-job training and exposure is a limiting factor for the success of share companies.

The other challenge mentioned is “exaggerated claims” of returns during the selling of shares which makes it difficult to live up to shareholder expectation during the operation of a company.

6.4.2 Business environment

The second management challenged mentioned could be categorised as

Results and Discussions 47

the business environment, which includes interaction and interference by the government and by regulatory bodies. The replies show the environment is not enabling managers to execute their job. Rather it is considered to be a hindrance. “Strong state intervention, regulatory hurdles, unpredictability of regulation, regulatory risk” and “fear of the system” has been mentioned during the interviews.

One shareholder said, unpredictability of the law is very difficult for managers to plan and implement projects. He cited an example of a change of land lease law which has become a big obstacle to Real Estate to build houses and apartments, and complete contracts with clients. He said there was a new law in 2011, which changed the land lease law, and this led to the grinding to a halt of real estate activity due to uncertainty and lack clarity. The change was not predicted and properly debated.

The other example given by share promoters is the new banking regulation which reduced directors’ benefits to a mere 50,000 birr per annum. Before the regulation founders and board members used to earn up to million birr, but that come to a stop due to this unexpected “over regulation”.

While the benefits are reduced, the penalties were increased. If non-executive directors make a mistake the penalty for this mistake could be up to 16 years imprisonment. Hence the risk and reward is not comparable. Therefore, board members and CEOs spend more time making decisions, and avoiding taking risks in order to protect themselves rather than aggressively pushing for growth and market share. In the last few years two CEOs of banks were imprisoned on various charges which makes others reluctant (Addis fortune, March 4, 2012)

6.4.2.1 Lack of national standards

The other management challenge raised particularly by a regulatory body is the lack of a “national accounting standard, an auditing system, and risk management test methods”. The absence of a national standard creates confusion because some companies report using the US standard and the other British accounting rules, thus, making it difficult to compare. For management this creates confusion and makes it difficult to focus on creating a vision and goals.

6.4.3 Capacity

The other challenge raised was “capacity”. Though knowledge, vision and experience were discussed as the first challenge, technical capability was mentioned by interviewees. Capacity somehow is technical capability, such as finding the right experts, and an absence of an internal control system for finance and management.

6.4.4 Principal –Agent power imbalance

The other management challenge could be summed-up as a principal and agency problem. Interviewees mentioned “conflict of interest”, “lack of cooperate governance”,

48 Results and Discussions

“promoting self-interest”, “exaggerated claims” and “lack of delivery” as some of the challenges in share companies. The Principal-Agency topic has been studied to align with the interests of directors, the agents, with that of shareholders, who are the principals. Rayton and Cheng (2009) state that “Principal-agent theory also illustrates the importance of aligning the interest of managers with shareholder either through financial rewards, threat of dismissal; and or direct monitoring”). At the moment, in Ethiopia, the lack of meritocracy and performance related pay does not align with the interest of shareholders and with that of managers therefore creating imbalance in power and information asymmetry and a management challenge.

In Ethiopia, it is a new phenomenon where investors buy part of a company that they are not involved in running. This division, coupled with the asymmetry of power and information has made the directors more powerful than the shareholders. In fact, in some cases, the shareholders have no influence or legal protection to control founders and directors except their votes and the court.

6.4.5 Mismanagement

The last management challenge raised was mismanagement: Under mismanagement “conflict in the board”, “lack of trust”, “failure to work as a team” have been raised as management challenges. One interviewee said the boards are often filled by those people who bought shares but have no experience in running businesses. In some cases people who have no experience of business but use their social standing, academic achievement or wealth to be on the board. One interviewee said these types of board members often interfere with the day to day running of the business by putting pressure on CEOs. A good example mentioned during the interview by one regulatory body was there were cases where boards of directors were putting influence on bank managers to give loans for themselves or for the people they know. These kinds of practices have been considered to be challenges for share companies.

In conclusion, lack of management know-how, the operating environment, a lack of skilled labour, conflict of interest, and mismanagement were considered to be challenges in the setting-up and running of a share company. In the absence of a strong legal framework and regulatory body, and in the absence of risks and opportunities sharing between the principals, the investors, and agent, the board and management, these problems may remain as big management challenges.

Results and Discussions 49

Table 10: What are the management challenges?Regulatory bodies Share promoters and

directorsShareholders

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

or

CEO

, fou

nder

, Rea

l Est

ate

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

e

Inte

rim C

EO, B

ank

Shar

ehol

der 1

Shar

ehol

der 2

Shar

ehol

der 3

Shar

ehol

der 4

Tota

l

Managerial knowhowLack of entrepre-neurship, managers, knowledge, experience, vision and competence

√ √ √ √ √ √ √ √ √ 9

Exaggerated claims and expectations

√ 1

EnvironmentStrong state interven-tion/ regulatory hurdles/ unpredict-ability of regulatory body/ regu-latory risk

√ √ √ √ 4

Fear to make decision due to regula-tory risks

√ 1

No risk man-agement/ inadequate internal and external control

√ 1

50 Results and Discussions

No ac-counting standard, no auditing standard

√ 1

Internal CapacityLack of hu-man re-sources/no technicians

√ √ 2

Absence of manage-ment & financial system

√ √ 2

Inadequate internal control

√ 1

Principal-AgencyConflict of interest, cooperate governance/ principal agent con-flict

√ √ √ √ √ 5

Manage-ment pro-moting self interest

√ √ 2

Exaggerated claims and expectations

√ 1

No link between performance and bonus /no motiva-tion

√ √ √ 3

Miss-managementConflict in the board, lack of Trust/ CEO have no independ-ence, board getting involved

√ √ √ 3

Results and Discussions 51

No meritoc-racy : Social standing, acad-emicians, wealthy people getting involved/

√ √ √ 3

Working as a team

√ 1

6.5 Commercial code of Ethiopia

During the collection of data and as well as the analysing of the data, it become apparent that this question is too broad to discuss as one question. From replies of the lawyers and academics, this, by itself, can be a complete work of dissertation. However, one of the objectives of this work is to highlight the shortcomings of the law and the risks associated with it. Hence, attempts have been made to summarise the results as shown in Table 11.

6.5.1 Shortcoming of the Ethiopian Commercial Code

As shown in Table 11, the list of shortcomings of the 1960 commercial code is quite long. The main replies focus on what is not in the 1960s law. . Some of the missing things are new things that have come into existence since 1960. For this reason it was found necessary to recap what had happened in the financial world since 1960.

Since 1960, the global stock market has expanded in size and geographic location. Many innovative financial instruments have been developed and many booms and busts have been registered leading to the tightening of legislation and control. To accommodate these changes most countries have to update their laws to strengthen the regulatory frameworks and protect shareholders’ values or create new knowledge-based economies. The fact that the commercial code was written long before all these innovations means it has no provision for all these new developments.

52 Results and Discussions

Table 11. Shortcoming of the 1960 commercial code Regulatory bodies Share promoters and

directors

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

orCE

O, f

ound

er, R

eal E

st

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

e

Inte

rim C

EO, B

ank

Tota

l

Code is outdated/beyond its ages

√ √ √ 3

No standard for account-ing, valuation & contribu-tion in kind

√ √ √ √ 4

No protection for share-holders/ no obstacle/ no quality control

√ √ √ √ 4

No arbitration, the only solution is court

√ √ √ √ 4

No regulation for forma-tion/ No regulatory body

√ √ √ √ √ 5

Paradise: No obstacle &quality control

√ 1

Lack of mechanism to set-up a market/ no liquidity/no exit

√ √ √ √ √ √ 6

No mechanism to avoid a conflict of interest

√ √ √ √ √ 5

No IPO standard/ no law against miss selling

√ √ √ 3

No disclosure rule/ no pro-vision for providing info/transparency

√ √ √ √ √ 5

No provision to protect start-up cost from abuse

√ 1

Conflict between com-mercial and trading laws

√ √ 2

No ecommerce, intangi-bles

√ 1

Results and Discussions 53

No group holding, no holding company/no sub-sidiaries

√ 2

Not in line with new fed-eral arrangement

√ 1

No bankruptcy law/ No notary service

√ √ √ 3

No clear distinction be-tween paid up capital and subscription

√ 1

Cumbersome decision making procedure/ unani-mous/ quorums/advertise through newspaper and radio/no letter

√ √ 1

No debt financing/ no preferential shares/class of shares

√ √ √ 1

Restriction on foreigners and Ethiopians in diaspora from buying bank share

√ 1

No mechanism to chal-lenge regulatory body

√ 1

For example, the stock market has been the centre of prosperity by the mobilising and allocation of capital in to productive sectors. Of course, Ethiopia had small share dealings from 1960 to 1974 but that was interrupted by a Marxist inspired revolution. Since the nationalisation of the major means of production, banking and manufacturing there was no need for the private sector to raise capital to invest in the country. But with the coming down of the military government, the role of the private sector has increased but, however, by then the law was already 32 years old and now it is 52 years old. Of course, even under this 52 year old commercial code around 496 share companies have been registered at the Federal Ministry of Industry, with an aggregate paid-up equivalent to 4.7% of GDP. However, it does not mean it will protect shareholders or resolve conflicts.

Since the 1960s, globalisation, a knowledge-based economy, www, e-commerce, WTO, outsourcing, real time trading, and free flow of currencies have arrived to change the nature of business while bringing down national barriers. In the global economy multi-national companies dominate the global transactions reaching every corner of the globe. Many of these were previously unknown. The historian, Niall Ferguson (2008, pp.4-5) in “The Ascent of Money”, narrates the state of the global financial market as follows:

54 Results and Discussions

“… you will see how the globalization of finance has, among many other things, blurred the old distinction between developed and emerging markets, turning China in to America’s banker- the Communist creditor to the capitalist debtor, a change of epochal significance”. He further states “[i]n 2006, the measured economic output of the entire world was around $47 trillion. The total market capitalization of the world stock markets was $51 trillion, 10 per cent larger. The total value of domestic and international bonds was $68 trillion, 50 per cent larger. The amount of derivatives outstanding was $473 trillion, more than ten times larger. …. Every day two trillion dollars change hands on foreign exchange markets. …. The volume of derivatives –contracts derived from securities, such as interest rate swaps or credit default swaps (CDS)- has grown even faster, so that by the end of 2007 the notional value of all “over-the-counter” derivatives (excluding those traded on public exchanges) was just under $600 trillion. Before the 1980s, such things were virtually unknown”.

In the 1960s there were no forward markets, future market, options markets, credit swap, derivatives contracts etc. (Shriller, 2011). If Ethiopia has to join the world financial community, it has to have at least a provision to understand and promote or regulate some of this financial innovation. One thing that the country cannot afford to do is ignore it and pretend that it does not exist.

As the interview results shown in table 11 describe, almost all regulatory bodies, CEO and directors say the “law have lived beyond its age”, “has no protection for shareholders”, “it does not recognise intellectual properties”, “it has no provision for stock-market start up”, “it has no disclosure requirement”, “it has no sufficient provision for bankruptcy and liquidation”, “it has cumbersome procedures in ratifying article of association and memorandum of understanding”, “it has no provision for conflict resolution mechanism between agents and principals except taking the case to court”. Furthermore, it does not recognise “group and subsidiary” companies. It has “no IPO standard”. These are huge indictments on the authorities entrusted to keep an eye on the law and update with change of time.

The list of shortcoming of the code is quite long but there is an overwhelming consensus that it needs total updating to bring it into the 21st century. At the same time there is a fear that a badly drafted new law could be worse than having an old one. In fact, it could create more damage to business start-ups than outdated ones. As two of the CEOs highlighted, the 1960 law is a paradise for share company promoters since it has no regulation and restriction. That may explain the popularity of share companies. But the fear is this; the authorities may draft a new law to control rather than using the law to enable businesses. If that happens, it may lead to over regulation of the system and take the steam out of emerging joint-stock companies.

In fact, the author had a chance to read a draft document which is “unofficial” and meant to be revising part of the commercial code. This document is not a revision of the whole commercial code but a piecemeal attempt to update part

Results and Discussions 55

of it. If this document becomes law, the fear of the interviewees would become a reality and lead to the death of share company start-ups.

For example, a loose translation of Part 2, Article 8.5 of the draft document states “share company founders would be required to put guarantee (collateral) equivalent to the amount of money they intend to raise from the public” . This clearly shoots the principle of a Share Company right through the heart. First, if founders have a resource equivalent to what they want to raise, they would not bother to raise capital from thousands of people. They can do the business without shareholders in private limited company (PLC). Second, entrepreneurs often have no money, but many have innovative ideas. An idea without the ability to raise money cannot reach the market. Neither Steve Jobs nor Bill Gates would have brought their innovations to the market if they were asked to put collateral to the amount they intended to raise. The 1960s law was amazingly ahead of its time and well drafted to be useful for 52 years, but whoever may have drafted the amendment has either no knowledge of the purpose of the foundation of the share market or has no clue of the impact of the implication of unlimited liability in the law.

Of course, if the agent misuses the resources of shareholders they could be criminally liable but they are not required to put the equivalent collateral to become a director of a company.

Having expressed the concerns and taken the risks in mind, it is still necessary to update the law and in the following section a few of the shortcomings are listed.

6.5.1.1 Lack of Standard for Initial Public offering (IPO)

Under the current law many of the interviewees have said there is no standard for the publication of IPOs. That means anyone can promise exaggerated profit and sell equities. The law has no articles that make company promoters liable for misleading or miss-selling equities. There is also no provision of what the initial public offering may contain and what information has to be disclosed. Most of the IPOs in Ethiopia are not more than one or two A4 size papers folded into A5 leaflets. In most cases, the information published is the profile of promoters rather than the financial analysis of the company. This means shareholders have no protection from rogue operators. That is probably the reason why social capital of the promoters is more important than promised financial return reported to have influence in buying patterns of shareholders. Some of the interviewees make it clear that there is not protection against miss-selling. In fact the shareholders have no say on the money they contribute for the running costs of start-ups. This is known as “commission” and the rate ranges from 6 to12 per cent. For example a company that sold 400 million worth of shares could potentially collect around 28 million birr (1.5 million USD) worth of commission at rate of 6% of commission. This money is at discretion of promoters. According to a bank regulator, the law only protects the money shareholders put to buy

56 Results and Discussions

shares and not the commission between 6-12 per cent they pay with it.

6.5.1.2 Lack of Disclosure Conflict of Interest

Aligning the interest of shareholders and managers is believed to be an important factor in creating a successful company by sharing opportunities and risks. However, the conflict of interest addressed in the commercial code is limited to voting rights and does not clearly address conflict of interest between shareholders (principal) and managers or board of directors (agents) in the day-to-day running of the company. Article 409 states the following about conflicts of interest.

1. Where the interests of a member, acting on his own behalf or on behalf of a third party, conflict with the interests of the Company, such member may not exercise his right to vote.

2. Where failure to comply with the provisions of sub-article (1) results in a resolution being adopted’ prejudicial to the company, such resolution may be set aside in accordance with the provisions of Art. 416.

3. Directors may not vote on resolutions relating to their duties and liabilities.4. Shares which are deprived of voting rights under this Article shall be taken

into account in calculating the quorum.

Apart from those provisions, there are no requirements for the disclosure of material benefits. In English commercial law, for example, there is a statutory provision duty to disclose interest. CA 2006, sec182 states “(1)Where a director of a company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section... Sec182 (2) also states how the declaration must be made—“(a) at a meeting of the directors, or (b) by notice in writing (see section 184), or (c) by general notice (see section 185)”

The penalty for failure to declare an interest under sec183 CA2006 is a fine. Sec195 (4): the following may be liable to account for any gain made directly or indirectly from the arrangement and to indemnify the company for any loss or damage caused by: (a) the director (unless he took all reasonable steps to secure compliance with the section); (b) the connected person (unless unaware of the relevant facts); (c) any other director who approved the transaction.In contrasts, lack of legal requirement for disclosure of interest could expose the shareholder to potential unfair practices of company directors. Hence, the agency and principal relationship is unbalanced in favour of the agents.

6.5.2 Share transfer and amendments

The commercial law unnecessarily restrict the transfer of shares to non-shareholders without the consent of 2/3 of total shareholders. Articles 523 (2) states that, “ (2) A transfer of shares outside the company shall be approved by

Results and Discussions 57

a majority of the members representing at least three-quarters of the capital, unless a larger majority or unanimity is fixed in the articles of association”. This process not only increases transaction costs but also stands in the way of creating a secondary market. Companies that want to make it easier to transfer their shares have to add this provision in their articles of association. 6.5.3 Arbitrary Private vs. Public Company Divide

The law divides companies into public and private share companies based on how the shares were sold. Since there is no stock market, there is no secondary market. Hence, the main differences between private and public share companies are at the state of formation. Public companies use public media to advertise to sell their shares (initial public offering) while the others use family and friends connections to sell the shares. This makes it very difficult where the private domain stops and the public domain starts.

6.5.4 Lack of Provision for Subsidiaries and group holdings

With growing globalisation and foreign direct investment a number of companies have been setting operations in Ethiopia, as highlighted by interviewees the Ethiopian commercial code has no provision for subsidiaries or group holding. It treats each company as a separate entity making it very difficult for companies who want to invest in Ethiopia or companies who want to have a group holding.

6.5.5 Lack of intangibles and goodwill valuations

As shown in table 11, lack of provision for valuation of intangibles creates a big obstacle for a knowledge-based economy. For example a newspaper company may not have a lot of assets except for a few computers, desks, filing cabinets and publishing software, but the newspaper could have a huge circulation and generate high revenue. The value of a publishing company is in its reputation or providing accurate information to the public. This intangible value cannot be fully valued using their assets.

6.5.6 Lack of regulatory bodies

Lack of regulatory body was highlighted by interviewees. With the exception of the banking sector, there are no regulatory bodies for shareholding companies. In 2008, the Banking Business Proclamation No. 592/2008 was ratified so that the national bank overlooked the sector. However, critics argue that the regulation has gone too far creating too much pressure on the banking sector (Seifu, 2010). For all other sectors there are no regulatory bodies and it is difficult for shareholders to complain about unfair practices except taking the case to court, which is expensive. 6.6 Conflict of Interest

58 Results and Discussions

The next question that regulatory bodies and directors asked was, are there a sufficient safeguards to avoid conflict of interest between shareholders and directors in the commercial law? Almost all interviewed except two CEOs said, “none at all except for the banking sector”. One interviewee said “not sufficient”. Another interviewee said “shareholders have only a mechanism to take the case to court” or “one vote at AGM”.

Two of the directors think that there are sufficient safeguards since the shareholders can use their vote and the courts to challenge the directors. However, as shown above, if the law, for example, has no provision for disclosure or conflict of interest, the shareholder cannot win the case if he/she takes the case to the court. Voting does not provide redress of past damages; it can only be useful to protect the future. Overall, the consensus is that the there is no mechanism to protect shareholders interest or resolve conflicts without going to court.

There is only a regulatory body for the banking sector and shareholders can complain to the banking regulator to intervene and take measures. There are two high profile cases where the banking regulators were involved to invalidate a board election and demand a new election (Addis Fortune, April, 2012, Reporter, and 22 May, 2011). However, in the other sectors, there is no regulatory body to complain to or report unfair practices.

6.7 Does Ethiopia need a stock-market?

One of the questions was: Do you think it is time to set-up a stock market in Ethiopia? The reply to this question was overwhelmingly “yes”; all regulators, directors and almost all shareholders said it was time to set-up a stock market in Ethiopia. Only one shareholder said he does not fully understand the stock market and cannot comment. The rest, 17 out of the 18 people interviewed, said “it is time”. One interviewee said, “yes, but it need a comprehensive commercial registration and valuation system” and the other one said “yes, but need a caution approach and gradual liberalisation including building the infrastructure, regulatory set-up and develop the human resource”.

Though the remarks are yes to a stock-market, the replies contain a cautious approach in setting-up the system, in creating the regulatory body, in updating the law and building the institution. However, they all agree that it is important to have a stock-market to create “liquidity” and “mobilise resource”. It will also help to reduce transaction costs, and help with the valuation of a company including putting value on brand, intangibles and reputations.

The stock market could also help to build institutions to monitor IPO, disclosure rules, corporate governance, reporting and efficient dissemination of information. As discussed in the literature review section, the stock market is an efficient way of resource allocation into a productive sector. This is now fully accepted across the globe. Even by African standards, 33 out of 54 African countries have a

Results and Discussions 59

stock-market. Ethiopia is the second most populous country and the 9th biggest economy in Africa. The economy has been growing at a higher rate and yet no attention is given to create a stock market. That is why the author also thinks that setting-up a security exchange is an important instrument to guarantee economic growth.

Table 12. Do you think it is time to start a stock-market? Regulatory bodies Share promoters and

directorsShareholders

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

orCE

O, f

ound

er, R

eal E

stat

e

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

e

Inte

rim C

EO, B

ank

Shar

ehol

der 1

Shar

ehol

der 2

Shar

ehol

der 3

Shar

ehol

der 4

Tota

l

Do you think it is time to start a stock-market

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ N/A

√ √

6.7.1 Profitable and loss making companies

The other questions all interviewees asked were to name a share company or companies that they know to be profitable and a company or companies that have failed. Then they were also asked to comment on the reason for failed share companies.

6.7.2 Profitable Share Companies

The reply is that banking and insurance were named as being the most profitable by all. From the banking sector, Zeman Bank, Dashen bank, and Wegagan were mentioned. From the non-bank sector, Dallol oil and TAF oil engaged oil distribution and petrol stations, Selam Bus and Sky Bus companies, that are in transportation, and Access Capital, which is an investment vehicle, was named.

6.7.3 Failed Share Companies

Examples of failed companies listed were Eco-energy, which failed before start up. a biodiesel business, Mulu Messob, which is a share company in the food sector, and Ageree construction, in the construction sector.

Two of the interviewees also considered the 14 banks under formation as failed cases. This has nothing to do with their management of the company but due to the unpredictability of regulation changes. They are unlikely to raise the 500 million birr needed to start up a bank. Some of them may find a way to merge,

60 Results and Discussions

but the others will dissolve and return part of the money to shareholders. Two banks are already in the process of dissolving and returning the capital to shareholders (Addis Fortune, Feb.12, 2012). 6.7.4 Causes of failure

Causes of failure of some of the companies were attributed to “miss-management”, “lack of legal advice”, “taxation”, “unpredictability of the law”, “abrupt policy change”, “limited oversight”, “imprudent equity to loan ratio” (high gearing), “mega project beyond capability of promoters”, “poor corporate governance”, “lack of proper control mechanism”, “poor accounting and asset valuation”, “failing to raise the necessary capital”, or “inadequate capitalisation”, “lack of experience”, “promoters weaknesses”, “lack of good planning”, “lack of proper business plan” were mentioned. One interviewee also said “too many government bureaucracy and academicians getting involved in start-up using their social capital than their experience”. The other interviewee said “disputes between board members or with shareholders” to have been causes of failure.

The Ethiopian share companies are on steep learning curve due to lack of experience and institution. Considering this problem, it is true that most companies are doing well. Nevertheless one needs to carry out a quantitative study to reach a definite success rate of the Ethiopian share companies and a rate of return on investment.

6.8 Initial Public Offering Document:

In developing countries an Initial Public Offering document is an important part of launching a public traded company. However, as discussed in previous sections and confirmed by interviewees, there is no legal requirement to publish IPO.

The requirement currently is to provide the objective of the business, what it intends to do, how much money it needs to raise, share prices, number of shares, and who is going to manage it.

The document that is often handed to buyers is called a prospectus. Before reviewing this document, it was found necessary to ask two questions to capture what the regulatory bodies, share promoters and shareholders think of this document. The first question asked was “How informative was the prospectus for floating of share to the public? And is there a minimum standard for publication of prospectus in Ethiopia?

6.8.1 How informative was the IPO document?

The replies from all regulatory bodies and shareholders were “no” to the question of how informative was the prospectus. For example, one academic put that it is not, because it lacks transparency, i.e. disclosure, has no proper valuation, and

Results and Discussions 61

not informative. The bank regulator say there is no minimum standard IPO.

Another interviewee also said he questions “credibility of prospectus” and said it is very difficult “verify the claim” He said some of the companies offer up to 120% profit. These figures are not verifiable using any forecast data.

Only CEOs said that their document is fully informative, which is similar to the US standard, with no fancy promises. . Another CEO thinks the document they provided is sufficient, however, when the document was checked it is one A4 page document printed on both sides and folded into an A6 format.

Shareholders’ replies to question “how informative was the prospectus in convincing you to buy shares”, was negative or not “enough”. Only one shareholder said “Access Capital’s document was better prepared” and two of them admit that they “haven’t read the prospectus”. The fact that the two of the shareholders did not read the IPO document when they bought share shows their trust of promoters, which in a way, contradicts their claim in table 8, section 6.2, that they bought on basis of economic factors than social capitals.

6.9 Risks

With regards to risk, two questions were asked. The first one was “what are the potential risks associated with share companies? Do you think shareholders often get fully informed about the risk in the prospectus and what would you recommend to reduce risks?The answers to these questions summarised are given in table 11 and 12.

For discussion purpose the risks were classified into regulatory risks, financial risks and operational risks.

As shown in table 11, the legal risks were mentioned by 11 of the 18 interviewees. The regulatory risks can be classified into three. The first is lack of law or regulatory, the second one is instability or unpredictability of the law, and the third are over-regulation in the banking sector.

6.9.1 Regulatory risks

The replies for what are the potential risks associated with share companies in Ethiopia were: “lack of updated laws, lack of regulatory systems, lack of dispute resolution mechanism, lack of sufficient shareholders’ protection law, lack of disclosure law, no criminal provision for wrong doing”, etc. This again supports what has been discussed in the section where the limitation of the law was discussed. The second reply is about unpredictability of the law. The interviewees mentioned “unpredictable legal framework”, “instability of tax law”, “the law changes without notice”, “regulatory risks” and “retrospective legal implementation”. This again confirms the directors and shareholders fear of the system.

62 Results and Discussions

The last one is fear of over-regulation. Even though the shareholders and directors want a modern law they still see the legislative body not as an “enabling” partner but as a potential risk for their investment. These replies are related to current very unpopular land lease law and over regulation of the banking sector, which is blamed for exposing 14 banks under formation to greater risk.

Why this happens is a bigger question which is beyond the scope of this research, however, it is good to remember that Ethiopia had 3000 years of a hierarchical monarchy system where the law is always handed down without consultation and discussion. This higher power distance is almost in the cultural DNA of the society and it may take long time to overcome this cultural program to move from a controlling to an enabling mind-set.

6.9.2 Financial risks

The second category of risk is financial risk. Financial risks are often quantifiable and may lead to financial loss which may lead to the collapse of a share company. The points mentioned during the interviews are, “inflation”, “currency deviations”, “undercapitalisation”, “raising capital”, “lack of economic growth or recession”, “high profile bankruptcy and contingency effect”, unfair completion from government owned banks”, and “competition”.

6.9.3 Operational risks

The last risks identified can be classified as operational skills. These are not external factors but internal company issues. The points raised under this category are “poor feasibility studies, poor business plan, ineffective implementation of project, lack of team playing, poor financial management, and lack of management experience”, and “over optimist assessment”.The share companies are on a steep learning curve and they do not have so many experienced leaders to help them grow and prosper.

6.9.4 Risk mitigation measures

Before progressing to the next question of what needs to be done to reduce risks, the interviewees were asked whether shareholders are often fully informed about the risks of the company in which they bought shares. This one is also given in the last row of table 11. The question was to say “Yes” or “No”. The answer was a resounding “No”. Fourteen out eighteen interviewed said “No” and one shareholder did not reply and three of company directors say, “Yes”. Only two of the directors join the regulators and shareholders to say they honestly do not think the shareholders are fully informed about the shares they buy. In fact, one promoter said, if the shareholders were told about risk, they would not buy shares. That means the law does not impose the need to disclose of risks and the share promoters do not feel obliged to inform potential shareholders of all the risks associated with buying shares.

Results and Discussions 63

Finally, the interviewees were asked to suggest what needs to be done to reduce risk. The replies are summarised in Table 12. The replies are also categorised as regulatory actions, financial actions and operational actions to reduce systemic and individual company risks.

6.9.4.1 Regulatory risk mitigation measures

The solution proposed under regulatory risks is updating the law to include a full disclosure, transparency and an accountable system, making the law predictable and reducing the legal instability risk. One interesting suggestion that came from one director is that setting up a stock market is a one package solution. Explaining this point he said creating a stock-market would create many institutions that would reduce systemic risks like standard IPO, disclosure of conflict of interests, financial reporting standards etc. He argues saying that a stock market capture systemic risks. The author also agrees that setting a stock-market could set institutions to monitor and capture risks. However, a lawyer stated, there is a need for a reformation agenda and the review has to be holistic and not a piecemeal approach.

With regards to financial risks, companies could develop their human capital to devise risk mitigation capability. For example one shareholder said speed of implementation can reduce risks associated with inflation, currency devaluation, including risks related to regulatory changes.

The last solution for companies’ operational risk is developing their human capital. One CEO said “good planning and good risk management” can reduce operational risks.

64 Results and Discussions

Table 11. Risk associated with current Ethiopian share companies Regulatory bodies Share promoters and

directorsShareholders

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

orCE

O, f

ound

er, R

eal E

stCE

O a

nd fo

unde

r, M

anCE

O a

nd fo

unde

r, ba

nk

Shar

e –m

arke

ting

Man

ager

, insu

ranc

eIn

terim

CEO

, Ban

k

Shar

ehol

der 1

Shar

ehol

der 2

Shar

ehol

der 3

Shar

ehol

der 4

Shar

ehol

der 5

Tota

l

Regulatory riskRegulatory risk/ unpre-dictability of the law/government policy/insta-bility of tax/ lack of law/

√ √ √ √ √ √ √ √ √ √ 10

Over regula-tion/power distance

√ √ √ 3

No regula-tion/ lack of regulatory system/no criminal pro-vision

√ √ √ 3

Financial risksInflation/mac-roeconomic environment/ currency devaluation

√ √ √ √ √ √ √ 7

Bankruptcy and contin-gency effect

√ √ √ √ 4

Raising capi-tal/ undercap-italisation

√ √ 2

Unfair com-pletion by the government/ competition

√ √ √ √ √ 5

Results and Discussions 65

Operational risksPrincipal and agent conflict/ conflict in the board

√ 1

Mismanage-ment/ poor business plan/ exagger-ated claims/ competence/poor imple-mentation/ Poor financial management/experience/over optimism

√ √ √ √ 4

Risk disclosure - IPO information about riskDo you think shareholders are fully in-formed about risk? Y (Yes) & N (No)

N N N N N N N N Y Y N Y N - N N N N 13

Table 12. Risk mitigating measures Regulatory bodies Share promoters and

directorsShareholders

Rea

sons

Regu

lato

r, Ba

nks

Law

Pro

fess

or

Edito

r Bus

ines

s

Equi

ty re

sear

cher

Law

lect

urer

Law

yer

Inve

stm

ent D

irect

orCE

O, f

ound

er, R

eal E

st.

CEO

and

foun

der,

Man

CEO

and

foun

der,

bank

Shar

e –m

arke

ting

Man

ager

, insu

ranc

e

Inte

rim C

EO, B

ank

Shar

ehol

der 1

Shar

ehol

der 2

Shar

ehol

der 3

Shar

ehol

der 4

Shar

ehol

der 5

Tota

l

Regulatory solutions

Create regula-tory body/ regulation

√ √ √ √ √ √ √ 7

Revising the legal system/ making sure predictability stability of the law

√ √ 2

66 Results and Discussions

Impose IPO standard, full disclosure and transparency

√ √ √ 3

Reliable and independent audit

√ 1

Create a Stock-market (sys-tem capturers the risk)

√ 1

Financial risk measureBoard benefit need revising

√ 1

Banking as-sociation

√ 1

Speed of im-plementation

√ √ √ 3

Human capital development

√ 1

Blocked ac-count

√ 1

Fair paly √ 1Operational risks/Market

Good plan-ning and risk management/proper feasi-bility/ good business plan

√ √ 2

Results and Discussions 67

6.10 Benefits to Share Company promoters and directors

Another point that was asked during the interview was “Are there legal restrictions on benefits of promoters and board members view of the new directive issued by banking?

The answer given is “the regulation only address the banking sector and it is 50,000 Ethiopia birr” That is on-going income for getting involved in the board. This does not include other benefits like sharing benefits for being a promoter of the share company. However, in other sectors promoters, founders and board members could share up to 10% of the profit for 3 years. This was significant for the banking sector. In most IPO documents the starting date is when the company starts operations and does not count any delay in the formation state. For example some companies have been raising capital in the last 3 years and it may take another 3 years for the implementation of the project. That means the shareholders have lost 6 years of interest if they had kept the money in the bank. However, the system does not penalise promoters due to delay of projects caused by bad planning and incompetence of the prompters. Their interest appears to be gold plated regardless of their performance.

The other area where there is no accountability is the commission money. Generally this money is going to be used for promoting and project administration till the company is formed. This commission ranges from 6 to12%; (only one start-up bank and insurance prompters charged 2% commission, which is more of a private equity set-up where 120 people raised the capital without advertising on the media). All the other companies charge a minimum of 6% which a significant. For example a company raising 400 million could have collected 28 million birr (1.5 million USD) in commission alone.

As one regulatory body pointed out, the law does not provide any protection for how this money could be spent.

68

7. Conclusions

The aim of this research was to assess the state of Ethiopian share companies, with the view of providing some insights to shareholders, regulatory bodies, share promoters and directors. It used an inductive method to explore the subject from the perspective of regulatory bodies, share promoters and shareholders.Eighteen people who are knowledgeable as regulators, academics, company directors, share company promoters and shareholders were interviewed. Analysis of qualitative data has revealed a number of points.

1. The reason for the growth of share companies is primarily driven by the transition from a socialist economy to “market oriented” economy. This had opened opportunities beyond the capital and human resources of sole traders and private limited companies. Currently there are around 496 registered share companies in Ethiopia with an aggregate capital in the range of 1.5 billion USD which is around 4.7 per cent of the GDP.

2. There is an overwhelming consensus that the Ethiopian commercial code which is 52 years old had served the country very well but has lacked many things to regulate a modern-day economy. The shortcomings listed are lack of provisions for intangibles, subsidiaries and group holding, lack of provision for creating a secondary equity market, and full disclosure of conflict of interests.

3. Currently the Ethiopian share companies face challenges, such as raising capital due to the absence of alternative financial institution. Shareholders too find it difficult to sell shares due to the absence of a secondary market. Hence, analysis of the interviews reveals that there is a strong case for setting-up a stock-market to create liquidity, reduce transaction costs and create institution to have better regulation and protection of shareholders values. Hence it is high time for Ethiopia to invest in institutional building to create a well-regulated and efficient market.

4. The analysis results have also revealed that unpredictability of the law arising from high power distance between regulators and companies as a major risk to businesses. Lack of regulatory bodies, red tape, lack of skilled management, conflict of interest between principal and agent, and the lack of a secondary market were raised as risks to Ethiopian share companies.

5. To reduce these risks, it is important to update the law, and set-up regulatory bodies with the objective of enabling business and providing protection for shareholders.

6. Creating a stock-market can reduce risk since it has to come up with rules for disclosure of conflict of interests, account reporting, standard for Initial public offering and a mechanism to resolve principal-agent conflicts.

69

Overall, as show in the aim of this research, the findings have values for regulatory bodies, share promoters and shareholders. For regulatory bodies it has highlighted the shortcomings of the current commercial code to provide points to consider during the redrafting of the law. For directors and share promoters, it has highlighted the risks associated under the current system and what mitigation measure they need to adopt to remain competitive and to avoid pitfalls. For shareholders it gives an overview of the state of share companies in Ethiopia and the lack of sufficient safeguards to protect their interest. Hence, this creates a need for shareholders to demand the incorporation of provision for disclosure of conflicts of interest and a high corporate governance standard in the company’s article of association and memorandum of understandings. It is hoped that understanding the risks associated with the current system would help shareholders to be vigilant and adopt risk mitigation measures during the selection of companies in which to invest.

In conclusion, share companies and stock markets are an effective way of mobilising resources to productive sectors. It also creates a stakeholder society where individuals would have a stake in the economic activity of society by encouraging saving and investment. To achieve that it requires a collective effort but the process must begin with the updating of the law. A piecemeal approach to revising the law is not advisable. The law has to be re-drafted as new to incorporate all the new developments since the 1960s. Furthermore, the commercial code needs to be re-drafted with sole aim of enabling business and protecting shareholders’ values.

Limitation to the Results

As explained in the aim of the research, this work is exploratory and it did not take a narrow section of the topic to go deeper and prove some pre-formulated hypothesis. The aim is to explore and leave some foundation for further studies. Hence, the research topic is wide and does not go deeper in to any one of the topics.

The fact that it is a qualitative study means it was not possible to establish a causal relationship between cause and effect. Some of the cause and effect relationships expressed by the interviewee cannot be verified through statistical values. Hence, further quantitative studies are required to establish causal relationships discussed in the research.

Overall, the time constraint has limited data collection to 18 interviews. Particularly, the data analysis of shareholders appears to be less diversified in terms of shareholding. A lager quantitative survey is important to understand current shareholders behaviours and their reasons for investing in shares.

70

Further WorksThis is an exploratory work, which addresses the state of Ethiopian share companies, but the discussion has led to the development of some hypothesis that can be tested using statistical methods. For example the following could be carried out using deductive methods

1. Why shareholders buy shares in Ethiopia2. Problems of lack of liquidity of the stock-market3. Conflict of interest and corporate governance due to absence of regulatory body4. Contribution of share companies to economic development

71

References

1. Access Capital Research, Dec. 2011; The Ethiopian Macroeconomic Handbook 2011/12, Access Capital, Addis Ababa, Ethiopia

2. Access Capital Research, 2012; Banking Sector Review 2011; Access Capital, Addis Ababa, Ethiopia

3. ADB, 2012, Electricity Transmission System Improvement Project, [online]; Available at: http://www.afdb.org/en/projects-and-operations/project-portfolio/project/p-et-fa0-008/, [Accessed on May 7, 2012]

4. ADB, Africa Statistical Yearbook, 2010, Major Sector Growth Rates in Ethiopia

(2008-2009); [online];Available at: http://www.afribiz.info/content/major-sector-growth-rates-in-ethiopia-2008-2009, [Accessed on May 7, 2012]

5. Addis Fortune, Feb.12, 2012, Noah, Tsehay Banks Request Dissolution Due to New Capital Requirements, Addis Fortune, 2012

6. Addis Fortune, April, 2012, Central Bank Rejects Bunna Bank’s Election; [online]; Available at: http://www.addisfortune.net/Central%20Bank%20Rejects%20Bunna%20Bank’s%20Election.htm; [Accessed May 7, 2012]

7. African stock exchanges, [online]; Available at: http://en.wikipedia.org/wiki/List_of_African_stock_exchanges, [Accessed on 27 April, 2012]

8. ASEA, African Securities Exchanges Association, 2012, [online]; available at: http://www.africansea.org/asea/Statistics.aspx, [Accessed on 29 April, 2012]

9. Bank of Abyssinia, [online]; Available at http://bankofabyssinia.com; [Accessed on May 4, 2012]

10. Brunnermeier, M.; (April 8-1, 2011), Has the Efficient Market Hypothesis Led to the Crisis?, The Inaugural Conference at King’s, Institute for New Economic Thinking, Cambridge, UK [Online]; http://ineteconomics.org/video/conference-kings/efficient-market-hypothesis-markus-brunnermeier; Accessed on April 19, 2012

11. Central Statistical Agency, Ethiopia, [online]; Available at :http://www.csa.gov.et/index.php?option=com_rubberdoc&view=category&id=79&Itemid=606; [Accessed on March 18, 2012]

12. CIA Factbook, 2012, GDP (purchasing power parity), [online]; Available at:https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html?countryName=Ethiopia&countryCode=et&regionCode=afr&rank=73#et;; [Access on 29 April, 2012]

13. CSA, May, 2007, HOUSEHOLD, INCOME, CONSUMPTION, AND EXPENDITURE

72

(HICE), SURVEY 2004/5, Statistical Bulletin 394, Volume I, ANALYTICAL REPORT

14. Demisse, F.; 2008, “Situated neoliberalism and urban crisis in Addis Ababa, Ethiopia, African Identities, Vol.6, No.4, pp.505-527

15. Dereje K, G, 2011; The potential of biotechnology in Ethiopia: Present situation and expected development; Food and Chemical Toxicology, 49, pp. 685–689

16. Dyer, J. and Chu, W., 2003; The Role of Trustworthiness in Reducing Transaction Costs and Improving Performance: Empirical Evidence from the United States, Japan, and Korea; Organization Science, vol. 14 pp. 157-68

17. Fifield P., 2011, Strategic Marketing MBA lecture, Lecture note. 18. Ferguson, N, 2008, The Ascent of Money, Allen Lane an imprint of Penguin

Book, pp.120 19. Ferguson, N; 2008, The Ascent of Money, Allen Lane an imprint of Penguin

Book, pp.4-4

20. Fragnière, E.; April 2012, Risk Management Lecture, Bath MBA, University of Bath

21. Gebremeskel, P., F.; 2010; Emerging Separation of Ownership and Control in Ethiopian Share Companies: Legal and Policy Implications; Mizan Law Review, pp.2-30

22. Geda, A.; 2001, Macroeconomic Performance in Post-Derg Ethiopia, Northeast African Studies, Vol. 8, No. 1, pp.159-204

23. Gray, R. K., Bythewood, C.; 2008, Emerging Securities Exchanges in Africa: Institutional Characteristics of the Nairobi Stock Exchange; Journal of African Business; 2, 3; pp. 65-73

24. Grosvold, J., Brammer, S.; and Rayton, B.; 2007; Board diversity in the United Kingdom and Norway: an exploratory analysis; Business Ethics; A European Review, V.16, N.4, pp.344-357

25. Gudina, M.; 2011, Elections and democratization in Ethiopia 1991-2010, Journal of Eastern African Studies, pp. 664-680

26. Gues, S. R., McDonald, M. I., 2007; Global GDP shares in the 21st century — An equilibrium approach, Economic Modelling ; 24; pp. 859–877

27. Hagstrom, G. R.; (1999), “The Warren Buffett Portfolio”; John Wilay & Sons, pp.

27

73

28. Henze, P., April, 1990, “Conversation with Meles Zenawi”; [online]; Available at: http://addisvoice.com/2011/06/paul-henzes-coversations-with-meles-zenawi/, [Accessed on May 15, 2012]

29. Hofstede, G (2006): Europe Versus Asia: Truth Versus Virtue, Journal of Management, Spirituality & Religion, 3:1-2, 155-159

30. IMF, 2011,: Top 10 Fastest-Growing Economies in 2005-09.World Economic Outlook; IMF

31. Infoplease website, [online]; Available at : http://www.infoplease.com/

atlas/country/ethiopia.html ; [Accessed on April 10, 2012]

32. Infoplease website, [online]; Available at: http://www.infoplease.com/ipa/A0934666.html; [Accessed on April 10, 2012]

33. Kahn, R.L and Connell, C.F.; 1967, Dynamics of Interviewing: Theory, Technique and Cases, Willey

34. Kebede, M, 1999, Survival and Modernization: Ethiopia’s Enigmatic Present. A

Philosophical Discourse, Red Sea Press, pp.150

35. Kebede, M, 1999, Survival and Modernization: Ethiopia’s Enigmatic Present. A Philosophical Discourse, Red Sea Press, pp.120

36. Keller, Edmond, 1988; “Revolutionary Ethiopia”, Indiana University Press, pp.194

37. Kenneth R. Gray and Craig Bythewood, 2001, Emerging Securities Exchanges in Africa: Institutional Characteristics of the Nairobi Stock Exchange, Journal of African Business, Vol. 2(3), pp.65-73

38. Mark Saunders, Philip Lewis, Adrian Thornhill, 2009, Research Methods for Business students, fifth edition, Pearson Education UK

39. Milena, R., Z; Dainora, G.; Alin, S.; 2008, Qualitative Research Methods: A Comparison between Focus-Group and In-depth Interview”, Annals of the University of Oradea : Economic Science, Volume: 4 Issue: 1 pp.: 1279-1283

40. MoFED, 2010, Growth and Transformation Plan (GTP), 2010/11-2014/15,

Ministry of Finance and Economic Development (MoFED), The Federal Democratic Republic of Ethiopia, September 2010, Addis

41. NBE (National Bank of Ethiopia), 2012, private interview with NBE’s Director Banking supervision directorate.

42. Oakland Institution, March 19, 2012; An Open Letter to the Government of Ethiopia; [online]; Available at, http://www.oaklandinstitute.org/search/

74

node/ethiopia; [Accessed on April 24, 2012]

43. Proclamation No 15/1992, A Proclamation to Provide for the Encouragement Expansion and Coordination of Investment; ; Negarit Gazitte; Berhane and Selam Printing Press, Addis Ababa, Ethiopia.

44. Proclamation No 30/1992, A Proclamation to Amend the Income Tax Proclamation, ; Negarit Gazitte; Berhane and Selam Printing Press, Addis Ababa, Ethiopia.

45. Proclamation No. 166 of 1960, Commercial code of the Empire of Ethiopia, May 1960, PP. III

46. Proclamation No. 52/1993; Mining Proclamation; Negarit Gazitte; Berhane and Selam Printing Press, Addis Ababa, Ethiopia.

47. Public Enterprises Proclamation No. 25/1992, ; Negarit Gazitte; Berhane and Selam Printing Press, Addis Ababa, Ethiopia.

48. Rayton, A. B., Cheng, S.; 2009, Corporate Governance in the United Kingdom: Changes to the Regulatiory Templet and Company Practice, Chapter 16, Codes of Good Governance Around the World, edited, Flex J. Lopex Iturriaga, Nova Science Publisher, Inc, pp. 383-411

49. Rayton, A. B., Seaton, S.J.; 1999; The Size of Employee Stakeholding in Large UK Corporations; Managerial and Decision Economics, 20, pp.259-266

50. Seifu, G, 2010; Revisiting Company Law with the Advent of Ethiopia Commodity Exchange (ECX): An Overview, Mizan Law Review. 4 pp.103-141

51. Shiller, J. R.; (2000); Irrational Exuberance, Princeton University Press, [online]; http://www.irrationalexuberance.com/, Accessed on 19 April, 2011

52. Shiller, R; 2011, Financial Innovations; Financial Market Lecture; [0nline]; Open Yale Courses, Yale University, available at Stanford Itune U; [Accessed on 28 April, 2012]

53. Siegel, J.; (April 8-11), Efficient Market Theory and the Recent Financial Crisis”, [online]; http://ineteconomics.org/video/conference-kings/efficient-market-theory-jeremy-siegel; Accessed on 19 April, 2011

54. Strate, History; [online]; Available at: http://www.strate.co.za/aboutstrate/overview/history%20of%20strate.aspx, [Accessed on 28 April, 2012]

55. Taleb, N, N, 2007, The Black Swan, Penguin Book Ltd, pp. xx

56. Tessema, A, 2003, “Prospects and Challenges for Developing Securities Markets in Ethiopia: An Analytical Review”, R&D Management; 15, 1, pp.50-64

75

57. The Economist, May 12, 2012; “Investing in Ethiopia: Frontier mentality”; The Economist, 2012

58. The Ethiopian Herald, 1 March 2012, Trade Ministry, Trade Registration and Licencing, Ethiopia.

59. The Ethiopian Reporter, May 22, 2012; Zemen Bank debacle ends in re-electing Ermias , [online]; Available at : http://www.thereporterethiopia.com/News/zemen-bank-debacle-ends-in-re-electing-ermias.html; [Accessed on May 5, 2012]

60. The Guardian, 26 May, 2010,[online]; Ethiopia’s ‘one-party democracy’ is spreading, Available at: http://www.guardian.co.uk/commentisfree/2010/may/26/ethiopia-one-party-democracy-africa; [Accessed on 24 April, 2010]

61. The Guardian, April 23, 2012; Campaigners claim World Bank helps facilitate land grabs in Africa, [online]; Available at: http://www.guardian.co.uk/global-development/2012/apr/23/world-bank-land-grabs-africa?newsfeed=true, [Accessed on 28 April, 2012]

62. UN, 2012; Members of United Nations, [online]; available at http://www.un.org/en/members/#a, [Accessed on April 28, 2012]

63. UNDP Human Development Index, Volume 5, Issue 4, 2011, pp. 664-680.

64. Von Pischke, D., J., (1968), Shares and share trading in Addis Ababa, Haile Selassie I University, Addis Ababa.

65. World Bank, 2010, Ethiopia at a glance, [online]; Available at : http://devdata.worldbank.org/AAG/eth_aag.pdf, [Accessed on May 6, 2012]

66. World Development Indicators database, 2010, [online]; Available at http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedReport?&CF=&REPORT_ID=9147&REQUEST_TYPE=VIEWADVANCED, [Accessed on 19 March, 2012]

67. Worldstat, 2012, Land use in Ethiopia, [online]; available at: http://en.worldstat.info/Africa/Ethiopia/Land; [Accessed on 15 May, 2012]

68. Yartey, A., C.; Adjasi, K., C., 2007, “Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges”, IMF Working Paper, International Monetary Fund, 1-33

76

Appendices

A: Interview questionaries’ for regulatory bodies, lawyers and academics

Organisation1 Name 2 Age Telephone3 Sex e-mail

4 Education High School

Degree Post Graduate

5 Work experience (No of years)

6 The sector you are working in a sector (Such as banking, manufacturing, etc.)

7 Position

8 Role in the S.C company as

Board/Director/Promoter

Shareholder Regulatory/academics/Lawyer

9 Do you own shares in Ethiopia

Yes No

10 If you own shares, what is the amount invested?

11 How do you describe yourself and your experience in relation to share companies?

General

12 What do you think the main driving factors for increasing number of share companies in Ethiopia in the last few years?

13 What do you think the main factors that led investors to buy shares in one company and avoiding another? (i.e. return on investment, confidence in promoters, experimenting, peer recommendation, sector of the business etc.)

Challenges

14 What are the biggest challenges for launching S.C in Ethiopia?

15 What are the biggest management issues?

16 What are the main problems or short-comings of the 1960 commercial code in dealing with growing S.C and what are your recommendation for improvement?

17 Are there sufficient safeguard to avoid or resolve conflict of interest between promoters and the shareholders’ interest in the 1960 commercial code?

18 Do you think it is time to set-up a stock-market in Ethiopia?

77

19 Trade Ministry Regulation and Licencing office data shows there are 496 share companies with paid up capital of over 27 billion birr (1.5 billion USD); most of the companies were formed in the last 10 years, what is your view about increasing number of share companies?

20 Can you give examples of profitable share companies and anther examples of companies that failed?

21 What do you thinks the main cause(s) of companies’ failure?Initial Public Offering Documents,

Document Preparation for IPO22 How informative was the prospectus for floating shares to the public (i.e. initial

public offering)?23 Is there a minimum standard for publication of prospectus in Ethiopia? What

information it must provide to perspective buyers? Do you think it need provide information such as disclosure of conflicts of interests, return on investment, balance sheets, when the company is going to breakeven, sales forecast, etc.?.

24 Are there legal restrictions on benefits of promoters and board members in view of new directives issued by banking regulation?

25 What is your view about absence of a stock market in Ethiopia? Risks

26 What are the potential risks associated with this S.C?27 Do you think shareholders often get

fully informed about the risk in the prospectus

Yes No

28 What would you recommend to reduce risks?

B: For share promoters, board members and entrepreneurs Interview share promoters, board members and entrepreneurs

Organisation1 Name 2 Age telephone

3 Sex e-mail4 Education High School Degree Post

Graduate5 Work experience

(No of years)

6 The sector you are working?

7 Position Founder, Board Chairman, CEO

8 Role in the S.C company

Board/Director/Promoter

Shareholder Advisor/academics/lawyer

78

9 Do you own shares in Ethiopia

Yes No

10 If you own shares amount invested (optional) and company

11 What is your role/position in the share company?General

11 What are the main driving factors behind increasing number of share companies in the last few years?

Challenges12 What was/is the biggest challenge in launching S.C?13 What are the biggest management issues?14 What are the main problems or short-coming of the 1960s Commercial Code?15 Are there sufficient safeguard to avoid or resolve conflicts of interest between

promoters and the shareholders interest?16 What changes and improvement do you recommend for the 1960s commercial code17 Do you think it is time to set-up a stock-market in Ethiopia?18 Can you give examples profitable and successful shared companies and companies

that failed?19 What do you thinks the causes of companies’ failure to start-up or become

profitable?20 What are your main reasons for getting involved in a start-up a share company?21 In what capacity

are you involved?As promoter Board

member Founder

As executive Other 22 So far, how many shares your company have sold?23 When is/was the deadline for closing share offerings?24 Was/Is the

closing date extended

Yes N0

25 Who is selling the shares

Banks/financial institutions

Brokers Through networks and contacts

26 What is the agent fee?

27 Planned date or date for stating of S.C operation

Company Finance28 Capital to be

raised?

29 Capital raised so far

79

30 What is expected return on investment (%)?31 By when (year)?32 Financial

structure of SC in per cent or figure?

equity investment

100% Loan

33 What is the likelihood of achieving targets?34 What is your plan B these targets are not achieved?

Prospectus Document, Initial Public Offering (IPO)

35 How informative was the prospectus? 36 Is the prospectus contain financial tables such as return on investment, balance

sheets, when the company is going to breakeven, sales forecast, etc.?Benefits

37 What are the promoters benefits

38 Founders benefits

39 Board of directors benefits

40 Do you consider capital growth to sell your shares?

41 Would it be good if there was secondary equity market (stock market to realise capital gains)?

Risks42 What are the potential risks associated with this share company?43 Do you think

the shareholders fully informed about the risk in the prospectus

Yes No

44 What would you recommend to reduce risks?

C: Questionnaires for shareholders Interview shareholders

1 Name 2 Age telephone3 Sex e-mail

80

4 Education Formal education

Degree Post Gradu-ate

5 Work experi-ence (No of years)

6 You are work-ing in what sector/indus-try (i.e. farm-ing, banking, sales etc.)

7 Position 8 Role in the S.C company? Yes, Shareholder 9 Do you own shares in Ethiopia Yes No10 Amount of money invested in the company or companies?11 What is/are the sector (s) of the share company/companies? Banks, agricul-

ture, manufacturing, trading etc.12 Is/are the company/companies operational and profitable? 13 Have you ever been paid dividend?

General14 Why did you

buy shares in this particular company? (rank 1 for very important to 6 least impor-tant)

Potential return on Invest-ment

Confidence in Promot-ers

Growth Potential

Experi-menting/Testing

Market size Recom-menda-tion

Challenges15 What do you think the main challenges for your share company? 16 What are your prime concerns about your shares?17 What do you think the biggest management issues for company promoters?18 How do you assess experience and capabilities of project promoters and

board members? 19 Do you think there are sufficient safeguard to avoid conflict of interest be-

tween promoters and the shareholders interest?20 Do you plan to sell your shares?21 Do you know any share company that failed to trade?22 Can you tell me a success story in recent S.C experience?

Prospectus document Initial Public Offering (IPO) Documents

81

23 How informative was the prospectus in convincing to buy shares?24 Does the prospectus contain financial tables such as return on investment,

balance sheets, when the company is going to breakeven, sales forecast, etc?Benefits

25 How do you rate promoters, founders’ benefits?26 Do you consider selling your shares?27 Would it be good if there was a stock-market?

Risks28 What are the potential risks associated with this S.C?29 Do you think

you have been sufficiently in-formed about risk associ-ated in share companies by promot-ers or in the prospectus

Yes No

30 What thing would you recommend to reduce risks?

82

83