The Impact of Stock Exchange Market on National Economy Particularly- Master Final

1

LEADSTAR

College of Management and Leadership

Faculty of Business and Leadership

The Impact of Stock Exchange Market on

National Economy, Particularly the

Pessimistic Impact in the Case of Ethiopia

By

Daniel Shiferaw

December 31st, 2016

Addis Ababa,

Ethiopia

Prepared by DANIEL SHIFERAW 2 / 46

December 31st,2016 The Impact of Stock Exchange Market on National Economy

LEADSTAR College of Management and Leadership


Master of Business Administration

The Impact of Stock Exchange Market on National Economy,

Particularly the Pessimistic Impact in the Case of Ethiopia

By

Daniel Shiferaw

Advisor

Misrak Tesfaye (Ass. Prof.)

A Senior Essay Submitted to the Institute of Continuing and

Distance Education of Leadstar College of Management and

Leadership

Faculty of Business and Leadership in Fulfilment of the

Requirements for the Master of Business Administration

specialization in Finance

December, 2016

Addis Ababa, Ethiopia



Approval

LEADSTAR

College of Management and Leadership


Master of Business Administration

The Impact of Stock Exchange Market on National Economy,

Particularly the Pessimistic Impact in the Case of Ethiopia

By

Daniel Shiferaw

Approved by Board of Examiners

Ato ____________ ___________

Director, Signature Date

Ato Misrak Tesfaye ____________ ___________

Advisor Signature Date

Ato/Wro ____________ ___________

Examiner Signature Date



Acknowledgments

First and foremost I would like to give thanks to the supreme and all powerful

God for helping me throughout this long study. Dealing with each chapters

where not easy task followed by finding the right information and questionnaire,

all have been done with God.

I thank you Ass Pro Misrak Tesfay for helping and guiding me in conducting

my senior research on the positive impact of stock exchange market in Ethiopia,

your guidance and advice where serious and most valuable in accomplishing this

research.

Finally I would like to express my sincere thanks to my wife Tigest Tiruneh

and my family for assisting me in giving support in the overall conduct of this

research.

I would also like to thank those has cooperated me in the filling of the

research questionnaire, previous researchers and the management of the school

for your valuable information.



Table of content Chapter One .............................................................................................................................. 11

Introduction .............................................................................................................................. 11

1.1 Background of the study ............................................................................................ 11

1.2 Statement of the problem ........................................................................................... 13

1.3 Research questions .................................................................................................... 14

1.4 Objective of the study ................................................................................................ 14

1.4.1 General objective of the study ............................................................................... 14

1.4.2 Specific objectives of the study ............................................................................. 15

1.5 Significance of the study ............................................................................................... 15

1.6 Scope of the study.......................................................................................................... 16

1.7 Limitation of the study .................................................................................................. 16

1.8 Ethical consideration ..................................................................................................... 16

1.9 Organization of the paper .............................................................................................. 16

Chapter Two ............................................................................................................................. 18

Literature Review ..................................................................................................................... 18

2.1 Theoretical Literature Review ....................................................................................... 18

2.1.1 Financial market .................................................................................................... 18

2.1.2 Financial system .................................................................................................... 18

2.1.3 Stock market .......................................................................................................... 19

2.1.4 The task of stock market ........................................................................................ 20

2.1.5 Components (Key players) of stock market .......................................................... 20

2.1.6 The impact of stock market in raising capital at the firm’s level........................... 20

2.1.7 The impact of stock market in investment decision to the investor ....................... 21

2.1.8 The Impact of stock market on a national economy .............................................. 21

2.2 Review of empirical studies .......................................................................................... 22



2.2.1 Kenya stock markets experience ............................................................................ 22

2.2.2 Summary of literature and research aim ................................................................ 25

Chapter Three ........................................................................................................................... 27

Research Methodology ............................................................................................................. 27

3.1 Introduction ............................................................................................................... 27

3.2 Research design ......................................................................................................... 27

3.3 Data Sources and Collection Methods ....................................................................... 29

3.4 Population and sample size ........................................................................................ 29

3.5 Method of data analysis ............................................................................................. 30

Chapter Four ............................................................................................................................. 31

Date Presentation, Analysis and Interpretation ........................................................................ 31

4.1 Characteristics of Respondents .................................................................................. 31

4.2 Results of Questionnaires from the share holders ..................................................... 32

Chapter Five ............................................................................................................................. 36

Summary of Findings, Conclusions and Recommendations .................................................... 36

5.1 Summary of Findings ................................................................................................ 36

5.2 Conclusions ............................................................................................................... 37

5.3 Recommendations ..................................................................................................... 38

6. Reference .............................................................................................................................. 40

7. Appendix .............................................................................................................................. 42

Questionnaires .......................................................................................................................... 42

7.1 Questionnaire for private bank share holders ................................................................ 42

7.2 Questionnaire for share issuing financial institutions.................................................... 45



List of Charts Page

Process chart 1.1: clear depiction of the gap created due to the luck 14

of stock exchange market.

Process flow chart 3.1: Primary data process flow chart 28

Process flow chart 3.2: Secondary data process flow chart 28

Process chart 5.1: the prevailing commercial banks share transaction path. 37



List of Figures Page

Figure 2.1: The structure of financial system 19



List of Tables, Figures & Charts Page

Table 2.1: Major stock exchanges 25

Table 4.1: Age, sex and educational level of respondents 31

Table 4.2: Ordinary and founder share classification of the sample 32

Table 4.3: Share bought from share sell company administration 32

Table 4.4: respondents who want to exchange their share to another 33

Company share

Table 4.5: Share sales experience of respondents 33

Table 4.6: Respondents who wants to sell their share 34

Table 4.7: Source of financing, which source of financing comes 34

to your mind first?

Table 4.8: views of respondents if a well-established exchange market 35

is established in Ethiopia



Abstract

This research is conducted to clearly elucidate the positive and negative impact of the stock

exchange market on the national economic growth of Ethiopia. Stock exchange is a legal

platform or institution arrangement where potential stock buyer and sellers transact in the

conduct of the exchange of financial securities for a reasonable some of value. The

unavailability of the stock exchange market in Ethiopia has been putting negative impact on

the economic growth of the country. The need to raise $4.5b for the development of the Great

Renaissance Dam has put pressure for the advancement of the bond market throughout the

country. However the country still needs an institutional platform and legal framework to

fully eat the fruits of the full scale application of the financial market. In clearly identifying

the positive and negative impact of the unavailability of the stock exchange market in

Ethiopia economic growth the researcher used descriptive research method aided with

observational technique. Thus enabled the researcher to reach at a sound conclusion i.e.

Ethiopia is still missing the serious advantages from the sector including enhanced capital

mobilization, efficient Capital allocation, mobilization of (local and Diaspora) savings for the

economic sector, further flexibility in corporate finance, promotion of an efficient financial

system, Supply of long-term funding, de-concentration of ownership and broader distribution

of corporate profits, resulting in wealth creation for private investors, improvement of

accounting and audition standards accompanied by higher reporting standards, provision of

effective tools for monetary and fiscal policy, support of transparent and efficient

privatization process, stimulation of private sector development, economic growth lower

unemployment rates and poverty reduction and indirectly support banks in getting back the

non-performing loan portfolios. To reach at this conclusion the researcher has seriously

conducted both primary and secondary data review and analysis including interview and

questionnaire to various shareholders, books of scholars, previous researches and various

journals has been effectively analyzed.

Key Word: Stock Exchange Market, National economic growth



Chapter One

Introduction

1.1 Background of the study

The historical background of stock exchange market in Ethiopia traces back to the 1974s. The

Addis Ababa Share Dealing Group was the new beginning on the stock market journey of the

country. However, after its abolishment by the imperial regime the stock exchange market is

still inactive in the financial market of the country. Various efforts have been done by many

scholars and government offices to set up a formal and well-structured stock market but due

to various reasons the idea is still an idea (Ruediger, November, 2011).

The concept of a formal financial market in Ethiopia is the emerging one with high regulation

and infrastructural limitation. As a developing country Ethiopia has been operating in the

traditional financial system before the commencement of the commercial banking practice in

the late 1952’s by the country leading bank, known as the Commercial Bank of Ethiopia.

(Dejene, October, 1993) stated in his research paper titled The Informal and Semi-Formal

Financial Sectors in Ethiopia: A Study of the Iqqub, Iddir, and Savings and Credits Co-

operatives, reveals that the financial system of Ethiopia is composed of both the formal and

the informal institutions.

The late development of the formal financial system has created a tight pressure on the

awareness of financial market instruments and the general financial market as a whole. As a

full scale financial market need to encompass derivatives, equity, debt, foreign exchange,

mortgage and money markets, Ethiopia’s financial market is highly saturated on the retail

banking and insurance service at large scale on a primary market base while the remaining till

awaiting for further sectorial development. Some of the most widely known financial

instrument in the country is the private banks share followed by the government issued TB

(Treasury bill) and Bond (Dejene, October, 1993).



The widely operated financial institution and intermediaries in Ethiopia are commercial

banks, insurances, micro credit & saving institutions, credit associations and the traditional

equib and edir. While, most of the financial instruments are only saleable on the primary

financial market i.e. from the institutions administration. The intermediaries are playing a

crucial role in the development of modern financial system in the country through

intermediation of surplus fund from lender to the potential borrower while taking the risk

associated with the intermediation (Dejene, October, 1993)

The necessity to raise capital for the Grand Ethiopian Renaissance Dam (GERD) project

has created a tight pressure on the government to float a bond on the large scale to the society.

Thus has contributed a great deal in the creation of awareness on the public plus the

expansion of the existing limited bond market (Ezana, 2015).

Today Ethiopia is eating the partial fruit of the financial market industry mainly from the

sale of bond for the renaissance dam, which this signifies that there are potential possibilities

that the government will engage in large scale on the sector. Despite the unavailability of the

stock market which hindered the transfer of financial securities transfer between owners and

buyers, the country is progressing its sustainable development projects. The need to raise

4.6$bn (Ezana, 2015) for the development of the Grand Ethiopian Renaissance Dam (GERD)

has put pressure for the birth various type of bonds. Interest bearing and non-interest bearing

bonds in regard to interest and in regard to maturity 5to 7 years and in regard to value

beginning from 100 birr to ….).

As to Mishkin & Eakins; 2012 in their Financial Market & Institution (7th

edition) book

stated regarding the general financial market that “Financial markets, markets in which funds

are transferred from people who have an excess of available funds to people who have a

shortage”. (Mishkin & Eakins; 2012) Further added that: “Financial markets, such as bond

and stock markets, are crucial to promoting greater economic efficiency by channeling funds

from people who do not have a productive use for them to those who do”

Finally Mishkin & Eakins concluded that “Indeed, well-functioning financial markets are

one reason that many countries in the world remain desperately poor”.

Stocks are shares of ownership of a corporation and traded on organized trade i.e. the stock

exchange market. Stock exchange markets are the key player for the advancement of

entrepreneurship in that they create a platform for entrepreneurs to raise capital for their



innovative ventures. Furthermore the selling of shares enables ideas to walk in their two legs

i.e. beyond the financial limitations.

Thus a stock market is “A share market only allows trading of shares. The key factor is

the stock exchange. The basic platform that provides the facilities used to trade company

stocks and other securities. A stock may be bought or sold only if it is listed on an exchange.

Thus, it is the meeting place of the stock buyers and sellers”.

1.2 Statement of the problem

The hindrance of the full scale application of the capital market specifically the stock

exchange market has put limitation on the realization of full scale economic growth in

Ethiopia. The study deal with the positive and the negative impacts that the missing stock

exchange market has bring to the national economy plus it investigates the prevailing gap on

the financial market of Ethiopia particularly in regard to the stock market key players.

1

Financial institutions

2

Financial securites

3

Dividend from share

4

Optional

Reseal Vs Hold ing decision

5

Missing Stock Market



Process chart 1.1: Clear depiction of the gap created due to the luck of stock exchange

market.

In addition the challenge that the late introduction of some of the financial instruments

such as securities, bonds, treasury bills, shares, derivatives, loan notes, debentures and other

financial instruments has bring has been further examined.

1.3 Research questions

By the end of this research the following basic questions get answers.

I. What it the picture of the current stock exchange market of Ethiopia?

II. What are the missing elements for the full scale incorporation of stock

exchange market in Ethiopia?

III. What are the major traded financial instruments on the prevailing financial

market?

IV. What are the positive and negative impacts that the unavailability of stock

exchange market has bring to the overall economic performance of Ethiopia?

V. What are the major hindrances for the full scale operation of the stock

exchange market in Ethiopia?

VI. What will be the consequence if the absence of stock exchange market

prevails in the long run?

1.4 Objective of the study

1.4.1 General objective of the study

The objective of the study is to clearly identify and illustrate the positive and the

negative impacts of the unavailability of the stock exchange market in Ethiopia’s economy.

The study further addresses the gap caused by the unavailability of an intermediary financial

institution to address the need i.e. the stock exchange market.



1.4.2 Specific objectives of the study

The specific objectives of this study are:

- To critically analyse and reveal the negative impact of the luck of stock exchange

market particularly on equity financing for Business Corporations.

- To identifies the impact of the luck of awareness about stock market and its impact on

individual business.

- To critically evaluate and identify the missing elements for the establishment of stock

exchange market in Ethiopia.

- To elucidates the current platform of the unstructured stock trading patterns of private

bank’s share in Ethiopia. And

- To identify and analyses the current active financial instruments throughout Ethiopia

specifically bond, treasure bills and financial and non-financial corporation’s share.

1.5 Significance of the study

This study elaborates and create awareness on the missing opportunities and the forgone

benefits particularly with regard to the absence of the stock exchange market in Ethiopia. So

that, the base of the study is the prevailing gap on the financial market of Ethiopia primarily

with regard to the stock exchange activity. The study further deal with the positive and

negative impact it has contributed on the overall economic performance of the country.

Furthermore it will try to address the implications of the late introduction of some of the

financial instruments such as securities, bonds, treasury bills, shares, derivatives, loan notes,

debentures and other financial instruments. And the prevailing government policy and

regulation on the stock exchange market for the effective application of the stock exchange

market.

By the end of the research, interested stakeholders will have awareness on the impact of

the missing stock market on the financial market of Ethiopia.



1.6 Scope of the study

The boundary of the study is restricted to the financial market of Ethiopia, primarily with

regard to share markets of private banks, cooperation’s, and other private business

institutions.

1.7 Limitation of the study

The major limitation of the study is the absence of well-organized stock exchange market

office in the country followed by the limited availability of financial, time and information

resource. Furthermore the lack of reference materials and non-cooperative respondents might

be the potential limitations in the conduct of the study.

Hence, to overcome this limitation: the researcher elucidate respondents that their profile

will not be reviled in the report and communicated major shareholders of various institutions

to grasp the impact of the missing stock market, and further reviewed extra research studies

by responsible government and non-government organs for further information.

1.8 Ethical consideration

Any data or information taken from other sources has been properly cited in the study

by using Harvard style. At the time of primary data collection: the interviewer/researcher has

explained the purpose of the research for respondents before the information is gathered.

Respondents are assured for the confidentiality of the information as it will be coded and

could not be traced to individuals or key informants. As a result the data are gathered only

after the respondents expressed their willingness to participate.

1.9 Organization of the paper



These research reports have five chapters. The first chapter is the Introduction which gives

an overview of the thesis. It includes the background, statement of the problem, objective of

the study, scope and rationales of the study. Chapter Two presents the relevant literatures

reviewed. Under Chapter three (Research Methodology): design of research & sampling,

method of data analysis and problems and limitations in doing the research were discussed.

Chapter Four focuses on the findings and analysis of the data obtained from field. Chapter

five, the final chapter, provide summary of key findings and conclusions of the thesis. At the

end it also outlines recommendations derived from the research findings.



Chapter Two

Literature Review

2.1 Theoretical Literature Review

2.1.1 Financial market

The financial market is a broad term describing any marketplace where trading of

securities including equities, bonds, currencies and a derivative occurs. Although some

financial markets are very small with little activity, some financial markets including the New

York Stock Exchange (NYSE) and the forex markets trade trillions of dollars of securities

daily. A financial market is a market in which people trade financial securities, commodities,

and other fungible items of value at low transaction costs and at prices that reflect supply and

demand. Securities include stocks and bonds, and commodities include precious metals or

agricultural products are traded with the aid of intermediary.

2.1.2 Financial system

According to the functional approach, financial markets facilitate the flow of funds in

order to finance investments by corporations, governments and individuals. Financial

institutions are the key players in the financial markets as they perform the function of

intermediation and thus determine the flow of funds. The financial regulators perform the role

of monitoring and regulating the participants in the financial system (Valdone, 2010).



Figure 2.1: The structure of financial system

2.1.3 Stock market

The stock market is the market in which shares of publicly held companies are issued

and traded either through exchanges or over-the-counter markets. Also known as the equity

market, the stock market is one of the most vital components of a free-market economy, as it

provides companies with access to capital in exchange for giving investors a slice of

ownership in the company. The stock market makes it possible to grow small initial sums of

money into large ones, and to become wealthy without taking the risk of starting a business or

making the sacrifices that often accompany a high-paying career. We can say that the stock

market is the platform where potential buyer and seller trade off their share transaction for

reasonable and agreeable value.

Investing in the stock market will never be risk free. You will no doubt have heard it

before. “The value of your investment can go down as well as up”. This is very true. Make no

mistake, stock trading is a business and must be treated as such. Business involves risk, but if

you are prudent and do your homework, you have a much better chance of coming out on top.

Firms

Stock market

Bond market

Short term fixed securities market

Banking Sector

Governments



2.1.4 The task of stock market

As to the (Dr. Hartmut, March, 1977) The basic tasks of a stock markets includes:

To enable investors to buy or sell securities regularly or even instantly;

To determine and publish prices of a certain quality;

To improve the liquidity and marketability of securities and to improve the depth of

the market;

To protect investors and to put all users of the market on equal footing;

To keep the cost of security-transaction services as low as possible;

To reduce the difference between the cost of capital to issuers or borrowers and the

yield.

2.1.5 Components (Key players) of stock market

Stock markets do not exist for their own sake. Rather, just like any other market, they

are intended to serve buyers and sellers and those who organize the market and bring the two

sides together. These groups, who for our present purposes will be investors, issuers and stock

market financial service organizations (dealing firms, stock exchanges and other organizations

which facilitate dealing in securities), place different demands on a stock market as a result of

their special interests. So that (Valdone, 2010) in his Financial Markets book stated that

according to the structural approach, the financial system of an economy consists of three

main components financial market, financial intermediaries (institutions) and the financial

regulators.

2.1.6 The impact of stock market in raising capital at

the firm’s level

Capital is one of the bootlick resource of many business corporation, even most

windups their business operation because of financial limitation but in an active stoke market

environment companies sell their company share at a competitive price to potential investors

in raising finance. Despite the unavailability of a formalized stock trading platform



Medpharm Holding Africa has raised $2.5 equity capital through issuing a part of its

ownership to the Acent Capital in the year 2016.

2.1.7 The impact of stock market in investment decision

to the investor

As to the Ruecker (2011) who stated stock market as one of the major ingredient of a capital

market, the practical benefit of the capital market includes:

Enhanced capital mobilization;

Efficient Capital allocation;

Mobilization of (local and Diaspora) savings for the economic sector;

further flexibility in corporate finance;

promotion of an efficient financial system;

Supply of long-term funding;

De-concentration of ownership and broader distribution of corporate profits,

resulting in wealth creation for private investors;

Improvement of accounting and audition standards accompanied by higher

reporting standards;

Provision of effective tools for monetary and fiscal policy;

Support of transparent and efficient privatization process;

Stimulation of private sector development;

Economic growth;

Lower unemployment rates and poverty reduction; and

Indirectly support banks in getting back the non-performing loan portfolios.

2.1.8 The Impact of stock market on a national

economy

There are a significant number of empirical works which support a positive

relationship between stock market and economic growth, among them include (Alemneh,

2005) who examined the effect of stock market development on the economic growth in



Ethiopia. The author employed descriptive statistical model to address the causal effect

between stock market development and GDP growth. The empirical result revealed a positive

bi-directional relationship between economic growth and stock market development, but the

stronger effect is from stock market development to economic growth.

Agreeing with various researchers (Jetu, 2014) stated in Mizan Law Review, Vol. 8,

No.2 that, stock markets have the potential to be powerful engines of economic growth in

developing nations such as Ethiopia. He further added that, efficient stock market provides the

public with investment opportunities and mobilizes savings, as well as international capital,

for a productive corporate financing.

Furthermore (Alemneh, 2005) reviewed and concluded from the various literatures

that, for an efficiently operating stock exchange market to exist in a country, the factors that

need to get the necessary attention are government commitment, policies and laws;

availability of market participants; the legal and regulatory framework that protects the right

and interests of shareholders; macroeconomic conditions such as GDP growth, FDI, inflation

rate, devaluation of currency, the level of domestic savings; awareness and trust of the public

towards stock markets; financial literacy, the development of accounting and auditing

standards and infrastructural development should get due regard, however his conclusion is

needs further evidence in regard to accounting and auditing standards, macroeconomic

conditions and on the legal and regulatory framework.

2.2 Review of empirical studies

2.2.1 Kenya stock markets experience

(Rose, March, 2003) stated in his discussion paper on the revolutionary process of stock

market development in Kenya that, the Nairobi Stock Exchange (NSE) has a long history that

can be traced to the 1920’s when it started trading in shares while Kenya was still a British

colony (IFC/CBK, 1984). While share trading was initially conducted in an informal market,

there was a growing desire to have a formal market that would facilitate access to long-term

capital by private enterprises and also allow commencement of floating of local registered

Government loans. The NSE was constituted in 1954 as a voluntary association of



stockbrokers registered under the Societies Act (NSE, 1997a). The newly established stock

exchange was charged with the responsibility of developing the stock market and regulating

trading activities. Despite its history, however, the stock market is yet to make significant

contribution in the development process.

Major stock exchanges (top 20 by market capitalization) of issued shares of domestic

companies, as of 31 January 2015 (Monthly reports, World Federation of Exchanges)

Rank Exchange Economy Head-

quarters

Market

cap

(USD bn)

Monthly trade

volume

(USD bn)

7 Euronext European Union

Amsterdam

Brussels

Lisbon

London

Paris

3,321 184

10 Deutsche Börse Germany Frankfurt 1,762 142

6 Hong Kong Stock

Exchange

Hong Kong Hong Kong 3,325 155

17 JSE Limited South Africa Johannesburg 951 27.6

3[2] London Stock

Exchange Group

United Kingdom

Italy London 6,187 165

18 BME Spanish

Exchanges

Spain Madrid 942 94.0

https://en.wikipedia.org/wiki/Stock_exchange

https://en.wikipedia.org/wiki/Market_capitalization

http://www.world-exchanges.org/statistics/monthly-reports

https://en.wikipedia.org/wiki/United_States_dollar

https://en.wikipedia.org/wiki/Euronext

https://en.wikipedia.org/wiki/Amsterdam

https://en.wikipedia.org/wiki/Brussels

https://en.wikipedia.org/wiki/Lisbon

https://en.wikipedia.org/wiki/London

https://en.wikipedia.org/wiki/Paris

https://en.wikipedia.org/wiki/Deutsche_B%C3%B6rse

https://en.wikipedia.org/wiki/Frankfurt

https://en.wikipedia.org/wiki/Hong_Kong_Stock_Exchange

https://en.wikipedia.org/wiki/Hong_Kong_Stock_Exchange

https://en.wikipedia.org/wiki/Hong_Kong

https://en.wikipedia.org/wiki/JSE_Limited

https://en.wikipedia.org/wiki/Johannesburg

https://en.wikipedia.org/wiki/List_of_stock_exchanges#cite_note-2

https://en.wikipedia.org/wiki/London_Stock_Exchange_Group

https://en.wikipedia.org/wiki/London_Stock_Exchange_Group

https://en.wikipedia.org/wiki/London

https://en.wikipedia.org/wiki/Bolsas_y_Mercados_Espa%C3%B1oles

https://en.wikipedia.org/wiki/Bolsas_y_Mercados_Espa%C3%B1oles

https://en.wikipedia.org/wiki/Madrid




quarters

Market

cap

(USD bn)

Monthly trade

volume

(USD bn)

11 Bombay Stock

Exchange

India Mumbai 1,682 11.8

12 National Stock

Exchange of India

India Mumbai 1,642 62.2

1

New York Stock

Exchange

United States New York 19,223 1,520

2 NASDAQ United States New York 6,831 1,183

15 Korea Exchange South Korea Seoul 1,251 136

5 Shanghai Stock

Exchange

China Shanghai 3,986 1,278

8 Shenzhen Stock

Exchange

China Shenzhen 2,285 800

16 OMX Nordic

Exchange

Northern Europe,

Armenia Stockholm 1,212 63.2

14 Australian Securities

Exchange

Australia Sydney 1,272 55.8

20 BM&F Bovespa Brazil São Paulo 824 51.1

19 Taiwan Stock

Taiwan Taipei 861 54.3


https://en.wikipedia.org/wiki/Bombay_Stock_Exchange

https://en.wikipedia.org/wiki/Bombay_Stock_Exchange

https://en.wikipedia.org/wiki/Mumbai

https://en.wikipedia.org/wiki/National_Stock_Exchange_of_India

https://en.wikipedia.org/wiki/National_Stock_Exchange_of_India

https://en.wikipedia.org/wiki/Mumbai

https://en.wikipedia.org/wiki/New_York_Stock_Exchange

https://en.wikipedia.org/wiki/New_York_Stock_Exchange

https://en.wikipedia.org/wiki/New_York_City

https://en.wikipedia.org/wiki/NASDAQ

https://en.wikipedia.org/wiki/New_York_City

https://en.wikipedia.org/wiki/Korea_Exchange

https://en.wikipedia.org/wiki/Seoul

https://en.wikipedia.org/wiki/Shanghai_Stock_Exchange

https://en.wikipedia.org/wiki/Shanghai_Stock_Exchange

https://en.wikipedia.org/wiki/Shanghai

https://en.wikipedia.org/wiki/Shenzhen_Stock_Exchange

https://en.wikipedia.org/wiki/Shenzhen_Stock_Exchange

https://en.wikipedia.org/wiki/Shenzhen

https://en.wikipedia.org/wiki/OMX

https://en.wikipedia.org/wiki/OMX

https://en.wikipedia.org/wiki/Stockholm

https://en.wikipedia.org/wiki/Australian_Securities_Exchange

https://en.wikipedia.org/wiki/Australian_Securities_Exchange

https://en.wikipedia.org/wiki/BM%26F_Bovespa

https://en.wikipedia.org/wiki/S%C3%A3o_Paulo

https://en.wikipedia.org/wiki/Taiwan_Stock_Exchange

https://en.wikipedia.org/wiki/Taipei

https://en.wikipedia.org/wiki/Sweden




quarters

Market

cap

(USD bn)

Monthly trade

volume

(USD bn)

Exchange

4 Japan Exchange

Group – Tokyo Japan Tokyo 4,485 402

9 TMX Group Canada Toronto 1,939 120

13 SIX Swiss Exchange Switzerland Zurich 1,516 126

Table 2.1: Major stock exchanges

2.2.2 Summary of literature and research aim

Various researchers have conducted a research on the financial market of Ethiopia

particularly in regard to the establishment of the stock exchange market while giving focusing

on the positive and the negative correlation between different variables for its non-existence

i.e. the stock exchange market. Among them (Alemneh, 2005) stated that, There is a positive

correlation between stock market and GDP as a crucial ingredient of a financial market, stock

markets contribute the intermediation in the secondary and primary financial market.

However, the studies conducted so far haven’t gave enough focus on the impact of the stock

exchange marketing in regard to the pros and cons to investors and the issuers in regard to

raising equity capital.

Thus most of the researchers clearly identify the hindrance for the full scale

application of stock exchange market mainly the institutional platform and the legal

frameworks however, the potential impact of stock exchange market in regard to job creation,

enhancing fund mobility, the contribution for the standardization of accounting & auditing


https://en.wikipedia.org/wiki/Taiwan_Stock_Exchange

https://en.wikipedia.org/wiki/Japan_Exchange_Group

https://en.wikipedia.org/wiki/Japan_Exchange_Group

https://en.wikipedia.org/wiki/Tokyo

https://en.wikipedia.org/wiki/TMX_Group

https://en.wikipedia.org/wiki/Toronto

https://en.wikipedia.org/wiki/SIX_Swiss_Exchange

https://en.wikipedia.org/wiki/Zurich



practices have been a study topic for many researcher while, this research thrives to address

this research gap in relation to raising capital. Public awareness on how stock market function

is the critical issue which need critical focus.

As the stock market encompasses various processes starting from the registration,

submission of accounting reports, compliance to various standards, management, listing and

other pertinent requirements, the stakeholder’s awareness have to be sufficiently developed

before the full scale application of the stock exchange market.

The stock market contributes a great economic support in raising equity financing

through enhancing the selling and buying of corporation’s shares and financial securities of a

publicly traded companies. In a country where there is a well performing stock exchange

market companies are eligible to sell their stock on a competitive price in raising financial

capital.

Today the government of Ethiopia is opening its door to previously closed sectors

mainly on the investment banking area. The government has officially issued three licenses to

three international private equity firms. Including Acent Capital, SGI Shoult, Cepheus and

Zoskalus. Despite the unavailability of the stock market in the country this private equity

firms are operating through approaching on door to door bases (John, 2015).



Chapter Three

Research Methodology

3.1 Introduction

The methodology deployed by the researcher in critically identifying the positive and

negative impact of the unavailability of a stock exchange market on the national economy of

Ethiopia is a descriptive research approach with the aid of observational research. The

potential impacts are gathered through reviewing various primary and secondary sources

which are made to evaluate/assess what impacts that the stock exchange markets in Ethiopia

and other Ethiopian neighbour countries has brought.

Self-administered questionnaire, semi structured interview, on the desk research of

previous research studies and various related journals have been critically examined to attain

the objective this research i.e. the impact of the stock exchange market on the national

economy of Ethiopia.

3.2 Research design

The conceptual structure of the research process incorporates both the primary and

the secondary data instruments. The graphical depiction of the conduct of the research

process is pictured below for both primary and secondary sources separately.



Process Chart 3.1: Primary data process flow chart

Process Chart 3.2: Secondary data process flow chart

Data Source primery

Questionnaire, observation & Interview

Data presentation, analysis & Interpretation

Conclusion

Reconommendation

Data Source Secondary

Referred journals, Previous researches,

books, Relayabel websites

Data presentation, analysis &

interpretation Conclusion Reconommendation



The researcher targets its focus on the group of the share, bond and security holders at

the different financial institutions in Ethiopia. As the most widely known financial

instruments in Ethiopia are private bank’s shares followed by bond and treasury bills, the

study also targeted its focus on the shareholders of private banks, bond holders and other

financial security owners.

3.3 Data Sources and Collection Methods

Both primary and secondary data have been gathered in various forms to the conduct of

this research. Primary data including questionnaire survey to financial institutions and

questionnaire survey on prospective investors, on the sight observation at various financial

institutions and companies were also be conducted to reach at sound conclusions.

Secondary data includes

Previous researches by various scholars and researches on stock market

Journals on stock market

Books and

Reliable website blogs.

3.4 Population and sample size

A selected 10 shareholders from different financial and non-financial business organization

has been approached in the conduct of the research followed by on the desk research on

material regarding the missing stock exchange market in Ethiopia.

Time was one of the main constraints especially to get appointments and consult

experts, companies and entrepreneurs. Hence, in addition to in person communications other

methods might be used. Thus are: mails, calls, business lunches/dinners might be taken to

communicate with the selected persons.



3.5 Method of data analysis

Electronic questionnaire with the aid of Google form have been developed to facilitate

the conduct of this research. And more than 37 questionnaires distributed to achieve the

sample size of 10 respondents. Tables, charts and graphs have been reviewed and

summarized in reaching at the research question.

The collecting and analysis of the data from the various financial institutions were

handled in a systematic and easily communicable way. That the method of data analysis that

is applied for the research on the impact of stock exchange market in Ethiopia is both the

qualitative and quantitative data analysis technique.



Chapter Four

Date Presentation, Analysis and

Interpretation

4.1 Characteristics of Respondents

The demographic combination including age, sex and educational level of respondents

are arranged and summarized in table 4.1.

Table 4.1: Age, sex and educational level of respondents.

Description No of respondents Percentage

Age

Below 20

years

0 0%

21 – 40 years 6 60%

41 – 60 years 2 20%

>60 0 0%

Total 8 80%

Sex

Male 5 50%

Female 5 50%

Total 10 100%

Occupation Self employed 2 20%

Employee 6 40%

Job seeker 2 20%

Total 10 100%

From the table 2 it is easy to see that the research focused on the relevant age group of

respondents in that 60 percent of the sample are within the age group of 21 to 40 while the

remaining 20 percent are in the age between 41 and 60. This shows that the research are



addresses the right age group who is responsible for the failure and development of the

national economy.

Furthermore the gender balance also give a right direction in that the 50 percent male

and the 50 percent female combination try to clearly elucidate the research finding from the

gender balance perspective. Adding with the gender, the occupation combinations of the

sample also provide a balance in the 3 perspective view i.e. from the perspective of company,

employee and job seeker.

4.2 Results of Questionnaires from the share

holders

Table 4.2: Ordinary and founder share classification of the sample

Description Number of respondents Percentage

Ordinary Share Holder 4 66.7%

Founder Share Holder 2 33.3%

Total 6 100%

In the pool of the sample 66.7 percent of the respondents are ordinary shareholders of

various business institutions including financial institutions and other non-finance related

business organizations while the remaining 33.3 percent are founder shareholders at different

financial and other non-financial business institutions.

Table 4.3: Share bought from share sell company administration


Institutions administration 6 100%

Broker and relatives 0 0

Total 6 6



All most all of the share transactions transacted throughout the country are

administered directly from the institutions administration while miner broker contribution is

in place in extreme cases.

Table 4.4: Respondents who want to exchange their share to another company share


Looking for exchanging party 1 16.7%

Wants to withhold existing

share

5 83.3%

Total 6 100%

Out of the sample size 16.7% respondent’s wants to exchange their existing share for

another institutions share may be looking for a company with high dividend. However the

main reason for inability of share exchange is the luck of the share exchange and transaction

platform. This reviles that the prevailing stock trading informal platform is restricted to

provide ground for various share holder to display the dividend pattern of their share to

enhance the exchange transaction. On the other side the potential exchanging might be

available somewhere but due to the luck of the platform they might live apart unless a broker

intervene. In a formal stock exchange marketing the listing enables potential investors to

present his share value including the dividend on instant time frame this facilitates the share

exchange transaction very fact. So that, the 83.3% of the population withholds their share not

only because their share are profitable instead they don’t have the room to display in a listing

and undertake the exchange transaction in a most profitable pattern.

Table 4.5: Share sales experience of respondents


Share holder who sold a

share in the past

1 16.7%

Share holder who haven’t

sold any share before

5 83.3%

Total 6 100%



The reason behind the sale of share in the case of 16.7% is because of to get some

relief from the tight business hassle. However the 83.3% of respondents didn’t mean that they

don’t want to sell their share but they don’t clearly see the way and the clear benefits in

raising business capital.

Table 4.6: Respondents who wants to sell their share


Share holder who wants to

sell their share

1 33.3%

Shareholders who don’t want

to sell their share

2 66.7%

Total 3 100%

The 33.3% of respondents wants to sell their share but due to personal reason and the

difficulty to locate the right buyer the shareholders are still in search of potential buyer of

their share. The advantage of equity financing i.e. raising capital through the issue of share is

unknown widely in the business community.

Table 4.7: Source of financing, which source of financing comes to your mind first?


Loan from bank (debt

financing)

4 66.7%

Selling portion of a share (i.e.

equity financing

0 0%

Loan from others 2 33.3

Total 6 100%



The result depicts that due to the unavailability of the stock exchange market almost

all of the business men haven’t enough awareness about the equity financing. Awareness

creation on the business community might enable the business society to see the greatest

advantage of equity financing their by the stock exchange market too. As equity financing

avoid risk of lag payment and interest unlike debt financing the sector need extra effort in the

area of awareness creation.

Table 4.8: views of respondents if a well-established exchange market is established in

Ethiopia


I am interested to transact

through if it emerged

8 80%

I am not interested 2 20%

Total 10 100%

80% of the respondents in the sample are eager to transact through a well-established

stock exchange market if a well-established stock exchange market emerges in Ethiopia.

Whoever due to unknown reason the remaining 20 percent are not willing to transact through

it, thus the reason could be the luck of awareness on its importance and function.



Chapter Five

Summary of Findings, Conclusions and

Recommendations

5.1 Summary of Findings

The summary of the findings includes that:

80% of the financial and nonfinancial corporation shareholders want to get involved in

a share business if the establishment of a well-organized and legally controlled stock

exchange market is in place.

Due to the luck of the institutional platform and the legal framework the country is

underutilizing the economic benefit of stock exchange.

Responsible stakeholders haven’t carried out enough effort on awareness creation on

stock exchange market. Furthermore the pros and cons of debt and equity financing

haven’t yet got serious attention.

100% of the share transactions are handled on the share issuing institution’s share

administration department. I.e. the dividend trend, the value of the share and other

share criterion are being subject to zero price competition zones.

The most common financial instruments of the financial system of Ethiopia are limited

to Treasury bills, bonds, and corporation shares.

After a rigorous research and analysis the researcher find out that the country is

missing a great advantage both at the macro and micro level due to the unavailability of stock

exchange market. Pictorially the researcher depicted the prevailing gap on stock exchange

market below in the case of financial institutions.



Process chart 5.1: the prevailing commercial banks share transaction path.

5.2 Conclusions

The researcher finally concluded that the country is losing limitless opportunities and

foreign investment. The luck of a formal institutional platform and legal framework that

connects potential investors and security traders have hindered serious economical benefit to

Ethiopia. Agreeing with (Ruediger, November, 2011) the potential impact of the stock

exchange market includes:

Enhanced capital mobilization;

Efficient Capital allocation;

Mobilization of (local and Diaspora) savings for the economic sector;

further flexibility in corporate finance;

promotion of an efficient financial system;

Supply of long-term funding;

Banks float their share to the public

Potential invester buy directely from

the bank

Secure dividend each year

inproportion to the share holding

(Optional)

Use it as a collateral for credit financing purpose

(Optional)

Resell the share to the bank or relatives at

uncompetitive price (Due to luck of

Financial Market



De-concentration of ownership and broader distribution of corporate profits, resulting

in wealth creation for private investors;

Improvement of accounting and audition standards accompanied by higher reporting

standards;

Provision of effective tools for monetary and fiscal policy;

Support of transparent and efficient privatization process;

Stimulation of private sector development;

Economic growth;

Lower unemployment rates and poverty reduction; and

Indirectly support banks in getting back the non-performing loan portfolios

At the micro level business entities mainly corporations are under utilizing the advantages

of equity financing almost all of the capital raising decisions are only subject to debt

financing. The pros and cons of equity financing need to be aware at the national level

including key government stakeholders.

Furthermore extra researches need to be conducted by responsible government organ and

the experiences of other countries need to be considered to learn a lesson from their success

and failure.

Thus has been putting serious pressure both at the Macro and Micro level influence at the

national economic growth of the county. The problem need serious focus by responsible

stakeholders, failure to give right considerations will continue costing the country on the long

run.

5.3 Recommendations

The positive and negative impact of the unavailability of stock exchange market is

critical to a nation. As the title of the study is the impact of stock exchange market on the

national economy of Ethiopia. The researcher agrees that the luck of stock exchange market

has been putting serious impact on the national economy of Ethiopia so that serious measures

have to be taken by responsible organs. And I recommend that the:

Government should give serious consideration on the development of stock

exchange market in Ethiopia. Furthermore the government should facilitate and



provide a legal platform and institutional arrangement in order to secure a great deal

from the stock market.

The National Bank of Ethiopia and other key stakeholders have to give enough

considerations for the establishment of stock exchange market in Ethiopia.

Strong accounting and auditing practice have to be developed throughout the country

for a greater harmonization and standardization of financial reports of companies.

Awareness creation seminars, workshops, trainings and various events have to be

organized to enhance the awareness of shareholders and institutional investors on the

subject.

Stock exchange market experiences of other countries have to be critically examined

by responsible government organ to clearly see its potential advantages.

Companies should develop a standard system for share return application from their

shareholders.

Companies have to comply with the prevailing international accounting and auditing

standards so as to be listed on international stock exchange market in equity

financing decision.



6. Reference

Ahferom, T., June, 2011. Should Ethiopia Consider Establishing of a Stock Exchange?. Addis

Ababa: Addis Ababa University College of Management, Information, and Economic

Sciences School of Business and Public Administration .

Alemneh, A. K., 2005. Is Ethiopia Ready to Institute a Stock Exchange Market?. Addis

Abeba: Adds Ababa Univeristy College of Business And Economics.

Bayeh, E., 2016. https://www.omicsonline.com. [Online]

Available at: https://www.omicsonline.com/open-access/agreement-on-declaration-of-

principles-on-the-grand-ethiopianrenaissance-dam-project-a-reaffirmation-of-the-1929-and-

1959agreement-2151-6200-1000170.php?aid=71460

[Accessed 08 April 2016].

Dejene, A., October, 1993. The Informal and Semi-formal Financial Sectors In Ethiopia: A

Study of the Iqqub, Iddir, and Savings and Credit Co-operatives, Addis Ababa: IDRC.

Dr. Hartmut, S., March, 1977. Advantages and disadvantages of an integrated market

compared with a fragmented market. Brussels: Commision of the European Communities .

Ezana, K., 2015. https://ezanakebede.wordpress.com. [Online].

Jetu, E. C., 2014. Legal Aspects of Stock Market Development in Ethiopia: Comments on

Challenges & Prospects. Mizan Law Review, 31 Decembe, 8(2), p. 441.

John, G., 2015. www.businessdailyafrica.com. [Online]

Available at: http://www.businessdailyafrica.com/Ascent-Capital-makes-first-investment-in-

Ethiopian-firm/539552-2635478-2rcmhvz/index.html

Rose, W., March, 2003. Development of the Nairobi Stock Exchang: A Historical Perspective.

Nairobi: Macroeconomics Division Kenya Institute for Public Policy Research and Analysis .

Ruediger, R., November, 2011. Market Potential Assessment and Road Map Development for

the Establishment of Capital Market in Ethiopia. Addis Ababa: The Addis Ababa Chamber of

Commerce and Sectoral Association.



Valdone, D., 2010. Financial Markets. Latvia : Lifelong Learning Programme, Leonardo da

Vinci programme project .



7. Appendix

Questionnaires

7.1 Questionnaire for private bank share

holders

LEADSTAR

College of Management & Leadership

Graduate Program - MBA Specialization in Finance

Questionnaire

My name is Daniel Shiferw and I am MBA student in Leadstar College of Management &

Leadership. The objective of the study is to critically evaluate the impact of the

unavailability of stock exchange market in Ethiopia. Please be aware that the purpose of the

study is purely academic and it may contribute something to the improvement of the

financial system of the country; please fill all the necessary data. I would like to thank in

advance for cooperating in filling this questionnaire, it would take a maximum of five

minutes. Your responses are voluntary and will be confidential. Responses will not be

identified by individual. All responses will be compiled together and analyzed in group.

General information: please mark x on the check box and answer on the space provided

1. Age 1-20 20 – 40 40 – 60 60>

2. Sex : Male Female

3. Occupation ______________________

Share information



4. Do you own (have) a share of any business entity?

Yes No

Note: If your answer is No please skip question 5 to 22 and go to question 23.

5. If your answer for question number 4 is yes. What is the business structure?

Sole Proprietorship Partnership Private Limited Company

Others like Union

6. What is the business sector? Banking and Insurance Manufacturing

Hotel & Tourism Construction & Real-estate Agriculture

Other not specified

7. Type of share: Ordinary Share Founder Share

8. When did you buy the share_________________

9. Number of share you own in percent (optional)__________________

Detail about the stock

10. From where did you buy the share? From the

Institution’s Administration or Broker

11. How many days do you spend in finding the shares you bought? ________________

12. Do you want to change your existing share to another companies share?

Yes No

13. If your answer for question 12 is yes, why haven’t you changed the share?

Because I don’t know where to find an exchanging party

Because I can’t find a broker

Am still searching for an exchanging party

14. Have you ever sold your existing share to third party?

Yes No

15. If your answer for question 14 is yes, why did you sold your share?

To get finance or to raise capital

To share the risk and profit with others

To get some relief of tight business hassle

16. If your answer for question 14 is yes, how did you find the buyer?

_____________________________________________________________________

_____________________________________________________________________



17. If your answer for question number 14 is No, Have you ever think to sell your share?

Yes No

18. If the answer for question 17 is yes, what delayed your action?

a. Personal reason

b. Unavailability of formal stock dealer

c. Unavailability of buyer

d. I don’t know where to sell

19. Are you still searching for a stock buyer?

Yes No

20. If your answer for question 19 is yes, when did you start the searching of the buyer?

____________________________________________________

21. In cases of searching finance for your urgent business need which source of financing

did come to your mind first?

Loan from banks Selling some share Finding other source

22. If your answer for question number 4 is No, Why? Because

Am not business man

Finding the best deal is difficult

I don’t know where to find the shares

I am not interested at all

Other not specified reason

23. If a well-established stock exchange market emerge in Ethiopia, would you be

comfortable to transact through the stock exchange market.

Yes No

24. Please feel free to live any comment or idea that you find it relevant to the conduct of

this research.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Thank you for your valuable feedback and time.



7.2 Questionnaire for share issuing financial

institutions

LEADSTAR

College of Management & Leadership

Graduate Program - MBA Specialization in Finance

Topic: Questionnaire for Private Banks Share Holders

My name is Daniel Shiferw and I am an MBA student in Leadstar College of

Management & Leadership. The objective of the study is to critically evaluate the impact

of the unavailability of stock exchange market in the Ethiopia financial market. Please be

aware that the purpose of the study is purely academic it may contribute something to the

improvement of the financial system of the country; please fill all the necessary data. I

would like to thank in advance for cooperating in filling this questionnaire, it would take

a maximum of five minutes. Your responses are voluntary and will be confidential.

Responses will not be identified by individual. All responses will be compiled together

and analysed in group.

General information: pleas mark x on the check box and answer on the space provided

1. Company (optional) _____________________________

2. Sector: Banking Insurance Other not specified

3. Company Age 1-20 21 – 40 41 – 60 61>

4. Position in the company ________________________________

Share information

5. How much was the company start-up capital at beginning? (optional)

_______________________________________________

6. How much where the equity portion of the capital?

________________________________________________

7. Through which medium did you issue the shares to your shareholders?

________________________________________________

8. How many shareholders do you have today?

________________________________________________



9. How many shareholders do you have during the initial establishment?

________________________________________________________

Detail about share transfer

10. What is the amount of share transfer transaction in the year 2008, 2007 & 2006

respectively?

________________________________________________________

11. What is the amount of share transfer request handled in the year 2008, 2007 & 2006

respectively?

_________________________________________________________

12. How many application have you received in the year 2008, 2007 & 2006 for share

return.

________________________________________________________________

13. How do you handle share return applications?

_______________________________________________________________________

_______________________________________________________________________

14. Do you accept share return applications? Yes No

15. If your answer for question number 14 is yes, how do you manage the return?

_______________________________________________________________________

_______________________________________________________________________

16. Is there a formal stock broker in/around your organization?

Yes No

17. If your answer for question 16 is yes, does the broker have a formal licence?

Yes No

18. It’s known that currently Ethiopia haven’t a well-established stock exchange market,

if a new stock exchange market emerge, does your organization benefit?

Yes No

19. If your answer for question 18 is yes, in what why?

_______________________________________________________________________

_______________________________________________________________________

Thank you for your valuable feedback!

Documents

The Impact of Stock Exchange Market on National Economy Particularly- Master Final