Introduction
Ethiopia has embarked on a series of ambitious economic reforms in recent years, aimed at liberalizing its economy and attracting foreign direct investment. Key sectors that were once restricted to domestic players have now been opened to international investors. A landmark development in this reform agenda was the official launch of the Ethiopian Securities Exchange on June 10, 2025. This historic step marked the beginning of a structured capital market in the country and introduced the role of investment banks—an essential pillar in modern financial systems. As Ethiopia continues to open up its financial sector, investment banks are expected to play an increasingly critical role in facilitating capital market transactions, underwriting securities, and supporting both corporate growth and investor confidence. The sector is evolving rapidly, signaling a transformative shift in the nation’s financial landscape.
This brief legal note provides a comprehensive overview of investment banking within the context of Ethiopia’s evolving financial sector. It begins by defining what constitutes an investment bank and explores the various roles these institutions play in the capital market, including underwriting securities, facilitating mergers and acquisitions, and advising clients on financial strategies. The legal note further outlines the legal and regulatory requirements that must be met to operate as an investment bank in Ethiopia, ensuring compliance with national financial regulations. Additionally, it describes the step-by-step application procedure for obtaining a license, the conditions under which an investment bank may exit the market, and the formal requirements involved in the exit process. Finally, it highlights the limitations and restrictions imposed on investment banks to safeguard market integrity and promote fair competition within the financial system.
Definition and Functions
The Capital Market Proclamation No. 1248/2021 (‘the Proclamation’) and the Ethiopian Capital Market Service Provider Licensing and Supervision Directive No. 980/2024 (‘the Directive’) provide the definition of investment bank with a comprehensive list of its functions. Accordingly, the Proclamation under Article 2 (4) and Article 47 of the Directive defines investment bank as a non-deposit taking financial institution that facilitates the creation of capital for other companies, governments, and other entities through underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations and acting as a broker or financial adviser for institutional clients. Thus, an investment bank is a specialized non-deposit-taking financial institution that plays a critical role in capital formation and financial intermediation within the economy. Unlike commercial banks, investment banks do not accept deposits from the public. Instead, they focus on providing a range of sophisticated financial services to corporations, governments, and institutional clients.
One of their core functions is underwriting, which involves assessing risk and helping companies raise capital by issuing stocks or bonds to the public or private investors. In this role, the investment bank can use three options. These are,
- The first is all/non commitment, in this option the investment bank agree to sell all the share issued by the company. It is contractual.
- The second is firm commitment, in which investment bank buy the securities from the issuer and sell them to investors, effectively assuming the risk associated with the issuance. They use this option when they are sure about the profitability of the company.
- The third is best effort option in which the investment bank agree to sell within their ability and give back what left to the issuer and receive commission.
Investment banks also act as intermediaries between securities issuers and the investing public. They ensure the smooth issuance and distribution of financial instruments, providing pricing, marketing, and legal structuring services. This function is vital in creating liquidity and enabling companies to access the funding necessary for expansion or operations.
Additionally, investment banks play a pivotal role in mergers, acquisitions, and corporate reorganizations. They offer advisory services, helping firms identify strategic opportunities, conduct valuations, negotiate terms, and navigate the legal and regulatory complexities of such transactions.
Furthermore, investment banks serve as financial advisors and brokers, particularly to institutional investors such as pension funds, insurance companies, and hedge funds. In this capacity, they provide market insights, investment strategies, and transaction execution services, thereby supporting informed decision-making and efficient capital allocation.
Through these roles, investment banks are fundamental to the functioning of modern financial markets, helping to connect capital seekers with capital providers and fostering economic growth and development. However, as it can be seen from Article 47 of the Directive, the list on the function of investment bank is not exhaustive because investment bank may engage in other services as defined by the Ethiopian Capital Market Authority (‘ECMA’) from time to time.
Licensing Requirements
Article 4 of the Directive clearly stipulates that no individual or entity may engage in regulated capital market activities without first obtaining the appropriate service license from ECMA. This legal provision underscores the necessity for formal authorization as a prerequisite to operate within the capital market framework.
In the context of investment banking, financial institutions intending to provide such services in Ethiopia must comply with a comprehensive set of legal and regulatory requirements. These requirements are outlined in various legislative instruments, including the Proclamation and the Directive.
These requirements include, but are not limited to, capital adequacy standards, fit and proper criteria for shareholders and management, internal governance structures, risk management systems, and ongoing compliance and reporting obligations.
Organ to Issue License
As per Article 55 (4) of the Proclamation cum Article 4 of the Directive, vested unto ECMA the power to issue license for Capital Market Service Providers (‘CMSP’). The Proclamation provides that before licensing, ECMA has to make sure that the person is fit and proper. In considering whether a person is a fit and proper person, ECMA shall have regard to the: a) financial status; b) educational or other qualifications or experience with respect to the nature of the application; c) ability to perform his proposed function efficiently, honestly and fairly; and d) reputation, character, financial integrity and reliability of the applicant.
The Directive is another applicable law that provide comprehensive list of requirements for licensing of CMSP. The Directive provides general requirements every CMSP shall meet and special requirements investment bank shall fulfill to engage in regulated capital market activities.
General Requirements
The general requirements are preconditions every CMSP shall fulfill before joining the market. These are the requirement provided by the Directive. Fees: the capital market service provider shall pay the application fees provided by law to get its license. Capital: capital market service provider shall at all times maintain adequate financial resources to meet its capital requirement, this is to avoid the risk. Fidelity guarantee: CMSP shall not later than one (1) month after the end of a financial year provide ECMA with evidence that it has obtained a fidelity guarantee of at least twenty percent (20%) of its total shareholder’s fund or net worth as may be applicable. Appointed representative: when the capital service provider is a share company or private limited company it shall at minimum have 3 (three) appointed representatives including: Chief Compliance Officer, Managing Director/Chief Executive Officer and any other personnel as may be specified in this Directive or any other Directives as may be issued by ECMA from time to time. Board of directors: every CMSP that is a share company or a private limited company, shall have a Board of Directors responsible for governance, and shall comply with the provisions of the Guidelines on Corporate Governance for CMSP. Police clearance certificate: all CMSP shall obtain a police clearance certificate, issued by the appropriate body, for each of its directors, appointed representatives and other employees as may be prescribed or required by ECMA from time to time. Letter of good standing: where the applicant is a foreign company with businesses in other jurisdictions – letter(s) of good standing issued by the applicable regulatory authority (ies) in the foreign jurisdictions. Tax and other documentations: tax clearance certificate for the financial year during which the application was received, if applicable, tax Identification Number (TIN) certificate, Value Added Tax (VAT) registration certificate and Memorandum of Association and list of individuals who have influence are also required by each applicant.
Specific Requirements
In addition to the general requirement listed above there are specific requirement applicable for investment banks. Organizational requirements: to be eligible for an investment bank license in Ethiopia, the applicant must be either a share company or a private limited company with a valid commercial registration and/or investment permit issued by the appropriate government body. In accordance with Article 14(4) of the Directive, such entities must also establish a board of directors responsible for governance. Additional requirements apply for investment banks that intend to act as brokers for institutional clients. In such cases, ECMA may require the applicant to present an Approval-In-Principle for a trading license from a recognized Securities Exchange or Over-the-Counter (OTC) facility in Ethiopia. Underwriting agreement:furthermore, any investment bank acting as an underwriter for a public offering of securities must enter into a formal underwriting agreement with the issuing company. A copy of the mandate letter and the underwriting agreement must be submitted to ECMA along with the public offering documents to comply with regulatory disclosure and approval standards.
Application Procedure and Time
Every CMSP shall apply to ECMA after fulfilling the requirements provided by law. An application for a license shall be made to ECMA in the prescribed form and shall be accompanied by the prescribed fee. In the case of an application for renewal of a license, such application shall be made not later than 1 (one) month before the expiry of the license. The applicant may be required to supply ECMA with such further information, in relation to the application, as the Authority considers necessary. The information is submitted to ECMA via its digitals. All applications and accompanying documents shall be filed with ECMA in the English and/or Amharic languages. If any information and/or document to be filed with the application is in any other language, then it shall be accompanied by an authenticated translated version to English and/or Amharic. All application information and documents or copies of such information and documents, in so far as practicable, shall be type-written, and in all cases shall be clear and easily readable. Even if the applicant fulfills the requirement and have paid the application fee the application will be terminated if he fails or neglects to continue with the processing of the application for a period of 30 (thirty) consecutive days without due notification to and approval of ECMA.
Limitations on Investment Banks
Limitations on Investment Banks (Directive No. SBB/92/2024), is enacted with the view of enhancing financial stability by limiting banks’ exposure to risky investments and refocusing them on core banking functions such as lending and deposit-taking. This Directive introduces stricter rules on investment activities of banks to reduce risk, improve governance, and align with macroeconomic priorities. The Directive outlines specific limitations on the types and amounts of investments banks can undertake. In relation to CMSPs, banks are permitted to acquire up to 100 (one hundred) % equity shares in CMSP.
Exit And Requirement for Exit of Investment Bank
Every CMSP has no obligation to stay in the market. It can leave the market by fulfilling the requirements laid down by the law by filing an application for the relinquishment of its license. Investment banks are required to provide a resolution from their board or that of their shareholders’ approving the decision of to exit the market. They should also provide a copy of the tax clearance certificate issued by the relevant government organ. There are also other requirements that needs to be fulfilled as to be prescribed from time to time by the relevant laws.
Conclusions
The introduction of investment bank is part of ongoing reforms in the financial sector in general and capital market in particular. Since investment banks have great impact for the development of the country economy and contribute for the smooth operation of capital market. These banks are new for Ethiopia the government must provide ongoing regulatory framework for their effective operations.
Compiled by Melkamu Destaw (Junior Legal Associate at MAP Legal Services LLP)
Disclaimer: This legal update is for informational purposes only and does not constitute legal advice. Million Alemu and partners Legal Services assumes no responsibility for any actions taken based on the information contained herein.
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Reference
- Capital Market Proclamation No. 1248/2021.
- Capital Market Service Providers Licensing and Supervision Directive No.980/2024.
- Public Offering and Trading of Securities Directive No. 1030/2024.
- Rulebook of the Ethiopian Securities Exchange.
- Limitation on Investment of Banks Directive No. SBB/92/2024.
