The Impact of Establishing Capital Market on Ethiopian Commercial Banks

Abstract

The paper analysed the implication of establishing the capital market on commercial banks operating in Ethiopia. The study aimed to identify its potential opportunities and main challenges to banks, to see how the capital market is operating in other African countries and to show the necessary preconditions to commercial banks to prepare themselves. The research method employed in the study had both qualitative and quantitative features, and the research was conducted using a mixed research method. Primary data was collected from focus group discussions with experts that have experience in the area, and, furthermore, secondary data were collected from literature and websites. The findings of the study identified the major risk of the capital market to the economy like economic risk to investments, inflationary/deflation risk, market value risk, being too conservative and political crisis by relating with the current situation of country regulation power. The study also investigated the major opportunities of the capital market to meet the financial need for the economy and how it can work with commercial banks. Besides, the study investigated its challenges to commercial banks working with security exchange companies. Many literature analyses confirmed the reputation of capital markets comparative to banks, which cannot explain across-countries deviation in economic growth. And it is better to establish a well-functioning legal framework, which plays a vital role in creating a healthy financial system. The study recommended that commercial banks should modify their business models and create products related to the investment bank and product differentiation that captures the mode of the capital market. And it is better for the commercial banks to empower their human resource, and they shall aggressively work on technology adaptation, work highly on awareness creation for all internal and external customers. Banks’ capital increment should be made before the security market is established to minimise any risk that may come with it.