Existing Share Transfer Mechanism in Ethiopia. Challenges and Benefits

TABLE OF CONTENTS

DEDICATION STATEMENT

BIOGRAPHICAL SKETCH

ACKNOWLEDGEMENTS

LIST OF ACRONYMS

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

Abstract

CHAPTER ONE
INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.3.1. General Objective
1.3.2 Specific Objectives
1.4 The research questions
1.5 scope of the study
1.6 Limitations of the study
1.7 Significance of the study
1.8 Organization of the paper

CHAPTER TWO
REVIEWS OF RELATED LITERATURE ON THE STUDY AREA
2.1 Theoretical Review Literature
2.1.1 Introduction to the financial system
2.1.2 The roles of Financial System in the Economy
2.1.3 The Financial Institutions and their roles in the Financial System
2.1.4 Financial market in the financial system
2.1.5 Types of financial markets
2.1.5.1 Debt versus equity market
B. Equity market
2.1.5.2 Money market versus capital market
A. Money market
2.1.6 Stock market
2.1.6.1 Primary versus secondary stock market
2.7 Stock exchanges
2.2 Empirical reviews
2.2.1 Overview of the global stock exchange markets
2.2.2. Overview of Stock Exchanges in Africa
2.2.2.1 Transferability of ownership right (shares) in Africa
2.2.3 Stock market and exchange in Ethiopia

CHAPTER THREE
METHODOLOGY OF THE STUDY
Introduction
3.1 Research design
3.2 Population descriptions’
3.3 Sampling design and Sample size
3.4 Type and source of data
3.6 Data collection instrument
3.7 Data collection procedures
3.8 Data analysis techniques

CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Introduction
4.1 Quantitative analysis of data’s
4.1.1 Response rate to the questionnaires
4.1.2 Back ground of the respondents
4.1.2.1 Educational qualification of the respondents
4.1.2.2 Professional certifications ‘and work experience of the banks employee
4.1.3 Means of transferring ownership rights (shares)
4.1.4 The roles of banking companies at the time of share transfer
4. 1.4.1 How to start the transfer of ownership rights
4.1.4.2 Determination of share price
4.1.4. 3. Do the banks issue share certificate immediately at the time of share transfer
4.1.4. General roles of the banking companies at the time of share transfer
4.1.5 Challenges with the existing share transfer mechanism
4.1.5 .1 Challenges with the existing share transfer mechanism as transferor (seller)
4.1.5 .2 Challenges with the existing share transfer mechanism as transferee (buyers)
4.1.6 Benefits with the existing share transfer mechanism
4.1.6.1 Benefits with the existing share transferring mechanism as a transferor (seller)
4.1.6 .2 Benefits with the existing share transferring mechanism as a transferee
4.1.7 Impact of non existence of secondary stock market on the transferability of shares
4.1.8 Data analysis that collected from share department employees of the banks only
4.1.8.1 Do the banking companies act as an agent at the time of share transfer?
4.1.8.2 Do the banking companies use other agent other than their share department employees for share transfer purpose?
4.1.8.3 Minimum denomination of share price in the banks
4.1.8.4 On average how many shareholders can transfer their ownership rights within a year?
4.2 Qualitative data analysis
4.2.1 Available options to transfer ownership right
4.2.2 Challenges and benefits with the existing share transfer mechanism
4.2.3 Effect of absence secondary stock market on transferability of shares
4.2.4 Suggestions given by the respondents for the banking companies via open ended questionnaires to improve shares transferability

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of findings
5.2 Conclusion
5.3 Recommendation

6. REFERENCES

7. APPENDIXS

Appendix I

Appendix II

Appendix III

DEDICATION STATEMENT

I dedicate this thesis manuscript to my younger sister Ehtalem Meshesha, my elder sister Amele Leggesse and my aunt Bekelech Demisse for nursing me with great affection and love and for their dedicated partnership in the triumph of my life.

BIOGRAPHICAL SKETCH

The author was born in July 21, 1993 G.C in Afkera East Shewa, Amhara region, Ethiopia. He attend his elementary and junior school education at Afkera Primary and Wegere Junior Secondary School and Molale Preparatory School in molale town his preparatory school. After passing the Ethiopian Higher Education Entrance Examinations’ he joined Addis Ababa University in September 2013 G.C and Graduated with Bachelor of Art Degree in Accounting and Finance by July 2016. And he joined Wolaita Sodo University in October 2016 to pursue his M.Sc. in Accounting and Finance.

ACKNOWLEDGEMENTS

Beyond of all, I honor my Almighty God in the names of Lord Jesus Christ for enabling me to complete my thesis work. Without the hold up of God, it was impossible to come on closing stages.

I would like to thank you my Advisor Dr. Rama Mohan (Professor) for his suggestions, advice and guidance during working on this thesis. And also I would like to thank you all of the respondents for taking a value time and providing useful information to carry out this study specially share department directors of (Awash bank, Cooperative bank of oromia and Debub global bank).

Furthermore, I am awfully grateful to my lovely Sister and my family for their support and merriment me up. Lastly but not least, I also would like to thank you my friends (Sitota.G and Dagmawi .K) for the time that we had and for your assistance to complete this research work.

LIST OF ACRONYMS

PBC Private Banking Companies

S.C Share Company

IPO Initial Public Offering

(AACCSA) Addis Ababa Chamber of Commerce and Sectoral Association

WFE World Federation of Exchanges

SPSS Statistical Packages for Social Science

NYSE New York Stock Exchange

LSE London Stock Exchange

TSE= Tokyo Stock Exchange

NBE National Bank of Ethiopia

IOSCO International Organization of Securities Commissions

OTC Over- The-Counter

AIB Awash International Bank

LIST OF TABLES

Table (1): world top ten countries by stock market capitalizations comparison (2016-2003)

Table (2): list of some African stock exchanges along with their market capitalizations

Table (3): Educational qualifications of the respondents (frequency table)

Table (4): professional certifications’ and work experience of share department employees

Table (5): Frequency and percentage of the responses of perceptions on the immediate Issuance of share certificate

LIST OF FIGURES

Figure1: Available options to transfer shares in (PBC) in the absence of secondary Stock market (frequency and percentage of the responses)

Figure 2: How does the transferring of ownership right are started (Frequency of the response)

Figure3: Determinations of share price (frequency and percentage of the responses)

Figure 4: General roles of the banks (banking companies) at the time of share transfers

Figure 5: Challenges of share transfer as transferor (seller) of shares (Frequency of responses)

Figure 6: Challenges of transfer of shares as a transferee (frequency and percentage)

Figure 7: Benefits of transfer of shares as a transferor (frequency of the responses)

Figure 8: Benefits of transfer of shares as a transferee (frequency and percentage)

Figure 9: Does non existence of secondary stock market has negative effect on transferability of shares Perceptions of respondents frequency

Figure10: Impact of non existence of secondary stock market on transferability of share

Figure11: Does the banking companies act as agent or not at the time of share transfer

Figure12: Does the banks use any other agent for share transfer purpose to assist their share holders (frequency of the respondents)

Figure 13: Does minimum denominations of shares (frequency of response)

Figure14: Yearly average numbers of shareholders that may can transfer shares in (PBC)

Abstract

The overall aim of this paper was to assess the existing share transfer mechanism in private commercial banking companies in the absence of secondary stock market in Ethiopia along with its challenges and benefits. The information was obtained from 12 purposively sampled private banking companies by adopting descriptive research design. Semi structured questionnaires were administered to 153 respondents from which 43 were all share department expertise and 110 were conveniently selected shareholders from those banks and interviews also administered for share department directors of those banks. The questionnaires covered the key aspects of what options are there to transfer shares in the absence of secondary stock market in Ethiopia and related challenges and benefits. The main conclusions of the paper were: despite the absence of secondary stock market in Ethiopia shares can be transferred between investors through different ways includes by purchase through the help of share department employees of the companies, by descendant’s if the transfer is sequestration, and through court order at the time of debt settlement, divorce, death. Difficult to know market value of shares, less marketability, inaccessibility of information about share trade were the major challenges with the existing share transfer mechanism that existed in private banking companies in the absence of stock market in Ethiopia. Generally the findings suggest that shares of the private banking companies can transferred between investors in the absence of stock market in Ethiopia. Some recommendations were given from those the banks should open formal office to act as an agent for share transfer purpose for their shareholders by doing so the banks can enhance the transferability of shares.

Keywords: Secondary stock market, Share, Transferability, Private banking companies,

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The financial system of any economy is visible to be alienated between the financial intermediaries (Banks, Stock Brokerage Firms, Non-Banking Financial Institutions, Building Societies, Asset Management Firms, Credit Unions , Insurance Companies, pension funds…) and the financial markets (bond and stock markets (Mala, 2006)).Even as an introduction creation, sale and transfer of financial assets within the financial engine may be categorized as primary market or secondary market transactions.

Primary markets are markets in which financial assets (debt security or equity security) are issued for the first time to elevate capital for investment. Subsequent shopping for and promoting of such security happens in secondary markets (Christiansen and koldertsova, 2009). Secondary stock market transactions do not boost extra finances for the initial provider rather there is an easy a switch of ownership from one stockholder to any other (WFE, 2015). Even if each market is not based upon the other, a deep and liquid secondary market encourage investment in the primary market, As stockholders were assured that they will be able to promote and sale their securities at present day market inside the secondary market when they prefer to do so (Ruecker, 2011). This is particularly vital, as buyers can be reluctant to spend money on primarily issued securities, such as stocks or bonds, in the event (absence of secondary stock market) that they did not trust the security might effortlessly marketable. Lenders (savers) usually have a preference for liquidity that is so as to convert their financial asset to coins within an anticipated or described period of time.

An efficient stock market helps the mobilization of domestic saving by providing the way for investors the options to investment by reducing the related threat, permit share organizations to raise long term assets at minimum possible cost and create an opportunity for the general public to take participate within the corporate region and share from its wealth (Ewart, 2008) as cited in Gashu (2010).Secondary stock market transactions also enable investors to reorganize (diversify) their investment portfolio over time to optimize their personal investment objectives. Active secondary markets also provide liquidity to primary securities market and encourage the culture of saving and capital investment. The investment in return enables the establishment of huge corporations having shares attractive to investors which could be easily transferable (Khalikov, 2016).

When we come to Ethiopia with this context a short-lived stock market was started out informally in the past due 1950s and turned into formally instituted in 1965(NBE, 2017). The stock market becomes administered through the National bank of Ethiopia, which were regarded as regulatory body inside the over-the counter markets and buying and selling occurs through a network of middlemen called stock dealers, who delivered inventories of securities to facilitate the buying and promote orders of buyers in place of offering the order matchmaking carriers and seen as professional for stock exchanges within the Ethiopian monetary sector during that time (Ruecker, 2011). The Imperial authorities tried to improve useful resource mobilization through the National bank and tried the use of organizing a commission-dealing institution, which was served as the connecting link for buyer and dealer in a public sale manner and then secondary markets where very important inside the transfer of shares between investors (Tiruneh, 2012).

The first institutional arrangements for the share dealing were established in May, 1960. When the state bank of Ethiopia formulate share exchange department in order to stimulate trading and holding of shares (Feyera, 1995) as cited in Gashu (2010). As the bank went on observing public interest in shareholding and trading, the bank itself involved as a full time shareholder with the objective of assuring share liquidity to the public and a smooth of gradual sale of its own portfolio which it had purchased earlier. However, as a matter of chance the whole life of the share market operation in Ethiopia ceased with the nationalization of all private properties in 1975 by the military government ruling Ethiopia at that time including private share companies (Feyera, 1975) as cited in Tiruneh (2012).

After the overthrow of the socialist government in Ethiopia (Dergue regime) in 1991 the current government of Ethiopia, in cooperation with the international financial organizations was taken steps to implement economic policy reforms to enhance economic development in Consistent with the principles of a free market economy( Abu, n.d). The new economic policy introduced in November 1991 caused the calumniation of command economy and the establishment of market oriented economic system. Following the economic change private financial institutions such as commercial banks, insurances and micro finance institutions grow significantly. However, Ethiopia does not have any type of secondary stock market until today (Alemneh, 2015).

But there are companies that issue shares which are transferable. Particularly in the banking industry of Ethiopia almost all private banking companies were established through share basis (AIB, 2017). Meaning early incorporated entities where established by charter as a separate legal personalities for creating or issuing share and trading to the public through initial public offering (NBE, 2017). However, generally there is no stock market (secondary stock market) in Ethiopia to transact (trade) farther the ownership right between investors after they purchase from initial public offering (NBE, 2017). So the basic aspires of this research was to make inquiries how the ownership rights (shares) can be transferred from one security holders to the other in the absence of secondary stock market in Ethiopia along with its related challenges and benefits.

1.2 Statement of the problem

It is habitual to set aside stock markets in to two types as primary and secondary market. When new securities are issued and traded for the first time it is called primary market, in addition to other purpose the proceeds from the sale of new securities on primary markets are used to finance real investment on physical structures like plant, equipment and inventories etc. It is that in primary markets those financial resources are actually mobilized for capital formation purposes. According to Aggarwal, (1999) after securities are issued and purchased in primary market, secondary market provides the medium for resale of these securities. Secondary markets may takes place plainly the securities in the form of either trough organized stock exchanges or through over- the counter markets. Organized stock exchanges are physical market places where securities are traded by open outcry or as in more modern exchanges by entering offers or bids in to computer screens (Christiansen and koldertsova, 2008). Only the securities of companies meeting the listing requirements of a given stock exchanges could be traded on those exchanges. All other securities particularly those belonging to smaller companies and to companies’ short track records are sold and purchased on over-the counter markets (Abu, n.d).

Even if the transactions in secondary stock markets do not necessarily lead to any addition in real investment or capital formations. Secondary stock markets are very essential for successful operations of primary markets whereby resources are actually mobilized for capital formation purpose. However, this will be well-exercised with the existence of stock market (secondary stock market) in countries having efficient and effective developed stock markets (both primary and secondary stock market). The existence of efficient secondary stock market mean that financial assets or securities could eagerly converted in to cash when holders want to do so like New York stock exchange in USA, Japan stock exchange in Japan, London stock exchange in UK, Australian stock exchange in Australia, frank fort stock exchange, Amsterdam stock exchange in Netherland, Toronto stock exchange in Canada, Paris stock exchange in France… (NYSE, 2017).

While when we see this in Ethiopian context it is almost uncommon, since there is no secondary stock market in the country (Ruecker, 2011). While many researches were done regarding the opportunities and challenges of establishing stock market in Ethiopia by Tiruneh (2010), readiness of Ethiopia to Institute a Stock Exchange Market by Alemneh (2015), establishing secondary stock market in Ethiopia benefits and cost study by Letenah (2013) and the like by adopting descriptive methods of research approach and purposive methods of company selections for data analysis according to their respective interest. And all of the above researcher conclude that it is necessary and time to establish stock market in Ethiopia at the movement to elevate the emerging economic growth.

Nevertheless, there were hardly any research study was done regarding how ownership rights (shares) can be transacted between stock investors in Ethiopia in the absence of secondary stock market in the country along with its related aspects (like challenges and benefits). This is because of the fact that as secondary stock market provides opportunities for stockholders like liquidity, marketability, accessibility of information’s about stock market, determinations of the stock market value (prices) of shares and others. Accordingly transferring of shares in the absence of (secondary stock market) or stock market may create challenges in those matters. And if any benefits that stockholder may be able to enjoy by transferring ownership rights without secondary stock market. Due to, the above stated real gap the main aspires of this research study was to assess what is the existing share transfer mechanism (option) in private banking companies in the absence of secondary stock market in Ethiopia and what was the major challenges and benefits for shareholders when shares transferred from one security holder to other security investors (any other individual) by answering the projected research questions.

1.3 Objectives of the study

1.3.1. General Objective

The overall aim or the general objective of this study was to assess what is the existing share transfer mechanism in the private banking companies in the absence of secondary stock market in Ethiopia along with its related challenges and benefits.

1.3.2 Specific Objectives

In order to achieve the general objective of this study as it mentioned in the above the researcher frame the following specific research objectives.

- To assess how ownership rights (shares) can be transferred between investors in private banking companies in the absence of secondary stock market in Ethiopia.
- To assess what the private banking companies did to assist their shareholders to make ownership rights transferable in the absence of secondary stock market in Ethiopia.
- To assess what are the related challenges and benefits with the existing share transfer mechanism.
- To assess how the absence of secondary stock market in Ethiopia affect the transferability of shares in the private banking companies.

1.4 Research questions

Since this research is descriptive research in which it laid down its major concern on describing, what is the existing (tradition) or mechanism to transfer ownership right in (PBC) in the absence of secondary stock market in Ethiopia? So in order to achieve the specific objectives of this study the researcher framed the following research questions to guide the topic of the study by the right direction.

RQ1: What options’ are there to transfer ownership rights in private banking companies in the absence of secondary stock market in Ethiopia?

RQ2: How the private banking companies help their shareholders to make ownership rights transferrable in the absence of stock market in Ethiopia?

RQ3: What are the related challenges and benefits with the existing share transfer mechanism in private banking companies?

RQ4: How the absences of secondary stock market in Ethiopia affect the transferability of ownership rights in private banking companies?

1.5 scope of the study

This study were confined only to the opinions of share transfer department employees, directors and conveniently selected shareholders of the twelve selected private Banking companies (namely Awash bank, Addis international bank, Abay bank, Berhan bank, Debub global bank, Dashen bank, Oromia international bank, Cooperative Bank of Oromia, Lion international bank, Wegagen bank and Enat bank) which operated as a share companies in Ethiopia which located in Addis Ababa. The PBC were purposively considered because of their convenience for the researcher to obtain the required data for the study.

1.6 Limitations of the study

Like any other study, this study has its own limitations. The main limitation of this study was that first the refusal (unwillingness) of some banks to deliver the required data, second the perceptions (understanding) of the share department employees, directors and shareholders of the selected banks about the study area, which was selected for the purpose of the study. As such individuals‟ perceptions are not measured precisely to evaluate the underlying reality that they are supposed to represent about the subject matters and third the absence of tangible secondary data in relation to this issue in the banks to support the outputs of the primary data by secondary data were the major limitations of this study.

1.7 Significance of the study

First this study helps the researcher to increase his knowledge and analytical skill in the area of financial market particularly in the secondary stock market. Secondly in addition to this paper help the researcher to fulfill his obligation for the partial fulfillment of one of the requirements to hold Masters of Science Degree in Accounting and Finance from wolaita Sodo University.

Thirdly the study may also provide information to existing shareholders and prospective investors in corporate business area of Ethiopia about transferability shares, how shares can be transferred between investors in the absence of secondary stock market in the country. Fourth the study in discussion area of this topic is very rare in Ethiopia. Therefore, the paper could be also used as a method of obtaining information for other interested researchers whom want to conduct their research in this study area in Ethiopia, by taking wider area on this topic of study or in any case who are interested in the area of this study.

1.8 Organization of the paper

The research paper of this study was constricted by five chapters. The first chapter was consists the introductory part of the research, which includes background, statement of the problem, objectives, scope, limitation, significance and organization of the study. The second chapter was consists the review of related literature which is related to the study area of this paper that includes both theoretical review literature and an empirical reviews from the past study of similar study that also help the researcher to acquire brain- storming knowledge’s to understand the research area (the study area) and to become capable of answering the research questions of this study. The third chapter was consist of methodology of the study, which includes research design, population descriptions, sampling design and size, source and types of data used, data instrument used ,data collection techniques, data collection procedures, and data analysis method used. The fourth chapter was consists the presentation, analysis and interpretations of collected data and finally the fifth chapter was consists the summary, conclusion and recommendation part of the finding of the paper.

CHAPTER TWO

REVIEWS OF RELATED LITERATURE ON THE STUDY AREA

This chapter generally presents the reviews of literature on the study area by two major sections. The first section presents the theoretical review literatures which focus on the feature of financial system and its role in the economy, by describing different types of financial market and their respective roles in the financial system, stock market and the roles of stock market in the financial system and participants of stock market and roles of stock market participants that played in the stock market in the first section. And an empirical evidence of stock market in the international arena, in Africa and the situation of Ethiopia also reviewed in the second section.

2.1 Theoretical Review Literature

2.1.1 Introduction to the financial system

Finance may be defined as an art and the science of managing money. Almost all individuals and organizations earn or raise money and spend or invest money. Finance is paying attention with the process, institutions, markets, and instruments involved in the transfer of money between individuals, businesses and governments (Gitman, 2006).

What is financial system? The financial system is defined as the set of markets, individuals, laws, regulation, legal guidelines, polices, systems, conventions, techniques and institutions through which bonds, stocks, and other securities are traded, interest rates are determined and financial services are provided and delivered (games,1999) as cited in Gashu (2010). The principal task of the financial system is to transfer scarce loan able funds from those who save (Surplus spending units /providers of funds/agents whose excess of income over their expenditure creates a financial surplus) to those who borrow (deficit spending units or seekers of funds or who consume/invest further than their current income) to buy goods and services and to make investments so that the economy can raise and increase the standard of living enjoyed by the people (Brigham, 2008). Economic activity and growth are deeply facilitated by the presences of a financial system developed in terms of the efficiency of the market in mobilizing savings and allocating them among rivaling users (Machiraju, 2008).

The financial system may be regarded as comprising of three principal components financial institutions, financial markets and financial assets. From those of the three component two of them mainly the financial market were elaborated below deeply hence it is the major concern for this study, but as an introduction the financial institutions carry out the role of intermediaries (middleman) (e.g. Banks), dealer (e.g. funding bank) and agent (stock broker), financial Markets offer an ordered and often regulate and shape the introduction, sale and switching of financial assets from one person to others (Gitman, 2006) and the financial assets are the medium by which the value of financial transactions within the financial system is recognized (e.g. bonds, Treasury bill, promissory notes, debentures, shares (Abu, n.d). Therefore, from the respective paragraphs anyone can understand that the financial system ascertain both the cost of credit (interest rate) and the amount of credit available to pay for millions of varieties of goods and services that we acquire daily. Similarly important, what happens in this system has an influential impact on the health of the entire economy of once Nations and also provides a road (mechanism) to exchange ownership rights between investors.

2.1.2 The roles of Financial System in the Economy

What are the basic roles of financial system in a given economy? As the financial system consists of institutional units and markets that act together normally in a complex manner for the function of mobilizing funds for investment and providing services, including payment systems for the financing of commercial activities’.

To better understand the role played by the financial system in our day today life let us we begin by examining its positions within in the economy. According to Rogers (2008) cited in the theory’ of Keynes the economic model of two sectors circular flow when he introduces two Sectors three markets which was the second version of the circular flow of this model adds the financial markets to the basics of this model and this addition illustrates how saving is diverted from the household sector to the business sector to finance investment expenditures that clearly show the role of financial market in the economy. Meaning when workers receive extra income than they spend on the purchases of goods and services; they are able to create savings. Savings are the part of a person’s disposable income that is retained or invested for use in the future. Household savings can become financial capital if the money is borrowed by a business firm. For example, money deposited by households in a bank savings account might be loaned by the banks to a business that needs to borrow funds to build a new factory or purchase new equipment. When this occurs, the business firm pays interest to the bank for the borrowed funds. Interest is a rate of return that represents return from the borrower or receiver of funds to the lender or depositor of the funds. The bank in return pays interest to the householders for the funds deposited in the savings accounts. Consequently, other transaction that occurs in resource markets is the supply of financial capital by households in exchange for interest income. The three-sector, three-market circular flow model also highlights the role played by the financial system by introducing the government sector in to this model.

2.1.3 The Financial Institutions and their roles in the Financial System

What mean by financial institutions? What are the main roles of financial institution in the financial system? Financial institutions generally in broad sense can be categorized as private (shareholder-owned) or public (government –owned) organizations that broadly act as a channel between savers and borrowers of funds or suppliers and consumers of capitals (Brigham, 2008). In the other way the two main types of financial institutions (with increasingly blurred dividing line) are:(1) depository banks and credit unions which pay interest on deposits from the interest earned on the loans, and (2) non depository institutions like, insurance and mutual funds (unit trust) which collect funds by selling policy or shares (units) to the public and provide return in the form of periodic benefits and profit payout (www.businessdictionary.com/).

Financial institutions are those organizations, which are involved in providing various types of financial services to their customers. And the financial institutions are under control and supervision of the rules and regulations delineated by government authority (Aderaw, 2016).

What are they? these institutions includes Banks, Stock Brokerage Firms, Non Banking Financial Institutions, Building Societies, Asset Management Firms, Credit and Insurance Companies. Financial institutions deal with various financial activities associated with bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirement planning, investment, portfolio management, and many other types of related functions. Many financial institutions play the role of a financial intermediary. That means they help to connect borrowers and lenders of funds anonymous (2002).

What are their roles in the financial system; financial institutions granted that manufacture loans out of money which people lend, what else can we say about what they do? As a general role, the roles of financial institutions within the system is principally to intermediate between those that provide funds and those that need funds and typically involves transforming and managing risk by the use of currency and financial assets (Abu, n.d)).

Brigham (2008) also elaborated that intermediation means acting as a go-between two parties. The parties here are usually called lenders and borrowers or sometimes surplus sectors or units and deficit sectors. As a general rule what financial intermediaries do is to create assets for savers and liabilities for borrowers which are more attractive to each than would be the case if the parties have to deal with each other directly.

From this anyone can understand that the financial institutions play a great role in the financial system by transferring money or funds to various tiers of the economy and thus play a significant role in acting upon the domestic and the international economic scenario. For carrying out their business operations, financial institutions implement different types of economic models. They assist their clients and investors to maximize their profits by rendering appropriate guidance. Financial institutions also impart a wide range of educational programs to educate the investors on the fundamentals of investment and also regarding the valuation of stock, bonds, assets, foreign exchanges, and commodities.

2.1.4 Financial market in the financial system

Financial markets are the innermost heart of the financial system that decide the quantity of credit score available, attract saving and placing hobby fee and security charge. According the reserve Bank of Australia (www.rba.gov.au/Glossary/text-only.asp), financial markets are defines as “a generic term for the markets in which financial instruments are traded. Financial instruments have no intrinsic value by themselves rather they represent a claim over real assets or a future income stream. The four major categories financial markets are the share or equity market, the fixed interest or bond market, foreign exchange market and the derivatives market.

Financial markets are one in which funds are transferred from those who have excess funds available to those who have shortage. Financial market like the bond and stock markets can be important in channeling funds from those who do not have productive use for them to those who can do this thereby resulting in economic efficiency (Gashu, 2010) cited in Miskin.

As per Brigham (2006) financial markets perform the essential economic function of channeling funds from households, firms, and governments that have saved surplus funds by spending less than their income to those that have a shortage of funds because they wish to spend more than their income. Who have saved and are lending funds, the lender-savers and those who must borrow funds to finance their spending the borrower-spenders. For this issue (Mishkin and Eakins, 2011) also explain that the principal lender-savers are households, and also business enterprises and the government (particularly state and local government), as well as foreigners and their governments sometimes also find themselves with excess funds and then they lend them out. The most important borrower-spenders are businesses and the government (particularly the federal government) but households and foreigners also borrow to finance their purchases of cars, furniture, and houses etc….

Financial markets and financial intermediaries carry out the task of channeling means from agents who have saved funds and want to let somebody use to agents who need funds and want to borrow in financial markets, liquidity is essential, because it allows investors to direct their portfolios and risks more efficiently, which tends to diminish the cost of borrowing. There are several dimensions to market liquidity, including tightness, depth, immediacy, and resilience. Tightness is a market’s ability to match supply and demand efficiently and can be measured by the bid-ask spread. Market depth relates to the ability of a market to absorb large trade volumes without a significant impact on prices and can be approximated by the amounts traded over a period of time (turnover) and quote sizes (Gashu, 2010) cited BIS, 2001a; BIS.

2.1.5 Types of financial markets

Financial markets are a market wherein financial properties (assets) are exchanged (traded). There are many ways to categorize financial markets, one approach is with the aid of the form of monetary claims which traded inside the market, debt market and equity markets, by means of the maturity of the claim which traded within the financial market for short- term instrument money market and for having extended period of maturity financial property (assets), the capital market. Financial markets can be also categorized based on the types of financial claims (securities) traded which may be newly issued, referred to as primary stock markets, and those for changing financial claims (securities) which were formerly issued, called secondary stock markets.

2.1.5.1 Debt versus equity market

The distinction between debt and equity market is by the types of financial assets or ownership for monetary claims which traded inside the market either debt or equity. How funds (moneys) raised by the company when they needs to finance their investment? To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the (IPO) Initial Public Offering (Anon, 2006). Let us see each of them in detail as follows.

A. Debt market

Debt market is financial market in which debt financial instruments are traded. A security (also called a financial instrument) is a claim on the issuer’s future income or assets (any financial claim or piece of property that is subject to ownership). A bond is a debt security that promises to make payments periodically for a specified period of time. The most common method is to finance fund requirement is by issuing a debt instrument, such as a bond or a mortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made. The maturity of a debt instrument is the number of years (term) until that instrument’s expiration date. A debt instrument is short-term if its maturity is less than a year and long-term, if its maturity is 10 years or longer. Debt instruments with a maturity between one and 10 years are said to be intermediate-term (Mishkin and Eakins, 2011).

Debt instrument is a contractual agreement by the issuer of the instrument (the borrower) to pay the holder of the instrument (the holder) fixed dollar amounts (interest and principal payments) at regular intervals until a specified date (maturity date) when a final payment is made. Examples: Government and corporate bonds. Equity is a contractual agreement representing claims to a share in the income and assets of a business. Example: corporate stock may pay regular dividends. Have no maturity date; hence are considered long-term securities. Since equity holders own the firm, they are entitled to elect members of the firm’s board of directors and vote on major issues concerning how the firm is managed (Gashu, 2010) cited from anonymous(n.d)

Generally bond market is the market in which longer-term debt instruments issued by governments and financial and nonfinancial corporations. The bond market allows a borrower to obtain long-term funds through the issuance of debt securities, while providing investors with an opportunity to purchase and sell these securities.

B. Equity market

As per Brigham (2006) equity markets are financial market in which equity securities or ownership rights are traded .The second method of raising funds is by issuing equities, such as common stock, which are claims to share in the net income (income after expenses and taxes) and the assets of a business. If you own one share of common stock in a company that has issued one million shares, you are entitled to 1 one-millionth of the firm’s net income and one-millionth of the firm’s assets. Equities often make periodic payments (dividends) to their holders and are considered long-term securities because they have no maturity date. In addition, owning stock means that you own a portion of the firm and thus have the right to vote on issues important to the firm and to elect its directors.

The main disadvantage of owning a corporation’s equities rather than its debt is that an equity holder is a residual claimant; that the corporation must pay all its debt holders before it pays to its equity holders. The advantage of holding equities is that equity holder’s benefit directly from any increases in the corporation’s profitability or asset value because equities confer ownership rights on the equity holders. Debt holders do not share in this benefit, because their dollar payments are fixed (Mishkin and Eakins, 2011).

(Brigham, 2008) explained that at this juncture, it is also vital to differentiate bond and stock. Bond is a security instrument which is used either by the government or any other corporation to raise funds in the bond market. Unlike stock which as indicated before is an equity instrument, bond is a debt security evidencing that a promise has been made by a government such as Treasury Bills (T-Bills) or by corporation such as debenture to pay a specified amount of money in recognition of a loan to the business. (Jetu, 2017) also elaborated that like stock, a bond is another way of obtaining funds but this time “representing funds borrowed by the corporation or the government from the holder of the debt obligation”. It should be noted that both stock markets and bond markets are categories of capital market. Like stock market, bond market helps bond holders to transfer their bond to third party when they want to sell it in the secondary market or use it as collateral to get loan from banks. In brief, a stock market is an open market place which provides facilities for stock brokers, investors and corporations to trade in stocks. Stock markets generally provide the means by which companies raise capital to start new business or expand the existing business by offering new stocks to the public. It also provides a trading facility for investors to sell their share ownership in corporations. Unlike the bond market, stock market provides an opportunity for companies to finance their business through equity investment.

From this anyone can understand that in general context equity securities represent ownership in a business firm. They are claims against the firm's profits and proceeds from the sale of its assets upon liquidation. They usually include common stock and preferred stock. Business ventures need capital or resources for their successful operation and maintenance. Equity financing and debt financing are the normal two options available for this purpose. Capital is important for business. However no less important is the means for raising it. This is because capital raised through different means entails imposition of different conditions on the operation of the business. It is up to the management to decide which course of action would be followed after conducting a well-researched cost benefit analysis.

2.1.5.2 Money market versus capital market

Another way of distinguishing between markets is on the basis of the maturity of the securities traded in each market. The money market is a financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded; the capital market is the market in which longer term debt (generally with original maturity of one year or greater) and equity instruments are traded. As per Gitman (2006) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. And Short-term securities have smaller fluctuations in prices than long-term securities, making them safer investments. As a result, corporations and banks actively use the money market to earn interest on surplus funds that they expect to have only temporarily. Capital market securities, such as stocks and long-term bonds, are often held by financial intermediaries such as insurance companies and pension funds, which have little uncertainty about the amount of funds they will have available in the future (Mishkin and Eakins, 2011)

A. Money market

According to games (1999) as cited in Gashu 2010 the term money market is actually a misnomer. Because the money-currency is not traded in the money markets, rather the securities that do trade there are short-term and highly liquid and they are close to being money. Money market securities, which are discussed in detail in this chapter, have three basic characteristics in common. They are usually sold in large denominations, they have low default risk and they mature within one year or less from their original issue date. Most money market instruments mature within less than 120 days. In the same Mishkin and Eakins (2011) also explain that money market transactions do not take place in any one particular location or building instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic money market securities usually have an active secondary market. This means that after the security has been sold initially, it is relatively easy to find buyers who will purchase it in the future. An active secondary market makes money market securities very flexible instruments to use to fill short-term financial needs

B. Capital market

Firms that issue capital securities and the investors who buy them have very different motivations than those who operate in the money markets. Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises. By contrast, firms and individuals use the capital markets for long term investments. Capital markets are markets that trade equity (stocks) and debt (bonds) instruments with maturities of more than one year. The major suppliers of capital market securities (or users of funds) are corporations and governments. Households are the major suppliers of funds for these securities (Brigham, 2008).

As per Mishkin and Eakins (2011) the primary issuers of capital market securities are federal, local governments and corporations. The federal government issues long-term notes and bonds to fund the national debt. State and municipal governments also issue long-term notes and bonds to finance capital projects, such as school and prison construction. Governments never issue stock because they cannot sell ownership claims. Corporations issue both bonds and stock. One of the most difficult decisions a firm faces can be whether it should finance its growth with debt or equity. The distribution of a firm’s capital between debt and equity is its capital structure. Corporations may enter the capital markets because they do not have sufficient capital to fund their investment opportunities. Alternatively, firms may choose to enter the capital markets because they want to preserve their capital to protect against unexpected needs. In either case, the availability of efficiently functioning capital markets is crucial to the continued health of the business sector. Capital market trading occurs in either the primary market or the secondary market.

2.1.6 Stock market

This is our focus area for this study and it was elaborated in detial? Stock markets provide a platform for trading to occur between buyers and sellers. A security’s price is determined based on the market process. Market makers can provide many different services and facilitate trading. The service provided by market makers depends on the structure of the market. A market maker sometimes acts as a broker in which case their role is to bring buyers and sellers together. Another important role of a market maker is to provide liquidity to the market particularly in situations when the market for a stock does not clear automatically at one price (Aggarwal, 1999)

According to Jetu (2017), the term stock can be defined as “the capital or principal fund raised by a corporation through subscribers’ contributions or the sale of shares”. Stock represents a share of ownership in a corporation. By and large, such kinds of stocks could be identified as security representing equity claims on the earnings and assets of the corporation. In this comment, the term stock is used interchangeably with the term share. Stocks are generally traded in stock market.

As per Hashamuddin (2016), Stock market refers to capital market in which stocks of corporations are sold to investors. In simple terms, it is a market place where equity interests are exchanged either at par value, premium value or for less than the par value – also called discount stock. Thus stock market allows stockholders (shareholders) to transfer to another investor when they want to sale their stocks (Tikikile, 2011). It should be noted that stocks could be sold and bought in primary capital market. In primary markets, new business can start by obtaining funds directly from households in which new stocks are sold to investors via the underwriting. The selling of common stock to the public through Initial Public Offering (IPO) in the primary market is an instance whereby widely held share companies under formation offer new shares to the investors (Jetu, 2017).

Trading of the above mentioned stocks (ownership rights) and debt securities is said to be stock market through different mechanism. Literally billions of shares of stock are sold each business day in the United States. The orderly flow of information, stock ownership, and funds through the stock markets is a critical feature of well-developed and efficient markets. This efficiency encourages investors to buy stocks and to provide equity capital to businesses with valuable growth opportunities. We traditionally discuss stocks as trading on either an organized exchange or over the counter. Recently, this distinction is blurring as electronic trading grows in both volume and influence (Mishkin and Eakins, 2011).

Accourding to Ahferom (2011) The stock market is also defines as an organized and regulated financial markets where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and supply. Stock exchanges basically serve as primary markets where corporations, governments, municipalities, and other incorporated bodies can raise capital by channeling savings of the investors into productive ventures; and secondary markets where investors can sell their securities to other investors for cash, thus reducing the risk of investment and maintaining liquidity in the system. Stock exchanges impose stringent rules, listing requirements, and statutory requirements that are binding on all listed and trading parties (Alemneh, 2015). Likewise, Investopedia.com, defines a stock market as a 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. Slice of ownership in the company.

Stock market can be categorized as primary stock markets and secondary stock markets. Primary stock markets are markets in which primarily issued securities, like common stock, debt securities, like bond, short term securities, like commercial paper, Treasury bill etc….are traded through initial public offering (IPO) to the public or through private placement for potential investors. While subsequent sale (transfer) of those securities in the stock market between investors are considered as secondary stock markets (Ruecker, 2011).

2.1.6.1 Primary versus secondary stock market

It is also customary to divided stock markets in to two categories as primary and secondary stock markets. According to Andriansyah and Messinis (n.d), when new securities are issued, they are traded for the first time in what we call primary markets. In addition to other purposes, the proceeds from the sale of new securities on primary markets are used to finance real investment in physical structure, plant and equipment, and inventories. It is thus in primary markets that financial resources are actually mobilized for capital formations. After securities are issued and purchased in primary market secondary market provide the medium for resale of these securities. Secondary markets may take the form of either organized stock exchange or what are called over the counter markets. Organized stock exchanges are physical market places where securities are traded by open outcry or as in more modern exchanges by entering offers or bids in to computer screens. Only the securities of companies meeting the requirements of a given stock exchanges could be traded in those exchanges. All other securities particularly those belonging to smaller companies and companies with short track records are sold and purchased on over- the counter markets anonymous (n.d).

Accourding to Mauer and Senbet (1992), generally secondary markets serve two major functions. First, they make it easier to sell the financial instruments in order to raise cash that is they make the financial instrument liquid. The increased liquidity of these instruments then makes them more desirable and thus easier for the issuing firm to sale them in the primary market. Second, they determine the price of security that the issuing firm sells in the primary market. The firm that buy securities in the primary market will pay the issuing corporation only the price they think the secondary market will set for this security: the higher the security price in the secondary market, the higher will be the price that an issuing firm will receive for its security in the primary market and hence, the grater the amount of capital it can raise. The state of the secondary market is therefore the most relevant to the corporation issuing securities.

2.7 Stock exchanges

What is stock exchange? The stock exchanges where the stocks are listed and traded are the entities specialized in the business of bringing buyers and sellers of stocks and securities together. The buyers and sellers of stocks are none other than the participants of the stock market. They range from small individual stock investors to large hedge fund traders who may be situated anywhere in the world. Their business is said to be accomplished when a professional at a stock exchange executes an order for such business. Stock Exchanges are an organized marketplace, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as an agent for their customers or as principals for their own accounts (Kaur, (2014).

Organized and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and supply. Stock exchanges basically serve as (1) primary markets where corporations, governments, municipalities, and other incorporated bodies can raise capital by channeling savings of the investors into productive ventures; and (2) secondary markets where investors can sell their securities to other investors for cash, thus reducing the risk of investment and maintaining liquidity in the system.

As per information from www.newyurkstockexchange.com, stock exchanges impose stringent rules, listing requirements, and statutory requirements that are binding on all listed and trading parties. Trades in the older exchanges are conducted on the floor (called the 'trading floor') of the exchange itself, by shouting orders and instructions (called open outcry system). On modern exchanges, trades are conducted over telephone or online. Almost all exchanges are 'auction exchanges' where buyers enter competitive bids and sellers enter competitive orders through a trading day. Some European exchanges, however, use 'periodic auction' method in which round-robin calls are made once a trading day. The first stock exchange was opened in Amsterdam in 1602; the three largest exchanges in the world today are the following in their decreasing order New York Stock Exchange (NYSE) in America , London Stock Exchange (LSE) in England and the Tokyo Stock Exchange (TSE) in Japan, also called stock markets see also exchange( www.businessdictionary.com/definition/stock-exchange).

Security exchange, once the stocks have been purchased in the IPO, the institutions may want to resell them. In fact, most sales of stock take place after the IPO, by two different kinds of markets. Securities can be traded either by listed in a stock exchange or sold in an over-the counter market. When you buy the stocks of listed companies from the New York stock exchange (NYSE) typically you would talk to a stockbroker at a brokerage firm. Brokerage firms are companies that specialize in handling purchases and sales of stock, along with offering financial advice, and have people on the floor of the exchange. You would place your order with a broker who would relay the order to a floor broker (someone who buys and sells on the trading floor). The floor broker would buy the stock from another floor broker, executing a sell order from another individual (Gashu, 2010) cited in James.

2.2 EMPIRICAL REVIEWS

2.2.1 Overview of the global stock exchange markets

According to Alemneh (2015) cited the world development indicator of the World Bank, the United States of America has the biggest stock market measured in terms of their market capitalization, followed by China, Japan and UK. The only representation Africa has in the top twenty stock market performers is South Africa, which is in seventeenth place. The whole market capitalization in the stock markets arena is now really worth further than double it changed from its positions thirteen years ago. And a variety of that development is coming from Asia’s so-called up-and-coming markets.

The full price in the arenas of stock markets by 2015 has risen 133 percent when you compared to that of 2003. current stock price improved by means of the range of stocks great – that is, market capitalization – for the whole global stands at US sixty five point six trillion, compared to US$28.1 trillion 13 years ago. The U.S. has – in absolute phrases – accounted for a lot of that increment, even though U.S. markets are up (simplest) 87 percentages growth. Other “developed” markets, like the U.K., France, Canada and Japan have visible their total market capitalization grow over the equivalent duration, though lots much less than the sector as a whole. The UK, with the 5th-largest market cap nowadays, is up handiest 36 percent when you consider that 2003. France (range 7) has risen forty six percentages. Slow financial increase, European sclerosis and continuous union and currency problems have crippled European markets. ( http://www.businessinsider.com/ . In addition to this in the southern America, also the BOVESPA (A Bolsa do Brazil) in Brazil and Mexican Stock Exchange in Mexico are well known markets. In Africa, with the exception of the Johannesburg Stock exchange, the rest are very small by world standards (Alemneh, 2015)

Table (1): world top ten countries by stock market capitalizations comparison (2016-2003)

Abbildung in dieser Leseprobe nicht enthalten

Source: http://www.businessinsider.com/world-stock-market-capitalizations-2016-11

2.2.2. Overview of Stock Exchanges in Africa

According to Adnan (2013) the stock market turned into began with eight stock exchanges inside the whole of Africa before 1987. The number of stock exchanges burgeoned to 29 by the year 2012, representing 38 nations’ Capital markets With Seychelles stock exchange and Egyptian exchange as the contemporary and oldest African stock Markets set up in 2012 and 1883 respectively, it' would be an erroneous expression to conclude that African stock Exchanges has not visible widespread improvement overtime.

Even though the continent has shown outstanding economic growth since the last decade or so with continental annual common economic growth in excess of 5% for the past7 years, it is nonetheless the least evolved continent which had blended GDP in 2012 became US$2.2 trillion. This compares w ith the combined world GDP seventy two point nine US$ trillion and that of China US$ 8.2 trillion in 2012. The continent is still in lingering poverty, unemployment and customary economic underdevelopment. To maintain the modern level of economic growth and inspire both home and foreign investment inside the continent, African desires to expectedly enlarge, broaden and modernize its economic markets. Evidence from recent empirical economic research suggests that deeper, broader, and higher functioning of financial markets be capable of stimulating the financial growth (Alemneh, 2015) cited in World Bank, 2014.

As per the information from http://www.africastrictlybusiness.com, The Africa’s equity markets in general are small in comparison with those developed world, with highest of them capitalized under $50 billion and with fewer than 10 listings companies. Nonetheless, African stock markets are seeing quickly increase, and the more outstanding exchanges are used software structure to boost the performance, increase operating speed and to reduce cost of transactions. As of September 2013, the entire capitalization of Africa’s equity markets became around one point five trillion US$, up from 113 billion US $ in 1992 and $200 billion in 2007, South Africa is the biggest market, by $137 billion in market capitalization alone, followed by Nigeria with $114 billion. Rounding out the peak five in terms of capitalization in Africa are Morocco by $55 billion and Egypt, African oldest exchange, with US$ fifty54. South Africa, Egypt, Nigeria, Morocco and Kenya in companied account around (96%) of daily exchange in Africa, of which South Africa represents almost 75%. The list of some African stock exchanges along its market capitalization will be displayed on the net page.

But it is not up to the potential of the continent of Africa as it is the second populated from the world. In order to be benefited from stock market the government of African countries government and private sector needs to give attention for this sector. Hence In principle, the stock market is expected to accelerate economic growth by providing a boost to domestic savings and increasing the quantity and the quality of investment (Massele, 2013). The stock market is expected to encourage savings by providing individuals with an additional financial instrument that may better to meet their risk preferences and liquidity needs. Better savings mobilization may increase the savings rate (Ahferom, 2011). Stock markets also 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 (IMF.2009)

Table (2): list of some African stock exchanges along with their market capitalizations

Abbildung in dieser Leseprobe nicht enthalten

Source :“(http://www.africastrictlybusiness.com/lists/africas-equity-market-capitalization, 2017)

2.2.2.1 Transferability of ownership right (shares) in Africa

Stock market liquidity has been a catalyst for long-run growth in developing countries. Without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods of time. In contrast, a liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favorable terms. By facilitating longer-term, more profitable investments, a liquid market improves the allocation of capital and enhances prospects for long-term economic growth (Alemneh, 2015)

With the exceptions of South Africa stock exchange and some other countries which have more developed stock market like, Morocco, Algeria and Egypt other African stock markets are low in liquidity means that shares are not easily transferable whenever holders want to change their ownership right to cash. Despite the rapid development in African stock markets, more needs to be done to ensure enough liquidity in order to attract more investors. The reasons for the low liquidity in African stock markets include low display of primary market activities. Low liquidity in for example Ghana Stock Exchange could be attributed to the fact that only a few shareholders control a larger portion of the market and in some nations of Africa like Ethiopia even if there is accompany that issuing and established based on shares due to absence of stock market the liquidity of shares in those nations are very low (Adnan , 2013).

2.2.3 Stock market and exchange in Ethiopia

History shows that share market was existed in Ethiopia at the time of Emperor Haile selassie. Before the nationalization of private property by socialist government in 1975, there had existed an infant share market in Ethiopia at that time (Tiruneh, 2012). Ethiopia's brief record of stock exchange indicates that there were share and bond dealings by the sponsorship of the national Bank of Ethiopia (NBE) beginning in March 1965. Lately, the Addis Ababa share dealing group became installation to trade in shares and government bonds. The group began functioning with share dealings of 15 indexed businesses and four government bonds, and the numbers of listed businesses reached 17 in 1966(Alemneh, 2015).

The first ownership right or shares that were offered for public subscription was issued by accompany called Abattoirs in 1956.the year after issuing of shares by Abattoirs company different types of other company issued different amount of shares for public subscriptions. Some of these companies include but not limited to, Bottling Company of Ethiopia” (1957), Indo-Ethiopian Textiles (1958), HVA Ethiopia (1959), Societe du Tedji d’ Ethiopia, Saba and Tendaho plantations (1961) and Addis Ababa Bank (1963). The total in the main publicly issued shares for the period of 1959-1963 was approximately up to Birr sixty-one million. From this much around forty one million (67%) of the general) were invested by foreign companies the the largest part which was HVA of Holland anonymous (n.d).

But the majority of new share business (companies) in Ethiopia during that time was financed by both private and public sector through acquiring of their shares. Government agencies were constitute as the main domicile inventors, held shares in most of largest companies. But the private sectors also held a significance portion of shares of in these companies. The general objective of the public policy in long run was to the favor of private ownership of those companies (Abu, n.d).

While after the eradication of the Addis Ababa Share Dealing Group in 1974 by the military government ruling Ethiopia at that time, no capital market has been in place in Ethiopia. For more than forty years, Ethiopia has been trying to have its own financial market by the current government but didn’t succeed until know (www.nbe.gov .et). The need for financial markets, as the next step in the ongoing financial liberalization is gaining consensus among various stakeholders in the country. A number of efforts, notably by scholars from academia, Addis Ababa Chamber of Commerce and Sectoral Association (AACCSA) and National Bank of Ethiopia (NBE) are being made towards institutionalizing the financial market. Virtually all of the researchers in this issue came up with findings in favor of establishing financial markets in Ethiopia (Tiruneh, 2012).

After the change of the socialist government in 1991, attempts were made to re-establish stock exchange market in Ethiopia by interested parties like the Addis Ababa Chamber of Commerce and Sectoral Associations. The National Bank of Ethiopia also undertook a study on the Feasibility of Establishing of Securities Exchange Market in Ethiopia and also prepared a draft of securities and exchange proclamation which are awaiting government approval (Alemneh, 2015).

However, know a day despite the fact that the absence of stock market in the country different companies are established by issuing shares and trading those shares to the public at initial public offering via advertisement on bile board, radio, television, magazine, news paper etc. The basic motive of this research is to answer the transferability of those shares (ownership right) from primary holders to other investors in the country in the absence of stock market.

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