By Tsegamlak Solomon, Lincoln Ford & Sintayehu Abebe | Fri Jun 10 2022
Our take on developments in the investment ecosystems of East Africa.
The Ethiopian Securities Exchange (ESX) is Under Formation
Starting from the entry into force of the Capital Market Proclamation in July 2021, the government of Ethiopia has been taking the necessary steps to make the capital market operational. One of the cardinal steps to operationalize this is the establishment of a securities exchange. Therefore, on May 19, 2022, the government took this crucial move by signing a cooperation agreement for the establishment of the Ethiopian Security Exchange (ESX). The Ministry of Finance (MoF), Ethiopian Investment Holding (EIH) and Financial Sector Deepening Africa (FSD Africa) have signed an agreement for establishing the ESX. According to the CEO of FSD Africa, the ESX will be operational within the next two years. When the ESX comes into effect, financial institutions and key economic players will be listed, which is expected to widen the investment opportunities for potential investors in Ethiopia. In addition, this is expected to have a positive impact on the country’s development by facilitating access to finance for businesses, whose source of finance has been limited to the banking sector for a long time.
Trade Registration and Licensing Activity Goes Fully Digital
According to the digital Ethiopia 2025 strategy, which was endorsed by the Council of Ministries on June 15, 2020, the government mentioned lack of E-governance as a reason for the country’s low rank on the Ease of Doing Business index. In order to avert this and other problems which are facing Ethiopia’s businesses, the government has listed initiatives that are undertaken in the digital Ethiopia 2025 strategy. These include digitizing government operations, government services and developing better service delivery channels.
As part of digitizing government operations and services, the Ministry of Trade and Regional Integration (MoTRI) has introduced an Online Trade Registration and Licensing System (OTRLS) this month. Clients of MoTRI and Addis Ababa Trade Bureaus are now not required to go to government offices to get the services previously provided by appearing in person at the above mentioned respective trade bureaus. Effective May 2022, MoTRI has stopped all in-person licensing activities and has shifted everything online. However, the online system has its flaws. From our experience, we have noticed that the system is not user friendly. In addition, we have realized that the personnel at MoTRI who handle the system itself are not accustomed to how it operates, which still causes some delays and frustration in the business community.
Foreign Mobile Money Operators Allowed to Operate in Ethiopia ahead of Revisions to the Banking Proclamation
Following the government’s decision to open up the financial sector to foreign players, the National Bank of Ethiopia (NBE) indicated that it is working on building the legal framework that liberalizes the sector. Similarly, NBE announced the government’s decision to allow foreign mobile money operators or other digital financial services to operate in Ethiopia ahead of revisions to the banking proclamation. This decision is part of the series of measures being taken by the government to liberalize the market. This is also related to another recent government decision – opening the telecom sector for foreign investors. Allowing mobile money will be a great advantage for Safaricom (who will be opening operations in Ethiopia this year) in its competition with Ethio Telecom, which recently announced Ethio-birr and gained millions of subscribers within a short period of time.
Litigation Continues in Bitature Case - A Deterrent for Foreign Investors?
Vantage Mezzanine Fund II (Vantage), a South African investment fund, and Mr. Patrick Bitature (Bitature), a Ugandan local, continue a litigation battle in Uganda’s courts. Vantage was recently blocked by Ugandan courts from foreclosing on its investment in Bitature’s hotel/real estate business, Simba Group.
Vantage provided a $10M secured loan to Simba Group in 2014. Simba Group defaulted on the loan in 2017; Vantage agreed to restructure the loan, with payments coming due in 2019. By 2019, the company had still failed to repay anything on the loan, and Bitature filed suit, claiming that the loan was invalid, and alternatively that it was signed under duress, and thus his company did not have to repay the loan. This lawsuit was eventually dismissed as baseless, but the legal battle continued. Vantage tried to enforce its security over the shares in Simba Group in an effort to recoup its loan. Under Ugandan law, the share transfer has to be registered with the Uganda Registration Services Bureau (URSB). When Vantage attempted to register it, URSB refused (there is speculation that Bitature may have interfered with the registration). Vantage filed suit to compel URSB to act, and the court dismissed the claim on the basis that Vantage Mezzanine Fund II was not registered as a partnership in Uganda and thus lacked standing to sue in Uganda.
This ruling is significant for the international investment community – it calls into question the enforceability of foreign investments in the country and may harm Uganda’s reputation in the international investment world. Foreign investors want certainty and predictability from the laws and legal systems of the countries in which they invest. This case puts a question mark on whether government agencies and courts in Uganda will uphold and enforce foreign investments.
In the latest development, Vantage received the green light from a commercial court in Uganda to sue Bitature and his wife directly, as they were guarantors on the loan. Bitature moved to dismiss this suit and asked the court to order a temporary injunction preventing Vantage from bringing private legal action against the Bitatures. The court dismissed Bitature’s requests and, remarkably, the judge directed the Bitatures’ lawyer to personally pay the court costs for representing his clients unprofessionally and filing a baseless lawsuit. This is the latest in the ongoing struggle by Vantage to recoup its investment; time will tell whether Vantage can win its money back through private prosecution.
Rwandan Central Bank Creates Regulatory Sandbox for Testing Fintech Products
The Rwandan Central Bank has introduced a platform for testing innovative fintech products and services in a live environment. This platform will serve a vital role in assessing and managing risks that financial products and services providers may face, such as interoperability and cybersecurity. Previously, financial products did not need to come to such an environment before applying for licensing. However, starting from this month, the central bank will now use this platform to assess the marketability of certain innovative financial products before issuing licenses. This will help the central bank to issue new laws and regulations, or amend existing regulations, by witnessing how these products function in a real market rather than based on assumptions. The sandbox regulation is part of the government policy to support innovation and development in Rwanda and is designed specifically for financial products that are deemed innovative.
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