The Ethiopian Capital Market Authority (ECMA) has proposed a maximum compensation payment of 100,000 birr, roughly 640 US dollars, per investor in cases of default, fraud, or failure by market participants, as it finalises its draft Capital Market Compensation Fund Regulation for submission to the Ministry of Justice.

The authority held a public consultation on the draft rules on Thursday, attracting market players, although participation was limited.

Briefing participants, Sirak Solomon, senior legal adviser at ECMA, said the compensation fund was originally set at around 700 US dollars four years ago, before Ethiopia liberalised its foreign exchange market. The move triggered a sharp depreciation of the birr, eroding its purchasing power by more than 150 percent over roughly fifteen months. Prior to mid-2024, the currency traded at around 57 birr per US dollar under the previous fixed regime.

Sirak said the current dollar-denominated compensation is 1,000 US dollars, though based on the official birr ceiling the amount is roughly 640 US dollars. He added the figure had been adjusted in response to the birr’s depreciation.

“We followed international practice from countries such as Kenya and Nigeria, where compensation amounts are around 1,500 US dollars and 250 US dollars, respectively,” Sirak said. “Nigeria, for instance, raised its threshold as its currency depreciated over time.”

After the regulation get a greenlight from the council of minister, the directive will be issued on the fair distribution of the compensation among market players based on their investment amount.

Sirak said the fund is designed to shield small investors and build confidence in Ethiopia’s fledgling capital market, which has so far listed only three companies. “Large investors can diversify their portfolios and are better equipped to manage risk and understand market dynamics,” he told Birrmetrics, when asked about the relatively modest maximum compensation. “Small investors, by contrast, face limited options and less capacity to spread risk, which makes protection through the compensation fund particularly important.”

Participants debated the fund’s financing model, with some arguing that the maximum compensation should be expressed as a percentage rather than a fixed amount, and others proposing it be sourced from transaction fees. “Investment varies widely across sectors, so a fixed ceiling may not reflect actual risk exposure,” said Eshetu, an independent consultant. “I would recommend setting it as a percentage instead.”

Mekdes Tesfaye, Head of Legal at the Authority said the mechanics of compensation will be spelled out in directives once the regulation is approved. She ruled out funding the scheme through transaction fees, noting that service providers will pay charges, and any additional fees would impose extra costs on investors.

Compensation is primarily triggered when a licensed service provider fails to meet its contractual obligations or loses its license, resulting in financial loss for the investor. However, the fund is not an automatic insurance for all; it specifically excludes sophisticated players like banks, insurance companies, and institutional investors, focusing its protection on retail investors. 

To receive a payout, an investor must demonstrate that they first attempted to recover their funds directly from the provider without success. The Authority is also tasked with proactively notifying the public when a provider fails, setting a six-month window for victims to file their claims

Beyond direct compensation for losses, the fund serves as a central repository for unclaimed dividends collected from public companies. These companies are required to transfer such funds along with detailed beneficiary information to the Authority, which then holds them in trust until the rightful owners come forward with proof of ownership. To further protect the market’s integrity, the regulation includes a whistleblower policy that rewards individuals who provide information leading to the recovery of fund assets. All financial activities of the fund are subject to strict record-keeping and annual audits to ensure transparency and accountability to the Board.

The draft regulation sets up a Capital Market Compensation Fund Administration Committee to oversee the fund’s operations. The Authority will define its detailed structure and duties through a separate directive. The Committee will advise on key decisions, including adjusting compensation limits, manage daily operations such as evaluating claims and determining payouts, oversee contributions from service providers, and implement policies to reward those who help recover fund assets.