Investment is defined as committing funds for a period of time in order to derive future payments that compensate for the time committed, expected inflation, and uncertainty. An investor has several investment alternatives including shares, bonds, bank deposits, mutual funds, life insurance, real estate, gold/silver, commodities, and derivatives. Shares represent ownership in a company and offer higher returns but also higher risk since prices fluctuate daily. Bonds are lower risk as they represent loans that pay fixed interest, but returns are also typically lower. Bank deposits provide liquidity but generally the lowest returns of the options.

1. Introduction to investment
Chapter –One

2. Definition
• Investment is the employment of funds with the aim of getting
return on it.
• investment means the use of money in the hope of making more
money.
• investment is the current commitment of dollars for a period of
time in order to derive future payments that will compensate the
investor for:
a. the time the funds are committed,
b. the expected rate of inflation during this time period, and
c. the uncertainty of the future payments.

3. • The “investor” can be an individual, a
government, a pension fund, or a corporation.
Similarly,
• this definition includes all types of
investments, including investments by
corporations in plant
• and equipment and investments by individuals
in stocks, bonds, commodities, or real estate

4. INVESTMENT ALTERNATIVES/FORMS
• An investor can select the best avenue after studying the
• merits and demerits of the following investment alternatives:
• 1. Shares
• 2. Debentures and Bonds
• 3. Bank Deposits
• 4. Post Office Savings
• 5. Money Market Instruments
• 6. Mutual Fund Schemes
• 7. Life Insurance Schemes
• 8. Real Estates
• 9. Gold-Silver
• 10. Derivative Instruments
• 11. Commodity Market (commodities)

5. SHARES:
• ‘The shares which are issued by companies are of two types i.e.common shares and
• Preference shares. Every company has share capital. The share capital of a company
is dividedinto number of equal parts and each of such part is known as a 'share'.
• A public limited company has to complete three stages. The first is registration. The
second is raising capital and the third is commencement of business.
• A public limited company issues shares to the public for raising capital. The first
public issue is known as Initial Public Offerings (IPO).
• Each share has a face value of birr 100, or 1000. In order to issue shares a
prospectus is prepared and it is got approved from concerned government body.
• These shares are listed with the stock exchange so that the shareholders can sale
these shares in the market. Investment in shares is more risky because the share
prices go on changing day by day. Today, the market is more 'volatile' means more
fluctuating. The share prices may go up or go down. If the stock market falls the
share prices will go down and the investor will lose money in the investment
However, the return on investment in shares is higher.
• The return on investment in shares is in the form of regular dividend, capital
appreciation,.

6. SHARES:
• There is also liquidity in this kind of investment. to increase their market reach or to
diversify or to purchase latest modern equipment. (the term investor here represents
retail investors, financial institutions, government, high net worth individuals, banks
etc).
• Shares constitute the ownership securities and are popular among the investing class.
• Investment in shares is risky as well as profitable.
• Transactions in shares take place in the primary and secondary markets.
• The purpose of a stock exchange is to facilitate the trading of securities between
buyers and sellers, thus providing a marketplace.
• Investing in equities is riskier and definitely demands more time than other
investments.
• There are two ways in which investment in equities can be made: i. through the
primary market (by applying for shares that are offered to the public) ii. Through
the secondary market

7. Bond
• Bond is a document issued by a company as an evidence of a debt. It is a certificate
issued by a company under its seal, acknowledging a debt due by it to its holders.
The term debenture includes debenture stock, bonds and any other
• A company can raise loans from the public by issue of debentures. The debenture
holder becomes the creditor of the company. The debenture holder gets interest on
the debenture which is fixed at the time of issue. The debentures are also issued to
the public just like issue of shares.
• However, there is a need for credit rating before issue of debentures or Bonds.
Bonds are issued by Government companies and the debentures are issued by the
Private sector companies.
• debentures are considered as secured loan. There is no much risk in the investment
in debentures as compared to shares. The return on debentures is also reasonable and
stable.
• The debentures are also listed with the stock exchanges and can be traded in the
stock market. However, the prices of debentures are not much volatile. The
debenture, being a loan, is redeemable at a certain period or maturity, otherwise it
can be irredeemable. The debentures can be convertible or nonconvertible. If a
debenture is convertible into shares at maturity, it is called convertible.
• The convertible debentures may be partly convertible or fully convertible.

8. Bond
• The method of raising long term funds through debentures is not popular in
Ethiopia. Bonds refer to debt instruments bearing interest on maturity. In simple
terms, organizations may borrow funds by issuing debt securities named bonds,
having a fixed maturity period (more than one year) and pay a specified rate of
interest (coupon rate) on the principal amount to the holders.
• Bonds have a maturity period of more than one year which differentiates it from
other debt securities like commercial papers, treasury bills and other money market
instruments. Debt instrument represents a contract whereby one party lends money
to another on pre-determined terms with regards to rate and periodicity of
interest, repayment of principal amount by the borrower to the lender.
• Most of the time, the term ‘bond’ is used for debt instruments issued by the
governments and public sector organizations and the term ‘debenture’ is used for
instruments issued by private corporate sector.

9. BANK DEPOSITS
• The deposits can be accepted from individuals, institutions and even
business enterprises, the business and profitability of banks depend on
deposit collection. For depositing money in the bank, an
investor/depositor has to open an account in a bank.
• Different types of deposit accounts are:
1. Current Account
2. Savings Bank Account
3. Fixed Deposit Account, and
4. Special Saving account.
• The rate of interest for Fixed Deposits (FD) differs from bank to bank.
Usually a bank FD is paid in lump sum on the date of maturity.
• This indicates the use of bank deposit as an avenue of investment by
investors.

10. MONEY MARKET INSTRUMENTS:
• Money market is a centre in which financial institutions join
together for the purpose of dealing in financial or monetary
assets, which may be of short term maturity. The short term
generally means a period up to one year and the term near
substitutes to money denotes any financial asset which may be
quickly converted into money with minimum transaction cost.
Thus, money market is a market for short term financial
instruments, maturity period of which is less than a year.
• The deals are over the counter. The numbers of players in the
market are limited. It is regulated by National Bank of Ethiopia.
• Money Market Instruments where Investors can invest are
Treasury bills, Certificate of Deposit, Commercial Paper,
Repurchase Options (Repo), Money Market Mutual Funds
(MMMFs).

11. MUTUAL FUNDS:
• Mutual fund is a financial intermediary which collects savings of the people
for secured and profitable investment.
• The main function of mutual fund is to mobilize the savings of the general
public and invest them in stock market securities.
• The entire income of mutual fund is distributed among the investors in
proportion to their investments- Expenses for managing the fund are charged
to the fund.
• These funds are managed by financial and professional experts. The savings
collected from small investors are invested in a safe, secured and profitable
manner. Therefore, it is said that mutual fund is a boon to the small investors.
• A mutual fund is formed by the coming together of a number of investors
who hand over their surplus funds to a professional organization to manage
their funds.
• The main function of mutual fund is to mobilize the savings of the general
public and invest them in stock market securities.

12. • LIFE INSURANCE POLICIES: Nothing is more important to a person than the feeling that
• their family is financially secure - at all times. “Life insurance is a contract whereby the insurer,
• in consideration of a premium paid either in a lumpsum or in periodical installments undertakes
• to pay an annuity or certain sum of money either on the death of the insured or on the expiry of a
• certain number of years, whichever is earlier.” The distribution system for life insurance
• products involves various intermediaries between the insurer and the insured. The different
• distribution channels used by insurance companies are, Agents, Brokers, Corporate Agents, Banc
• assurance. Private insurance companies have been exploring the various distribution channels
• available instead of concentrating on individual agents. Life insurance is a kind of Investment
• Avenue provides family protection to the investor as well as return on investment in the form of
• yearly bonus on the policy. The return on investment is reasonably low because of risk coverage
• and tax incentives. Though, the maturity period is longer the insurance policy can be
• surrendered or loan can be availed on the policy, therefore there is some sort of liquidity in this
• investment. Thus, investment in life insurance is a profitable investment and there is no risk in
• this investment. Life insurance covers the risk that exists in one's life. These risks may arise due
• to accident, illness or natural causes like fire, flood, and earthquake. Life insurance aims to
• protect the family of the life insured so that they may not suffer from financial consequences on
• the death or disability of the insured person.

13. • INVESTMENT IN REAL ESTATES: Investment in real estate includes properties like
• building, industrial land, plantations, farm houses, agricultural land near cities and flats or
• houses. Such properties attract the attention of affluent investors. It is an attractive, as well as
• profitable investment avenue today. A residential building represents the most attractive real
• estate property for majority of investors. The prices of real estate are increasing day by day. The
• land is limited on the earth but the population has been increasing. As the demand increases but
• the supply of land is limited, the prices tend to increase. Therefore, it is attractive investment
• which generates higher return during a short period of time. Types of properties are Residential
• property, Commercial property, and Agricultural land. Ownership of a residential house provides
• owned accommodation to the family and gives satisfaction to the family members. It acts as one
• useful family asset with saleable value. It is a long term investment. Investment in real estate
• provides capital appreciation of residential buildings, urban land and flats. It gives reasonable
• return on investment. There is a low risk but there is no liquidity. There are chances of capital
• appreciation also. The property can also be used as security for raising loans. There is a quick
• appreciation in the value of assets. There is a low liquidity in case of investment in real estates.
• The risk in the investment is also more as compared to investment in banks and mutual funds.
• The amount of investment is huge and therefore the benefits of diversification of investment are
• not available. In real estate profitability is available at the cost of liquidity.

14. • INVESTMENT IN GOLD AND SILVER: Gold and silver are the precious objects.
• Everybody likes gold and hence requires gold or silver. These two precious metals are used for
• making ornaments and also for investment of surplus funds over a long period of time. Some
• people buy these metals as an investment. The prices of gold and silver are also increasing
• continuously. The prices also depend upon demand and supply of gold. The supply has been
• increasing at low speed. However, the demand has been increasing very fast. Therefore, the
• prices also go on increasing. People use gold and silver at the time of marriages and other
• festivals. Apart from gold and silver, precious stones such as diamonds, rubies and pearls are
• also appealing for long term investment particularly among rich people. Gold and silver are
• useful as a store of wealth. They act as secret assets. The investment is highly liquid, which can
• be sold at any time. The market prices are continuously increasing. Therefore, the return on
• investment is also increasing. The investment is also safe and secured. There is a high degree of
• prestige value for gold and silver in the society. The benefit of capital appreciation is also

15. • DERIVATIVE INSTRUMENTS: A derivative is a product whose value is derived from
• the value of an underlying asset, index or reference rate. The underlying asset can be equity,
• forex, commodity or any other asset. For example, if the settlement price of a derivative is based
• on the stock price of a stock for e.g. Facebook which frequently changes on a daily basis, then
• the derivative risks are also changing on a daily basis. This means that derivative risks and
• positions must be monitored constantly. A derivative security can be defined as a security whose
• value depends on the values of other underlying variables.
• Derivatives are of four types, (1)
• Forward (2) Futures (3) Options and (4) Swaps. From the point of view of investors and portfolio
• managers, futures and options are the two most important financial derivatives. They are used
• for hedging and speculation. The difference between a share and derivative is that
• shares/securities are an asset while derivative instrument is a contract.

16. • COMMODITIES: A commodity may be defined as a product or material or any physical
• substance like food grains, processed products and agro-based products, metals or currencies,
• which investors can trade in the commodity market. One of the characteristics of a commodity is
• that its price is determined as a function of its market as a whole. Well-established physical
• commodities are actively traded in spot and derivative commodity market. Commodities actually
• offer immense potential to become a separate asset class for market-savvy investors, arbitragers
• and speculators. Retail investors, who claim to understand the equity market, may find
• commodity market quite tricky. But commodities are easy to understand as far as fundamentals
• of demand and supply are concerned. Retail investors should understand the risks and advantages
• of trading in commodity market before taking a leap.

17. INVESTMENT AND SPECULATION
• Investment and speculation are somewhat different and yet similar because
speculation requires an investment and investment are at least somewhat
speculative.
• Probably the best way to make a distinction between investment and speculation
is by considering the role of expectation.
• Investments are usually made with the expectation that a certain stream of income
or a certain price that has existed will not change in the future.
• Whereas speculation are usually based on the expectation that some change will
occur in future, there by resulting a return.
• An investment also can be distinguished from speculation by the time horizon of the
investor and often by the risk return characteristic of investment.
• A true investor is interested in a good and consistent rate of Return for a long period of
time. In contrast, the speculator seeks opportunities promising very large return earned
within a short period of time due to changing environment.
• Speculation involves a higher level of risk and a more uncertain expectation of returns,
which is not necessarily the case with investment.

18. •MAJOR INVESTOR IN SECURITIES
• They are generally classified in to two: Individual investors and
Institutional investors:
• Individual Investor: “
• An individual who purchases small amounts of securities for
themselves, as opposed to an institutional investor, also called as
Retail Investor or Small Investor.”
• Individuals invest to earn a return from savings due to their deferred
consumption.
• Individual investors are characterized by large in number, investible
resources are smaller, lacks extensive evaluation & analysis

19. Institutional investors:
• An institutional investor is an organization, rather than an
• individual, that invests on behalf of the organization's members.
• They are a large organization, such as a bank, pension fund,
insurance company, which makes substantial investments on the
stock exchange.
• Organization with surplus fund who engage in investment activities.
In contrast to the individual investors institutional
• investors are fewer in numbers, their investible resources are much
larger, and use professional approach in the investment decision
making process.
• There are generally six types of institutional investors: pension
funds, endowment funds, insurance companies, commercial banks,
mutual funds and hedge funds.

20. THE INVESTMENT PROCESS

21. Regulations and administration of
investments in Ethiopia
Chapter -Two

22. INVESTMENT PROCLAMATION
PROCLAMATION NO. 1180/2020

23. Objective
• to create an economic framework that fast-tracks the global competitiveness of the
National economy, increases export performance, generates more and better employment
opportunities, and facilitates sustainable and entwined linkage among various economic
sectors;
• it has become necessary to further increase and diversify foreign investment inflow to
accelerate inward transfer and diffusion of knowledge, skill, and technology
• it has become necessary to maximize linkages between foreign and domestic
investments, promote equitable distribution of investments among regions, and leverage
foreign capital to promote the competitiveness of domestic investors
• it has become essential to put in place a system of monitoring and supervision to ensure
that investments deliver on promised potentials stated in National Investment Objectives
and are operated in accordance with the law;
• WHEREAS the investment administration system has to be transparent, predictable, and
• efficient to increase investment attraction, retention, and expansion;
• WHEREAS, to these ends, it has become necessary to revise the existing law on
investment;

24. Definitions
• Investment: means expenditure of capital in cash or in
kind or in both by an investor to establish a new enterprise,
or to acquire, in whole or in part, or to expand or upgrade an
existing enterprise;
• “Enterprise” means an undertaking established for profit-
making
• Capital” means local or foreign currency, negotiable
instrument, machinery or equipment, building, working
capital, property right, intellectual property right, or other
tangible or intangible business assets;
• “Investor” means a Domestic or Foreign investor who has
invested capital in Ethiopia;

25. Definitions
• Domestic Investor” means any one of the following who
has invested capital in Ethiopia:
a) An Ethiopian National;
b) An Enterprise incorporated in Ethiopia and wholly owned
by Ethiopian National;
c) The Government;
d) a Public Enterprise;
e) A cooperative society established as per the relevant law

26. • Foreign Investor” means any one of the following
who has invested foreign capital in Ethiopia:

27. Investment Objectives
• The investment objective of the Federal Democratic Republic of Ethiopia is to
improve the living standard of the peoples of Ethiopia by realizing a rapid,
inclusive and sustainable economic and social development.
• The particulars of the objective include the following:
– To enhance the competitiveness of the national economy by promoting
investments in productive and enabling sectors;
– To create more and better employment opportunity for Ethiopians and
advance the transfer of knowledge, skills and technology required for the
development of the country;
– To increase foreign exchange earnings by encouraging the expansion in
volume, variety and quality of the country’s export products and services;
– To save foreign exchange through local production of import substitutes
– To augment the role of the private sector in the country’s economic
development;
– To exploit and develop natural, cultural, and other resources of the country;
– To create an integrated economy by strengthening inter-sectoral and foreign-
domestic investment linkages;

29. AREAS OF INVESTMENT, FORMS
OF
ENTERPRISE AND CAPITAL
REQUIREMENTS

30. Areas of Investment
• any investor may engage in any area of investment except where it is
contrary to law, moral, public health or security.

31. • Forms of Enterprise for Carrying out Investments
• 1/ Investments may be carried out in one of the following Enterprises:
• a) Sole proprietorship;
• b) Enterprise established in Ethiopia or abroad;
• c) Public Enterprise established in accordance with the relevant law;
• d) Cooperative society formed in accordance with the relevant law.
• 2/ Any investment made in the forms prescribed under Sub-article (1) of
this Article shall be
• registered in accordance with the Commercial Code of Ethiopia or other
applicable law.
• 3/ Any enterprise registered in Ethiopia having been established abroad
shall be governed by
• the Commercial Code of Ethiopia and other laws applicable to enterprises.

32. Minimum Capital Requirements for Foreign Investors
• Any foreign investor, to be allowed to invest under this Proclamation,
shall be required to allocate a minimum capital of USD 200,000.00
(two hundred thousand) for a single investment project.
• Notwithstanding the provision of Sub-article (1) of this Article, the
minimum capital required of a foreign investor jointly investing with a
domestic investor shall be USD 150,000.00 (one hundred fifty
thousand).
• Notwithstanding the provision of Sub-article (1) of this Article, the
minimum capital required of a foreign investor investing in
architectural or engineering works or related technical consultancy
services, technical testing and analysis or in publishing works shall be:
• a) USD 100,000.00 (one hundred thousand) if the investment is made
on his own;
• b) USD 50,000.00 (fifty thousand) if the investment is made jointly
with a domestic investor.

33. Minimum Capital Requirements for Foreign Investors
• The minimum capital requirement under this Article shall not apply
to:
• a) Foreign investor re-investing his profits or dividends generated
from his existing enterprise in any investment area open for foreign
investors;
• b) Persons elected as members of board of directors following the
change of a private limited company to share company; and
• c) A foreign investor buying the entirety of an existing enterprise
owned by a foreign investor or the shares therein.
• 5/ Any foreign investor bringing investment capital into the country
shall have such capital registered by the appropriate investment
organ with in one year and obtain a certificate of registration. The
appropriate investment organ shall send a copy of the certificate to
the National Bank of Ethiopia.

34. INVESTMENT PERMIT
• The following investors shall be required to obtain
investment permits:
• a) Foreign investors;
• b) Domestic and foreign investors investing jointly
• c) Domestic investors who, investing in areas eligible for
incentives, seek to be beneficiaries
• of such incentives; and
• e) An investor seeking to expand or upgrade an existing
investment, provided that the
• investment is eligible for incentives and the investor seeks
to be beneficiary of such
• incentives.

35. INVESTMENT PERMIT
• The following investors shall be required to obtain
investment permits:
• a) Foreign investors;
• b) Domestic and foreign investors investing jointly
• c) Domestic investors who, investing in areas eligible for
incentives, seek to be beneficiaries
• of such incentives; and
• e) An investor seeking to expand or upgrade an existing
investment, provided that the
• investment is eligible for incentives and the investor seeks
to be beneficiary of such
• incentives.

36. Renewal of Investment Permit
• An investment permit shall be renewed annually until the investor
commences marketing his products or services. There shall be no need
for renewal of investment permit after issuance of business license.
• An application for renewal of investment permit shall be submitted
within one month after the end of a period of one year for which the
permit was valid.
• 3/ An investment permit shall be revoked if an investor fails to
commence implementation of his project within two years of being
issued the permit or has delayed the completion of the project by two
years from the time that will be agreed with the appropriate
investment organ.

40. INVESTMENT ADMINISTRATION
ORGANS
• The Organs of investment administration shall comprise
the following:
1. The Ethiopian Investment Board;
2. The Ethiopian Investment Commission;
3. The Federal Government and Regional State
Administrations Investment Council; and
4. Investment administration Organs established pursuant
to Regional Laws

41. Ethiopian Investment Board
• The Board shall:
a. Supervise the implementation of this Proclamation and follow up activities of the
Commission;
b. Initiate Policies on matters pertaining to investments;
c. Recommend, as necessary, amendments to this Proclamation and Regulations issued
d. Issue Directives necessary for implementation of this Proclamation and Regulations
issued
e. Decide on complaints lodged by investors against final administrative decisions of the
f. Commission or other Federal Government Executive Bodies submitted in accordance
with the grievance procedures specified in this Proclamation;
g. Put forward to the pertinent Government Organ an assessment-based recommendation
regarding the type and extent of investment incentives to be granted to investments and
the criteria for identifying investments eligible for incentives;
h. Decide, in consultation with relevant public and private sector stakeholders, to open to
foreign investors those investment areas reserved for joint investment with the
government, or to domestic investors, or for joint investment between domestic and
foreign investors, as well as restrict foreign investment in areas

42. The Board Members
• The Board shall be constituted of the following Thirteen members:
a. The Prime Minister……………..…Chairperson;
b. A Government official designated by the Prime Minister...Vice
Chairperson;
c. Eight Government Officials having core or related administration
mandate over trade, industry,services,finance,revenues,agriculture,
energy, and other relevant sectors…Members;
d. Two representatives designated by the private sector…….Members;
e. The Commission's Commissioner- Member and Secretary.