‘Missing Middle’ gone after a decade | The journalist


When Daniel Birhanu, 34, started a small business processing shoes, handbags and other leather products in Lebu, his aspiration was to become a large leather factory and start exporting his products as soon as possible. However, six years after its creation, he struggles not to close the company.

“After I graduated from small to medium, there was less and less support. Lack of space to grow the business and find funding has been a big problem over the past three years. We are unable to access operational capital to purchase inputs and operate at full capacity,” Daniel said.

Her business has had access to loans from microfinance institutions since it was a small business. But once his loan need exceeded 300,000 birr, the MFIs could no longer provide him with the finance. Basically, MFIs ask for guarantees for loans above this threshold. Daniel also says that he could not receive additional sewing machines because he asked the sub-city and city administration for additional land.

In Ethiopia, as businesses move from micro to small, small to medium and medium to large, a smooth transition and uninterrupted growth has been impossible in Ethiopia. This problem has long been identified as “the missing link”. The term was coined especially for the lack of ongoing financial support, especially as small businesses scale up to a medium level. The “missing link” indicates the disconnect between MFIs and banks.

“These companies are too big for MFIs but too small for banks. As a result, small and medium enterprises, in particular, cannot obtain financing from both MFIs and banks. Therefore, their growth momentum is hampered in the middle for many years,” says UNDP program specialist Selamawit Alebachew.

A study conducted by UNDP also indicates that most micro, small and medium enterprises (MSMEs) in Ethiopia face the same pattern of challenges similar to Daniel.

According to the study, 70% of Ethiopia’s 2.29 million MSMEs do not have access to credit from any of the potential sources and must rely on their own funds. Currently, the gap between MSME credit supply and demand stands at USD 6.9 billion. Eighty percent of all MSMEs do not grow. 2.29 million MSMEs obtained a license between 2011 and 2021.

UNDP Resident Representative Turhan Saleh agrees that Ethiopia, despite having a large number of MSMSEs, is not fully utilizing their potential, which could have resulted in robust economic growth, industrialization, creation of jobs and the generation of foreign exchange.

“The financing system in Ethiopia is not linked to the business life cycle. This needs to be changed. Failing to serve businesses at every stage of their growth and failing to identify and provide funding in tandem is a big problem. If MSMEs are to contribute to Ethiopia’s growth, their demand for credit must be met,” agrees Turhan.

Of the 2.29 million MSMEs, 71% are micro, 19% are small and 8% are medium stage. This means that very few companies make it to the medium and large stages, even a decade after their creation. Amhara Regional State accounts for 29.6% of the total, Addis Ababa accounting for 28.7% and Oromia Regional State accounting for 21%. This indicates that even in Addis Ababa, where the presence of MFIs and banks is strong, access to finance remains far-fetched.

The study also found that although the majority of MSMEs hold a significant portion of their savings in bank deposits, the banking system prefers to lend the deposits to non-MSME clients, especially businesses.

According to the NBE report, of the 329.4 billion birr of loans that banks disbursed in the 2021/22 financial year, only 1.52% (or 5 billion birr) went to the MSME sector. . Bank lending to SMEs has been halved since 2018/19, from 3.1%. The five billion birr loan went to 115,000 MSMEs. This means that it is 43,500 birr per company, on average.

The average share of bank lending to MSMEs in developing countries is 16%. This indicates that Ethiopia is at the bottom of this trend. According to studies, Ethiopian banks have the most collateralized banking system in the world, requiring 234% higher collateral value than the loan.

On the other hand, the Development Bank of Ethiopia (DBE) provided 13 billion birr of credit to MSMEs in 2020/21.

The 39 MFIs in the country extended a total credit of 4.3 billion birr in the 2020/21 financial year. This includes both MSMEs and individuals, based on the group guarantee scheme.

Despite the fact that the micro and small enterprise development program started in Ethiopia in 2005, their contribution to Ethiopian GDP was only 5%, according to a UNDP study. They have also only created 13 million jobs over the past decade.

In many developing economies, the contribution of MSMEs has become irreplaceable. For example, there are over 44 million SMEs in China which contribute over 60% of GDP, over 75% of employment, around half of national tax revenue and around 68% of export revenue. Brazil, China and Nigeria account for 67% of the world’s 162 million MSMEs.

Of course, globally, there is still an $8.9 trillion credit gap for SMEs, compared to the current MSME credit supply of $3.7 trillion, according to the World Bank. and the IFC.

In an effort to bridge the huge gap between demand and supply of MSME credit in Ethiopia, the National Bank of Ethiopia (NBE) and UNDP have recently designed a new lending program. The two have signed a letter of intent to establish an Innovative Finance Lab (IFL), which aims to mobilize funds and provide them to MSMEs in Ethiopia. The lab is formed and its Board of Directors, consisting of 17 prominent Board members, has convened its first Board meeting on October 18, 2022 at the Sheraton Addis Hotel.

The lab raises loanable money from external sources, angel investors, venture capital, government sources, national banks and the private sector. Then, the lab provides the financing to selected MSMEs that have growth potential.

“One of the bottlenecks preventing MSMEs from accessing credit is collateral. To avoid this requirement, NBE has agreed to provide a guarantee for credits provided by MSMEs,” said Solomon Desta, Deputy Governor of NBE, during the inauguration ceremony. Under the credit guarantee scheme, the NBE compensates for defaulted loans by MSMEs through the IFL. The lab provides seed money, which will recycle and serve many businesses.

NBE’s agreement with UNDP also includes a ‘policy sandbox’, which allows the lab to adopt and pilot financial services products that are currently trending in Ethiopia. The IFL will also facilitate the listing of potential MSMEs on the Ethiopian stock market to generate finance. The exchange, which is currently in formation, is expected to be operational within the next 18 months.

“Previously, it was forbidden to test any new financial services product in Ethiopia before the NBE created a legal framework for it. But the “political sandbox” allows the laboratory to pilot any new financial product without waiting for the legal framework to be introduced. In the meantime, if the product considers the NBE Craft Act, piloting is underway,” Solomon said. It is hoped in particular that this will facilitate the inflow and injection of foreign capital into MSMEs, which have been hampered by the minimum capital requirements of Ethiopian investment regulations.

The lab aims to provide up to $60 million in credit to MSMEs over the next two years, which is a drop in the bucket compared to the $6.9 billion financing gap for MSMEs in Ethiopia.

Even though the government is starting to recognize the ‘missing middle’ after many years and is starting to devise alternative funding venues, experts say it’s never enough.

“The financing gap for MSMEs in Ethiopia will never be closed. It’s not for lack of capital. Capital is available elsewhere. The problem is that Ethiopian MSMEs lack the knowledge and skills to obtain finance from national and international sources. They don’t know how to write good proposals. So they also need these skills and capacity building to find funding on their own. We need to teach MSMEs to fish, rather than giving them the fish,” says UNDP team leader Gizachew Sisay.

Of course, recent policy changes in the Ethiopian financial sector are also having a domino effect on corporate finance. Especially after the central bank allowed large MFIs to transform into banks, a significant vacuum is being created. Amhara, Oromia, Somali and Omo MFIs, which are the oldest and largest MFIs in the country, recently evolved into Siinqee, Tsedey, Shebele and Sidama banks respectively, after the NBE changed its policy.

On the other hand, the NBE does not rigorously follow commercial banks to properly channel credit to MSMEs. The NBE has ordered commercial banks to allocate 5% of their annual total credit portfolio to MSMEs. However, this is not properly implemented, as the central bank has no penalties for banks that do not comply. So far, only Awash Bank has a banking department for MSMEs. If all commercial banks in the country properly channel the 5%, MSMEs could get up to 25 billion birr in credit per year from banks alone.

lower the runaway interest rates of MFI lending rates. “MFIS charges us interest rates of up to 35% on the loan. That’s more than twice bank lending rates. No manufacturing company can afford such rates.

Finally, although there have been a number of initiatives to establish SME banks in Ethiopia, there is no banking legal framework that allows for the establishment of specialized banks.

“No such license application has been filed with NBE to date,” Solomon said.

Turhan, on the other hand, is optimistic that MSMSE financing in Ethiopia will soon improve given the revolutionary policy changes that Ethiopia is implementing in the banking sector.

“Ethiopia is currently liberalizing its financial sector for foreign investors. This is a major change that can unlock more funding opportunities for MSMEs. With regard to closing the financing gap for MSMEs in Ethiopia, we hope that other development partners will invest money. We are also expecting financing from commercial banks, private investors and DFIs. Businesses are important for the growth of the Ethiopian economy. Technology and digital finance can also be used for this purpose,” Turhan hopes.


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