Ethiopia is one of the least urbanized countries in the world with almost 80 percent of its population dwelling in the rural part mostly engaged in farming.
The insufficient infrastructure which hampers provision of various services in these parts of the country limits financial institutions to expand their business. As a result, there is only about 35 percent of the population that get banking services across the country at the moment.
Solomon Zegeye, an economist and a private consultant working in various firms said that the financial inclusion means having access to and using one or more formal financial services though the access is not at the level of including all entities. Some of the mechanisms that can be cited in this regard are; savings, credit and insurance Payments.
The economist further said that, ensuring access to tailored financial products and services that are needed by low -income individuals in particular and the society in general with fair, transparent and equitable mode are essential.
According to the World Bank, the segment of the population which is making less than 1.9 USD a day categorized as poor. Amongst the population of Ethiopia, the bulk amount which is 65 percent of it is unbanked of which most of them are women, poor, rural residents, migrants and low-income households. Financial service for the poor is a critical enabler for the reduction of poverty, increase in productivity and wellbeing.
In order to alleviate financial constraints in the rural parts of the country, thus, implementing better policy, enacting regulatory frameworks and identifying high-priority areas for innovation are among essential measures. In this regard, Medium and Small-Scale Enterprises (MSEs) play crucial role in Ethiopia’s economy. Despite their profound economic impact, these enterprises face a variety of hurdles that include access to finance.
Development Bank of Ethiopia has 82 branches all over the country and availing credit to MSEs is one of its core objectives. Assessing the policy enacted regarding MSEs and facilitating access to credit and creating fair playing ground for them are among its priority goals.
According to reports, domestic credit has increased from 26.4 percent of GDP in 2010 to 35.3 Percent in 2020 through strengthening banking system. Credit to the central gov’t by NBE amounted to more than 17.6 percent of the outstanding credit.
Commercial Bank of Ethiopia is the main loan provider and more than 60 percent or 30 million deposit accounts provided to borrowers mainly to the small- scale enterprises in which 85.6 percent of the Banks’ outstanding loan is given to the public sector. 47.7 percent of CBE’s total loan is provided to the sector on subsidized interest rate with the guarantee of government.
“The main clients of micro finance institutions are medium and small -scale enterprises. Hence, it may not be wrong if we assume that the highest share of outstanding credit of microfinance institutions goes to these institutions. The credit of micro finance institutions stood at Birr 64.9 billion in June 2020, which is just 6.3 percent of the outstanding credit by banking system during the same year,” the report stated.
Project and lease financings are the major financing products of Development Bank of Ethiopia whereas; lending small scale enterprises money is carried out by commercial banks and microfinance institutions. Large amount of their loan, which is more than 8o percent, mainly goes to the private sector. DBE has been mainly providing loan to the manufacturing sector an average of about 65 percent followed by the agriculture sectors on average 16 percent. Total outstanding loan of DBE at the end of June 2020 was 51.1 billion Birr of which 9.2 billion Birr is provided to small scale enterprises. In addition, 5.1 billion Birr, which is 28.5 percent of the total loan, is given to the micro finance institutions.
According to the recent NBE report, it intervened in the loan allocation by issuing different policies at different times. The National Bank’s directive compels private banks to buy NBE bills equivalent to 27 percent of their disbursement.
Commendably, movable collateral registry system is implemented to address the lack of collateral for access to loan of micro and small-scale enterprises. It requires Banks and MFIs to extend at least 5 percent of their annual loan disbursement in the movable collateral system.
According to Solomon, the top three problems faced by small scale industries are insufficient permitted loan, high collateral requirement and long loan processing periods. Some of the shortcomings of policies and practices among others such as loan disbursement practices are undertaken by CBE through guarantee from the government.
Common government intervention which is direct lending through state owned banks, capacity building, partial guarantee and issuing a regulation which compel private sector to provide some fixed amount of loan to the sector are essential for their business sustenance.
Some of the policies that aimed to increase medium and small-scale enterprises access to credit by DBE and the introduction of movable collateral registry system with 5 percent requirement can be mentioned.
Allowing technology provider to give digital financial services and micro finance institutions helps them to grow to the level of micro finance banks.
Some public owned banks through partial public credit guarantee scheme give credit guarantee to the maximum amount with the maximum maturity of 10 years. Banks enabled to increase the number of loans guaranteed as well as the value of guaranteed loans.
Medium size enterprises are protected by the loan guarantee schemes accounted for more than 10 percent of all commercial loans.
As mentioned above, Ethiopia relies on agrarian economy. Therefore, in order to reduce the dominant role of agriculture, expanding the development of manufacturing is essential and in this regard medium and small -scale enterprises are the base.
The enterprises are playing crucial role in creating employment and value chain through utilizing other enterprises’ raw materials as inputs. In addition, they have been a source of income to the government through paying tax.
However, due to lack of sufficient access to financial loan and working place they are hampered not to utilize their potential in full scale. Therefore, enhancing the on- going support is vital.