Final FSE Report

FINANCIAL SERVICES ECOSYSTEM
ANALYSIS IN ETHIOPIA
CONTENTS
LIST OF TABLES 3
LIST OF FIGURES 3
ACRONYMS 5
1. EXECUTIVE SUMMARY 6
2. OVERVIEW 6
3. PRIORITY RECOMMENDATIONS 8
4. APPROACH & METHODOLOGY 16
5. CAPITAL SUPPLY 17
5.1. FINANCIAL SYSTEM OVERVIEW 17
5.2. DEFINING SMES IN ETHIOPIA 26
5.3. DEBT FINANCING TO SMES 29
5.4. EQUITY CAPITAL SUPPLY TO SMES 69
6. CAPITAL DEMAND 72
6.1. PROFILE OF ETHIOPIAN BUSINESSES 72
6.2. LATENT UNSERVED POTENTIAL DEMAND: UNDERSTANDING & SIZING THE FINANCING GAP77
6.3. FINANCING GAP TRENDS 80
6.4. BARRIERS TO LOAN DEMAND 83
7. FINANCIAL INTERMEDIARIES 86
7.1. CURRENT STAGE OF DEVELOPMENT - MARKET FACILITATORS IN ETHIOPIA 86
7.2. CURRENT TYPES OF MARKET FACILITATORS IN ETHIOPIA 86
8. FINANCIAL INFRASTRUCTURE 88
8.1. CURRENT PROFILE OF ETHIOPIA’S FINANCIAL INFRASTRUCTURE 88
8.2. DIGITAL INFRASTRUCTURE 90
8.2.1. SWITCH (B2C) 92
8.2.2. POS OPERATORS (B2B) 93
8.2.3. PAYMENT GATEWAYS 93
9. ENABLING ENVIRONMENT 94
9.1. REGULATORY REGIME FOR FINANCIAL INNOVATION IN ETHIOPIA 94
9.2. REGULATORY RESTRICTIONS LIMITING SME ACCESS TO CAPITAL 99
9.3. LEGAL AND REGULATORY LIMITATIONS ON CAPITAL FLOWS 101
9.4. REGULATION OF LEASING COMPANIES 103
9.5. PROVISION OF GUARANTEES OR OTHER CREDIT ENHANCEMENTS 103
ANNEXES 105
BIBLIOGRAPHY 111
LIST OF TABLES
Table 1: Sample size and sampling distribution.................................................................................................. 17
Table 2: SME definitions by different stakeholders (Sources: Interviews) .................................................. 27
Table 3: MFI loan products and terms ................................................................................................................. 43
Table 4: SME financing initiatives in Ethiopia ...................................................................................................... 56
Table 5: Leading companies in the export of agricultural products (Sources: KII, IMF).......................... 73
Table 6: Some companies in emerging sectors.................................................................................................. 76
Table 7: Interest free banking in Ethiopia (Sources: Islam Leasing Document, Mudaraba, Musharaka,
Murabaha - new terms to bank on, Salam Contract for Profit and Loss Sharing) .................................... 85
Table 8: The Main Digital Wallet Services in Ethiopia ..................................................................................... 93
Table 9: The share of SME loan from financial instaurations ...................................................................... 105
Table 10: Financing Gap Trends ......................................................................................................................... 106
Table 11: Credit Gap per Region....................................................................................................................... 106
LIST OF FIGURES
Figure 1: Saving and investment trends (Source: NBE, IMF, WB, and Precise analysis) .......................... 18
Figure 2: Finance/capital supply landscape in Ethiopia (Source: GIN, Cepheus capital, NBE, and WB)
....................................................................................................................................................................................... 19
Figure 3: Finance supply sources, uses and instruments (Sources: NBE, Cepheus capital, UNCTAD,
and Precise analysis) ................................................................................................................................................. 20
Figure 4: Relative Depth and breadth of Ethiopia's Financial system (Sources: WB, IMF, IFC, NBE, and
Precise analysis) ......................................................................................................................................................... 21
Figure 5: Key facts about Ethiopia's financial system (Source: NBE, IMF, WB, and Precise analysis)... 21
Figure 6: Capital market activities (sources: NBE, Precise Analysis) ........................................................... 22
Figure 7: Gender Difference in Financial Access (sources: IFC, Precise Analysis) .................................... 23
Figure 8: Enterprise financing in Ethiopia (Sources: WB, Precise analysis) ................................................. 24
Figure 9: Total capital supply to SMEs (Sources: Banks annual report, WB, IFC, KII, and Precise
analysis) ....................................................................................................................................................................... 25
Figure 10: Access to finance among women managed enterprises (Source: WB).................................... 26
Figure 11: Banking overview (Bank’s annual report, NBE, Bank’s websites, Precise analysis) ............... 30
Figure 12: Growing Importance of Private Banks (Source: Precise Analysis based on data from NBE,
WB, IFC, Banks’ annual report) ............................................................................................................................ 31
Figure 13: Bank credit products (Source: Bank’s annual statement, NBE, Bank websites, Precise
analysis) ....................................................................................................................................................................... 32
Figure 14: Loan market share and share growth (2014-19) by sector (Source: NBE, bank’s annual
statements, Bank’s websites, Precise analysis) ................................................................................................... 33
Figure 15: Bank loan distribution by loan size/exposure per borrower (Source: Banks, Precise
analysis) ....................................................................................................................................................................... 33
Figure 16: Overall average loan size per borrower (Source: Banks, Precise analysis) ............................. 34
Figure 17: Banks loan supply and accessibility for SMEs (Sources: WB, Mckinsey, Precise analysis) ... 34
Figure 18: Bank loan distribution by region (Source: Banks, Precise analysis) ........................................... 35
Figure 19: Collateral and document required for banks loans (Bank’s annual statements, GIN,
Websites).................................................................................................................................................................... 36
Figure 20: Pricing of banks loans (Source: NBE, Precise analysis)................................................................. 36
Figure 21: Average loan terms: private vs public (Sources: NBE, Precise analysis) .................................. 37
Figure 22: Seasonality in bank lending and saving activities (Sources: NBE, Precise analysis) ................ 39
3 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Figure 23: Microfinance overview (Sources: NBE, Association of Ethiopian microfinance institutions,
Precise analysis) ......................................................................................................................................................... 40
Figure 24: Capital structure of MFIs (NBE, AEMFI, Precise analysis) ........................................................... 41
Figure 25: Types of MFIs ......................................................................................................................................... 41
Figure 26: MFI's credit customers (Sources: NBE, ADMFI, Precise analysis) ............................................. 44
Figure 27: Interest rates of MFI loan (Sources: AEMFI, Precise analysis) .................................................... 45
Figure 28: Capital goods financing overview (NBE, Precise analysis) ........................................................... 46
Figure 29: NBE directives (Source: NBE) ........................................................................................................... 46
Figure 30: Lease financing terms and share to SMEs (Source: NBE, KII, Precise analysis) ...................... 47
Figure 31: Credit supply to SMEs (Sources: NBE, KII, WB, IFC, Precise analysis) ................................... 49
Figure 32: Factors that drive SME supply (Sources: KII, WB, IMF, Precise Analysis) ............................... 49
Figure 33: Factors that constrain SME capital supply (Sources: NBE, KII, IMF, Precise analysis) .......... 50
Figure 34: Deposit and lending rates, pre-and post-adjustments on minimum deposit rate (Sources
NBE, Precise analysis) .............................................................................................................................................. 52
Figure 35: Credit reporting and registry (Sources: WB) ................................................................................ 53
Figure 36: Example supply chain financing model (Sources: company websites, KII, Precise analysis) 60
Figure 37: Heineken’s Contract Farming / SCF model (Heineken, MOA, Academic Studies, Precise
analysis) ....................................................................................................................................................................... 61
Figure 38: Local sourcing (Diageo, MOA, Academic Studies, Precise analysis) ......................................... 62
Figure 39: WEDP (Sources: DBE, WB, Precise analysis) ................................................................................ 65
Figure 40: Youth revolving fund (Sourcing: MoF, FARA, Precise analysis) ................................................. 67
Figure 41: Equity capital supply landscape (Source: Enterprise partners, GIN, KII, Precise analysis) .. 69
Figure 42: Equity capital supply (Sources: Enterprise partners, GIN, KII, UNCTAD, Precise analysis)
....................................................................................................................................................................................... 70
Figure 43: Major export items in Ethiopia 2018-19 in millions of USD (Sources: NBE) ......................... 73
Figure 44: Number of MSEs by region in 2018-19 (Source: NBE) ................................................................ 74
Figure 45: Number of newly formed MSEs In Ethiopia by year (Sources: NBE) ....................................... 74
Figure 46: Size and distribution of SMEs in Tigray and Amhara region (Precise analysis)....................... 75
Figure 47: Size and distribution of SMEs in Oromia and Addis Ababa (Precise analysis) ........................ 76
Figure 48: Capital demand of firms and startup phase (Source: GIZ).......................................................... 77
Figure 49: Loan demand per enterprise by CFF categories (Source: Precise analysis based on bank’s
report) ......................................................................................................................................................................... 78
Figure 50: The financing gap per enterprise size, per millions of ETB (Source: Precise analysis, NBE,
IFC)............................................................................................................................................................................... 79
Figure 51: WEDP and financing gap shortfall in Ethiopia (Source: WEDP and Precise analysis) ........... 80
Figure 52: The financing gap for SMEs (Sources: NBE, IFC, Precise analysis) ............................................ 80
Figure 53: SME financing gap by gender (Sources: NBE, IFC, Precise analysis).......................................... 81
Figure 54: SME ownership by gender in 2020 (Source: IFC, Precise analysis) ........................................... 81
Figure 55: Average credit gap by gender in 2019(Sources: NBE, IFC, Precise analysis) .......................... 82
Figure 56: SME financing gap per enterprise in millions of ETB in 2019 (Sources: Precise analysis) .... 82
Figure 57: Loan demand by Ethiopian SMEs per region in millions of ETB (Sources: Precise analysis)
....................................................................................................................................................................................... 83
Figure 58: Collateral value per loan (Source: IFC) ........................................................................................... 84
Figure 59: Enterprise loan interest rates in 2020 (MFI yearly reports) ....................................................... 84
Figure 60: Depth of credit information index - 0 low, 8 high (Source: Doing Business, 2020) ............. 86
USAID.GOV USAID REPORT TITLE HERE | 4

ACRONYMS
Agricultural Transformation Agency Financial Institution
(ATA) ................................................................ 60 (FI) ................................................................... 7, 8
Automatic Teller Machine Foreign Direct Investment
(ATM)................................................................ 14 (FDI) ..................................................................... 9
Capital Expenditure Government of Ethiopia
(CAPEX) ..............................................................9 (GoE) ................................................................... 7
Capital Goods Financing Companies Gross Domestic Product
(CGFC) ................................................................9 (GDP) ................................................................ 17
Capital Markets Authority Information Communication Technology
(CMA) ............................................................... 95 (ICT) .................................................................... 7
CATALYZE Interest Free Banking
Market Systsms for Growth (IFB).................................................................... 32
(CATALYZE Management Information Systems
MS4G) .........................................................7 (MIS)................................................................... 41
Center for Accelerated Women’s Economic Micro Finance Institution
Empowerment (MFI)..................................................................... 9
(CAWEE) ......................................................... 88 Micro, Small and Medium Enterprises
Collaborative For Frontier finace (MSME) ................................................................ 7
(CFF) ................................................................. 28 Ministry of Innovation and Technology
Collaborative For Frontier finance (MINT) .............................................................. 96
(CFF) ................................................................. 28 National Bank of Ethiopia
Commercial Bank of Ethiopia (NBE) ................................................................. 92
(CBE) ................................................................. 21 Non-Governmental Organization
Compound Annual Growth Rate (NGO) ............................................................... 40
CAGR ............................................................... 18 One Stop Shop
Credit Refrence Bureau (OSS) ................................................................. 64
(CRB) ................................................................ 53 Point of Sale
Dedebit Credit and Savings Institution POS .................................................................... 15
(DECSI) ............................................................. 66 Small and Medium Enterprises
Development Bank of Ethiopia (SME) ................................................................... 6
DBE.................................................................... 21 Special Purpose Vehicle
Development Finance Institution (SPV) .................................................................. 95
(DFI) .................................................................. 37 State Owned Enterprise
Ethiopian Commodity Exchange (SOE) ................................................................... 7
(ECX) ................................................................ 22 Sub-Saharan Africa
Ethiopian Electric Power (SSA) .................................................................. 26
EEP ..................................................................... 22 Technology Service Providers
Ethiopian Institute of Agricultural Research (TSA).................................................................. 99
(EIAR)................................................................ 60 United States Agency for International
Ethiopian Investment Commission Development
(EIC) .................................................................. 96 (USAID) .............................................................. 7
Ethiopian Securities Exchange USAID ................................................................. 7
(ESE) .................................................................. 95 Women Entrepreneurship Development
Federal Job Creation and Food Security Project
Agency WEDP................................................................ 10
(FUJCFSA) ........................................................ 26

1. EXECUTIVE SUMMARY
Ethiopia faces a chronic overall capital shortage, and private sector financing is crowded out by state-
owned or affiliated enterprises. In allocating what capital remains for private enterprises, SMEs often
receive low priority. Lenders see SMEs as riskier borrowers who lack the collateral, assets, and
financial acumen of other borrowers to whom they can lend their limited capital. Borrowers see
banks’ high collateral requirements as a barrier to borrowing, and limited lending products provide
few ways for SMEs to finance their business.
Equity flows to SMEs are limited on the supply side by growth rate and exit challenges in Ethiopia,
and on the demand side by a limited pool of high growth ventures. By international standards,
lending is extremely restrictive in Ethiopia. Collateral expectations are extremely high (100% of the
loan amount and higher), qualifying collateral is limited (real estate dominates). These restrictions
are not by law but instead are driven by bank policy and competitive market conditions. Lending
products are by international standards quite limited (mainly term loans), and financial innovation is
even more limited (especially in light of explosive fintech innovation in many other countries,
including East African neighbors.
In a context where capital supply cannot meet demand, and current solutions are too few and
inadequate, it will be necessary to expand supply-side solutions, and to ‘innovate’ to bring a wider
range of low-to-moderate risk instruments and mechanisms to serve demand.
To expand capital flows, this study leads us to believe that
• Expanding lending is likely to have the highest leverage and impact of any asset class;
• Expanding successful local lending innovations is likely to produce the most
immediate impact, since these are already working, in Ethiopia, by and for Ethiopians
(Corporate-led supply chain solutions, equipment leasing, non-collateral lending);
• Adapting proven SME lending products to Ethiopia can help mitigate the ‘collateral
conundrum’ and expand the range ‘lendable assets’, using instruments that Ethiopian lenders
can see evidence of being widely proven and only new to Ethiopia (purchase order financing,
receivables factoring, asset-based lending). This is likely to take longer than expanding local
innovations, but could have a bigger impact;
• Bringing Fintech innovation to Ethiopia – in ways that work around regulatory barriers
– could have the biggest long-run impact of all, and may take the longest to bring to market.
Many elements of Ethiopia’s constrained lending markets could be enabled, accelerated, or
disrupted by the dozens of fintech innovators in developing countries. Attracting these
innovators and partnering them with local Ethiopian institutions would take a long-term
development commitment but could have high potential.
2. OVERVIEW
The overall objective of this study is to provide a deeper understanding of the Ethiopian financial
services ecosystem and identify ways blended financing could be deployed to unlock and accelerate
private commercial capital flows to SMEs, specifically to:
1. Characterize the SME market in Ethiopia, and SMEs’ current financing behavior
2. Map the supply of SME finance currently flowing to SMEs across asset classes
3. Make actionable recommendations to increase capital flows to MSMEs

This assignment is intended to inform CATALYZE: MS4G efforts to support Ethiopian economic
growth, job creation, and export growth through concessional and blended finance. USAID /
CATALYZE: MS4G seeks to mobilize $500m in new capital flows to SMEs in Ethiopia. Potential
interventions include, but are not limited to, mobilizing capital to enterprises in priority sectors,
capacity development, and expansion of financial services and employment development providers.
Given the significant role of the Government of Ethiopia (GoE) in the economy overall and the
financial, telecom, ICT, and emerging ‘fintech’ sectors, in particular, a priority would be to identify
the high impact and realistic ways to address legal and regulatory barriers and improve the overall
business enabling environment.
Priority Sectors: Given their importance to the Ethiopian economy and CATALYZE jobs and
export growth objectives, priority sectors are agribusiness, light manufacturing, and
telecommunications / ICT including financial technology (‘fintech’).
Inclusive Growth: Given the CATALYZE goal of inclusive growth, emphasis and consideration
will be placed on women and youth, in both Addis and secondary cities (Bahir Dar, Mekelle, Gondar,
Hawassa, Dire Dawa, and Adama).
Overall, the Ethiopian economy has enjoyed rapid and sustained growth – at higher rates, for the last
decade - longer than most of Sub-Saharan Africa. Credit growth on the surface appears strong, but
a deeper investigation uncovers several undermining realities. These include: 1) an overall domestic
capital shortage, and high external capital dependence; 2) public sector dominance, and government
and state-owned/affiliated enterprise’s borrowing needs crowding out capital flows to the private
sector; 3) constrained capital flows funding state-owned enterprise (SOE) inefficiencies and losses,
versus productivity and growth; 4) tremendous untapped and underutilized pools of capital,
effectively sitting idle for legal or regulatory reasons; 5) chronic balance of payments deficits,
resulting in sustained foreign exchange shortages; 6) extremely high collateral requirements and
over-collateralization of loans by nearly all lenders in Ethiopia, not by law or regulation, but by habit,
practice, and policy, driven by market and competitive conditions.
The recommendations in this report are intended to drive increased capital flows to SMEs. This in
turn may drive economic growth, export growth, and employment growth. In particular, these
recommendations are or can be targeted to support strategic priorities - agribusiness, light
manufacturing, and exporters. Priority will be given to women-owned and led businesses and those
employing youth, in the design and implementation of programs.
We also intend for these recommendations to provide a pathway to developing and strengthening
Ethiopia’s capital markets and financial sector, by:
• Expand practical solutions already successfully tested by Ethiopian FIs.
• Adapt instruments that work in comparable countries to Ethiopia, working with local partners
(for example Purchase Order financing, Receivables Factoring, Asset Based Lending, Venture Debt)
• Adapt and test innovative new ‘fintech’ solutions from other countries to Ethiopia
Finally, by focusing GoE and regulator attention on instruments that are working in low-risk, limited
pilots, these recommendations can build evidence to support greater financial sector reform, the
introduction and regulation of new financial instruments and innovations, and to support the
modernization of the Ethiopian financial sector.

3. PRIORITY RECOMMENDATIONS
We have identified a combination of immediately actionable, testable recommendations to accelerate
SME capital flows, as well as longer-term, systemic improvements that will also drive the flow of
capital to SMEs for the immediately actionable program recommendations, we have prioritized three
complementary strategies. Each strategy has multiple action programs. Each action program has at
least one way to bring it to market, and some have more than one.
Longer term systemic improvement recommendations are then provided and discussed.
Looking ahead to action and implementation, we have sequenced the three strategies below:
#1 – Expand practical solutions already tested by Ethiopian FIs in Ethiopia. Lowest risk.
#2 – Adapt what works in comparable countries to Ethiopia, working with local partners.1
#3 – Bring and test innovative solutions – riskier, more experimental - but large potential.
Importantly, two groups should be prioritized in the development of programs to implement these
recommendations. The first is women, which in some cases are expressly called out and in others
are implied or not specifically referenced. The other is the Muslim population, representing 1/3 of
the Ethiopian population (i.e., almost as large as Kenya’s entire population), and representing the
majority of certain key economic sectors, including trading. Notably, although several banks offer
Islamic products or versions of their services, a new 100% Islamic bank has been registered in the
past two years. This bank, Hijra, would likely be a high value partner to engage as this program shifts
to design and implementation.
Strategy #1: Replicate / Scale Practical Solutions Already Successfully Tested by

Ethiopian FIs.
We believe this approach holds promise for immediate impact, as these are initiatives that are
already working in Ethiopia, and could be adapted, replicated, and scaled.
a. Corporate Led Supply Chain Solutions: Two major international beverage companies
– Heineken and Diageo – commit their capital and management resources to provide an
input credit facility for 56,000 farmers (Heineken 50,000, Diageo 6,000), and have spent
years fine-tuning the operations and nuances of the program. We envision two
opportunities:
i. Replicate and adapt these programs with an initial group of 10 large
manufacturing companies operating in Ethiopia, prioritized for the number of
SMEs in their supply chain and the value this program could bring to the
manufacturer.
ii. Explore with Heineken and Diageo their potential interest in partnering to
form a new kind of intermediary to serve as the go-between, freeing up
1 For Strategy #2: “Adapt / Replicate Proven Successful SME Lending Products to Ethiopia”, a ‘How it Would Work’ section is provided in
an Annex, which more fully develops the strategy, action program, and potential paths to market.

Heineken and Diageo’s capital and management resources, and/or bringing in
a financing partner – a motivated MFI or private commercial bank.
The textile and garment industry operating in FDI industrial parks could be a
promising supplier development opportunity. The off-grid solar sector, which
seeks to develop local SME suppliers to localize content and assembly and displace
imports, would be another high-priority target.
b. SME Equipment Leasing by Capital Goods Financing Companies (CGFCs):

CGFCs are the only new type of financial institution in Ethiopia focused on working with
SMEs. They are also the only FI type in Ethiopia open to foreign investment and ownership.
Equipment leasing targets the SME CAPEX financing gap (vs. Working capital), and eliminates
the 1.2x to 2x usual collateral requirement by using the equipment as collateral. We
envision two opportunities:
iii. Support CGFCs and SMEs with Capacity Building & Technical
Assistance to help remove barriers and accelerate deployment. As detailed
in Section 4.3, the nascent leasing sector in Ethiopia has been constrained by
the lack of qualified and experienced professionals in key technical areas
across the sector’s value chain, such as in product development and pricing,
and in equipment specification, acquisition, operation, and maintenance.
Targeted capacity building and technical support in such key areas to CGFCs
can play a vital role in minimizing the existing know-how gap.
iv. Consider Linking to Off-Grid Solar, and Partner with Ethio Lease.
One of several examples of how this could be implemented is in the off-grid
solar sector. As context, Ethiopia’s National Electrification Plan (NEP 2.0)
has set targets that would drive massive growth among SMEs but have a
significant financing gap. ‘Leasing to own’ is the business model of most off-
grid solar SMEs. Ethio Lease, which currently has no operation in the off-
grid solar space, is the only private CGFC currently active in Ethiopia and
brings international know-how, FDI, and an entrepreneurial market-
development mindset.

c. Drive Non-Collateral Lending with Tools, Training & Capacity Building: The
World Bank’s Women Entrepreneurship Development Project (WEDP) has been a well-
documented success. One of its successful components has been training MFIs to replace
or reduce collateral requirements with a combination of cash flow-based lending tools and
techniques and psychometric screening of prospective borrowers.
Since there aren’t any credit information systems that can help lenders identify creditworthy borrowers, financial institutions in
Ethiopia resort to asking for restrictively large collateral.
In 2014, a World Bank team explored how developments in the fintech could be harnessed to unlock the collateral challenge
facing Ethiopia’s women entrepreneurs. They looked to technology at the frontiers of financial inclusion: psychometric credit
scoring. They piloted an idea to use psychometric testing to determine if a borrower was creditworthy. If borrowers pass the
designated cut-off of the test, they could use their test score as a form of collateral and receive a loan without providing a fixed
asset as collateral.
The Entrepreneurial Finance Lab (EFL)developed a short interactive assessment, for Amhara Credit and saving Institute (ACSI),
the largest MFI in the country, that could be taken by potential borrowers on a tablet computer and could predict the likelihood
that the borrower would repay a loan.
During the pilot, 2,496 borrowers took the psychometric credit assessment and 1,132 loans were disbursed using ACSI’s
standard loan decision-making criteria. In the early months of the pilot, hundreds of loans were disbursed, usually with a 24-
month tenor, and almost none of the borrowers went into arrears. However, ACSI knew that customers were more likely to miss
payments as the loan term progressed, with more defaults emerging after six months, and the peak number of defaults
emerging after 18 months.
As months passed and loans matured, data began to come in on the clients that had taken the psychometric test. Customers
who scored higher on the test were seven times more likely to repay their loans compared to lower-performing customers.
Through the pilot phase, ACSI was able to develop a proof of concept, showing that psychometrics could accurately predict which
of their borrowers were likely to go into arrears or default.
The next step would be to move towards using psychometrics as a substitute to traditional collateral and to shift to a model
where the psychometric score became the basis of the loan decision. But, despite its measured success, the pilot faced several
challenges to scale up. The low-cost distribution, homogeneous product offering, and a high-performing portfolio, with almost no
default business model of ACSI still, even though, it slowly began to gain trust in the psychometric screening process, remained
reticent to offer large, unsecured loans against the scores. Also, a conflict erupted in the areas where it operates, and as a result
of the prolonged conflict, late repayments temporarily spiked, as mass closures of businesses, violence, and protests inflicted
damage on the economy. The old technology ACSI used, was incompatible with the new digital products, and the human-centric
model of the organizations couldn’t easily adapt to the new tech-savvy environment.
Thus, instead of using the psychometric technology as a full replacement for asset collateral, ACSI began to see it as an
additional data point on potential borrowers in the credit decision.
Source - Disruptive Finance: Using Psychometrics to Overcome Collateral Constraints in Ethiopia (English). Washington, D.C.: World Bank Group.
We envision two opportunities:

v. Help scale this component of the WEDP by pilot / partnering with MFIs
seeking to increase loan size or grow SME lending
vi. Replicate it by piloting/partnering with motivated Tier 2 ‘underdog’ private
commercial banks
This approach could be applied in any of the focus sectors; certain MFIs are actively seeking to grow
loan size and SME lending, and ‘underdog’ Tier 2 banks are more likely to innovate in this way, given
appropriate programmatic guidance and support.
d. Drive Quality SME Deal Flow & Venture Development: Many banks cite a lack of
quality deal flow as a primary reason for not lending to SMEs. Dashen Bank has recently
launched a successful program targeting SMEs - initially in 6 cities - called the Dashen Power
Talent Program. Dashen runs and funds a competition to select 30 MSMEs from a larger
pool of applicants, to receive seed capital of up to ETB 500,000 (~US$12,664) along with
additional ongoing support in building market linkage and providing access to working capital

through an MSME network, called ‘Dashen Business Club’ (aimed at providing training and
financial assistance for at least 1000 entrepreneurs in each city). Their CEO and top
management are engaged, and report that it has 3 benefits: it builds SME loan pipeline for
the bank; it helps identify and screen high-quality SME prospects without costly formal
underwriting; it builds Dashen’s reputation and image in the SME market they are trying to
grow. This program bridges the gap between emerging SMEs and the largest source of
private credit in Ethiopia – commercial banks – in a practical way. We envision two
opportunities:
vii. Working with Dashen to expand the program from 30 to 100, 200 or more
viii. Replicating it with 3-4 other banks focused on growing SME lending
Strategy #2: Adapt / Replicate Proven Successful SME Lending Products to Ethiopia:
Our research uncovered an opportunity to adapt or replicate four SME-focused financing products
widely used and proven successful by SMEs and SME capital providers in other countries, all of which
address the working capital financing gap of SMEs:
We believe this approach could have a high impact because these instruments are widely used in
other developed and developed markets, and they address the collateral challenge head-on.
a. Purchase Order Financing - to help SMEs finance the purchase of materials, production,
and shipping upon receipt of a customer order. Many banks offer this, but by policy (not law
or regulation) almost all have a $500k minimum.
b. Receivables Factoring - to help SMEs finance receivables and speed the cash cycle,
reducing collection lead-times to 5-15 days. Both Dashen and Abyssinian – two banks
focused on SME lending -- offer factoring, but on a small scale. Few others do.
c. Asset-Based Lending - to help SMEs finance using working capital assets as collateral, in a
short-term, revolving facility.
d. Business Plan Based Venture Term Debt - to help ‘High Growth’ SMEs unlock equity
capital and finance their permanent working capital growth
Doing so would unlock capital to SMEs, and have three strategic benefits:
a. Leverage recent regulatory reform allowing ‘movable’ collateral

b. Workaround long-standing collateral habits and practices of lenders, and lack of SME
financing product innovation
c. Expand limited product/instrument options for SMEs, and provide a demonstration model
for other banks
We recommend partnering with two types of private commercial banks:
a. 4 Motivated Tier 2 ‘Underdog’ Banks, specifically Debub Global Bank, Enat Bank, Addis
International Bank, and Birhan Bank
b. 3-4 Banks Actively Trying to Grow their SME Portfolio, specifically Awash, Dashen, and
Abyssinian banks.
We would recommend two strategically targeted enablers to motivate SME capital flows:
a. Selective use of partial 1st loss guarantees

b. Selective use of ‘Results-Based Forex’ allocations, as an incentive for results, which is highly
likely to motivate targeted commercial bank behavior.

c. Liberal use of other ‘Results-Based’ incentives for desired behavior and increased capital
flows. We believe incentives may be necessary to motivate increased lending to SMEs, and
risk mitigation (guarantees) and forex (in scarce supply) are likely to be the two best
incentives.
This strategy would need a long-term programmatic commitment. The contours and components
we envision include facilitated collaborations between established international providers of these
instruments and local Ethiopian banks. There are several ways this could be done which are beyond
the scope of this report.
Strategy #3: Attract or Adapt / Replicate SME-Focused Fintech Innovations: In the past
5-10 years, there has been an explosion of innovation focused on providing or enabling financing to
MSMEs. Little of this has thus far been introduced in Ethiopia. Recent financial sector regulatory
reforms and a growing ecosystem of ‘high growth’ Ethiopian start-ups and innovators have
converged to create a fertile market environment for financial innovation. Unlike supply chain
financing, which provides credit to purchase raw materials, certain fintech products allow companies
to “sell” their products before they are made, collect the payment, and produce the sold products
with it – essentially enabling entrepreneurs to only bring their ideas to the table without having to
finance them. There are at least 15-20 innovations succeeding and scaling in other countries, many
of which could be adapted and replicated in Ethiopia. Pursuing this would require a dedicated, multi-
year business development program. No discussion or consideration of accelerating SME financing
can exclude radical reductions in financing requirements or radical increases in capital flows through
fintech.
Interestingly, just one region – Somali – has more than half the fintech users and customers in the
entire country. Somali could be a high potential region to consider as a focal point in developing and
implementing a pilot program(s) from this recommendation.
We believe this approach could potentially have the largest impact and is likely to take the longest
time and require the most concentrated and sustained effort.
1. Improve Lender Credit Decisions to Increase Capital Flows to SMEs and Reduce
Collateral Requirements. There have been numerous innovative approaches to bridging
the gap in client credit information. While the Ethiopian credit rating system continues to
be developed and expanded from current the 5% of Ethiopians, we envision attracting or
adapting /licensing/ replicating existing approaches being used successfully in analogous
developing countries. This would not only enable better, faster credit decisions – reducing
risk and reliance on collateral – it would also help SMEs and individuals build a credit history.
This is highly complementary to the effort underway in Ethiopia and could be integrated (to
avoid parallel or potentially competing systems and approaches). We have not approached
any of the many potential prospects. Three illustrative start-ups whose approaches could
add potentially significant value to Ethiopian lenders motivated to penetrate the SME market
are:
• CreditEnable provides a cloud-based platform, enabling SME lenders to improve speed,

efficiency, and portfolio decision-making while also better managing risk. SMEs benefit from
improved visibility of credit requirements and better, faster access to affordable credit.
CreditEnable has commercial contracts in place with lenders that manage a cumulative loan
book of USD $60 billion.

o Pezesha addresses the limited coverage of credit bureaus in Kenya by offering ‘credit-
decisioning-as-a-service’ for financial institutions through its marketplace platform. Through
Patascore, its proprietary credit scoring model that integrates traditional and alternative data
with machine learning algorithms, Pezesha calculates scores for thin-file or no-file borrowers. Of
the users that seek out its SMS application and trusted third-party services in assessing their
creditworthiness, 80 percent are women undertaking informal businesses (MSMEs).
Pezesha embraces a hybrid approach and includes financial literacy education within the SMS
application to frame responsible credit as a wider wealth creation tool. Its competitive lending
structure ensures transparent, affordable interest rates, while its positive and negative credit
data has reduced portfolios’ non-performing loans by up to 20 percent. To date, Pezesha has
connected 100,000+ low-income Kenyans to lenders.
o Mosabi drives behavior change in entrepreneurs in India, Kenya, Mexico, Senegal, and Sierra
Leone through mobile e-learning, incentives, and calls-to-action; data harvested through this
process is then funneled to financial institutions as a new basis for credit scoring. The financial
literacy curriculum is constructed by Mosabi’s local expertise – lessons are customized to users’
environments and available in local languages. Its learners are low-income entrepreneurs in
cities, peri-urban areas, villages, and slums, many of whom operate in the informal economy with
no financial identity or footprint. Partner financial institutions can access the data, including KYC
information, e-learning performance insights, questionnaire responses, and Mosabi’s alternative
credit score via open APIs – and then offer financial products to borrowers. To date, Mosabi has
on-boarded 20,000 micro-entrepreneurs across five countries.
2. Partner or create joint ventures between Fintech Startups and Motivated SME-
Focused Ethiopian Banks, MFIs, and CGFCs to Deepen SME Penetration and
Help Them Grow Their SME Loan Portfolios. Digital credit is exploding in other
developing countries, especially in Africa. The majority of customers are MSMEs in all major
sectors of the local economy. Other than leasing (CGFCs), lending remains closed to
foreign investment in Ethiopia. However, licensing, JVs, or other forms of partnership could
be developed which conform to current regulatory restrictions. Four examples, each better
suited to either banks, MFIs, or CGFCs are highlighted below. This would likely be best
developed as a ‘business development’ program, with a capable 3rd party reaching out to,
cultivating, and attracting non-Ethiopian fintech entrepreneurs, and developing a JV,
partnership, or other pathways to bring their innovation to Ethiopia.
o Happy disburses working capital loans digitally to mom-and-pop stores and small-scale online
retailers. The lending process leverages a wholly paper-less, human-less, and application-less
digital model, with loans as low as ten dollars and repayment terms as short as two days. This
innovation is facilitated by the integration of Happy’s lending APIs and machine-learning
algorithms into the platforms of India’s largest payment providers, including but not limited to
point-of-sale networks, online payment gateways, and e-commerce platforms. Happy has
disbursed over 33,000 loans, with over half of its clientele classified as first-time borrowers in
the formal financial system.
o Three Wheels United is disrupting lending to low-income and less-literate clients. Their
holistic AI/data-driven loan management system expands the scalability of micro-finance (MFI)
across the Global South, helping to bridge the lending gap between MFIs and banks. Their
technology takes a holistic approach to lending to low-income clients, maintaining the critical
human elements required in this demographic while using AI and data to drive smart decisions
and reduce the high operational costs of a typical high-touch MFI model.

o Tulaa provides smallholder farmers in Kenya with access to inputs, credit, and markets, through
an online marketplace that makes it easier for farmers, suppliers, and lenders to connect
o FarmDrive - Using a combination of agriculturally relevant data, Know Your Customer data, and
advanced behavioral analytics, FarmDrive has developed a proprietary lending engine to extend
loans to smallholder farmers.
o Jai Kisan provides low-cost and timely financing for rural assets like agricultural and dairy
equipment in India. Jai Kisan utilizes a hyper-local credit scoring model and an innovative
approach to securitization that helps financial institutions lend to farmers at lower risk-adjusted
rates. Of India’s smallholder farmers, only one in eight households can access formal credit, and
of total credit flow to agriculture, only a meager three percent was dedicated to equipment
financing. Through its unique network of rural channel partners including retailers, petrol pump
operators, and buyers of agricultural produce, Jai Kisan can bridge the last mile distribution gap.
3. Explore the Potential for Exporting Financial Assets to Increase Forex

Availability. Ethiopia struggles with a chronic balance of payments deficits and a critical
continuing need for hard currency foreign exchange (forex). Yet it has a large and growing
base of financial assets in SME customer receivables, which SMEs urgently need to finance.
Modern lending products could address this in part, and four are discussed above. But an
alternative – sale of the financial asset to foreign investors – could potentially convert some
portion of these currently unfinanced assets into export, and provide a boost for FDI and
Forex. If such an approach is workable under current regulations, then one of several such
companies, and the market leader in Africa, is Lendable.
o Lendable enables leasing companies, retailers, and other providers of products on an

installment sales basis to raise capital, improve liquidity and grow their customer portfolio by
selling their receivables to investors. Lendable uses advanced algorithms to assess and price
risk and serves a large and growing range of clients in several African and Asian countries.
LONGER TERM SYSTEMIC IMPROVEMENT RECOMMENDATIONS
Targeted improvements in financial sector policy and financial sector infrastructure would transform
the Ethiopian economy and greatly accelerate capital flows to SMEs. Three key enablers are
highlighted below for their potential impact:
1. Greatly Expanded Use of Digital Payments: Ethiopians’ trust and rely on cash-based
transactions as illustrated by the fact that accessing a physical cashier is the main withdrawal
method (83%) compared to ATMs (1%). Ethiopia (30% of population access) is far behind the
rest of Africa, and especially Kenya (90% of the population)2 in the use of digital payments.
One way the GoE could drive digitization is to require – with adequate notice, lead time,
awareness and education, and other support – that all utility bills or payments to the
government be made digitally, using any one of the numerous digital payment platforms
already available. In the other direction, and potentially more motivating to desired behavior
2 Global Findex data base, the world bank group, 2017

change with fewer complaints, would be to transition to all government payments to all
individuals and business entities to digital channels. These two steps would rapidly
accelerate this critical enabling infrastructure.
This would greatly increase the impact of nearly all the other recommendations in this
report. In combination with the recommendations in this report, the impact on SME capital
flows of habitual, easy digital transactions is likely to be profound. Notably, Abyssinia Bank
started GizePay in November 2020, a service that can be used without a bank account via
agents (enabled by the agent banking regulatory reform). Around January of this year, the
service had manged to acquire 22,787 mobile wallet customers3.
In other countries, most notably Kenya, the widespread use of digital payments has led to
rapid growth in fintech and other innovative solutions which leverage the digital payments
infrastructure (such as PAYG solar home systems, lending products, insurance products and
others).
2. Accelerated and Increased Investment to Reach Complete Interoperability

Between Financial Systems. A critical enabling factor for digital transformation in
Ethiopia is the ability to have compatible systems no matter which service you subscribe to.
Thus, the efforts of EthSwitch to ultimately make all financial systems in Ethiopia
interoperable, starting from POS services and mobile transfers, is a crucial area that needs
support. Interoperability is at a nascent stage in Ethiopia and is currently limited
overwhelmingly to analog inter-banking transactions. These transactions require the
customer to be physically present in the bank and fill out paper forms. While banks are
implementing mobile wallet services – a positive step forward - they are unfortunately
lacking interoperability too. To access the current mobile wallet services, Ethiopians who
already have a bank account need to open a parallel account, which would not be necessarily
connected.
Therefore, the combination of (i) lack of interoperability among and within banks and (ii) the
public’s lack of awareness and access to digital banking services has led to very low adoption
of digital payments. The few E-Commerce solutions in Ethiopia depend on ‘cash on delivery’
transactions.
EthSwitch needs a longer-term investment plan, capacity building, and a strategy that
positions the company to be customer-oriented, focusing on serving commercial banks, and
non-bank financial institutions. For the development of the EthSwitch, the NBE could
envision the institution as a hub and a connector for other service providers performing its
role as an interoperability platform to access cards, mobile and bank accounts, and also,
connecting it to other bill aggregators, payment gateways, government portal (Derash), and
any digital ID infrastructure.
3. Widespread use of Digital ID. In Ethiopia, the Kebele card confers legal identity as well
as citizenship. It allows Ethiopian citizens to conduct almost any public or private transaction,
3 https://addisfortune.news/abyssinia-reintroduces-mobile-wallet/

including obtaining a passport, voting in an election, or opening a bank account. It is very
accessible based on anecdotal evidence. In many ways, it functions, as the de facto national
ID yet there is no central registry, no way to ensure uniqueness, and an extremely weak
credential that can be easily forged.
One of the barriers to financial inclusion, as it turns out, is the lack of proper identification4.
Every step of the process to financial integration requires ID, which many of the rural
population may not have, Thus, creating an infrastructure that can reach the unbanked
population, is not only a step towards financial inclusion but also a setting stone for the
widespread use of digital financial transactions.
4. APPROACH & METHODOLOGY

To fully capture the objectives of the study, we employed a purposive sampling strategy that
encompassed most key stakeholders from banks and MFIs to multilateral organizations. The
selection criteria we used were, the relative size of the business and their location, as well the
sector they are engaged in for the SMEs; their size and market share for the capital suppliers, and
their business models for financial intermediaries.
Accounting for all these factors, we interviewed a total of 57 respondents. A summary is provided
in the table below.
Importantly, since no single common definition of SMEs exists, throughout this report we have used
both a quantitative definition of SMEs and a qualitative one. The quantitative definition is the NBE
definition of SMEs, as provided in the Capital Goods Financing Directive (2019). According to this
definition, SMEs are those firms with 6 to 100 employees, and/or capital amount of ETB 0.5 to 20
Million (~US$12,500 to $500,000). The qualitative definition is the Collaborative for Frontier Finance
framework, which segments SMEs into four actionable ‘families’ for financing needs, growth and scale
potential, innovation profile, and entrepreneur attitudes and behavior. The CFF framework is
discussed in more detail on page 28 in the Capital Supply section below.
To address the study objectives and respond to the study question, Precise employed in-depth
interviews, phone interviews, key informant interviews, and a desk review. In-depth interviews with
stakeholders were conducted.
4 Global Findex survey, the world bank group, 2017

Table 1: Sample size and sampling distribution
SAMPLE SIZE AND SAMPLING DISTRIBUTION
Stakeholders Sample Size Focus Area
SMEs 27 Demand + Enabling environment + Infrastructure
Financial Intermediaries 7 Intermediation + Facilitation
Banks 8 Supply
MFIs 3 Supply
Leasing Firms 3 Supply
Equity Firms 3 Supply + Enabling Environment
Supply Chain Financiers 2 Supply
Multilateral Organizations 2 Supply + Demand + Enabling Environment
Gender and youth organizations 2
Total 57
5. CAPITAL SUPPLY
This section provides an in-depth understanding of capital supply for SMEs in Ethiopia. We begin
with an overview of the Ethiopian financial system and key aspects of the economy that pervasively
affect all forms of private sector financing. We proceed to a discussion of the Ethiopian financial
system, and key financial sub-sectors; this context is key to understanding the barriers and enablers
that ultimately affect SME capital flows. With this context established, all major forms of capital
relevant to SMEs are reviewed in depth. Barriers, enablers, and potential interventions are
discussed. The depth and breadth of this section reflect both the critical nature of supply and the
extent and quality of information available, relative to other focus areas of this study.
5.1. FINANCIAL SYSTEM OVERVIEW

Financing Development in Ethiopia
External Dependence. In Ethiopia, domestic savings have consistently been substantially below
investment demands. As shown below (Figure 1), gross capital formation (investment) declined from
40.7 % of GDP in 2015 to 35.2 % in 2019, domestic savings remained far below investment demands.
Domestic savings relative to GDP over the same period remained less than 24 %, resulting in up to a
50% shortfall between local savings and local investment. As a result, the growth of Ethiopia’s
economy has increasingly become dependent on external capital.

Figure 1: Saving and investment trends (Source: NBE, IMF, WB, and Precise analysis)
Credit Growth – Mixed.

Ethiopia’s domestic credit stock
grew by 26 % CAGR between
2014 and 2019. Topline credit has
more than tripled from 300 Bn
ETB in 2013/14 to 964 Bn in 2019.
Credit as a share of the economy
grew from 28.3 % of GDP in 2014
to 48.5 % of GDP in 2019. The
country’s broad money supply
(M2) increased as a share of GDP
from 28.1 % in 2014 to 44.6 % in
2019, reflecting an expansionist
monetary policy by the central
bank5. However, much of the
growth in domestic credit is
lending to public projects rather
than private investment, and a
large proportion of credit
outstanding is to State-owned
enterprises (SOEs). This ‘crowding
out’ by public sector borrowing
absorbs capital that might
otherwise serve private sector
demand, suppressing private
sector growth in Ethiopia. The
share of private sector credit of
the total outstanding credit has
been ~34% for much of the past
decade. The crowding out of private financing and the low level of intermediation in Ethiopia is
evident by a low private sector credit to GDP ratio of just 18%, versus 28% on average for Sub
Saharan-Africa.
Financing Landscape – Sources, Uses & Instruments. Figure (2) below shows an overview of
the financing landscape in Ethiopia, capturing sources of funds, instruments, and users of funds6.
5NBE, Annual Report

6’A Financing Map of Ethiopia: The funding landscape for future growth, Cepheus Capital, 2019; Impact Investment in Africa: Trends,
Constraints and Opportunities’, (United Nations Development Programme Regional Service Centre for Africa, 2016); ‘Scale Up!
Entrepreneurs’ Guide to Investment in Ethiopia’, (The Global Business Network (GBN) Programme, Tech-Entrepreneurship Initiative
Make-IT in Africa, 2019); ‘Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders’, (ReDesigning
Development Finance Initiative, A joint initiative of the World Economic Forum and the OECD, Sep 2015)

Figure 2: Finance/capital supply landscape in Ethiopia (Source: GIN, Cepheus capital, NBE, and WB)
Debt, equity, and hybrid forms are all available to varying degrees in Ethiopia and are provided by
both domestic and external sources. As shown in Figure (2) above, in terms of sources, external
and domestic funds each account for nearly half of the total ETB 4 trillion capital supply (stock of
funds) estimated to be available in 2019/20. In terms of users, nearly 49% went to the public sector,
35% went to the private sector, further demonstrating public ‘crowding’ of private investment7.
In terms of instruments and sources, external financing in the form of debt and equity continues to
play an increasingly important role in financing both public and private consumption and investment
expenditure. While the domestic debt stock reached ETB 1.47 Billion in 2019/20, external debt
stock reached ETB 995 Billion8. The FDI stock of the country reached USD 27.3 Billion (or ETB 941
Billion). More alarmingly, while FDI inflows recently declined globally, the decline in FDI inflows to
Ethiopia has been consistently worsening since 2016 (-3%, -18%, -24% per annum for the periods
2016-17, 2017-18, and 2018-19, respectively). This reduction in already low FDI inflows has further
constricted already limited forex and constrained economic growth, especially in sectors reliant on
imports.
7 The remaining 16% is residual, and can’t be clearly allocated to any particular user (this could partly reflect double counting, e.g.,
pensions funds available in banks). Note however that this doesn’t affect our credit supply calculations, because credit figures are directly
provided by NBE and other relevant sources which we used to calculate SEM capital supply figures.
8 Public Sector Debt Statistical Bulletin BULLETIN No. 35, Ministry of Finance, 2019/20

Figure 3: Finance supply sources, uses and instruments (Sources: NBE, Cepheus capital, UNCTAD, and Precise analysis)
Overview of Ethiopia’s Financial System: Access, Depth and Breadth
Relative to peer countries, Ethiopia’s financial system is shallow and less developed. For example,
relative to GDP, Kenya’s financial sector is almost twice the size of Ethiopia’s. As shown below, from
2016-19 average financial intermediary services output represented 1.3% of GDP in Ethiopia vs. 2.6%
of GDP in Kenya; FDI inflows were 1.5% of GDP in Ethiopia Vs 4.3% of GDP in Kenya. In 2018, the
size of financial sector assets relative to GDP was 63 % in Ethiopia and 118 % in Kenya. The non-
bank financial sub-sector is virtually absent in Ethiopia (although recent legal and regulatory reforms,
discussed in detail in the enabling environment [Section 9.1], may change this over time).

Figure 4: Relative Depth and breadth of Ethiopia's Financial system (Sources: WB, IMF, IFC, NBE, and Precise analysis)
Figure 5: Key facts about Ethiopia's financial system (Source: NBE, IMF, WB, and Precise analysis)
Furthermore, government plays a completely

different role in the two countries. In Ethiopia,
government banks control nearly 65% of banking
system assets while in Kenya government
ownership of bank assets is less than 5% of total
bank assets. Ethiopia’s financial sector is
comprised of 18 commercial banks (including two
state-owned banks, CBE and DBE), 17 insurance
companies (including the state-owned EIC), 41
microfinance institutions (MFIs), one reinsurance
company, six capital goods finance companies, and
over 18,000 savings and credit cooperatives. The
sector is dominated by banks, which currently
represent more than 92.6% of the total assets of
the sector. Banks and MFIs together hold 98.6% of
total financial sector assets.
Limited, State Dominated Bond Markets.

Ethiopia does not have developed capital markets
and existing markets are mainly comprised of
treasury bills and government bonds. Treasury

bills are sold to captive investors, every week. Maturities of T-Bills range from 28, 91,182, and 364
days; 91 days and 364 days are the most demanded terms. As of June 2018/19, the outstanding T-Bill
amount stood at ETB 138.1 billion, out of which Public Servants Social Security Agency (PSSSA)
owned 52%, Private Organizations’ Employees Social Security Agency (POESSA) owned 23%, DBE
owned 22% and other non-bank public institutions owned the remaining 3%. Annual transaction data
shows that demand outstrips supply. Given that the bills are fully sold to public institutions, it
suggests captive public institutions possess idle capital that could have been deployed elsewhere,
especially for the private sector, in a capital-constrained economy. Given Ethiopia’s capital supply
shortages, and already limited flows to the private sector and within the private sector especially to
SMEs, any material idle capital is harmful to SME financing.
Figure 6: Capital market activities (sources: NBE, Precise Analysis)
When it comes to bonds, there is no market-

based issuance of domestic government debt in
Ethiopia, and secondary bond markets do not
exist. Pensions (currently mandated to only
purchase government T-bills) and insurance
companies which could support demand for
market-based issuance of government bonds are
under-developed. The only non-government
bond issuance is that of SOEs, which is also not
market-based. The corporate bond market
remains underdeveloped; only a few public
institutions and regional governments
participate. Ethiopian Electric Power (EEP),
Railways Corporation, and Addis Ababa City
Government accounted for 78%, 13%, and 9% of
the total corporate bonds outstanding. CBE is
the sole purchaser of these bonds. As of June
2018/19, the stock of corporate bonds held by
CBE stood at ETB 338.6 billion.
Solid Commodities Market. Ethiopia has a

relatively well-functioning commodity exchange,
the Ethiopian Commodity Exchange (ECX),
whose trading and settlement platforms could
be further leveraged to support market development. Also, retail investors are already active in
government infrastructure debt securities, private share offerings and trading. They can serve as a
starting point for developing Ethiopia's capital market.
Except for the leasing sector, the financial sector is closed to foreign investment. The
banking sector has been closed to foreign investors, who are prohibited from acquiring shares of
Ethiopian banks. However, a recent proclamation (2019) ratified by the Ethiopian Parliament has
allowed ‘foreigners of Ethiopian origin’ (diaspora) to purchase shares in Ethiopian banks. The new
proclamation also allowed interest-free lending to support the development of Islamic financing.
This is discussed in detail in Enabling Environment [Section 8.5].

Figure 7: Gender Difference in Financial Access (sources: IFC, Precise Analysis)
Penetration of formal
financial institutions remains
very limited. Ethiopia has
achieved good progress in
improving financial inclusion
over the past decade. However,
a majority of Ethiopians still rely
more on informal institutions for
their financial needs and more
effort is needed to bridge the
gap9. According to 2017 Global Findex10, only 35% of Ethiopians (Vs 82% of Kenyans) owned a bank
account at a formal financial institution. Although 62% of adults reported saving money in the past
year only 26% had their savings in a formal (regulated) financial institution. Likewise, 41 % of
Ethiopians said they borrowed money but only 11% borrowed from a financial institution. Almost all
adults pay utility bills with cash. Besides, women are less banked than men (only 29% of female adults
Vs 40% of male adults have an account; only 8.5% of female adults Vs 13% of male adults borrowed
from a financial institution). Overall, there is a large and untapped market of borrowers and savers
in Ethiopia that are not using financial services offered by formal financial institutions. This suggests a
potential opportunity for ‘fintech’ financing innovation. More importantly, financial inclusion paves
the way for individuals and businesses to access financing to invest in enterprises without which
private sector growth and job creation are curtailed11.
Rapidly growing retail access. There are over 39,000 access points including branches,
automatic teller machines (ATMs), point of sale (POS) terminals, and agent outlets providing financial
services in Ethiopia. The number of bank branches in Ethiopia increased from 2,208 in 2014 to 5,564
in 2019, with a CAGR of 20 %12. Ethiopia now has 5.64 bank branches per 100,000 adults, higher
than the SSA average of 5. On the other hand, Ethiopia still lags behind SSA in terms of digital
penetration. In 2018 Ethiopia had 4.37 ATMs per 100,000 adults compared to the SSA average of
6.7. While 80% of the Ethiopian population lives in rural areas, the majority of access points are
concentrated in Addis Ababa, where about 35.4% of total bank branches and 53.4 of insurance
companies’ branches are located. Distance to regulated financial institutions is a barrier to account
ownership for rural residents13.
9 ’Ethiopia - Small and Medium Enterprise Finance Project - Project Appraisal Document ‘, (IDA, 2016); ‘Ethiopia - The Path to an Efficient
Stable and Inclusive Financial Sector’, (The World Bank, December 18, 2019)
10 The Global Findex, Measuring Financial Inclusion and the Fintech Revolution (WBG, IFC, The Global Findex Database, 2017)
11 ’Ethiopia - Small and Medium Enterprise Finance Project - Project Appraisal Document’, (IDA, 2016); ‘The Global Findex Database,
Measuring Financial Inclusion and the Fintech Revolution’, (WB, 2017)
12 Annual Report, NBE, 2019/20
13 NBE Annual reports, (NBE, 2012/13 to 2019/20)

Capital Supply to SMEs
Figure 8: Enterprise financing in Ethiopia (Sources: WB, Precise analysis)
In Ethiopia, it is not just households and

individuals but also firms in general and small
and medium enterprises (SMEs) in particular
that find access to finance a major
obstacle14. Overall, business investments in
Ethiopia are primarily financed via retained
earnings (83%), compared to 8 % by banks,
5% through equity or stock sales, or 0.2%
from supplier credit15. Bank’s collateral
requirements remain high above 100% of
the loan amount. Also, collateral
requirements remain high above 1.5x the
average collateral requirement in SSA,
typically about 1.2-2x the original amount of
loans.
The total capital supply stock for SMEs is approximately ETB 110 Billion in 2020, of which nearly 82
billion in debt and the remaining 28 billion equity. Overall, in terms of capital supply to SMEs in
Ethiopia, we found that Ethiopia is behind
other peer African countries in terms of
credit and overall capital supply to SMEs. As
of Dec 2020, the share of SME lending in the
overall lending portfolio of banks in Ethiopia
is just 12 % (Vs 7 % according to WB 2014
study16).
Although FIs involvement in SME lending has

improved over the past five years, financial
institutions believe that the potential for this
segment of the market hasn’t yet been
cultivated well. The majority of surveyed
financial institutions believe that prospects
for the SME market are good and that the SME market size is large. However, SMEs still find it
difficult to compete with large corporates to get access to capital from banks as well as other FIs.
14 ’Ethiopia - Small and Medium Enterprise Finance Project - Project Appraisal Document ‘, (IDA, 2016); ‘MSME Finance Gap’ (IFC, World
Bank, SME Finance Forum, 2017); SME Finance (World Bank, 2017); SME Finance in Ethiopia: Addressing the Missing Middle Challenge,
(World Bank, 2014)
15 ’World Bank Ethiopia Enterprise Survey’, (WB, 2011, 2015)
16 SME Finance in Ethiopia: Addressing the Missing Middle Challenge’, (World Bank, 2014)

Figure 9: Total capital supply to SMEs (Sources: Banks annual report, WB, IFC, KII, and Precise analysis)
SME Lending Gap. SMEs represent a “missing middle” in the financial sector. While access to
finance is a major challenge for all firms in Ethiopia, Ethiopia’s SME business owners are held back by
a ‘missing middle’ financing problem that has been exacerbated by the COVID-19 pandemic. The
expansion of microfinance has improved access to finance among low-income households and
microenterprises. Banks have traditionally served the large corporate sector well. However, growth-
oriented SMEs tend to find themselves in a market segment that is not served adequately by either
microfinance institutions (MFIs) or banks. SMEs tend to be too large to be served by microfinance
institutions and yet too small and high-risk to be attractive to the formal banking sector, resulting in
what has been termed the “missing middle” phenomenon.17 MFIs primarily provide loans to informal
entrepreneurs, not small business owners, and the amounts they offer (about ETB12,000, on
average) tend to be too small for growing firms that seek to make substantial capital investments.
Lending to SMEs is limited as MFI deposit and loan portfolios are comprised mainly of
microenterprises (over 90 %). At the same time, small businesses tend to find it difficult to ‘graduate’
from MFIs to commercial banks, which prefer to lend to larger, less risky clients and are reluctant to
issue small loans (on average, bank loans are ETB2.7 million per borrower). This leaves a
considerable missing-middle of SMEs not served by either banks or MFIs and who need access to
finance18.
SME Equity Gap. Venture capital is still a niche phenomenon in Ethiopia, and the few existing
firms typically target investments of USD1 million (or about ETB40 million) and above in high-growth
industries. As a consequence, entrepreneurs report access to finance as their biggest challenge: 44
% of Ethiopian (Vs 25.1 % of SSA) small enterprises and 32 % of Ethiopian (Vs 17.6 % SSA) medium
17
‘Scaling Access to Finance for Early-Stage Enterprises in Emerging Markets: Lessons from the Field’ (Dutch Good Growth Fund, 2018);
‘Ethiopia - Small and Medium Enterprise Finance Project - Project Appraisal Document’, (IDA, 2016)
18 ’Ethiopia - Women Entrepreneurship Development Project Additional Financing, Project Paper ‘(IDA, 2020)

enterprises19. Although 90.7 % of mid-size firms and 90.7 % of small firms have access to a checking
or savings account, only 28 % of mid-sized firms and 30.4 % of small firms have a bank loan or line of
credit. Of their total investment finance 75.6 and 90.2 %, are internally sourced in small and mid-size
firms, respectively. According to the World Bank, this constraint has worsened significantly because
of the COVID-19 pandemic, with banks and MFIs alike slashing their lending operations to preserve
liquidity. This has significant development consequences because the majority of economic growth
and employment is created by SMEs. Thus, their difficulty in accessing finance constrains overall
economic growth.
Gender Gap20. Women entrepreneurs are especially disadvantaged in accessing finance, primarily
because they have less access to collateral. According to the World Bank’s 2015 Enterprise Survey
for Ethiopia, the number of female managers who use bank financing for investment purposes (3.1 %)
is smaller than the corresponding figure for both male managers in Ethiopia (8.1 %) and female
managers in other African countries (9.6 %). Similarly, the proportion of female managers who
consider access to finance a key obstacle to growth – about one in two – is much higher than the
ratios for Ethiopian male managers and female managers in SSA. Whereas relative to male managed
SMEs, female managed SMEs are asked smaller collateral as a percentage of loan21, limited access to
collateral among females can be a key impediment, especially in light of FIs preference for real assets
(buildings) as collateral for business loans and women’s relatively limited ownership and control of
such assets.
Figure 10: Access to finance among women managed enterprises (Source: WB)
5.2. DEFINING SMES IN ETHIOPIA

There isn't a commonly agreed-upon definition of SMEs across financial institutions as well as across
various government and development agencies. Employment, capital, turnover, assets, profits, and
exposure are the observed criteria used for classifying firms into SMEs and other categories.
However, these criteria aren’t consistently used across institutions. Commercial banks tend to rely
more on loan size and operating performance indicators (turnover or profit) to distinguish retail
19 2015 Enterprise Survey – full footnote - World Bank’s 2015 Enterprise Survey for Ethiopia
20 ’World Bank Ethiopia Enterprise Survey’, (WB, 2015)
21 While we are unable to find direct evidence and explanation for why female managed SMEs are asked smaller collateral, we believe that
one potential explanation can be related to relative reliability and credibility of women managed SMEs (for instance, even if female
managed SMEs generally have less access to bank loans, those that have access might be successful, have strong track record and
continuing business relationships with banks; as a result of which female managed SMEs that have access to bank loans are generally asked
lower collateral).

(and SME) clients from corporate clients. Government agencies tend to use the number of
employees along with capital or asset indicators to define SMEs. While all the three surveyed MFIs
loosely apply the definition of micro and small enterprises provided by the Federal Job Creation and
Food Security Agency (FUJCFSA), the two MFIs also use loan exposure as the litmus test criteria,
with small enterprises being defined as those firms whose loan exposure is between ETB 50,000 and
ETB 2.5 million.
The problem with definitions provided by federal agencies is a lack of consistency, as different
Agencies employ different definitions depending on specific contexts and purposes. The only sector
that employed a consistent definition of SMEs is the leasing sector, because of the regulatory
requirements stipulated by the NBE. Because so many enterprises in Ethiopia are small by global
standards, the definition of SMEs used by equity investors and international agencies would
fundamentally change the SME landscape in Ethiopia. Nearly all “large” Ethiopian firms would become
‘medium’ firms and the majority of firms customarily considered to be small enterprises into
microenterprises.
Table 2: SME definitions by different stakeholders (Sources: Interviews)
Stakeholders Employees Capital Asset (ETB Turnover/ Annual Annual Exposure (Million ETB)
(ETB Million) Sales Profit
Million) (ETB/Million)
NBE 6-100 0.5 to 20
DBE 6-100 0.5 to 7.5 1 – 30
FUJCFSA 6-30 1.5
IFC/IMF 100-300 USD 0.1-1.5 USD 0.1-15
World Bank 6-100
Commercial 30 or less 10 or less

Bank of
Ethiopia
Enat Bank 10 or less
Dashen Bank 30 million 15 or less

or less
Awash Bank 30 or less (Loan) or 20

or less (Deposit) or USD
500,000 (Forex Account
Abay Bank 6-100 10 or less
Hibret Bank 100 or less 20 10 or less
Addis Saving 0.05-2.5

and Credit
Oromia 6-100 1.5

Microfinance
Nisir MFI .05 or more
Addis CGF 6-30 0.5 to 20
Ethio Lease 6-30 0.5 to 20

Oromia CGF 6-30 0.5 to 20
Renew USD 2
Investments (EBIDA)
Note: All monetary figures are in ETB unless indicated otherwise
The lack of a common definition makes it difficult to generalize study findings and to estimate capital
demand and supply. However, even without an aligned definition, there are widely shared views
regarding the kinds of businesses SMEs represent and the challenges they face in accessing capital to
grow. For this report, unless indicated otherwise, the quantitative definition we employ is the NBE
definition of SMEs, as provided in the Capital Goods Financing Directive (2019). According to this
definition, SMEs are those firms with 6 to 100 employees, and/or capital amount of ETB 0.5 to 20
Million.
A potentially more actionable way to consider SME capital access is through a framework recently
advanced by the Collaborative for Frontier Finance (‘CFF’, or ‘the Collaborative’). The Collaborative
uses a wide, inclusive quantitative definition of SMEs/SGBs: Commercially viable businesses with 5 to
250 employees, seeking financing in the range of $20,000 to $2 million.
More usefully for this purpose, the CFF approach uses a qualitative definition that segments the SME
market into four types of distinctly differentiated SMEs, based on factors that impact and help
characterize each SME types:
• Financing needs
• Attitudes toward external capital
• Role in job creation in emerging economies
• Unique gaps faced between available financing options and enterprise needs
It was developed using quantitative data on SMEs from investors, insights into how investors
segment the market for capital investments, and behavioral analysis of entrepreneurs. It aligned well
with the capital providers and entrepreneurs interviewed for this study, and uses 3 main factors to
group SMEs into ‘families’ facing similar financing needs and motivations:
• Market growth and scale potential
• Product or service innovation profile
• Entrepreneur behavioral attitudes
The CFF’s 4 Types of SMEs / SGBs are:
• High Growth Ventures: Disruptive business models targeting large markets. High
growth and large-scale potential. Often led by ambitious entrepreneurs with high risk
tolerance. These start-ups are usually technology focused and demand ‘risk equity capital’ in
an effort to break into the market. In Ethiopia, they are often founded by young people aged
18-34.
• Niche Ventures: Innovative product or service targeting niche markets. Entrepreneurs

seek growth but often prioritize other objectives than scale.

• Dynamic Enterprises: Operate in ‘bread and butter’ industries (trading, manufacturing,
retail, services). Deploy existing products and business models; seek to grow by market
extension or incremental innovation. Moderate growth and scale potential.
• Livelihood Sustaining Enterprises: Family run businesses on a path to incremental

growth. Formal or informal; operate as owner-operator or family businesses. Primary goal
is income for the owner-operator or family. Replicative business models, serving highly local
markets or value chains.
This framework was developed to help the Collaborative fulfill its mission – to unlock greater flows
of appropriate capital to SMEs/SGBs in frontier and emerging markets, and to help foster the
development of more efficient financing markets that better match enterprises to the financial
services providers that can help them. As discussed in the Capital Demand Section and our
recommendations, we find it practical and useful in mobilizing additional capital flows to SMEs.
5.3. DEBT FINANCING TO SMES

The main source of debt finance for SMEs in Ethiopia are banks, MFIs, and leasing companies.
Banking Sector
Growing, Profitable, Strong Liquidity and Asset Quality. Ethiopia’s banking sector consists
of 18 commercial banks that—as of June 2020—collected Birr 999 bn in deposits from more than
35mn savers; provided Birr 502bn loans and advances (to more than 250K borrowers), operating
with more than 5.2K branches. Traditionally, banks’ service menu covers basic offerings including
simple deposit accounts, loans, guarantees, and Letters of Credit for importers. In recent periods,
digital banking including ATMs, POS, online banking, and mobile banking, are becoming more
common. Interest-Free Banking (IFB), and personal (consumer) loans are also becoming common.
The sector continues to show favorable safety indicators: in June 2019 the average risk-weighted,
system-wide capital adequacy ratio was 11 % (1.37x minimum requirement); and the non-performing
loan ratio was only 5.3 % (although 2x 2015 levels). The sector has seen consistent growth, high
profits, and high returns for over 20 years. Over 10 years, deposits, loans, and profits have grown by
28 %, 31 %, and 22 % per annum, respectively. While these metrics show a strong banking sector
and commercial discipline, they also indicate a pattern of limited risk-taking, practices heavily
influenced by limited capital supply, and low competition.22
22
‘Ethiopia’s Banking Sector’, (Cepheus Capital, Cepheus Research & Analytics, May 2019)

Figure 11: Banking overview (Bank’s annual report, NBE, Bank’s websites, Precise analysis)
Exclusively
Domestic. The
banking sector is
operated
exclusively by
domestic banks by
law, is highly
concentrated, and
is dominated by
state-owned
banks.
State
Dominance of
Banking. State-
owned banks
(CBE and DBE)
command 65 % of
total assets of the
banking sector, 49
% of lending, and 60 % of deposits. The state-owned Commercial Bank of Ethiopia (CBE) holds 59%
of total banking assets and 60% of total bank deposits. The Development Bank of Ethiopia (DBE) is
another state-owned bank and is the second largest bank in Ethiopia. The GoE uses the two banks as
instruments for directed credit, using CBE to finance large infrastructure projects, and state-owned
enterprises (SOEs) and, using DBE to provide subsidized financing to small and medium enterprises
(SMEs) in key priority sectors.
Unlevel Playing Field. This approach diverts finance from productive private investments to
public enterprises most of which are loss-making. Despite an overall capital shortage in Ethiopia, to
SOEs, the directed and abundant flow of credit tends to lower market discipline and disincentivizes
the CBE to rethink its business model to serve SMEs currently unable to access bank loans. The DBE
acts both as a conduit for largely donor-funded lending to SMEs and as a funding vehicle for large
projects in the manufacturing, agriculture, and textiles sectors. While DBE’s SME-focused credit
programs have demonstrated some success, its project financing activities resulted in abnormal levels
of nonperforming loans (NPLs ratio 34% as per official reporting to the NBE, June 2019), posing a
substantial quasi-fiscal risk. Due to their sheer size and (implicit) government guarantee of their debt,
the CBE and DBE can offer subsidized funding (DBE lending rate is 9-11%, CBE is around 11% - 12%,
whilst private banks average between 14% - 18%). Overall, the unlevel playing field between private
and government-owned banks continues to be a fundamental obstacle to efficient financial
intermediation and development of the overall Ethiopian banking sector, and an obstacle to
improved access to finance among SME enterprises in Ethiopia.

Figure 12: Growing Importance of Private Banks (Source: Precise Analysis based on data from NBE, WB, IFC, Banks’ annual report)
The Growing Importance of

Private Banks in the SME
Space. Among private banks,
Awash, Dashen, Abyssinia, CBO,
and United are the top five private
banks in terms of assets. In
2019/20, the share of private
banks in total bank loan portfolio
and deposits has been 51% and
40%, respectively. Private banks’
share of branch network,
outstanding loan, and net deposits
mobilization grew at a CAGR of
5%, 10%, and 11.1% per annum,
respectively, between 2014 and
2019. Private banks have also
become more competitive and
less concentrated over time23.
Over the past five years, private
banks have increased their
involvement in SME lending. We
estimate that in 2019/20, private
banks represented 67% of bank
loans outstanding to SMEs in
Ethiopia, which demonstrates the
strong position private banks
command in the SME space. The increasing collaboration between DFIs and private banks to
introduce SME-focused credit schemes have helped leading private banks to start thinking about the
SME segment as a major growth opportunity. All the leading private banks have been working with
major consulting firms (e.g., Deloitte, KPMG) in implementing large scale strategic and organizational
transformation initiatives that have helped private banks to reassess their past view of the retail and
SME segments and to renovate their business model to be able to serve SMEs better. For instance,
the three leading private banks introduced SME / retail divisions as part of these organizational
transformation initiatives.
Bank Credit Clients and Products
Narrow Product Range in Practice: Term Loans Dominate. In addition to term loans,
credit products provided by Ethiopian banks include overdraft facility, merchandise loan, letter of
credit, guarantee facilities. Term loans represent nearly 76 % of loans outstanding, followed by
advances (14 %) and overdraft and others representing the remaining 10%.
23 ‘Ethiopia’s Banking Sector’, (Cepheus Capital, Cepheus Research & Analytics, May 2019)

Figure 13: Bank credit products (Source: Bank’s annual statement, NBE, Bank websites, Precise analysis)
Products Not
Matched to Client
Needs. Banks offer SME
clients more or less the
same products they offer
to their corporate clients.
While a few banks are
experimenting at a small
scale with modest
adjustments around
existing products,
comprehensive SME-
focused product
innovation is significantly
lacking in the sector,
limiting bank’s accessibility
for SMEs. Similarly, banks
also fail to make their
products accessible to
specific SME segments
such as women-led SMEs.
Whereas four out of
seven surveyed banks
have some micro and
small business credit
schemes targeting women
managed enterprises, in
general, banks give little
consideration to
particular needs and
characteristics of women
borrowers (e.g., relative
to men, women are less able to provide collaterals for loans) in their product development, budget
allocation and loan disbursement to their clients. On the other hand, recent rapid growth in
Interest-Free Banking (IFB) has enabled banks to improve access to finance among SME clients that
have Muslim owners who for religious and cultural reasons are not well served by conventional
interest-bearing loan products.

Figure 14: Loan market share and share growth (2014-19) by sector (Source: NBE, bank’s annual statements, Bank’s websites,
Precise analysis)
Sector Distribution. The distribution

of lending by sector is summarized below.
The banks we interviewed reported that
sector is not an important variable for
customer segmentation and targeting. As
long as regulatory directives and
guidelines of bank credit risk management
and diversification (e.g., limits on
exposure to a single borrower, limits to
lending to related parties, NBE risk
management guideline) are met24, banks
are willing to lend to the most profitable
client whatever the client’s sector might
be. However, some sectors – such as
manufacturing -- are favored by banks.
Between 2014-19, the
industrial/manufacturing sector received 36.4 % of bank loans, followed by Domestic Trade (10.6),
Housing & Construction (10.1), and International Export Trade (9.1), and International Import Trade
(8.7). Over the same period, excluding government deficit financing, personal loans showed the
highest CAGR growth rate (107.8 %), followed by Export Trade (37.8 %), Domestic Trade, Hotels &
Tourism.
Figure 15: Bank loan distribution by loan size/exposure per borrower (Source: Banks, Precise analysis)
Large Customers Dominate. A look at bank

loan distribution by average loan size reveals a high
concentration of loans among small proportion of
large customers. As shown in the charts to the left
(Figure 15), borrowers with a loan size of ETB 5
million or less represent 94 % of borrowers but
account for just 32 % of loans outstanding, with the
remaining high exposure borrowers (5 million and
above) who represent just 6 % of the total
borrowers borrowed the remaining 68% of loans
outstanding. The top 1 %of borrowers (all of which
borrowed more than 50 Mn per head) have 38 % of
the entire loans outstanding. Thus, a large
proportion of loans outstanding is concentrated
among a handful of large corporate clients.
24 More on this in Section 8, ’Enabling Environment’

Figure 16: Overall average loan size per borrower (Source: Banks, Precise analysis)
The overall average size of the loan per borrower among

private banks is ETB 2.7mn. This figure is inaccessible for a
large proportion of small firms that would like to get bank
loans. Using the common loan size-based definition of
SMEs employed by several banks, the retail segment
(representing both consumer and MSMEs) falls within the
10 million or less loan size range, and on the surface
appears to represent as much as 30% of bank loans
outstanding. However, a deeper look that takes into
account the share of bank loans to consumers and
microenterprises, and the typical capital structure of SMEs, shows the proportion of bank loans to
SMEs is likely below 20% of total bank loans outstanding.
In terms of firm size, the 2015 World Bank Enterprise survey shows that access to bank loans
significantly varies between large firms and SMEs. As shown in Figure 17, loan application rejection
rates were 0.6 % for large firms vs. 6.5 % and 22.7 % for medium and small firms, respectively. While
large firms used bank finance for working capital (48.8%) and capital investments (68.1%), and
medium-sized firms used bank financing for working capital (17.6%) and capital investments (9.6%),
only 11.3% of small firms used bank loans for working capital; and only11.9% for capital investments.
SMEs also have a relatively smaller share of their working capital financed by banks (Large firms
(18.9%), Medium (8.3%) and small (7.5%)) as well as their investments (Large firms (17.1), Medium
(6.1), and small (6.9)). All of this supports that the worldwide “Missing Middle” phenomenon is
especially pronounced in Ethiopia. Overall, based on our interviews and review of previous studies
and banks’ reports, we estimate that SME loans represented just 6% of outstanding loans in CBE,
16% in DBE, and 15% in private banks.
Figure 17: Banks loan supply and accessibility for SMEs (Sources: WB, Mckinsey, Precise analysis)

Figure 18: Bank loan distribution by region (Source: Banks, Precise analysis)
Heavy Concentration in Addis Ababa. Banks say they

have no geography-based business model and are ready to
serve any client anywhere in Ethiopia with the same credit
products as long as the client meets the necessary business,
technical and legal requirements. However, 69% of loans are
originated in Addis Ababa, because Addis Ababa is the hub of
the country’s business activity. Addis Ababa also has the
largest bank borrowers; Addis Ababa has 38% of total bank
borrowers, but these borrowers represent 69% of banks’
loans outstanding.
Collateral and Documentation Requirements for Bank Loans
Extreme Over-Collateralization. I In Ethiopia, the majority of finance provided by banks is

secured with both immovable and movable assets. Unsecured credit is granted on an extremely
limited basis to longtime clients who have demonstrated earnings equivalent to 100% of the loan for
the past two years and who have been given a high ranking based on the bank’s credibility indicators.
Several industry observers and analysts have noted that collateral requirements are one of the major
obstacles to accessing loans by SMEs in Ethiopia. Our analysis based on data from selected banks
confirms this. On average, the value of collateral tied up to secure bank loans is 2x the original value
of loans. This practice supports bank profitability, asset quality, and sector financial strength and
resiliency, but it severely limits credit availability, economic growth, and the inclusiveness of growth.
And counter to the common belief, among SMEs we interviewed, there is no legal or regulatory
requirement for collateral. More on this in later sections, but addressing this barrier would be one
of the highest impact steps available.
SMEs are Even More Restricted. Collateral requirements vary somewhat with borrowers’ size
but are extreme at all sizes. According to the World Bank Enterprise survey (2015), small firms are
asked higher (323%) collateral compared to large firms (282%) – but both are effectively 3x the loan
amount. All banks require at least 85% of the loan as collateral, except for loans that are backed up
by government or DFI guarantee. This excludes many SMEs from accessing bank loans because many
SMEs can’t present as much collateral.
Real Estate Dominates. In the context of extreme over-collateralization by the standards of

more mature lending markets, banks we interviewed express a slight preference for taking
immovable property as collateral, most accept movable collateral as well. The most common
collateral in terms of value is real estate (64%), machinery (9.3%), and vehicles (3.5%). Movable
collateral is largely represented by vehicles and 90 % of the total movable collateral reported to the
Credit Reference Bureau is of this type. While machinery and equipment are also commonly
accepted, banks revealed they are reluctant to take fluctuating assets, such as accounts receivables
and inventory, as movable collateral. One of the main reasons Ethiopian banks consider movable
collateral a higher risk is the lack of a single movable property registry. In Ethiopia, there are several
registries in which interests in certain types of movable collateral can be registered depending on the
type of asset. These registries are located throughout the different regions of the country and are
not linked, thus the information registered within each registry is not automatically shared with the
other regional offices.

Figure 19: Collateral and document required for banks loans (Bank’s annual statements, GIN, Websites)
NBE directive on lending with movable property collaterals. The latest NBE directive
requires banks to have at least 5% of the value of their loans backed up with movable asset
collateral. When and if properly implemented, this directive may improve SMEs’ access to bank
loans.
Bank Credit Pricing
Figure 20: Pricing of banks loans (Source: NBE, Precise analysis)
Bank lending rates can be

as high as 20% and
averaged 13.5% in 2019.
The average spread
between the lending rate
and weighted average
deposit rates was 8.28 % in
2018/19, which is only
slightly less relative to 8.84
% in 2014, and 9.43 % in
2016. This is a large
spread, especially when
considering that banks
collect various loan
processing fees (appraisal
fees, credit processing
fees, among others) for all
administrative costs they
incur in the lending
process. Hence, the
lending spread by and large translates into profit. Interviewed bank leaders confirm that the interest

rates banks currently charge for loans are very high, generating large profits for banks. noteworthy.
It is noteworthy that the GoE has not been more directing in the matter. It may be that the GoE’s
borrowing needs from private banks, and the political risk that could arise from an increase in
defaults may be contributors.
Figure 21: Average loan terms: private vs public (Sources: NBE, Precise analysis)
Longer Tenors Harder to Secure for SMEs.

Based on the loan portfolio of both public and private
banks, bank loans have an average term of 3 years
period in 2018. Relative to private banks, public banks
provide loans with longer tenor.
Concerning
tenor, long-
term
financing
needs of SMEs served less adequately. SMEs have more
constraints in accessing long-term finance than short-term
working capital finance. Among surveyed private banks,
the maximum loan term reported was 6 years for SME
loans v.s 10 for large enterprise loans. Furthermore, the
average term for all types of loans among public banks is
4.2 years Vs 2.2 years among private banks. Given private
banks represent 67% of bank lending to SMEs, and that on
average private banks’ lending tenor is shorter, it can be
deduced that the overall average bank lending tenor to
SMEs is likely to be shorter. Moreover, according to the
2015 World Bank Enterprise Survey, among SMEs, access
to investment capital (longer-term) is even more
constrained than access to working capital (short-term in general). This indicates that the long-term
financing needs of SMEs are not well addressed and that there is a potential market gap here.
However, shorter-tenor loans (2-3 years) are much easier for banks to provide, and could work
perfectly well for SMEs so long as SME owners have confidence they can refinance or extend their
loans if they perform well.
Many Banks Have At least One SME-related DFI / NGO / Government / Non-DFIs
Guarantee Scheme. Schemes commonly provided by banks are associated with MasterCard,
DBE / World Bank, and USAID. This has created an inaccurate view among banks that SME lending is
unprofitable and can be done only when initiated by donors, DFIs, or the government. On the
positive side, SME financing schemes driven by DFIs have helped to motivate banks to set up a
separate SME unit to manage SME-related loans even when their sole program for SMEs is donor-
driven. Sometimes this means a unit composed of a single analyst who follows up such schemes, but
this has enabled banks to gain experience in SME lending and to identify opportunities for growth in
the SME space. If properly reinforced, this can steer further growth in banks’ SME lending.
Bank Lending Products Inaccessible to Particular Groups. The introduction and growth of
Interest Free Banking / Islamic Banking services by existing commercial banks as well as new full scale
Islamic Banks has expanded access to banking / finance within the Ethiopian Muslim community.
Despite these recent developments, available bank products don’t satisfy the financing needs of
Muslim owned SMEs. This is particularly important for guarantee and other schemes that are

designed to improve access to finance for SMEs. A case in point is in relation to guarantee schemes
that have been introduced recently, about which our interviews indicate that products and services
provided in partnership with DFI and Non-DFIs fail to cater to the needs of the Muslim community,
who don’t accept interest. For instance, while implementing the MasterCard program one of the
surveyed banks discovered that some Muslim SME owners who fulfilled the necessary criteria
required to get loans dropped out when they learned that the credit scheme is interest based.
Similarly, whereas DFI backed schemes have contributed much for improving women owned SMEs
access to capital, overall supply of capital targeting women managed SMEs remains very limited thus
far.
Loans based on guarantee schemes and special funds have high default rates. Key
informants also expressed their concerns that default rates among SMEs that received loans via SME
guarantee programs by DFIs / government tend to be greater and such borrowers are more likely to
use borrowed money for purposes other than agreed in loan contracts.
Untapped SME Lending Profit Potential. According to interviewed banks, not only are bank
loans highly profitable overall, but lending to SMEs could be even more profitable and attractive, with
significant untapped market potential and growth opportunities. This is supported by a 2012
McKinsey study on MSME banking, covering Ethiopia along with several emerging market countries.
Ethiopian banks participating in the study serving MSMEs reported the segment yields up to 25-31%
Return on Equity25.
SME Banking Model and Methodology
Gradual Shift to Prioritizing SMEs. Four out of the seven banks interviewed have introduced an
SME-focused division overseen by a c-suite executive or director. The remaining three have a small
team or an officer assigned to engage SME clients and manage donor-driven guarantee or other SME
financing programs. This contrasts with the World Bank’s 2014 MSME financing study which found
only one bank having a dedicated MSME unit. There is significant progress in this regard between
then and now.
Standard Appraisal Process. Most banks follow the same selection and approval process. All
require sufficient collateral, good credit history, financial statements and records from applicants,
and various legal documents. The lending process includes: Application, Appraisal (Technical,
Financial appraisal), and Decision; and lending approvals are made by committees.
Using CCR as a Substitute for Financial Statements. For SMEs lacking adequate financial
records and statements, banks commonly use a form known as CCR as a substitute for formal
financial statements and are completed based on interviews with applicants. Most loan application
rejections are due to incomplete documentation by applicants
Low Rejection Rates Once Formal Application is Submitted. Considering formally

submitted loan applications only, the rate of loan request rejection is very low among banks, not
25 ‘Micro-, small and medium-sized enterprises in emerging markets’, (McKinsey 2012)

more than 5 to 10 %. However, this low rejection rate is due to applicants’ decision not to submit
applications in the first place once they received oral advice from branch managers.
Majority of Decisions at Branch Level. Most approval decisions are made by credit committees
at the branch level. Depending on the size of banks, loan appraisal and approval decisions authority
vary. For larger banks, branches can approve up to Birr 5 to 10mn, regional offices/districts up to
Birr 30mn. For smaller banks, up to Birr 1.5mn is more typical.
Figure 22: Seasonality in bank lending and saving activities (Sources: NBE, Precise analysis)
Seasonality in Loan
Demand and Bank
Liquidity. Demand for
bank loans tends to be
seasonal, tied to
harvesting and export of
key crops. As can be
seen in the chart to the
left, Bank liquidity
reaches its low during
harvesting season, and
credit demand at these
times far exceeds supply
(Oct-Dec Season).
During Ethiopia’s
planting and cultivation
season (Apr-July), banks’
liquidity reaches its
highest, and banks tend
to be more lenient in
their lending requirements. Banks we spoke with tend to be relatively more lenient in their lending
to SMEs during those seasons where they have low demand from large corporate clients and their
liquidity position is stronger. This suggests SMEs are more likely to secure loans in the months of
April-July, when banks’ liquidity is at its highest, provided that they have 1x-2x collateral and meet
other requirements.

Microfinance Institutions (MFIs)
Figure 23: Microfinance overview (Sources: NBE, Association of Ethiopian microfinance institutions, Precise analysis)
Massive Comparative Reach26. MFIs are an important vehicle for financial inclusion in Ethiopia.
MFIs reach market segments that other financial institutions in Ethiopia do not and play a critical role
in the provision of credit to underserved borrowers. MFIs now serve over 5 million loan customers
– 20X the estimated 250,000 loan clients served by commercial banks. About 45% of Ethiopian MFI
clients are women. Most of the MFI portfolio is in rural areas, and operates through group lending
models, with average loan sizes of about $320.
The importance of the microfinance sector has increased over time and is promising. The sector is
characterized by a heterogeneous mix of institutions. As of September 2020, there were 39 MFIs (41
as of Jan 2021) that mobilized total savings deposits of ETB 42.7 billion and outstanding credit of ETB
62.1 billion and total assets of ETB 92.2 Billion. All these indicators show the growing contributions
of MFIs to financial inclusion in rural and urban areas through their focus on underserved, low-
income segments of the society. Engaging MFIs, even more. would be an excellent mechanism for
expanding financial inclusion in Ethiopia.
But Limited in Scope and Reach. Despite the MFI sector’s growth and contribution to the
financial sector, less than 50% of Ethiopian households and microenterprises can be reached through
MFIs. The other half must either develop a relationship with a formal banking institution or rely on
internal or informal sources of capital.
Critical Challenges to MFIs. Despite the growth in the sector, the sector faces several
challenges, which include, but are not limited to, high market share concentration, funding
26 In Ethiopia MFIs are permitted to take customer deposits

constraints, high operational costs, deficient management information systems, and limited
management capacity and expertise.
High Concentration Limits Nationwide Impact and Concentrates Power. The sector is
dominated by a handful of large MFIs affiliated with regional governments, along with smaller private,
commercial MFIs and MFIs affiliated with NGOs. Of the 41 MFIs in Ethiopia, five (12% of MFIs)
accounted for 82% of total capital, 91% of savings, 87% of the credit, and 86% of the assets of all
MFIs combined. They are all owned by different regional governments, operating in different regions
and therefore not competing with each other: Amhara (ACSI), Dedebit, Oromiya, Omo, and Addis
Credit and Savings Institution.
Figure 24: Capital structure of MFIs (NBE, AEMFI, Precise analysis)
Funding Shortfalls Constrain Growth.

Difficulties in attracting savings and lack of funds
for on-lending to clients were indicated as the
most severe constraints to the growth of the
sector. As of Sep 2020, the value of total savings
(ETB 42.7 billion) stood at 69% of the value of
outstanding credit (ETB 62.2 billion). The
limitation of Ethiopian MFIs in saving mobilization
is further evident when we compare their funding
structure relative to MFIs in other countries. For instance, on average between 2016-17, the saving
to loan ratio stood at Ethiopia (77%) Vs Africa (124%), and the share of deposits in funding structure
stood at Ethiopia (52%) Vs Africa (71%)27. This funding gap is compounded by the fact that foreign
entities cannot invest in or own MFIs.
Operating Inefficiencies and Capacity Limitations. MFIs face insufficient capital, low savings
mobilization, and difficulty accessing commercial financing, all of which limit MFIs’ ability to meet
their high credit demand. There is a widespread lack of modern technology, in particular
management information systems (MIS) and core banking systems, which keeps operating costs high
in an already high-cost delivery system. Often, staff capacity is low. All these factors combine to
limit the product offerings, innovation, and drive of MFIs to grow and expand their market.
Figure 25: Types of MFIs
The dominance of Government-Affiliated MFIs, which do not

operate on a fully commercial basis, has distorted overall growth in the
sector. This has resulted in several unintended negative consequences.
Government-affiliated MFIs access concessionary funds to fund their loan
portfolios and are less motivated to mobilize retail deposits or innovate
in product design or service delivery. The MFIs that do operate on a
commercial basis, end up facing higher relative funding costs requiring
them to charge higher rates. Government representatives make up the vast majority of shareholders
and board members of such MFIs, which are often used as channels by the regional government to
27 Global Outreach & Financial Performance Benchmark Report (Mix, 2016/17, 2017/18)

provide subsidized lending to underserved segments. Management can face pressure to use looser
lending criteria to disburse loans at below-market rates and with lighter terms and conditions. While
these are worthy policy objectives, it is risky to utilize deposit-taking MFIs as a direct
implementation tool for government development objectives.
Unhelpful Public Perceptions. The MFI sector has gained a reputation among consumers as a
source of low-cost government-sponsored credit and not as a safe, commercial, formally regulated
place to save. This has undermined the ability of all MFIs to attract retail deposits. Consumers
perceive MFIs to be riskier and have greater trust in banks as safer, more commercial institutions
required to comply with stricter rules and regulations. As a result, the MFI sector is not well-
positioned for long-term sustainable growth or innovation. More commercialization of the MFI
sector would be needed for it to advance in sophistication, expand outreach efficiently, and reach its
potential of contributing to inclusive growth in Ethiopia.
Other Countries Offer Relevant Learnings. In other countries, the commercialization of

microfinance has resulted in greater efficiency, sophistication, and scale of operations.
Commercialization of MFI sectors typically entails transitioning from donor-funded, subsidized
operations to private, financially sustainable institutions with a for-profit orientation.
Key Elements and Benefits of Commercialization. Common patterns in successful MFIs in

other countries include (1) adoption of a for-profit orientation, (2) progress towards operational
and financial self-sufficiency, (3) usage of market-based sources of funds, and (4) operation as a for-
profit, formal institution subject to good governance practices, clear regulation, and supervision.
These all enable the attraction of equity investment.
Commercialization of MFIs in other countries has resulted in more modernized MFIs with easier
access to commercial finance, increased efficiency, and expanded operations, thereby allowing for
profitable, financially sustainable outreach to greater numbers of underserved consumers and a
larger contribution to financial inclusion goals.
In Ethiopia, greater sophistication of operations will be necessary for MFIs to modernize and be
better positioned to leverage improving financial infrastructure in Ethiopia. This would further
enable MFIs to expand product offerings, and upscaling of MFI product offerings is needed for MFIs
to play a role in bridging some of the significant gaps in SME finance.
Potential DBE Role. A restructured DBE could play a role as an apex institution to support the
development and introduction of new financial instruments, programs, and practices, as well as to
support the development of a more commercial microfinance sector operating more effectively. The
DBE currently finances MFIs and understands the sector well. However, for this to occur, the DBE
would have to improve its capacity to innovate products and services while managing risks and
improve its operating efficiency.
Microfinance Credit Products and Clients
The provision of credit and saving products are the two most important financial products/services
delivered by all MFIs in Ethiopia, although a few MFIs are being involved in managing the pension fund
of Social Security Authority and money transfer,
Savings. Saving is a pre-condition for investment and consumption smoothing and as a result, it can
be an effective instrument to overcome economic shocks. MFI savings products include center
savings, compulsory group savings, individual voluntary savings, and institutional voluntary savings.

Credit Products. The most common microfinance product is microcredit, characterized by a
range of loan products with short maturities, limited amounts, and fixed repayment schedules.
Sector Classification. One way to classify MFI loan products is by type of economic activity:
Agricultural, Micro-business, and Other loans. Agricultural loans are loans for agricultural inputs,
livestock production, bee-keeping, etc. These are usually term loans; principal and interest are repaid
in full at the end of the loan term. Terms vary from one week to one year for all MFIs in Ethiopia.
Micro-business loans are loans for petty trade, handicrafts, and other services, which are repaid
weekly, bi-weekly, or monthly regularly. Micro-business loans tend to have lower default risks than
agricultural loans. Other loans include civil servant/employee loans, package loans (food security
loans), and housing loans.
Lending Model Classification. Another classification is based on the lending model: Group
Loan, Individual Loan, and Enterprise / Business Loan. Microfinance loans are often accessed either as
individual or group loans. MFIs primarily use the group lending methodology to serve those without
traditional collateral. Individual lending methodologies are used to lend to MSE operators that need
larger loans. This method is important to people who have collateral or a good repayment track
record. It provides more developed small-scale enterprises with the flexibility to borrow for specific
needs as and when they need the resources. Enterprise loans share many of the features of
Individual loans. However, while individual loans can be extended to an individual
farmer/household/business person (and hence, the loan requires a personal guarantor), Enterprise
loans are granted to business enterprises as legal entities (who can provide assets that can be
pledged as collateral for loans), where the number of owners can be a single individual or multiple
individuals. Non-performing loans (NPLs) for the sector are relatively low.
Table 3: MFI loan products and terms
SMALL BUSINESS GROUP LOAN INDIVIDUAL LOAN

ENTERPRISE/ LOAN
Target Groups of urban and semi- Smallholder farmers, Women Smallholder farmers
urban clients
and petty traders
Purpose Small business and Working capital, agriculture and Irrigation farming, livestock rearing
enterprises
related activities
Lending Individual, ETB 5,000- Group Personal guarantors

Method 10,000
Group size Around 5 5-10 Individual
Interest Rate 15%-18% per annum, flat 18 per annum, flat 18-24 per annum, flat
Loan Size 5,000-100,000 200 – 100,000 1,000-50,000

(ETB)
Repayment Weekly / Biweekly Weekly / Biweekly or monthly End of loan term

Modality
or monthly installment
Compulsory 10-15% of loan disbursed 10-15% of loan disbursed 10% of loan disbursed
saving
Credit 1% credit insurance 0.3-0.5% of loan disbursed 1% of loan disbursed service charge
insurance /
mandatory service charge
Service
Charge

Group Lending Model Common among MFIs. The group lending model has been widely
applied with good results globally as well as in Ethiopia. It has proved to be a powerful mechanism
for reducing risks and transaction costs, especially in remote and low population density areas. It
builds on traditional indigenous institutions. Examples of traditional informal group savings and
lending schemes include the Ekub in Ethiopia. These schemes are based on traditional knowledge and
values and microfinance initiatives that build on them can count on legitimacy, accountability, self-
enforcement, and expanded reach.
MFIs partner with NGOs / the Government and Banks to increase access to credit for
small size clients. Loan guarantee facilities are common where some NGOs enter into a
partnership with MFIs / commercial banks in the provision of loans in the form of risk-sharing. The
NGO deposits a loan guarantee with the MFI / commercial bank and in return the MFI/commercial
bank provides and manages the loans on a commercial basis including supervision and monitoring of
the loan recipients. This introduces the borrowers to commercial or conventional banking and
prepares the borrowers to enter into the world of commercial banking. This approach has mostly
been used to demonstrate to MFIs / commercial banks that poor people are viable clients. In a
similar vein, public banks and large private banks commonly partner with MFIs whereby the former
provides funds to MFIs who in turn lend the funds to small-size clients that banks often find less
attractive to serve directly.
Figure 26: MFI's credit customers (Sources: NBE, ADMFI, Precise analysis)
Microenterprise Focus by
MFIs. Microenterprise loans
represent 92% of all borrowers
and 84% of outstanding MFI loan
value. Household loans represent
10% of outstanding value and 8%
of the total number of loans.
Loans to SMEs represent 6% of
the loan outstanding and 1.5 % of
the total number of loans. In
terms of sector, agriculture,
manufacturing, and construction
businesses are the top three
recipients of MFI loans. Female
borrowers represent 57% of
borrowers and 56% of the
outstanding loan value of MFIs,
less than some other countries
where women are the primary borrowers.

Microfinance Lending Terms
Figure 27: Interest rates of MFI loan (Sources: AEMFI, Precise analysis)
The average loan term among MFIs tends to be short, about 12-18
months. The average interest rates across all products and all MFIs
at the end of 2020 was ~18 %. Interest rates for MFI loans range
from a subsidized rate of 8% for Youth Revolving Fund to a 36%
rate for SME loans. MFIs use a declining interest calculation method
to incentivize early repayment.
MFI Collateral Requirements Limit Borrowing. MFI

collateral requirements are high but slightly lower in MFIs than in banks. Private MFIs may ask for
collateral worth 80% to 200% of the loan depending on the type of the loan, the type of the MFIs,
and the credit history of the borrower. Typically, privately owned and for-profit MFIs require
collateral amounting to an average of 120% of the loan. Collateral commonly used to secure MFI
loans include vehicles, houses, guarantees (salary, government, donor, etc.). Among commercially
driven MFIs, 90% of collateral used for SMEs are vehicles.
Mixed Default Rates. Default rates tend to be higher in state-owned MFIs, compromising the
overall portfolio quality of the MFI sector. By contrast, commercially driven MFIs target at least a
95% collection rate, and demand up to 200% of the loan as collateral, to ensure timely and full
repayment. For repeat clients, the collateral requirement is reduced to 150% for a client who
borrows for a second time with a good previous credit record.
Higher Loan Administration Costs. Relative to banks, MFIs incur high average loan
administration costs. This is driven by small transaction size, travel distance to customers, and
customer density. According to one MFI we interviewed, a small MFI has to serve 100 customers
for every single bank customer, which translates into proportionately higher administrative costs.
Lease Financing
A Model of Rapid Financial Sector Development. Although leasing legislation has existed
since 1998 in Ethiopia, institutions only began offering finance leases locally in 2014. Within just 6-7
years, as of December 2020, there were six lease finance companies (1 privately owned and 5
publicly owned), serving over 5 million MSMEs with lease finance through a combined 52 branches.
Total lease finance outstanding was Birr 981mn. The six companies together have 3.9 billion Birr in
assets.
Regulatory Summary. The Capital Goods Leasing Business Proclamation 103/1998 as amended
by the Capital Goods Leasing Business (Amendment) Proclamation 807/2013 are the two major
pieces of legislation regarding leasing (more on this is provided in Enabling Environment (Section
7.5). The current regulatory framework for leasing is considered one of the most advanced and best
practices in the region. The related tax environment is also considered conducive for leasing
business. In March / April 2014, the GoE through the National Bank of Ethiopia (NBE) licensed five
regional independent leasing companies to commence business in capital goods finance and hire
purchase transactions to build a strong and viable leasing sector in Ethiopia. All the five newly-
established leasing companies have met the ETB 200 million (US$10 million equivalent) minimum
capital entry requirement and are regulated by NBE.

Since 2014, with support from the World Bank, the NBE has worked to create a favorable
regulatory environment to help grow the country’s US$153.7 million leasing market to reach its
estimated potential of US$1.05 billion potential. The NBE is currently revising the existing
Proclamation for leasing and capital goods business in partnership with the Ministry of Trade and
Industry and with technical support from the World Bank. In January 2019, major policy shifts and
changes in the prudential guidelines for capital goods and leasing business were approved by NBE
related to the lifting of the interest rate cap; access to foreign borrowing; allowance to include big-
ticket leases within portfolios; increase of the single borrower’s limit; and lifting of restrictions on
the number of branches and operations required in the country. Following these reforms, the NBE
licensed the first foreign-owned independent leasing company in Ethiopia, namely, Ethio Lease.
Figure 28: Capital goods financing overview (NBE, Precise analysis)
Clients and Products of CGFCs
Figure 29: NBE directives (Source: NBE)
Priority Sectors. The Manufacturing Sector receives the largest

proportion of lease financing. By law, lease companies are required to
provide at least 65% off lease finance to manufacturing SMEs. Other
key leasing sectors are construction, agro-processing, services (e.g.,
photocopy machines). Leasing companies are expected to provide
lease finance for machinery and equipment to the priority areas such
as: (a) textile, garment, leather, and leather products; (b) metal and
woodworks; (c) agro-processing, including dairy and poultry
equipment; (d) construction machinery; (e) irrigation;(e) wet and dry
coffee processing; (f) post-harvest grain processing including seed
cleaning equipment; and (g) freight transporters from fields to market
centers and warehouses, (h) farm and non-farm cooperatives, unions,

and model farmers28. Typical SME focused lease equipment includes baking machines, crushers, agro-
processing machines, flour mills.
Strong Priority Sector Fit. Overall, the sectors likely to benefit from capital goods financing in
Ethiopia are enterprises producing goods and services for export and import-substituting
enterprises, as well as enterprises capable of creating large employment opportunities.
SME Focus. Leasing companies are a prime channel through which to expand SME
capital flows. While leasing companies are required by law to provide a minimum of 60% of
financing to SMEs, they can also serve microenterprises. But regional CGFCs currently require
government guarantees to provide lease finance to micro-enterprises.
Gender Focus and Opportunity to Grow SME Capital Flows to Women. Only one of the
three (Addis CGFC) specifically targets women. However, this one could be a channel through
which to increase financing flows to women, and their approach could potentially be replicated. At
Addis CGFC, at least 50% of lease finance goes to women entrepreneurs; women-owned
enterprises are asked lower down payment rates (10%), and for handicapped and family-focused
women the company provides lease finance for machines such as chips machine; onion grinding
machine that is below 50K birr (the minimum lease size for conventional clients).
Lease Financing Terms & Conditions
Figure 30: Lease financing terms and share to SMEs (Source: NBE, KII, Precise analysis)
In Ethiopia, capital goods financing includes financial lease and hire

purchase (also known as ‘rent-to-own, or ‘lease-to-own), wherein title is
transferred to the lessee and excludes operating lease (where title
remains with the equipment leasing company). The typical lease size
provided by CGFCs is in the range of ETB 50K to 5mn. The average
lease term is between 3 to 6 years. Interest rates vary widely from 14%
(state-owned CGFCs) to 21% (private CGFCs). In providing both
financial and hire purchase lease products, CGFCs follow standard
processes that are used by the bank, including credit appraisal and
approval procedures. There are only a few additional factors/criteria that
CGFCs particularly pay attention to in evaluating applications, such as
technological viability (equipment available and operable given all the conditions of the business). Like
banks, CGFCs also follow a tiered approach for lease finance approval. Branches are delegated to
approve lease finance applications of up to a certain maximum amount (e.g., ETB250 thousand at
Oromia CGFC). Also, committees are commonly used in lease finance approval decisions.
Major Difference in Collateral Requirements. Since leased equipment self-collateralizes,

CGFCs don’t ask for additional collateral. However, companies require lessees to deposit down
payments, ranging from 15 to 20% of the value of the leased equipment. For instance, Addis CGFC
requires a 15% down payment for manufacturing clients, a 20% down payment for service sector
28 ‘Ethiopia - Small and Medium Enterprise Finance Project - Project Appraisal Document’, (IDA, 2016)

clients, and a favorable 10% down payment for women-owned enterprises. Ethio Lease, the first
private leasing company and the only foreign-owned leasing company in Ethiopia, requires leases to
deposit 20% down payment upfront.
High Default Risks, Especially for Highly Specific Assets. The leased machine or equipment
is essentially the only collateral used in lease financing, and some interviewees expressed doubts
whether that is sufficient, especially given that SMEs are the main target clients for lease financiers.
The default rate for DBE lease finance, in particular, has been high in recent years (more than 20%)
but this may be particular to the program, or their management. Recently, COVID-19 has caused
equipment to wait at the port, or equipment imports have been banned, causing delays in the leasing
process and leading to increased default rates. Frequent failure of machines and unavailability of local
expertise to maintain failed machines has also forced some lessees to default. Whereas actual default
rates so far seem to be acceptable, the leasing sector is still nascent and more time is needed to
adequately assess the risk of default in the sector. However, key informants from CGFCs expressed
concerns that unless carefully addressed early on, the above-mentioned and other factors can result
in significant default rates in the future.
SMEs find it Difficult to Access Lease Finance for Specialized equipment. For highly
idiosyncratic equipment and machines, such as manufacturing equipment that can be used only for
limited purposes and involve significant relocation costs, access to lease finance is more constrained.
For such specialized machinery, the only collateral available to secure the loan is the machine, which
has low value in alternative uses (It can’t be easily turned into alternative use or user in case original
lessee defaults). However, specialized assets (physical or otherwise) are fundamental to efficiency in
almost all economic sectors. Inability to finance the acquisition and use of such assets will continue
to undermine the productivity of Ethiopian SMEs. This could potentially be a fruitful area for the
deployment of targeted CGFC-level guarantees to encourage leasing among otherwise promising or
qualifying borrowers, especially in priority sectors, women and young entrepreneurs.
Financing and Liquidity Limits CGFCs ability to serve more SMEs. CGFC stakeholders
indicated that high-quality demand for lease finance outstrips their capital supply. Other than regional
CGFCs that have some access to the World Bank fund, the main source of funding for lease
companies is owner’s equity. This limits their ability to grow and satisfy more SME demand.
Estimated Credit Supply to SMEs
Using the methodology in Annex 1, the estimated value of SME credits outstanding in 2020 is ETB 82
Billion, out of which: CBE granted 13.3 billion, DBE 7.6 billion, Private banks 38 billion, MFIs
provided 6 billion, and the rest 0.71 billion by CGFCs.

Figure 31: Credit supply to SMEs (Sources: NBE, KII, WB, IFC, Precise analysis)
Encouraging SME Capital Supply
Figure 32: Factors that drive SME supply (Sources: KII, WB, IMF, Precise Analysis)
Drivers / Benefits of
serving SMEs. Several
factors motivate FIs to serve
or want to serve SME
customers, including
developmental, financial, and
social motives.
• Returns and Contribution to Ethiopia’s Development: All banks, MFIs, and leasing
companies indicated that expected returns and the contribution to the economic development
of the country as the main drivers for lending to SMEs and microenterprises. The co-existence
of the economic dimension of profitability of the business with the more political dimension of
contributing to the country’s economic development represents an interesting feature of the
Ethiopian market, where publicly owned financial institutions dominate both the banking and
the microfinance sector.29
• CSR: Serving SMEs enable FIs to deliver corporate social responsibility (CSR) goals.
29 While the developmental dimension is relatively the more important driving factor for government owned FIs; it’s also viewed to be an
important consideration by leaders of private FIs.

• Growth: Increased customer base and ability to cultivate a pipeline of firms that are expected
to grow in the future.
• Access to Funding: Improved deposit attraction and access to additional funding (reduce
liquidity problems) from donor / DFI / Government driven programs.
Main Obstacles to SME Capital Supply
Several factors undermine SMEs’ access to credit, which can be considered as SME-specific factors,
Regulatory and Enabling environmental factors, and FIs related factors30.
Figure 33: Factors that constrain SME capital supply (Sources: NBE, KII, IMF, Precise analysis)
30 Note that ratings of each FI type against evaluation factors reflects solely the significance of each factor as an obstacle for that particular
FI’s SME lending. A factor on which a FI is currently rated low may be rated high when that specific factor is assessed from the perspective
of other considerations.

SME Specific Factors31
SME Risk. SMEs are perceived to be at higher risk than large corporations due to several factors.
According to KIIs, major SME specific factors include: SME owners lack of business experiences and
financial management, informality, poor quality of financial statements (and failure to present formal
documentation including financial, income tax statements, etc.; documents containing either highly
exaggerated or underestimated figures)32, lack of awareness on how to be bankable, lack of credit
history, lack of adequate collateral that SMEs can pledge for loans; owners having wrong attitude
relating to debt repayment, unable to provide correct information, and using borrowed money for
other purposes.
In Lease Financing, Lack of SME Technical Expertise and Capacity. CGFCs indicated that
in their start-up periods, they found equipment specifications were incomplete or wrong, mainly due
to lack of entrepreneur expertise in specific industrial equipment and machinery. Moreover, in the
DBE lease finance scheme, borrowers/target groups (mainly new university graduates) are often
unprepared both financially and technically. Most can’t afford the 20 % equity contribution expected
from them. Once they start operation, they also face a shortage of working capital and forex for
importing key raw materials that aren’t available locally. This has forced some clients to go bankrupt
and default. This has made it clear that machinery and equipment provided via lease financing
arrangements will be of limited use without adequate access to working capital.
Regulatory Restrictions and Enabling Factors
Regulatory Constraints. The banking sector faces several constraints impacting banks’ liquidity
and capacity to provide more SME financing.
As detailed below, the sector faces tight regulation of deposits (minimum interest rates), lending, and
forex (a strict waiting list system to allocate forex funds based on NBE Directives of priority items).
These NBE requirements put heavy restrictions on the size of bank loans, interest rates, and sectors
receiving capital.
Public Crowding Out of Private Banks. The largest constraint is an unlevel playing field that
favors state-owned banks, crowding out lending by private banks. A good example is the recently
repealed 27% rule (the ‘Rule’) which applied only to private banks and is used to extend credit to
the DBE to finance projects in priority sectors such as agriculture and manufacturing, and to
purchase Government T- Bills. The ‘Rule’ constrained banks’ liquidity, increased costs, and exposed
banks to interest rate mismatch as they must purchase long-term NBE bills by an amount equivalent
to 27% of each new loan issued at a fixed rate using short-term savings and deposits at variable
31
Precise Key Informant Interviews (2020)
32 For instance, according to ‘SME Competitiveness Outlook 2019: Big Money for Small Business – Financing the Sustainable Development
Goals’, (International Trade Center, Geneva, June 2019), small enterprises in Ethiopia have lower relative standing compared to those in
Kenya on key capability and information related factors that influence access to credit. For instance, on ‘managerial experience’, small firms
in Kenya received 1.83x the rating received by small firms in Ethiopia. Similarly, on ‘Audited financial statements’, Kenyan small firms
scored 1.61x better than small firms in Ethiopia. While the gap is not as wide, Kenyan medium firms better those of Ethiopia’s on both of
these criteria.

rates. It significantly diminished available funding for the private sector in general, and SMEs in
particular.
As important a milestone as it undeniably is in undoing tight credit constraint that has been facing
the private sector, the repeal of the 27% Rule only scratches the surface of a deep and widespread
problem of Public Crowding-Out and lack of market discipline in Ethiopia’s banking sector in
particular and the Financial sector in general. For instance, recent reports on unusually high levels of
NPLs at DBE, high national public debt burden, and declined National credit rating are in part or fully
traceable to lacking market discipline in a highly state-dominated financial sector. In sum, major
institutional and structural reforms may be necessary before the Financial sector starts to operate
more efficiently based on market discipline.
Figure 34: Deposit and lending rates, pre-and post-adjustments on minimum deposit rate (Sources NBE, Precise analysis)
Minimum Deposit Interest Rates. Another

important regulation that impacts capital supply
to SMEs is restrictions on deposit rates. Lending
rates have increased following NBE’s directive on
the minimum deposit rate, which increased the
minimum saving deposit rates from 5 to 7% in
2018. While the average lending rate was around
12.23 % between 2014-17, it increased to 13.5 %
following the 2% increase in the minimum deposit
rate. However, higher interest rates tend to
exacerbate constraints limiting SMEs’ access to
credit33.
Minimum Capital Requirements. Recent regulations have raised the start-up capital
requirement for new commercial banks, discouraging new banks to join the industry. Existing private
banks also have had to increase their paid-up capital to increase their single borrower limit and
hence scale up their loan portfolio to the large and corporate segment away from the small
borrowers. Other regulatory challenges are related to lack of consistent SME definition, poor
coordination among FIs around customer-related information, and cumbersome reporting and
documentation requirements from DFIs and regulators.
Infrastructure
As discussed more fully in the Financial Infrastructure Section, the credit infrastructure
systems (collateral registry, secured transactions framework, and credit reporting system) are
underdeveloped in Ethiopia.
33 Annual Reports 2013/14-2019/20, NBE

Figure 35: Credit reporting and registry (Sources: WB)
Credit Reporting. The NBE Credit Reference Bureau (CRB), the credit
reporting system in Ethiopia, is still nascent. While it has made progress
since it was first established in 2012, only 0.4 % of the adult population is
covered in the credit registry in 2018/19. With the Prime Minister’s
instruction in 2019, NBE has integrated the microfinance and leasing sectors
into the CRB requiring extensive collaborative effort among the relevant
stakeholders (NBE, MFIs, leasing companies, and service providers).
According to the World Bank, 2.8 million borrowers from 20 MFIs were
uploaded to the NBE CRB in 2019. Together with those registered at banks
these increases the public bureau credit registration from 0.4 to 5.2 % of the
adult population34.
Substantial Investment Needed. Despite this progress, the CRB remains understaffed and
under-resourced. It will require substantial investments in technology and expertise for service
provision to diverse lenders and develop value-added services and products that could cater to
lenders’ needs. While some key interviewees indicated that they are using the credit bureau
information for SME loan analysis, the full potential of the credit bureau is not being effectively
exploited. The system is viewed to be less effective. Moreover, there is no private credit bureau that
can provide value-added services on credit information such as credit scoring, marketing service,
application processing, and portfolio monitoring to facilitate quality decision-making on credit
provided by financial institutions and thereby minimize fraud and mitigate risks.
Collateral Registry. Overall, the lack of an effective collateral registry in combination with
ineffective enforcement of contracts in case of default could contribute to significant losses for
banks. This risk limits lending to SMEs. Until these issues are resolved, Ethiopian financial institutions
are likely to continue to rely heavily on fixed asset collateral to assess creditworthiness, rather than
explore other risk-mitigating approaches to unlock and accelerate capital flows to SMEs.
Low Competition and State Domination. Within the banking, MFI, and lease sectors,
government-owned institutions still have a dominant position, restricting the level of competition
and limiting access to capital to SMEs.
Banking. CBE and DBE command more than 65% of sector assets and are used as tools by the
government for directed credit – mainly via CBE to finance large infrastructure projects, and state-
owned enterprises (SOEs) and, through the DBE, subsidized financing to small and medium
enterprises (SMEs) in key priority sectors.
MFIs. Many MFIs do not operate efficiently and have limited outreach. The dominance of
government-affiliated MFIs, which do not operate on a fully commercial basis, has distorted overall
growth in the sector and has unintended negative repercussions. Government-affiliated MFIs access
concessionary funds to fund their loan portfolios and are less motivated to attract retail deposits or
34 World Bank Open Data

innovate in product design or service delivery. On the other hand, commercially driven MFIs face
higher relative funding costs which require them to charge higher rates.
Leasing. Although leasing is a relatively early-stage financial sector, in 6-7 years only one private
leasing company has started full operation. The remaining five CGFCs are owned by regional
governments and operate the way state-owned FIs do in the banking and MFI sectors. Competition
in the financial sector is hampered by cumbersome licensing requirements, lack of a local capital
market in which to raise funds, and a lack of foreign investment and know-how.
In the leasing sector, there are three additional obstacles to uptake and capital deployment:
• Absence of qualified domestic suppliers and high forex requirement. Machines are
not locally available, creating a time lag to import and start operation. The sector also has
become highly forex dependent as a result
• Lengthy process in the supply chain. The typical lease finance deal takes more than 6
months to complete. Significant delays in sourcing equipment from abroad, and slow and
tedious importing procedures in Ethiopia present cause major challenges.
• Utility-related challenges such as electricity; water; working area. Power and
electricity interruptions and shortages can force clients to default. Availability of power is
now one of the main appraisal criteria used in approving lease finance applications.
Financial Institution (FI) Specific Factors
FI-level challenges include the lack of interest in SMEs at FIs, limited geographic outreach of FIs, lack
of appropriate products, knowledge on how to evaluate MSMEs, and high collateral requirements.
Limited Specialized SME Units. Five years ago, few if any major banks had a unit focused on
SMEs, but today several major banks are experimenting with adjustments of existing conventional
products to more closely align with the needs of SMEs. However, only 4 out of 16 private banks
possess a separate SME unit and these 4 do not yet have SME divisions or products. As a result,
these 4 do not provide ongoing loan access, and when they do, the amount available is limited. This
progress in SME access is due in large part to DFIs, who provided guarantees and other SME-focused
credit support programs over the past five years.
Highly Standardized Products; Little Product Innovation. The product mix offered by
financial institutions is largely limited to term loans from banks, micro-enterprise loans from MFIs,
and capital equipment leasing. The great majority of financial institutions in the study reported no
change in their financial product offering even after setting up a dedicated SME unit. FIs still require
high collateral, accept only certain types of collateral, and charge the same interest rates for both
SMEs and large firms. The credit amount accessible from MFIs are also often too small for medium-
sized firms. On the institutional level and regarding specific business models, MFIs and banks diverge
in terms of sector targeting. Both target enterprises in the manufacturing sector as required by the
government. Banks however have further outreach to the export trade sector, while MFIs focus
more on agriculture. Some MFIs have SME-specific products but target smaller firms. FI interviewees
reported that MFIs lack the financial capacity to meet the needs of SMEs, because of their low
deposit base, which severely limits their ability to expand their loan sizes beyond microenterprises.

Prevalence of Relationship Lending35; Limited Penetration of Credit Management
Technology. Loan appraisals are mostly based on traditional relationship lending rather than on
transactional technologies such as credit scoring or other indicators. Previous studies showed that
having bank ties significantly increases firms’ use of bank loans. As a consequence, loan processing
and administration costs tend to be high especially for smaller FIs.
Perceived Risks and Risk Mitigations: While banks and MFIs believe there is high growth
potential in lending to small enterprises, the current lack of involvement is due to perceived risks.
Most financial institutions in this study perceive costs and risks to be higher in the SME segment
compared to the large enterprise segment. Banks seem to have a more negative perception of risks
and costs than MFIs. Further, when asked to compare the profitability of SME loans versus large
enterprise loans, this is considered considerably lower in the SME segment36. On the other hand,
government or DFIs financed programs (credit guarantee programs and line of credit with technical
assistance) are playing an important role in encouraging banks and MFIs to serve otherwise unserved
SMEs. The interviewed banks and MFIs see partial credit guarantee schemes and the provision of
dedicated credit lines associated with technical assistance as important to their participation.
Directed credit programs are also perceived as having a positive impact, confirming, once again, the
dominant role that public institutions can play in the pursuit of targeted outcomes in the banking and
microfinance sector21.
Other FI Specific Factors. Among regional MFIs, government interference in lending decisions is
viewed as a major obstacle to effective operation. Lack of capable branch managers and credit
analysts, who have the capability, experience, and professional discipline is a major issue for CGFCs
and MFIs. Poor core banking systems and lack of interconnectivity between branches are also
limiting factors that inhibit MFIs' ability to provide more efficient saving products and to attract
deposits.
Major SME Financing Programs / Initiatives
There exist several SME financing-focused initiatives in Ethiopia. Six example initiatives are listed in
the table below (Table 4). Based on the availability of information and relevance to USAID
CATALYZE: MS4G, a summary of the first three initiatives is provided below.
35‘Productive Capacity and Economic Growth in Ethiopia’, (Admasu Shiferaw, CDP Background Paper No. 34, UNITED NATIONS,
Department of Economic and Social Affairs, April 2017)
36 Precise Key Informant Interviews (2020); SME Finance in Ethiopia: Addressing the Missing Middle Challenge’, (World Bank, 2014)

Table 4: SME financing initiatives in Ethiopia
Progra Program Overview Date SME SMEs Female Cost of Relevanc

m Finance served / benefici capital e for
released beneficiari aries USAID:
es MS4G
Supply Heineken and Diageo Supply Chain Ongoin Diageo: Diageo: 8% 14%-18% High
Chain / Financing projects have been supporting g since N/A 6,446
Value more than 56K farmers in Ethiopia, and 2012/1 farmers
Chain enabled improved access to working 3 Heineken
Financin capital for thousands of collectors, farmer : ETB Heineken:
g Model cooperatives, and other small enterprises 60mn + 50k+
in their supply chain ecosystem. farmers
The Catering to women owned micro and 2012 - USD133 16,181 100% Moderate
Women small enterprises, this program is driven Ongoin mn
Entrepr by the World Bank, with co-financing g
eneurshi from Canada, Italy, Japan and the
p European Investment Bank.
Develop Implementation is led by DBE, serving as a
ment wholesaler, and 12 MFIs.
Project
(WEDP
)
The A 10 Billion Birr revolving fund distributed 2017- ETB4.2bn 224,000+ 28% 8% Low to
Youth via regional MFIs, to micro and small Ongoin people moderate
Revolvin enterprises, funded by the GoE, and g
g Fund administered by regional investment 39,003
(YRF bureaus, MSEs
2017)
SME A World Bank program with four major 2016 - USD108 224 SMEs N/A 9% Low to
Financin components: (1) Access to credit, Ongoin mn moderate
g complemented by technical assistance to g
Project participating financial institutions, (2) (As of
– World Enabling environment, with focus on June
Bank movable asset registry and insolvency, (3) 2020)
Business development services for SMEs,
and (4) Project management and impact
measurement. Implemented in
cooperation with 27 FIs. SMEFP is the
largest financial services project in
Ethiopia, with a credit line from the
World Bank and European Investment
Bank totaling USD 276 million. The
technical assistance provided to
participating financial institutions
complements the credit line and focuses

on innovative products (e.g., Leasing) and
services to target SMEs in manufacturing,
agro-processing, construction and
tourism.
Dashen Launched in 2019, this 100mn Birr Annual, ETB100m 320+ N/A 0% High
Bank’s initiative is aimed at encouraging job since n
Ethio creations, providing capacity building and 2019/2
Talent financial support to talented individuals 0
Power and reducing unemployment. According to
Series the Bank, the program is initiated as part
Progra of their business enhancement and social
m responsibility strategy, and targets
encouraging job creations by talented
citizens in the Small, Micro and Medium
enterprises space. Components of the
program are: capacity building, financial
assistance and market linkage (Dashen
Business Club). As part of this project, the
Bank has provided entrepreneurship and
business skill trainings to 320
entrepreneurs in three centers, run a
business plan competition and is in the
process of financing winners (Dashen aims
to award 30 winners per round, with Birr
100K-500K seed capital each). The
Dashen Business Club component of the
program aims to provide a more
comprehensive ongoing support to SMEs
including access to working capital and
capacity building. According to KIIs, the
program has been given senior
management attention and follow up, and
is reported to be on track in terms of
progress towards goals and set
schedules37.
Master MasterCard guarantee program to 2020- N/A N/A N/A N/A Low to
Card support small businesses affected by Ongoin Moderate
Foundat COVID-19, by providing access to g
37 ‘Annual Report 2019/20’, (Dashen Bank, 2020); ’Dashen Bank Newsletter’, (Year 3 Issue 3 and 4, Aug 2020)

ion working capital in collaboration with
Project banks.
Program Description Date SME SMEs Female Cost of Relevance

Finance served / benefici capital for
released beneficiari aries USAID:
es MS4G
Supply Chain Heineken and Diageo Supply Chain Ongoin Diageo: Diageo: 8% 14%-18% High
/ Value Chain Financing projects have been g since N/A 6,446
Financing supporting more than 56K farmers in 2012 farmers
Model Ethiopia, and enabled improved Heineken:
access to working capital for ETB Heineken:

thousands of collectors, farmer 60mn + 50k+
cooperatives, and other small farmers
enterprises in their supply chain
ecosystem.
The Women Catering to women owned micro and 2012 - USD133m 16,181 100% Moderate
Entrepreneur small enterprises, this program is Ongoin n
ship driven by the World Bank, with co- g
Development financing from Canada, Italy, Japan
Project and the European Investment Bank.
(WEDP) Implementation is led by DBE, serving
as a wholesaler, and 12 MFIs.
The Youth A 10 Billion Birr revolving fund 2017- ETB4.2bn 224,000+ 28% 8% Low to
Revolving distributed via regional MFIs, to Ongoin people moderate
Fund (YRF micro and small enterprises, funded g
2017) by the GoE, and administered by 39,003 MSEs
regional investment bureaus,
SME A World Bank program with four 2016 - USD25.7 72 SMEs N/A 9% Low to
Financing major components: (1) Access to Ongoin mn moderate
Project – credit, complemented by technical g
World Bank assistance to participating financial (As of
institutions, (2) Enabling environment, June
with focus on movable asset registry 2018)
and insolvency, (3) Business
development services for SMEs, and
(4) Project management and impact
measurement. Implemented in
cooperation with 27 FIs. SMEFP is the
largest financial services project in
Ethiopia, with a credit line from the
World Bank and European
Investment Bank totaling USD 276
million. The technical assistance

provided to participating financial
institutions complements the credit
line and focuses on innovative
products (e.g., Leasing) and services
to target SMEs in manufacturing,
agro-processing, construction and
tourism.
Dashen Launched in 2019, this 100mn Birr Annual, ETB100m 320+ N/A 0% High
Bank’s Ethio initiative is aimed at encouraging job since n
Talent Power creations, providing capacity building 2019/20
Series and financial support to talented
Program individuals and reducing
unemployment. According to the
Bank, the program is initiated as part
of their business enhancement and
social responsibility strategy, and
targets encouraging job creations by
talented citizens in the Small, Micro
and Medium enterprises space.
Components of the program are:
capacity building, financial assistance
and market linkage (Dashen Business
Club). As part of this project, the
Bank has provided entrepreneurship
and business skill trainings to 320
entrepreneurs in three centers, run a
business plan competition and is in
the process of financing winners
(Dashen aims to award 30 winners
per round, with Birr 100K-500K seed
capital each). The Dashen Business
Club component of the program aims
to provide a more comprehensive
ongoing support to SMEs including
access to working capital and capacity
building. According to KIIs, the
program has been given senior
management attention and follow up,
and is reported to be on track in
terms of progress towards goals and
set schedules.
Master Card MasterCard guarantee program to 2020- N/A N/A N/A N/A Low to
Foundation support small businesses affected by Ongoin Moderate
Project COVID-19, by providing access to g
working capital in collaboration with
banks.

Supply Chain Financing38
Figure 36: Example supply chain financing model (Sources: company websites, KII, Precise analysis)
Supply chain financing has been successfully used by many large firms to facilitate the development of
a supply chain ecosystem of MSMEs in Ethiopia via support provided by large firms in the form of
improved access to capital and other related support. Heineken and Diageo have implemented
model projects of this kind since 2012/13. The two brewery giants have helped in improving access
to finance for MSMEs both upstream and downstream.
Heineken’s CREATE Program39. In the upstream sector, Heineken introduced CREATE in

2012/13 in collaboration with ATA and EIAR. Heineken’s diversified sourcing strategy includes a
focus on nucleus farmers, malt barley producers and supplier cooperatives, multipurpose primary
cooperatives, informal groups, and even commercial/state farms. CREATE includes full package
support to farmers and other supply chain participants including seed supply, technical support,
training, and credit. Providing credit to farmers and collectors is an important element of the
package, as it allows farmers and collectors to purchase inputs and fund working capital needs. In
collaboration with four non-governmental MFIs (Buusaa Gonofaa, Wasasa, Harbu, and Metemamen),
38 ‘Malt barley commercialization through contract farming scheme: A systematic review of experiences and prospects in Ethiopia’,
(Addisu Bezabeh Ali, African Journal of Agricultural Research, Vol. 13(53), pp. 2957-2971, 31 December, 2018)
39 The review about Heineken’s CREATE program mainly draws from ‘Supporting farmers in the malt barley value chain in Ethiopia:
clients’ satisfaction and value chain approach to assess the adequacy of the microfinance services provided by Buusaa Gonofaa MFI’,
MASTER’S THESIS (Roxane Lemercier, 2018-19)

Heineken arranges an input purchase credit scheme for farmer cooperative unions. Heineken
provides a guarantee for loans provided by MFIs to farmers for the input during the farming season.
Figure 37: Heineken’s Contract Farming / SCF model (Heineken, MOA, Academic Studies, Precise analysis)
Heineken also provides a facility that enables its 100 plus collectors to access credit during harvest
seasons, for the purchase and supply of final malt outputs from farmers. While farmers repay their
debt during harvest seasons, collectors repay theirs during the farming season. On average,
collectors borrow between up to ETB 2 million per collector.
Both the input and output credit arrangements rely on continuing relationships as security for loans
and require no physical collateral from borrowers. The default rates are small (typically 1 to 2%).
Farmers and collectors can also borrow at reduced rates. The interest rate for input purchase
credits for farmers is about 18% Vs 24% for conventional input credits provided by MFIs. This
arrangement is supported by a contract between Heineken and farmer cooperatives/collectors,
which includes provisions for a repayment schedule, remedies in the event of default, etc.

Figure 38: Local sourcing (Diageo, MOA, Academic Studies, Precise analysis)
Diageo’s S4G Program40. Diageo launched

in 2012/2013, their new malt barley sourcing
strategy - a pilot in cooperation with the Melka
Awash cooperative union. In total, 6,000
farmers (3,000 hectares) have been contracted
from five cooperative unions. The program
was designed to increase the production and
productivity of local barley farmers as well as
creating a vehicle to provide farmers with
reliable access to markets. The program’s
interventions respond to the productivity
challenges faced by farmers by i) providing
access to modern inputs (seed, fertilizers, and
pesticides) through an affordable credit system;
ii) providing farmer training, extension, and
advisory services on various Good Agricultural
Practices (GAP); iii) establishing contracts with
smallholders, and iv) aggregating the product
and transporting it to the malt processor. Also,
in certain areas, the program has piloted a crop
insurance scheme and training on crop rotation
and offers possibilities to farmers to use
elements such as rented machines and soil
testing. Like the Heineken CREATE project,
Diageo’s S4G allows farmers and collectors to
get access to credit.
Contract farming and Benefits to farmers / producers41
While producers and traders are still price takers and need to fulfill buyers’ requirements, they are
better represented and have better access to information as a result of the Value chain financing and
contract farming models introduced by Heineken, Diageo, and other companies. In the case of the
Heineken model, prices are defined at the regional level, through a platform managed by Agricultural
Transformation Agency (ATA), which gathers the key actors in the sector (malt processing
companies, breweries, unions, governmental agents, etc.). Each year, they set the minimum price for
malt barley, following the market and international trends. Breweries and government efforts to
increase price information positively influenced prices given to farmers for their production. Access
to information allows them to better negotiate with local traders or other buyers. According to
Lemercier (2018/19), even farmers not involved in the chain benefit from this new system. Farmers,
therefore, improved their negotiating power and can generate more value. According to Rashid et al.
40 ‘WOMEN IN BARLEY FARMING A gender analysis of the Diageo barley value chain in Ethiopia’, (Diageo, Care, 2019/20)
41 Based on: ‘Supporting farmers in the malt barley value chain in Ethiopia: clients’ satisfaction and value chain approach to assess the
adequacy of the microfinance services provided by Buusaa Gonofaa MFI’, MASTER’S THESIS (Roxane Lemercier, 2018-19)

(2015), farmers and buyers are the ones getting the highest part of the value-added along the chain.
They showed that farmers get 44% of the total value added (Vs 42% for processors), generate the
highest margin of 35% (Vs 18% for processors and 8 to 10% for intermediaries).
On the other hand, the positive impact of the value chain development and contract farming model
is not entirely without its limitations. Challenges include: in some situations, buying conditions set in
value chain agreements are less interesting than other opportunities on the market or not adapted
to farmers’ needs: some actors propose low prices, payments are made with delay, collection timing
is not convenient. In the worst scenarios, for some producers, prices may not be enough to cover
operating costs (inputs, labor, mechanization, and transport costs). More, margins tend to decrease
for less well-off farmers located far from urban centers.
Supply Chain Financing Risks and Challenges42
While so much has been said about the success of Heineken’s and Diageo’s SC Financing
approaches, there are still a few challenges that have been encountered in implementing the
initiatives. These include:
• Side Selling. Some farmers/traders may sell their malt/barley to other buyers who can offer
even slightly higher prices.43
• Compromising Quality. Farmers may deliver good malt mixed with low-quality malt.
• Hoarding. Keeping malt for a long time with the expectation of selling it later for a better
price.
• Government Interference. Lower-level administrators interfering to set prices higher, only

to give the impression that they are pro farmers, to increase their political capital.
• Liquidity Gap. Interviewees indicated that during some seasons they find it difficult to
provide adequate funds for farmer credits (i.e., encounter liquidity challenge). MFIs and Banks
lack the readiness to collaborate in implementing Supply Chain financing initiatives. The
sustainability of programs such as Heineken’s and Diageo’s depends on ownership and active
involvement of Banks and MFIs.
• Default. Whereas the historical default rates on loans to farmers and collectors are below
2%, default risks must still be considered and could jeopardize the whole logic of the SC
financing model unless managed carefully, per interviewees. Crop failure, farmers’ death or
disability, and political unrest result in high default rates and undermine Supply Chain financing.
42 Precise Key Informant Interviews (2020)

43 A USAID expert brought it to our attention that in other countries buyers have successfully used a set price band to release financing
and control side-selling.

The Women Entrepreneurship Development Project (WEDP)44
According to DIA, the WEDP was launched in 2012 to provide loans and business training to
increase earnings and employment of growth-oriented women entrepreneurs in Ethiopia. As of
September 2020, more than 16,000 business owners have been able to access loans and more than
22,000 have completed business training. The WEDP is implemented in collaboration with the DBE
and the Federal Urban Job Creation and Food Security Agency (FUJCFSA). The project’s line of
credit is disbursed through 12 participating MFIs, while business training is offered through a
network of public and private service providers. Outreach to beneficiaries is ensured by WEDP city
coordinators and the ‘one-stop shop’ (OSS) offices in participating locations. The project currently
serves a network of more than 38,000 entrepreneurs in ten major cities and 89 satellite towns
across the country.
The project was able to ‘crowd in’ several rounds of co-financing from Canada, Japan, Italy, and the
European Investment Bank (EIB) for a total disbursement of US$144 million. All co-financiers
provided a parallel loan to the GoE and signed a co-financing agreement with the World Bank. The
project has made strong progress since inception and has charted a path for similar initiatives in
other countries and regions. Highlights include:
• SME Gap Addressed. By targeting ‘missing middle’ SMEs, typically unserved by MFIs or
commercial banks before, the WEDP has filled a substantial market gap. A World Bank report
showed 66% of WEDP borrowers had never previously accessed formal financing, and for
repeat borrowers, the average WEDP loan was 870% larger than previous loans.
• Women-Led SME Growth and Access to Finance. WEDP clients demonstrated

impressive growth and solid business fundamentals. Between 2014 and 2019, the average
WEDP client has grown her income in US dollar terms by 67% and employment in her firm by
58%. Clients who accessed a loan through a participating MFI have also considerably
outperformed firms that did not access external financing. Profits increased by 35% and
employment by 73% compared to a control group over the same period. The most recent data
show that the WEDP firms are employing a total of 89,282 workers, of whom 61% are female.
44 This section heavily draws from ‘Designing a Credit Facility for Women Entrepreneurs Lessons from the Ethiopia Women
Entrepreneurship Development Project’, (World Bank, Women Entrepreneurship Development Project, MAY 2020); ‘Ethiopia - Women
Entrepreneurship Development Project Additional Financing, Project Paper’, (IDA, Dec 2020); “WEDP LOAN PORTFOLIO ANALYSIS’,
(World Bank, November 2017); ‘Improving Access to Finance for Small and Medium Enterprises in Ethiopia: Case Study’, (Enterprise
Partners, April 2018)

• High Asset Quality. WEDP asset quality across the 12 participating FIs has been good, with
a portfolio at risk (PAR at ninety days, PAR90) of only 3.1% as of March 2020, well below a 5%
industry benchmark.
• 100% MFI Repayment. Participating MFIs have repaid the WEDP funds provided by the DBE
fully and on time.
• Catalyzing Private Co-Financing. WEDP’s line of credit has been successful in crowding in
private capital over time; participating MFIs are now using their capital to issue loans to the
WEDP clients. To date, internal funds have amounted to US$40 million, or nearly 30% of total
WEDP disbursements.
• Driving Innovation. The WEDP has pioneered innovative approaches to both financing and
training which enhance the initiative’s sustainability. This includes credit technologies to lenders,
such as psychometric tests, which can predict the ability of a borrower to repay a loan and
reduce the need for collateral. A new mindset-based business training has resulted in profit
increases of nearly 30% for participating entrepreneurs relative to a control group, according to
an impact evaluation, further supporting project sustainability.
• Compliance. Loan covenants and requirements for procurement, safeguards, and financial
management are all met.
Figure 39: WEDP (Sources: DBE, WB, Precise analysis)
• Strong Policy Evidence. The WEDP has also generated rigorous evidence for
policymakers. To date, four World Bank Policy Research Working Papers and four Policy
Briefs have been published based on these data, and external researchers are also citing data
generated by the project. Lessons from the WEDP model are informing World Bank
initiatives to finance women entrepreneurs in Nigeria, Turkey, Mexico, and Indonesia.

• Driving Collateral ‘Innovation’. Collateral requirements have been a key barrier to
businesswomen in Ethiopia preventing access to credit, which EP-WEDP addressed from
inception. Most MFIs required a house or building as collateral for bigger loan sizes. WEDP
encouraged MFIs to accept alternate forms of collateral and base lending decisions primarily
on cash flow analysis of the business. An encouraging trend is observed in the utilization of
alternative forms of collateral. As of November 30, 2017, 52% of loans were secured with
collateral other than houses, up from 34% in June 2014. These included vehicles, personal
guarantees, postdated cheques, Jewelry, share certificates, machinery, savings, and
combinations of these. As a result of adopting cash-flow based lending methodologies, all 12
partner MFIs have reduced collateral coverage requirements to an average of 100%, as
compared to over 200% before WEDP intervention. MFIs like ACSI even went as low as
50% for repeat borrowers with viable businesses and those passing the newly-adopted
psychometric testing45. DECSI, for WEDP loans below ETB 60,000, now only requires 30%
compulsory savings. SFPI reduced the collateral requirement to 80% for repeat borrowers.
• Longer Loan Terms. WEDP loan term averaged nearly 32.0 months. This is viewed to be
very long, considering many loans were for working capital. The main driver of longer loan
terms is that the women clients preferred smaller repayments over a longer time, which is
normally allowed by MFIs.
The Youth Revolving Fund (YRF 2017)46
This Fund was approved on March 10, 2017 allocating ETB 10 billion from federal funds for regional
governments to serve as a permanent source of finance to assist youth employment. The fund
targets residents between 18 and 34 years old both employed by micro and small enterprises in
urban and rural areas. Ministry of Finance, Regional States, Ministry of Women, Children, and Youth,
Commercial Bank of Ethiopia, and regional MFIs were the partnering institutions involved in the
distribution and management of the fund.
45 ‘Disruptive Finance: Using Psychometrics to Overcome Collateral Constraints in Ethiopia’, (The World Bank, World Bank Africa
Gender Innovation Lab; and the Finance, Competitiveness and Innovation Global Practice, February 2019)
46 This section draws mainly from ‘Enhancement of Employment and Income Opportunities for Rural Youth in Ethiopia: A Review of Four
Large Youth Employment Initiatives’, (Tigabu D. G and Gebeyehu M. F, (2020), FARA Research Report 5(4): PP 35)

Figure 40: Youth revolving fund (Sourcing: MoF, FARA, Precise analysis)
Criteria. The YRF was disbursed to ultimate beneficiaries through the major regional MFIs, using a
group lending method. The beneficiaries needed to fulfill the following criteria to get the loan: i)
unemployed, aged between 18 and 34 years old; ii) good references in the community they lived in;
iii) any business type in any sector, including agriculture, industry, trade or service.
Terms and Conditions. The terms and conditions stipulated for accessing the loan include,
borrowers need to save an amount equivalent to 10% of the fund they borrowed; iii) the interest
rate of the loan was 8%; iv) the repayment of the loan depended on the type of business with the
maximum ceiling of five years (i.e., the duration of the time the business needed to have generated
returns).
Performance. As of Jan 2019, 90 % of the fund was distributed to the regions. Addis Ababa,
Amhara, SNNP, and Harari took the entire budget allotted to them before Jan. 2019 while other
regions had not accessed the balance of their allotted fund. The fund was released based on the
performance of the previously released installments. Based on those regions that reported the
performance of the program, the key achievements as of Jan 2019 include:
• Disbursement and Repayment. ETB4.22 billion of the ETB10 billion (around 42.2%) was
lent to 224,000 youths, organized into 39,003 businesses (They organize and start a business
in groups) that were established since inception47. Some have already started repaying the
loan; a total of around ETB553.9 million of the loan was returned and made ready for re-
lending.
47 Thus, the average business firm has 5.7 youth owners. The Fund supports Youth who are organized into group owned firms,

• Gender Balance. There were 2.5 times more males than females, making the program
less successful in terms of improving young women’s access to finance and employment.
• Regional Results. The Southern Nations, Nationalities, and People (SNNP) region
performed best in terms of the number of businesses established, the number of jobs
created, the share of funds distributed, and loan repayments despite SNNP having received
less funding than Oromia and Amhara. The SNNP region commenced a rural employment
creation drive 5 years earlier, in 2012, so this program built on that foundation. Other
regions established rural youth job creation programs after the launch of the Youth
Revolving Fund.
• Solid Program Design. The amount disbursed to rural youth from the YRF (4.2 Billion
ETB) was almost double the amount of funding disbursed over the same period to rural
youth from the regular fund (2.2 billion ETB). This was because the YRF has been cheaper
for the borrowers and simpler to access than the regular fund. For instance, YRF relative to
regular similar schemes provided more grace period (12 Vs 6 months) required less saving
(10% Vs 20%),48 and allows a longer maximum loan repayment period (5 years Vs 3 years).
Limitations49. Interviews with MFIs and other studies indicated important limitations of the YRF:
• The initiative did not set clear targets in terms of the number of jobs aimed to create.
• The program was developed following political instability in the country. This might have
made the fund appear to be short-sighted, developed primarily to get legitimacy and to
consolidate power instead of strategically solving youth unemployment problems.
• Funds were used for purposes other than those stipulated in the loan agreements, some of
which were alarming (e.g., purchase of weapons).
• A sense of entitlement among recipients and the perception that MFI loans are grants.
• Due to high default rates on the initial disbursements, some MFIs returned to traditional
lending, asking borrowers to provide guarantees and/or collateral.
• There has been poor data recording and monitoring and evaluation of the success and
challenges of the program.
• The youth who started businesses in rural areas faced challenges due to poor market
linkages and limited complementary infrastructure such as electricity and roads to market
centers. Owners of micro and small enterprises noted that lack of adequate working
premises, lack of access to credit, and shortage of (electricity) power supply were the top
three constraints impeding smooth daily operation and growth of enterprises.
Moral of the Story. The key lesson from the YRF is that funding youth who are not business-ready
can do more harm than good.
48 It is a common practice among MFIs in Ethiopia to require borrowers to maintain compulsory savings attached to the loans they
receive from MFIs. Between 2014-20, compulsory savings in MFIs have been between 11% to 15% of outstanding loan. This practice has
multiple intentions / goals behind. Besides improving awareness among MFI clients regarding MFIs’ saving products and increasing deposit /
resource mobilization by MFIs, it serves as partial security for loans and increases borrowers’ commitment to the relationship.
49 Precise Key Informant Interviews (2020); ‘Enhancement of Employment and Income Opportunities for Rural Youth in Ethiopia: A
Review of Four Large Youth Employment Initiatives’, (Tigabu D. G and Gebeyehu M. F, (2020), FARA Research Report 5(4): PP 35)

5.4. EQUITY CAPITAL SUPPLY TO SMES
Equity investors in Ethiopia are mainly firms that operate across East Africa. Both direct, as well as
proxy indicators of equity finance supply to SMEs, indicate that Ethiopian firms in general and SMEs,
in particular, have limited access to equity capital.
Equity Investment Landscape in Ethiopia
Figure 41: Equity capital supply landscape (Source: Enterprise partners, GIN, KII, Precise analysis)
Limited Flow. According to

Enterprise Partners, in 2015 the
total equity capital flow in the East
African region was around $9
Billion; Ethiopia’s share was only
4%, about USD 360 Mn, despite the
largest population by far50. This
sets an upper limit to the quant of
equity finance flow to SMEs in
Ethiopia. However, the supply of
equity finance to SMEs is even much
smaller. According to the 2015
World Bank Enterprise Survey,
while only 18 % of large firms are
sole proprietorship, 34.3 % of
medium firms, and 70.5 % of small
firms are sole proprietorships.
However, it’s very unlikely for sole
proprietor firms to access equity
capital, because they often are
slow-growing, and may not be likely
to provide the exit and returns
equity investors require. The
majority of equity finance providers
in Ethiopia are foreign firms,
providing foreign capital. On the other hand, the proportion of firms with at least 10% of foreign
ownership are 22% among large firms, 14% among medium, and 0.5% among small firms. Small firms
have nearly zero access to foreign equity capital or any form of FDI, and medium-sized firms are
limited. Finally, based on information from fourteen major equity investment companies that have an
operation in Ethiopia, we found that the range of equity finance per transaction provided by these
firms is mostly inaccessible to SMEs in Ethiopia; generally, what these equity firms consider as SMEs
are large firms by the national SME definition51. Equity finance also includes impact investment, of
both DFI and non-DFI type. According to GIIN (2015), in 2013 the total impact capital flow in
50 ‘Private Capital Advisory Facility Developing Private Equity Markets: Intervention Fact Sheet’, (Enterprise Partners, April 2017)
51 Precise Key Informant Interviews (2020); THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA, (GIIN, 2015)

Ethiopia was $514mn, out of which non-DFI impact investment represented just 18%. Agriculture,
financial services, education, and energy were among the top sectors that interested most non-DFI
impact investors. The average deal size per transaction was $3.6mn, and most of the impact
investment capital went to deals with $5mn or more deal size, again much beyond the reach of SMEs
in Ethiopia. In sum, access to equity capital among SMEs in Ethiopia is very limited.
Equity Capital Supply
Figure 42: Equity capital supply (Sources: Enterprise partners, GIN, KII, UNCTAD, Precise analysis)
Overall, taking FDI

inflows as available
equity funds for all
firms, and assuming a
3% share of supply to
SMEs, the annual SME
equity finance supply is
estimated to be ETB
6.7 bn while the stock
of equity investments
in SMEs is estimated to
have reached ETB 28.3
bn in 202052.
Manufacturing and
agro-processing
sectors are the top
two sectors for equity
investment inflows
The median
transaction size per
deal is USD 5 million.
The average deal
processing time is 9
months, and the average exit time for equity investors in Ethiopia is about seven years. Strategic
sales and management buyouts are the two most common approaches to exit among equity
investors in Ethiopia. The average IRR expected by equity investors, excluding impact investors is
23.3%, and 20.4% if impact investors are included. The average acceptance rate is around 1 in 10;
ten potential firms are considered for every successfully closed deal53.
52WORLD INVESTMENT REPORT, (UNCTAD, 2018-20)

53Insights on SME Fund Performance: Generating Learnings with the Potential to Catalyse Interest and Action in SME Investing’ (Shell
Foundation, Omidyar Network, and Deloitte, 2019); ‘Scale Up! Entrepreneurs’ Guide to Investment in Ethiopia’, (The Global Business
Network (GBN) Programme, Tech-Entrepreneurship Initiative Make-IT in Africa, 2019)

Drivers of Equity Finance Supply to SMEs: Surveyed equity investors identified the following
as major factors that motivate equity investors to invest inSMEs in Ethiopia:
▪ SMEs are easy to grow and improve their performance

▪ Significant untapped market potential and opportunities in many Ethiopian industries
▪ Advantages of early entry into Ethiopia market
Major Challenges / Obstacles for Equity Supply to SMEs: Major challenges related to equity
finance supply in Ethiopia can be classified into challenges related to:
▪ Opportunity identification and target selection

▪ Valuation of the business
▪ Management of the business, and;
▪ Exit related challenges54.
Opportunity and Target Identification and Selection. Interviewed equity investment

companies emphasized the lack of investor readiness for equity investment within the business
community in Ethiopia. Furthermore, equity investors face a significant information gap, including
both information on existing opportunities in Ethiopia, and the quality of information that firms may
have. Finally, fear of loss of ownership and control among Ethiopian business owners (a demand
barrier) is also a key barrier to the inflow of equity capital supply to SMEs in Ethiopia.
Valuation Challenges. The ways equity investors value a business are different from how owners
assess the value of their business. Most importantly, Ethiopian business owners focus on their land /
physical assets value, but equity investors focus on the cash flow and growth capacity of the business
(the economics of the business). This emanates partly from the lack of experience and awareness of
business finance on the part of business owners, and in many cases the underlying purpose and
nature of the enterprise. Many SMEs are ‘dynamic’ or ‘livelihood’ enterprises in the CFF framework
discussed above, while equity investors tend to target ‘high growth ventures’ first and certain ‘niche
ventures’ secondarily.
Management Challenges. Equity investors unanimously perceive a significant-top management

talent gap in Ethiopia. They believe that access to more experienced managers in neighboring African
countries can help address this problem. On the other hand, even if there is a mid-level management
talent gap, it’s possible to address it through targeted training, according to surveyed equity
investors.
Exit Challenges. All the equity firms surveyed for this study expressed concerns about high exit
barriers for equity investors in Ethiopia. These barriers are related to several factors including high
capital gains taxes (30% in Ethiopia Vs 5% in Kenya), difficulty in collecting investment and profits in
hard currency, delays in repatriation, and others. These and other challenges cited by equity
investors are addressed in depth in Enabling Environment section later in this report.
54 Precise Key Informant Interviews (2020)

6. CAPITAL DEMAND
This section looks at the nature of the capital needs of SMEs in Ethiopia. We begin with an overview
of the composition of the Ethiopian business economy, unpack SME capital needs by stage and
purpose, and estimate the gap between supply and demand. We then identify barriers and enablers
to SME capital flows in Ethiopia.
6.1. PROFILE OF ETHIOPIAN BUSINESSES

Atypical Business Sector. The Ethiopian business environment is very different from most
developed economies and neighboring East African benchmarks, reflecting a legacy of state
ownership and involvement being gradually reformed. It is characterized by three primary types of
enterprises: state-led enterprises, endowment and conglomerate companies, and private enterprises
which range from informal to large-scale55. State-led enterprises are engaged in strategic
government-controlled sectors: finance, infrastructure, and certain large-scale manufacturing
activities. Endowment and conglomerate companies are mostly widely diversified firms that engage in
multiple sectors. Most endowment companies are state-affiliated holding companies operating
multiple large-scale businesses. Examples include The Endowment Fund for the Rehabilitation of
Tigray (EFFORT) and Tiret, each of which employs over 25,000 people, have a business line of more
than 20 firms, and have a total capital outlay of one billion USD56.
EFFORT owns firms that are engaged in construction, textile, agriculture, and mining. The firms owned by EFFORT include Messbo
Cement, Sur Construction, Almeda Textile, Hiwot agriculture, etc. The target sectors of TIRET include trade, construction,
manufacturing, textile, and electronics. The companies owned by TIRET include Ambasel Trading House, AZILA electronics, Bahir
Dar textiles, Walia Corki factory, etc.
MIDROC and East Africa Holdings are the dominant conglomerates that are owned by the private sector. MIDROC owns 36
companies in Ethiopia with different ranges of work. The companies include ELFORA, MOHA soft drinks, Horra food complex, MAA
garment, and textile, etc. East African Holdings is a share company that operates on the engineering and construction cluster,
marketing and distribution, and agro-processing cluster. The companies on East African Holdings include National Cement, East
African real estate.
Exports. Given the chronic balance of payments deficit and external dependence discussed in the
supply section, Ethiopia’s export sector is critical. Currently, exports are dominated by low value-
added agriculture commodity products, led by coffee, oilseeds, and khat.57 These are usually
exported through local or foreign private enterprises and endowment companies that own trading
houses. Exporters are usually medium and large-scale firms.
55
Made in Africa: Industrial Policy for Ethiopia
56
Rethinking business and politics in Ethiopia: The role of EFFORT, the Endowment Fund for the Rehabilitation of Tigray
57
Enterprise Map of Ethiopia

Figure 43: Major export items in Ethiopia 2018-19 in millions of USD (Sources: NBE)
Table 5: Leading companies in the export of agricultural products (Sources: KII, IMF)
Items Lead Exporters

Coffee Kerchanshe Trading PLC
Tracon Trading PLC
Adem Kedir Haji Hassen Trading PLC
Oilseeds Belayneh Kinde Import and Export
Kabew Trading PLC
Flowers AQ Roses
Dummen Orange Ethiopia
Informal Dominance. Sixty% (60%) of the private sector enterprises in Ethiopia are informal
businesses operating in and serving the local market.58 SMEs are primarily in construction, service
provision, and leather products. The growth of SMEs in Ethiopia has been influenced by government
spending, with 36.6% of the registered SMEs operating in the construction sector. 59
Regionally Concentrated. By region, the majority of private enterprises are in Oromia, Amhara,
and Tigray, as shown in the table below, concentrated largely in Addis Ababa, Dire Dawa, and other
secondary cities within these regions. A total of 110,253 formal micro and small enterprises (MSEs)
were registered, with the total employment from these MSE’s reaching 882,098 in 2019.60
58
IFC Enterprise Survey
59
SME Development Ethiopia
60
NBE Yearly Report (2018/19)

Figure 44: Number of MSEs by region in 2018-19 (Source: NBE)
Declining New Business Formation. As shown below, the number of new MSEs registered in
Ethiopia has been steadily declining from a peak of over 250,000 in 2015 to just over 100,000 in
2019. Based on our interviews with entrepreneurs, we believe this primarily reflects a combination
of lack of appropriate financing options (availability and cost), regulatory hurdles, and bureaucratic
processes.
Figure 45: Number of newly formed MSEs In Ethiopia by year (Sources: NBE)
Manufacturing SMEs- There are 19,144 manufacturing SMEs in Ethiopia. Eighty percent of the
manufacturing SMEs in Ethiopia were small-sized enterprises, while twenty percent of the
manufacturing SMEs in Ethiopia were medium-sized. In terms of regional distribution of Manufacturing
SMEs, Tigray lead the distribution of manufacturing SMEs, followed by Addis Ababa, Amhara, and

Oromia. The four regions represent 80% of manufacturing SMEs in Ethiopia. In terms of sectorial
concentration, wood and metal works, agro-processing, and textile and garment dominate.
Most of the SMEs in the Tigray and Amhara regions are small-scale by nature. Wood and metal works
dominate the sectoral share of manufacturing SMEs followed by agro-processing and construction.
Small-sized manufacturing SMEs, on average, employ five people, with 80% of the employees being
male. Medium-sized manufacturing enterprises in Tigray, on average, employ sixteen people, with 62%
of the employees being male. In total, small and medium manufacturing enterprises employ 42,000
people in Tigray.
Wood and metalworks dominate the sectoral share of manufacturing SMEs in the Amhara region,
followed by textile and agro-processing. Small-sized manufacturing SMEs in the Amhara region, on
average, employ six people, with 80% of the employees being male. Medium-sized manufacturing SMEs
in the Amhara region, on average, employ nineteen people with 70% of the employees on average
being male. In total, small and medium enterprises in Amhara employed 28,500 people.
Figure 46: Size and distribution of SMEs in Tigray and Amhara region (Precise analysis)
The share of medium-scale manufacturing SMEs in the Oromia region is around 42%. Agro-processing
dominates the share of manufacturing SMEs followed by textile. Agro-processing SMEs, in Oromia, are
usually medium-sized and engage in meat, coffee, and flour processing. Small manufacturing SMEs, on
average, employ 32 people, with 68% of the employees being male. Employee number for small
manufacturing SMEs in Oromia is higher due to labor-intensive enterprises engaged in coffee
processing. Medium manufacturing enterprises, on average, employ 30 people, with 55% of the
employees being male. In total, manufacturing SMEs in Oromia employs 58,000 people.
Small-scale manufacturing SMEs dominate the SMEs in Addis Ababa. Most of the SMEs in Addis Ababa
are engaged in the agro-processing and textile sectors. Most of the leather and leather product SMEs
are found in Addis Ababa. Most of the agro-processing SMEs in Addis Ababa engage in bakery and
grain milling, while textile SMEs mostly engage in garment and traditional clothing. Manufacturing SMEs
in Addis Ababa employed 33 people on average, with the total employment from manufacturing SMEs
in Addis Ababa was 148,000 people.

Figure 47: Size and distribution of SMEs in Oromia and Addis Ababa (Precise analysis)
Emerging Sectors. E-commerce and ICT products and services are growing part of the Ethiopian
SME landscape.61 E-commerce based service providers have thus far primarily entered
transportation, food delivery, and digital markets.62 Almost all of the e-commerce and ICT
companies are based in Addis Ababa. Some examples of these companies are shown in the table
below.
Table 6: Some companies in emerging sectors
Sectors ICT Products
Fintech M-Birr, Yene-pay, Hello Cash, Amole, CBE Birr, and PayWay Ethiopia.
E-commerce Qefira, Hello Market, Delala, and Merkato Online marketplace.
Jobs Sira, Hello Sira, and Zion Jobs.
Transportation RIDE, Feres, Taxiye, and ZayRIDE.
Food Delivery Deliver Addis, Z-mall, Balderas, and Ahun.
61
Digital Ethiopia 2025: A digital strategy for inclusive prosperity
62
Fintech and The Digital Economy: An Ethiopian Perspective

6.2. LATENT UNSERVED POTENTIAL DEMAND: UNDERSTANDING & SIZING THE
FINANCING GAP
Ethiopian SMEs are usually highly constrained financially with little or no access to finance. Globally,
the SME financing gap is estimated to be 4.5 trillion USD, and only 44% of SMEs’ financing needs are
estimated to be satisfied.23
SMEs need finance or capital at all stages of their business. However, as noted earlier, most SMEs
operate in the “missing middle” – too large and/or not qualifying in other ways for microfinance
institutions (MFIs), and too small and/or lacking required collateral or other requirements for
commercial banks.
The stage of a start-up also affects the capital needs of the start-up. One way to visualize this is
provided by GIZ63, and describes five stages of growth, as shown below. A start-up starts with an
idea, then develops a product or service concept, designs a prototype, refines their products or
services, and tests them in the market. The capital or finance demand increases for the start-up as
they pass through each stage of the business, as shown below.64
Figure 48: Capital demand of firms and startup phase (Source: GIZ)
Early-Stage Capital Needs: Most SMEs have relied on internal financing in their start-up phase,
with founder capital, operating revenue, and loans from informal sources like friends and families. 24
Each of the four types of SMEs often needs different types of capital. High-growth ventures often
demand “risk capital” (equity, and in some cases, grants) in their initial phase to fuel the development
63 Scale Up! The entrepreneur guide to investment in Ethiopia, GIZ, 2020

64
Scale Up! The Entrepreneurs guide in Ethiopia, GIZ, 2019

of products and services, and initial customer sales and early growth. Niche ventures also need risk
capital to support product or service development and early sales and growth. 25
Dynamic enterprises often need startup capital to finance working capital (customer receivables,
inventory) to set up production, and/or to establish initial their retail outlets or service location(s) 26.
Livelihood sustaining enterprises have similar initial capital needs, and usually, finance their own
business through savings and income rather than seeking external capital. 28
Expansion Stage Capital Needs: Ethiopian SMEs need expansion capital for several purposes:
to working capital, strategic investments in operating expenses, to scale up their capital investments
(machinery, equipment, new production facilities), to expand their business into new geographic or
product/service areas or to lease land either for workspace or as collateral to secure a larger loan.65
Expansion capital needs also vary by type of SME. The vast majority of Ethiopian SMEs are livelihood
sustaining and dynamic enterprises that operate in the Ethiopian economy, consistent with global
patterns 66 Dynamic enterprises in Ethiopia need expansion capital to buy new machines; they report
needs in the range of two million ETB to six million ETB. Livelihood enterprises in Ethiopia need
expansion capital for working capital; the SMEs we interviewed often cited a need below 500,000
ETB (<13,000USD). Most high-growth ventures need working capital to fund sales growth and for
asset-light technology companies to reach more customers through marketing investments. The
demand among high-growth ventures we interviewed is in the Eight million ETB to Ten Million ETB
range (200,000-250,000USD). 67
Figure 49: Loan demand per enterprise by CFF categories (Source: Precise analysis based on bank’s report)
65
Interview Notes with SMEs
66
The Missing Middle: Segmenting Businesses to understand their financial needs, Collaborative for Frontier Finance, 2018.
67
Interview Notes with SMEs and Precise Insights

The size of the enterprises has also an effect on the amount of finance SMEs demand. As firm size
increases, capital needs also increase. The finance gap per enterprise in Ethiopia often gets larger as
firms size increase as they are not served by either microfinance, due to their size, or banks, because
they lack the appropriate collateral to secure a loan.68
Figure 50: The financing gap per enterprise size, per millions of ETB (Source: Precise analysis, NBE, IFC)
Ethiopian SMEs are usually either underserved with no access to financial supply or under-served,
despite access to finance, doesn’t fully satisfy their needs. Most Ethiopian SMEs are in this “missing
middle”, as MFIs usually serve micro-enterprises and individual companies with an average loan
portfolio of 12,500 ETB, and commercial banks mostly serve state-owned enterprises and exporters
with an average loan portfolio of 2.7 million ETB. 69 As shown below, the ‘missing middle’ in Ethiopia
is usually located in the region of 5,000 USD-50,000 USD (200,000-4,000,000 ETB). 70 The Ethiopian
SME on average has a finance gap of around 1.5 million ETB.71
68
IFC Enterprise Survey
69
Bank loan reports from MFI’s and NBE yearly report
70
WEDP loan portfolio analysis (2017)
71
Precise estimates

Figure 51: WEDP and financing gap shortfall in Ethiopia (Source: WEDP and Precise analysis)
6.3. FINANCING GAP TRENDS

Shortfall in Absolute Funding
Ethiopia SME latent demand (financing gap) has more than tripled in five years, despite intense efforts
by commercial banks to approach the SME segment of the market via the creation of SME loan
divisions. The financing gap of Ethiopian SMEs is estimated to be around 250%-300% of the loan
amount currently supplied for SMEs.72
Figure 52: The financing gap for SMEs (Sources: NBE, IFC, Precise analysis)
72
MSME Enterprise Gap (2017): Figure for SME Financing Gap and Capital Supply, IFC Enterprise Survey (2015)

Gender Gap Trends
Ethiopian SMEs are mostly owned by men. 73 As shown below, 70% of women-owned SMEs in
Ethiopia are either unserved or underserved by financial institutions in Ethiopia, compared to 58% by
men.74 A women-led SME has a greater finance gap than men-owned SME. 75
Figure 53: SME financing gap by gender (Sources: NBE, IFC, Precise analysis)
Figure 54: SME ownership by gender in 2020 (Source: IFC, Precise analysis)
73
IFC Enterprise Survey (2015)
74
Financing women entrepreneurs in Ethiopia (2017)
75
Precise estimates

Figure 55: Average credit gap by gender in 2019(Sources: NBE, IFC, Precise analysis)
Figure 56: SME financing gap per enterprise in millions of ETB in 2019 (Sources: Precise analysis)
The unfilled loan demand is a significant percentage in every region, but is by far the largest in
Oromia, Amhara, and Addis Ababa, as shown below. Most of the credit supply for SMEs is
concentrated in Addis Ababa, Dire Dawa, and ‘the big four’ regions of Ethiopia (Amhara, Tigray,
Oromia, SNNPR).76 The demand for debt capital is highest in Amhara and Oromia region followed
by Addis Ababa. Not surprisingly, as noted earlier, SMEs are also concentrated in this part of the
country.
76
NBE Yearly Report

Figure 57: Loan demand by Ethiopian SMEs per region in millions of ETB (Sources: Precise analysis)
6.4. BARRIERS TO LOAN DEMAND

Collateral - There is a high collateral requirement for commercial loans from SMEs in Ethiopia. The
value of collateral per loan stood at 296% of the loan77, which is huge compared to the Sub-Saharan
Africa average (203%). Financial providers in Ethiopia usually request fixed assets for collateral like
land, buildings for loans, which SMEs in the missing middle usually don’t have.
There have been attempts to reduce the value of collateral for a loan through establishing SME loan
officers in commercial banks in an effort for SMEs to know Small and medium enterprises in Ethiopia
and reduce collateral requirements, allowing loans with movable collateral, allowing a person to use
his business as collateral, and establish a one-man company to limit liability to the person, directly. 78
77
IFC Enterprise Survey (2015)
78
Draft commercial code 2020

Figure 58: Collateral value per loan (Source: IFC)
High interest rates - Financial intermediaries usually charge a high interest rate for SMEs for their
loans. This discourages enterprises from borrowing from commercial banks as the amount they repay
after loaning is quite large. Micro-finance institutions loan for enterprise mostly ranges between 15-
20%, which is higher than the average lending rate of 13%. 79
Figure 59: Enterprise loan interest rates in 2020 (MFI yearly reports)
Interest rate on loans for enterprises in Ethiopia.
40%
35%
30%
25%
20%
15%
10%
5%
0%
79
Microfinance yearly reports

Social and religious factors - Lending and interest-based lending is considered as a ‘sin’ in some
social groups, which has made businesses seek alternative routes for financing like a family loan, or
own savings. Currently, only three MFIs offer interest-free financing (Afar, Somali and Rays MFIs in
Ethiopia)80, which are pretty small in terms of asset ownership and the number of loans they lend to
businesses. Commercial banks currently offer interest-free financing, but they remain underutilized by
these SMEs. The first interest-free bank was established in 202081, under the name of the type of
interest-free lending offered by banks include:
Table 7: Interest free banking in Ethiopia (Sources: Islam Leasing Document, Mudaraba, Musharaka, Murabaha - new terms to bank
on, Salam Contract for Profit and Loss Sharing)
Interest-free financing offered in Ethiopia How they operate?
Mudaraba (Trust Financing) A type of financing in which one partner provides the
investment (rab-ul-maal) and the other partner invests it in a
commercial enterprise (mudarib). The profits are shared in a
predetermined ratio.
Murahaba (Cost+ Trade Financing) A contract of sale in which a customer requests the Islamic
bank to buy goods from a supplier and resell them to the
customer at the original purchase price plus expenses and a
negotiated profit, on agreed terms.
Musharika (Participating Finance) Form of a joint enterprise through which the partners share
their profit according to a predetermined ratio
Ijarah (Leasing) An agreement between two parties, one being the owner of
the asset, who gives possession of the assets for the use of
the other party, the hirer, on an agreed rental over a mutually
agreed period.
Salam (Advance payment Sales) Salam is a contract in which advance payment is made for
goods to be delivered at a future date
Istisina (Build) Asking someone to construct, build or manufacture an asset.
Bureaucracy and time of loan approval - Loan approval in banks takes a huge amount of
time taking up to a year which discourages SMEs to loan finance. In addition to time, the
bureaucracy for loan approval is usually tedious as there are a poor credit registry and
information about the potential credit viability of enterprises by banks, which makes getting
credit difficult for Ethiopia SMEs. 82
80
Microfinance loan reports
81
https://www.ecofinagency.com/finance/1410-41934-zamzam-bank-becomes-ethiopia-s-first-islamic-bank
82
Doing Business Index, 2020

Figure 60: Depth of credit information index - 0 low, 8 high (Source: Doing Business, 2020)
7. FINANCIAL INTERMEDIARIES
7.1. CURRENT STAGE OF DEVELOPMENT - MARKET FACILITATORS IN ETHIOPIA

Intermediaries play a critical role in an economy by directing funds from actors with a surplus to
those who need it to perform certain economic activities.83 In the early stage and restricted
Ethiopian market, facilitators are limited in number and the scope of services they provide.84
Valuable financial facilitation services such as investment banking don’t yet exist in Ethiopia, and
banks have kept their scope narrowly focused on highly secured lending at high interest rates,
currency trading, and not much else.
The financial facilitators in operation only provide basic services such as locating investors, allocating
grant money, and addressing information asymmetry about finance - by organizing trainings on
financial matters for businesses and giving them information about different financial options and new
regulations as well as explaining to those who come looking for capital about what their options
are.85
7.2. CURRENT TYPES OF MARKET FACILITATORS IN ETHIOPIA

There are three basic types of intermediaries in the Ethiopian market.86
Business Accelerator/Incubation Centers. These mainly work with startups and innovative
companies. These types of intermediaries provide a workspace, limited business training, and in
83 https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-intermediary-transactions/
84
Interviews with Audacia, CAWEE, and DOT
85
Interviews with Iceaddis, Lucy Partners, and DOT
86
Interviews with facilitators

some cases seed money to their incubatees.87 These hubs provide limited scope support to
companies in raising capital by linking them with prospective investors and donors. Their ‘business
model’ is primarily, getting grant support from donors, although some revenue accrues from
workspace renting and consulting.88 Intermediaries like this usually have two ways to help companies
raise capital. The first is to re-grant funds provided by NGOs and development partners to fund the
companies they are incubating.89 Incubators can also make introductions to angel investors, venture
capital firms, grants, government funds, and other incubators. But they do not provide the kind of
full-service advisory support and fundraising process management that investment bankers do.
These innovation centers are paid in one or a combination of the following:
A. Grants or funds from development partners and NGOs
B. Minimal office space rent from the companies they incubate
C. Consulting service fees mostly covered by development partners
D. Some invest in the companies and take ownership in the company90
The major facilitators in this category are BlueMoon, Iceaddis, FasterCapital, and Xhub.
Consulting Advisory Firms. The second type is investment/transaction advisors who conduct
studies on behalf of a company, provide certain consulting services, and support a capital raise.91.
These firms typically tap into a wider pool of capital sources from debt and equity to grants.
Manufacturing companies are the most common clients approaching these firms for assistance with
fundraising.92 These companies have shown a reluctance to give up ownership of their business to
raise capital via equity financing.93 They usually approach the advisories because they don’t have
enough collateral to take out a loan with or the interest rate was too high94, Many of these
companies would fall into the ’Niche’ or ’Dynamic Enterprise’ category, struggle with the idea of
“giving up” part of their company to a stranger and ask to just get a grant or something similar. This
pattern is less frequent in ’High Growth Ventures’ led by young entrepreneurs and innovators.95
These types of firms are paid in a variety of ways:
A. They receive service fees
B. A development partner covers the fee on the company’s behalf
87
how it works, BlueMoon, < https://www.bluemoonethiopia.com/bluemoon-incubator/how-it-works/
88
Interview with Iceaddis
89
Interview with Iceaddis
90
https://www.bluemoonethiopia.com/bluemoon-ventures/bluemoon-seed-
fund/#:~:text=Our%20seed%20funding%20is%20based,%E2%80%9Cskin%20in%20the%20game%E2%80%9D.
91
Enterprise partners, 2018., A Financing Map of Ethiopia: The funding landscape for future growth.
92
93
94
https://www.zemenbank.com/loan-calculator
95
Interviews with SMEs and facilitators

C. They take a percentage of the funds they raise usually 1-2%, plus a certain amount of
money as guaranteed payment regardless of much money they raise
D. Some are currently charging 4% of the company’s profit for 2 years on top of service
charges which the investor and the company are splitting.96
E. Some buy equity in the company97
The main capital suppliers are local family businesses, returning diaspora residents, banks, DFIs,
Private Equity Firms, Syndicate Funds, Family Offices, Strategic Investors, Regional and Local
Financial Institutions, and Sovereign Wealth Funds.
The major facilitators in this category are Lucy Investment Partners, Pragma Investments, First
Consult, BDO Consulting, Verdant Consulting, HST Consulting, and Precise Consult.
Non-Profit Training Firms. The third category comprises non-profit organizations that provide
much-needed trainings to business owners and people who want to start a business and put them in
the same room with capital suppliers, particularly MFIs and banks. This type of organization is less
involved in the actual fundraising and mostly focuses on making connections that lead to the
investment of funds.98 There is also a much stronger linkage with financial service providers and
organizations in this category, as they seem to arrange loans from banks to their members (CAWEE
from Enat bank), and their certificates are used as a stamp of approval to grant loans (DOT’s
certificate is usually a good sign you will get a loan from an MFI in the regions). The main source of
funding for these organizations is foreign governments and development partners.
The major players are currently: Reach for Change, DOT, and CAWEE.
8. FINANCIAL INFRASTRUCTURE
8.1. Current profile of Ethiopia’s financial infrastructure

Financial infrastructure represents the core enablers – the ‘plumbing’ -- of the financial system and is
a precondition of its functioning. The financial infrastructure is made up of technical systems through
which payments are made and financial transactions between and among individuals and institutions
are executed. Several banks and other financial institutions are participants in financial infrastructure
systems and in many cases these systems also participate in each other's systems. This
interconnectedness means that there are many interdependencies between the systems in the
financial market infrastructure, banks, and the financial markets.99
96
Interview with Audacia
97
Interviews with Lucy partners and Pragma
98
99
https://www.riksbank.se/en-gb/financial-stability/the-financial-system/the-financial-infrastructure/

As noted in the Capital Supply section, the financial system in Ethiopia is dominated and influenced
by state-owned or affiliated institutions and has concentrated around a select few financial
institutions. Except for leasing, the financial sector is closed to foreign investment (although a recent
small step the GoE now allows foreign investors of Ethiopian origin (diaspora) to invest in local
banks.
Currently, the Ethiopian financial sector consists of 2 public banks, 16 private banks, 16 private
insurance companies, 1 public insurance company, 41 microfinance institutions, and over 18,000
Saving and Credit Cooperatives (SACCOs) in both rural and urban areas. A notable 98.6% of all
Ethiopian financing assets are controlled by banks and MFIs.
Nascent Stage of Credit Monitoring & Reporting. Nascent Stage of Credit Monitoring &
Reporting. Ethiopia’s finance ecosystem is nascent when compared to the rest of the world or
nearby peers. Ethiopia does not yet have specialized institutions necessary to better facilitate
financings such as credit rating agencies, investment banks, or mortgage banks. The credit reporting
system in Ethiopia (NBE Credit Reference Bureau or CRB) is still nascent, as noted earlier, although
it has made progress since it was established in 2012100. The CRB is still understaffed and under-
resourced and will require substantial investments in technology and expertise for service provision
to diverse lenders and to develop value-added services and products that could address lenders’
needs and improve credit flows and the quality of credit decisions, and reduce risk. In a significant
move, the Prime Minister in February 2019 instructed the NBE to integrate the microfinance and
leasing sectors into the CRB requiring extensive collaborative effort among the relevant
stakeholders. By April of the same year, 2.8 million borrowers from 20 MFIs were uploaded to the
NBE CRB. Together with those registered at banks, they represent 5.2 % of the adult population.
But there is not yet any private credit bureau coverage in Ethiopia which can monitor and report
current information on repayment history, unpaid debts, or credit outstanding by a private firm or
individual.101
Recent Modernization of Collateral. Collateral is quite an important factor for lending and
financing in Ethiopia, and historically most collateral has been limited to ‘fixed’ assets (real estate,
equipment). The Ethiopia Movable Collateral Registry (EMCR) has recently been established at the
National Bank of Ethiopia (NBE) and is concerned with security rights over movable property. It
aims to substantially change and improve how a security right can be created over movable assets, to
expand the collateral base in the country for lending purposes. It has created a nationally accessible
digital public notice board listing security rights over movable property and business assets owned by
a company or an individual. A company or an individual can now use these movable assets
as collateral to secure loans. Movable collateral can include motor vehicles, accounts receivable,
plant, machinery and equipment, crops and livestock, and the like. In such cases, the lender or any
secured creditor has a security right over the collateral. This right must be registered on EMCR to
ensure that this right is protected.102
100
https://nbebank.com/nbe-launches-credit-bureau-upgraded-credit-info-system/
101 HYPERLINK "https://www.indexmundi.com/facts/ethiopia/private-credit-bureau-
coverage"https://www.indexmundi.com/facts/ethiopia/private-credit-bureau-coverage
102
https://emcr.nbe.gov.et/Home/About

This is a welcome change as it provides secured creditors with the ability to register an effective
security right (legal right) over movable assets and applies to all types of rights over tangible or
intangible movable assets that exist at present or may exist in the future. Immovable property (land,
building, fixed assets), ships, aircraft, or publicly traded securities are excluded as these assets
require special registration in a register which already exists.
This new and modern secured transactions legal regime is part of the NBE’s Financial Inclusion
strategy. It is envisioned as a mechanism to improve the flow of appropriate capital to individuals,
persons in the agriculture sector, and MSMEs Improved access capital could enable SMEs to finance
their business, expand into other business opportunities create new jobs, and enhance efficiency and
economic development for all Ethiopians.103
Non-Existent Capital Markets. As noted earlier, Ethiopia does not have developed capital
markets. There is no market-based issuance of domestic government debt in Ethiopia, and secondary
bond markets do not exist for several technical and pricing reasons. Foreign investors are not
allowed to participate in the capital market. Pensions are currently mandated to purchase only
government T-bills. Insurance companies which could support demand for market-based issuance of
government bonds are under-developed and tightly regulated. The only non-government bond
issuance is that of state enterprises (SOEs), which is also not market-based. Market infrastructure
for capital markets does not yet exist. Securities are issued in the form of paper-certificates, and
there is no Central Securities Depository for government securities, making transactions more
difficult. It should be noted, however, that Ethiopia does have a relatively well-functioning
commodity exchange, the Ethiopian Commodity Exchange, whose trading and settlement platforms
could be leveraged to support other financial markets and infrastructure development. Also, retail
investors are already active in government infrastructure debt securities, private share offerings, and
trading. These could also be harnessed to develop the capital markets.
Stock Market Operating by 2022. As discussed in more detail in Enabling Environment, the
Council of Ministers of Ethiopia approved a draft law prepared by the National Bank of Ethiopia that
allows it to introduce a capital market, which is now pending approval by the House of Peoples
Representatives of Ethiopia. Once passed, it will pave the way for the introduction of a stock
market in Ethiopia. The expectation is to start trading company shares on the new stock exchange in
2022. This will include SOEs and large state-affiliated companies, which are currently regulated by
the National Bank of Ethiopia, including banks and insurance companies.104 Once this market exists,
access to capital for large banking institutions should improve. Over time, this could benefit capital
supply and capital flows to SMEs.
8.2. DIGITAL INFRASTRUCTURE

Continued Prevalence of Informal ‘Institutions’. While Ethiopia has made good progress in
terms of expanding financial inclusion, more effort is needed to bridge the gap with comparable
countries especially in access and usage of digital financial services. Two-thirds of Ethiopian adults do
not have a transaction account; women account for a disproportionate share of the unbanked. Only
103
https://emcr.nbe.gov.et/#:~:text=About%20the%20Registry,can%20be%20accessed%2024%2F7.
104
https://newbusinessethiopia.com/trade/ethiopia-approves-law-to-introduce-capital-market/

35 % of adults have an account at a formal financial institution. A% of adults reported saving money
in the past year only 26 % had their savings in a formal financial institution. Similarly, 41 % of
Ethiopians said they borrowed money but only 11 % borrowed from a financial institution.
‘Insufficient funds’ is reported as a key barrier for financial inclusion as well as distance and lack of
proper documentation. Almost all individuals pay utility bills with cash. Importantly, financial inclusion
paves the way for individuals and businesses to enter the financial system, access financing, and
improve their skills to invest in enterprises without which private sector growth and job creation
would not be feasible.105
Early Elements of ‘Fintech’. Recognizing the above, the majority of transactions in Ethiopia are
conducted via cash-only transfers (banknote exchange and account to account transfer). However,
important driving factors of fintech adoption are already prevalent in the country. These include
demographic trends as the second most populous country in Sub Saharan Africa with a large youth
and young adult population, major telecommunications reforms, and weak financial inclusion. The
new (2018) government has taken policy, regulatory and legislative steps which could begin to
transform the digital profile of the country. Further improvements in financial technology could
support accelerated economic growth, improved financial inclusion, and improved capital flows to
SMEs.106
Regulatory Summary. The Ethiopian Fintech market is nascent, and fintech companies are mainly
providing digital payment technology services to licensed commercial banks, not holding the money.
The lack of traction within the mobile money market is in part due to the bank-led approach to
licensing service providers and low coverage and penetration of mobile services in the country.
Fintech companies are typically licensed by the Ministry of Trade and Ministry of Innovation and
Technology which implies a license for a technology provider, not a financial services provider.
Consequently, the NBE tends to outsource the due diligence of those providers to commercial
banks that work directly with those providers. This approach leaves the fintech companies in an
ambiguous position and creates a gap in understanding the risks introduced by those providers. Also,
despite ongoing progress by EthioTelecom, the penetration rate for mobile services remains low,
and access to data services and smartphones is still limited, especially in rural areas and among
lower-income users. The plans for EthioTelecom privatization and the introduction of further mobile
network operators to the market will fill a significant gap in access to basic internet and data
services.
Digital Infrastructure Progress. The financial digital infrastructure in Ethiopia lacks several key
elements needed to service its over 100 million residents. The current infrastructure accommodates
only banking and payment, both to varying degrees of access.107 The goal of digital infrastructure is to
support interoperability between mobile wallet providers, microfinance institutions, government
departments, card terminals and POS, money transfer organizations, retailers and merchants, banks,
and other agents in the financial ecosystem and conduct every financial service and transaction
smoothly, reliably, securely and accurately.
105
Findex data base
106
https://pragma-advisory.com/wp-content/uploads/2020/06/FintechDigitalEconomy_Ethiopia_ReportPragma.pdf
107
https://addisfortune.news/ethiopia-maps-out-digital-payment-strategy/

The main payment systems deployed in Ethiopia were radically modernized in 2011, though more
remains to be done. The major ‘government to person’ payments (salaries, pensions, suppliers, and
subsidies) are not digitized or operate in a very limited way, and the same is true for government
collections from persons and businesses (taxes, customs, fees). The payment systems infrastructure
is owned and managed by the NBE and it includes a real-time gross settlement system, which
provides facilities for the final settlement of payments between banks. The automated clearing house
system, to be used for the clearing of retail payments, is not yet operational. This infrastructure is a
critical enabler to foster the development of electronic payment instruments and services in
Ethiopia, as it would increase the efficiency, interoperability, and cost-effectiveness of payments for
both the private and the public sectors. The national e-payment switch, EthSwitch, was launched in
2016, to allow interoperability of automated teller machines (ATMs), mobile money and, point of
sale networks. The system is currently active for ATMs, but the platform for mobile payments
interoperability is yet to be introduced and integrated with service-providing banks.108
Investment in network expansion and the acceleration of mobile penetration has resulted in an
increase in internet coverage from 1.1% in 2011 to 18.6% in 2017, demonstrating an annual growth
rate of 45%. Despite the impressive growth rate, this remains slightly below the Sub-Saharan African
average of 22.1%. In contrast, populations in Rwanda (21.8%), Tanzania (25%), and Nigeria (27.7%)
have greater access to the Internet.109
Similarly, Ethiopia has experienced significant growth in mobile subscriptions in the last decade, but
mobile adoption is still lower than African peers. In 2011, only 15.6% of Ethiopians had mobile
subscriptions. This grew to 60% by 2017 (though only 41% were active subscriptions). The Sub-
Saharan average of mobile currently stands at 74%.
Three other key elements of the Ethiopian digital financial infrastructure are discussed below.
8.2.1. SWITCH (B2C)

The technology that allows interoperability between different banks has been fully implemented in
Ethiopia on ATMs and POS110, with a company jointly owned by all the banks in Ethiopia including
the national bank called EthSwitch holding a national license. While this has enabled perfect sync for
all ATMs and POS in the country, mobile transfers and internet banking are not yet included. This is
the next phase of EthSwitch expansion.111
EthSwitch provides all Financial Service Providers (FSPs) interoperability with their payment systems
and gives FSPs the benefits of owning such systems and technologies without the investments. They
support domestic transactions and payments. Enable financial service providers, bill payment
aggregators, and processors to service their customers.
108
HOW WILL INTEROPERABILITY SHAPE THE FUTURE OF FINANCIAL INCLUSION AND DIGITAL FINANCIAL SERVICES?
HTTPS://WWW.YOUTUBE.COM/WATCH?V=-0PFKAGAN3C&T=1903S
109
International Telecommunication Union. (2018). Measuring the Information Society Report (Vol. 2)
110
https://addisfortune.news/ethiopia-maps-out-digital-payment-strategy/
111
https://www.youtube.com/watch?v=-0pFKAgAN3c&t=1903s

Currently, there are seven banks hosted by EthSwitch including Buna, Enat, Anbessa, Oromia
International, and Debub global banks. Six banks have switches (Dashen, Abyssinia, CBE, Abay,
Wogagen, and Zemen). Another six share a switch (Awash, Hibret, Cooperative Bank of Oromia,
Nib, Addis international, and Birhan).
8.2.2. POS OPERATORS (B2B)

Point of sale devices enable bank customers to make payments via POS devices. POS eliminates
customers’ need to carry cash and addresses the security and cost of handling cash for retailers and
financial institutions. Many Ethiopian commercial banks provide the service, and interoperability was
achieved in September 2020. Numerous POS companies, including POSBee, Lingaros, Elioplus,
Nexglobal, Hillmark Ethiopia, and Ovvi POS supply the majority of POS systems in Ethiopia.
8.2.3. Payment gateways

Digital Wallets (B2C)
In a country of almost 110 million, banks are offering mobile wallet solutions to almost 1 million
previously unbanked clients (Dashen Bank, 700,000 customers, and Commercial Bank of Ethiopia,
200,000). Non-bank technology providers who do not handle cash today – Mbirr and HelloCash --
helped create the market. HelloCash has ~1 million customers and 5,000 agents. mBirr has ~1.2
million customers and 6,500 agents. A Retail Payment Interoperability Initiative led by Ethio switch
aims to achieve real-time retail payments.
Table 8: The Main Digital Wallet Services in Ethiopia
THE MAIN DIGITAL WALLET SERVICES IN ETHIOPIA
Name Description Inaugurated Agent Subscribers Partners FI

in branches
Amole Owned by Moneta Technologies SC, it 2018 8,000 3.5 million serving Dashen Bank
provides mobile bill payment, airtime
purchase, money transfer, mobile wallet.
CBE birr owned by Commercial Bank of Ethiopia and 2017 10,000 3.6 million
their captive provider, provides the same -
mobile bill payment, airtime purchase, money
transfer, mobile wallet.
Mbirr Owned by Moss ICT Consultancy, it provides 2010 14,000 1.7 million It serves the largest
the same services as Amole and CBE Birr - Microfinance Institutions in
mobile bill payment, airtime purchase, money Ethiopia: ACSI, DECSI,
transfer, mobile wallet. OCSSCO, OMO, ADCSI,
and PMF.
HelloCash A venture-backed private company owned by 2011 8,000 1.5 million It is serving Wegagen bank,
Belcash Technology Solutions PLC. HelloCash Lion bank, Somali
provides money transfer, bill payment, airtime microfinance, and
purchase, social cash transfer, e-commerce, Cooperative Bank of
and international remittance. Oromia.
GizePay The newest addition to digital wallets in 2020/21 107 22,787 Abyssinia bank’s platform
Ethiopia, is a reintroduction of the Enqupay,, it
provides Utility payment options, such as
mobile top-up, air ticket purchases, and DSTV
subscription fees, much like most mobile
wallets but this service allows customers to
use it without having an account at Abyssinia
bank.

Aggregators (B2B and B2C)
Aggregators function as the ‘glue’ that helps businesses, governments and donors easily connect with
a variety of payment platforms--like mobile money services or banks—and the customers who pay
via those services.
YenePay is the only major aggregator service currently operating in Ethiopia. Established under
YenePay Financial Technologies and provides online/mobile payment aggregation for e-commerce,
delivery & digital services. They service EthioSwitch, Derash, 11 banks, and numerous businesses.
9. ENABLING ENVIRONMENT
While numerous barriers remain in the financial sector, several recent reforms – if fully taken
advantage of by lenders and other capital suppliers, supported by the right programs - have the
potential to enable significant increases in capital flows to SMEs in Ethiopia. This section provides a
comprehensive overview of the areas we find most important, and the potential impact on SME
capital flows.
9.1. REGULATORY REGIME FOR FINANCIAL INNOVATION IN ETHIOPIA

Recent Enabling Reforms
Since 2018, the administration of Ethiopian Prime Minister Abiy Ahmed has launched several
important economic reforms, legislative actions, and regulatory activities to address issues in the
financial sector, spur financial innovation in Ethiopia and accelerate appropriate capital flows to
support sustainable economic growth and development.112 The financial sector in Ethiopia has been
closed to foreign participation for the past three decades; the sector is dominated by state-owned
and local private banks.113 The key regulatory agency in charge of the financial sector is the National
Bank of Ethiopia (“NBE”). Key regulatory reform initiatives relevant to the financial sector include:
i. Relaxation of entry restrictions to the banking sector: the involvement of foreigners

in the banking sectors has been strictly prohibited including Ethiopians with foreign
nationality. An amendment to the Banking Proclamation114 relaxed such legal restrictions and
opened investment in the banking sector to foreigners of Ethiopian nationality. This seeks to
tap into Ethiopia’s huge diaspora and inject much-needed foreign capital into the economy
and bring technological advancement to the sector.
112
Spearheaded by the NBE, there is currently a Financial Sector Reform Program, which includes reform of the NBE and the two leading
state-owned banks, Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE).
113
Available data show that Ethiopian financial sector is dominated by banks which account for 92% of the total assets of the financial sector.
The state-owned Commercial Bank of Ethiopia (CBE) holds more than 60% of the total bank deposits. Micro-finance institutions represent
5.2%, insurance companies 2.2 %.
114
Banking Business Amendment Proclamation No. 1159/2019

SME Capital Impact: While this will have a more limited impact than the wider opening of the
sector to foreign participation, it is a positive initial step. How and how much of these flows can be
potentially steered toward SMEs remains to be seen.
ii. Allowing non-banking institutions to provide banking services: to introduce

innovation to the financial sector, the NBE issued a new directive in April 2020 to allow the
provision of traditional banking services by non-banking institutions. The National Payment
Issuers Directives allows non-banking institutions to provide services such as cash-in, cash-
out, local money transfer including domestic remittance, load to a card or bank account,
transfer to a card or bank account, inward international remittance, domestic payment
including bill payment services, micro-saving, micro-credit, micro-insurance, and pension
products.115 Furthermore, the Banking Proclamation amendment expanded the definition of
banking business to also include “Digital financial service” provision and “agent banking”
services116 to potentially pave the way for the introduction of digital services and agent
banking. It should be noted that the payment instrument issuance sector is only permitted
to Ethiopian Nationals and the Ethiopian Diaspora. Foreigners are not permitted to invest in
the sector.
SME Capital Impact: Limiting this new activity to Ethiopian nationals and members of the
diaspora will mute the immediate impact on local capital formation and flows. But allowing non-bank
financial institutions to provide the newly permitted services will support additional local innovation
and financial infrastructure development.
Introduction of Capital Markets - Ethiopia does not yet have a capital market regulatory system.
To establish a modern capital market to support the national economy and promote financial
innovation, the Ethiopian government recently approved a draft proclamation to introduce and
regulate Capital Markets in Ethiopia.117 Under the Capital Markets Proclamation, capital market
activities such as buying, selling and dealing in securities, investment advice, underwriting, fund
management, investment banking, corporate finance advice, custodial services, collective investment
schemes, credit rating services are permitted and regulated.118 The Proclamation establishes a capital
markets regulatory body, the Ethiopian Capital Markets Authority (CMA), and the Ethiopian
Securities Exchange (ESE). The law allows companies to offer asset-backed securities119 using a
Special Purpose Vehicle (SPV). The CMA is expected to come up with further legislation determining
the products and activities related to securitization and asset-backed securities and disclosure
requirements. Foreigners are permitted to engage in the securities market and also acquire shares in
the ESE.
SME Capital Impact: For SMEs and their capital providers, one of the most significant reforms in
the Capital Markets Proclamation is the permission of ‘asset-backed securities’, serviced by cash
115
National Payment Instrument Issuers Directive No. ONPS/01/2020
116
Id. Article 2(1) (f) (g)
117
Capital Markets Proclamation (2021) [DRAFT]
118
Id. Article 56 (1)
119
Asset backed securities include: securities serviced by the cash flows of a discrete pool of receivables or other financial assets (fixed or
revolving), securities including promissory notes but excluding shares or entitlements under collective investment scheme,

flows of customer receivables or other financial assets (fixed or revolving). This creates the
potential for new ways to finance working capital assets through lending, one of the greatest capital
demand needs among SMEs in Ethiopia, and one of the biggest gaps between Ethiopian and more
mature capital markets.
iii. Electronic Transaction Proclamation120: Ethiopia passed electronic transaction121

legislation in 2020 to enable the digitization of private and public services. E-commerce
regulates the transaction of goods and services through the internet and other information
networks. While the law seeks to regulate the use of Ethiopia’s domain name (“et.com”) by
public agencies and provision of electronic public services, it also grants legal recognition to
private transactions such as electronic exchanges via emails, the issuance of electronic
receipts, and formation of contracts through electronic exchanges. Intermediary electronic
service providers that offer and manage services such as caching, hosting, information
location tools, and take-down notifications also received legal recognition. The regulatory
entities in charge of implementing the proclamation are the Ministry of Innovation and
Technology (MINT) and the Ethiopian Communications Authority.
SME Capital Impact: All steps that support improved financial sector infrastructure ultimately
support capital flows to all participants including SMEs, but the direct and immediate effect of this is
not likely to be significant.
iv. Investment Proclamation: Ethiopia introduced a new regulatory regime for foreign
investment through the promulgation of the Investment Proclamation122 and Investment
Regulation123 (“Investment Laws”). The new legal regime reversed the previously restrictive
approach to investment admission and administration in Ethiopia which only allowed foreign
investors to engage in sectors specifically allowed by law. These sectors were mainly in the
manufacturing and agriculture sectors, and largely excluding services. Under the Investment
Laws, a more liberal approach was adopted whereby sectors that are restricted for foreign
investors are narrowly and exhaustively listed in the law and liberalizing all others that are
not listed. The list of restrictions for foreign investment includes primarily financial services,
retail/wholesale trade, import trade, and other small and medium sector services.124 The law
also makes an exception to the restriction on retail and wholesale trade by allowing retail
and wholesale trades over electronic commerce to be allowed for foreign investors.
Subsidiary legislation is expected to be enacted by the investment regulatory body, the
Ethiopian Investment Commission (EIC) on the extent and modality of participation of
foreign investors in electronic retail and wholesale. All foreign investors investing in Ethiopia
are required to inject a minimum of USD200,000 at a first instance.
SME Capital Impact: For SMEs, the Investment Laws could have a significant impact, although it
will vary greatly with foreign investment and market entry interest across sectors, and certain key
120
Electronic Transaction Proclamation No. 1205/2020
121
Electronic transaction includes the conduct of business over computer mediated networks including mobile phones and other devices,
and includes electronic commerce (the transaction of goods and services over the internet or other information networks) and electronic
government services.
122
Investment Proclamation No. 1180/2020
123
Investment Regulation No. 474/2020
124
Investment Regulation No 474/2020

sectors and subsectors including financial services remain blocked to foreign participation. This
could act as a continuing brake on financial innovation in Ethiopia and will maintain current low levels
of competition among Ethiopian banks and financial institutions.
v. Movable Property Security Right Proclamation125: In Ethiopia, one of the main

challenges faced by SMEs in accessing credit is the inability to provide security (collateral)
and lack of legal recognition for assets held by SMEs (receivables, equipment, and inventory)
as subjects of collateral. Banks for the most part require securities in the form of immovable
properties (land, house, or buildings) or special movable properties (vehicles) to extend
credit. To address this persistent challenge, the Movable Property Security Right
Proclamation was approved in 2019 which recognized various movable assets as eligible
properties that may be collateralized. These movable properties include money, negotiable
instruments, negotiable documents, receivables, agricultural products, deposit accounts,
intellectual property rights, warehouse receipts, agricultural and construction machinery,
motor vehicles. To allow more SMEs access to finance, the NBE Directive, starting July 01,
2020, required all banks must allocate at least 5% of their credit disbursements of the year
to individuals, persons in the agricultural sector including cooperatives, unions, and others
and SMEs against movable property as collateral.126 Further, an electronic Collateral Registry
system that is accessible nationwide was established under the auspices of the NBE 127 to
allow creditors to carry out due diligence efficiently.
SME Capital Impact: For SMEs and their capital providers, this proclamation could be potentially
quite significant, enabling access to working capital financing. The recognition of customer
receivables and warehouse receipts (inventory) as legitimate collateral assets removes a major
barrier to the expansion of the SME collateral base in Ethiopia and is a key pre-condition for lending
on such assets. This opens the door to initiatives to encourage lending on these critical SME
working capital assets.
Other notable legislative actions include general reform initiatives to ease the starting and
operationalization of businesses including a revision of the commercial registration and business
licensing regime and a revision of the existing commercial code.
It is also useful to keep in mind that most of the above reforms have not yet been fully tested on the
ground given their recent introduction.
Continuing Regulatory Barriers to Financial Sector Innovation
Barriers to Foreign Participation: A major continuing barrier is the restriction on the

involvement of foreign players with the requisite finance and technology to lend to or invest in
Ethiopian financial institutions, and/or provide direct equity or debt financing to domestic businesses
in Ethiopia. Financial service delivery and capital flows are constrained by the inability to attract
foreign capital and technology. This limits overall capital supply to local capital formation, the
diaspora, and development financing. It also limits the transfer of know-how and technology from
125
Movable Property Security Right Proclamation No. 1147/2019
126
Article 19.1, Operationalization of Movable Collateral Registry Directive No. MCR/01/2020
127
Please visit (https://emcr.nbe.gov.et ) to access the Collateral Registry.

more advanced foreign financial institutions to Ethiopian institutions. While capital leasing has been
liberalized to allow foreign participation, the sector has not yet taken off with only one foreign
company registered to date.128
Loan financing by foreign lenders is only allowed to either (i.) exporters of goods or services or (ii.)
foreign investors. Domestic businesses are not permitted to obtain foreign loans unless there is a
special authorization from the NBE. The manner and process to obtain a foreign loan by exporters
and foreign investors are regulated by the NBE Directive129, which requires pre-approval of the loan
and registration of the loan upon disbursement. The applicable debt to equity ratio for foreign loans
is 60:40 and cannot exceed this unless authorized by the NBE.
Restrictions on Innovation by Banks: In terms of introducing new and innovative products,

banks may introduce new banking services or products only after obtaining prior written approval of
the NBE.130 All bank policies, standards, and terms are required to be reported to the NBE. Such
policies, standards and terms are approved by the relevant Board of Directors of the bank. In the
event of the introduction of new and innovative procedures for delivering existing services, banks
are not required to obtain prior approval of the NBE. A notification will suffice.
Restrictions on Innovation by Non-Bank Financial Institutions: Until very recently, only

financial institutions licensed by the NBE were permitted to offer banking services. This was recently
relaxed to allow National Payment Issuers, which are non-bank institutions, to invest and offer their
services to the public. As noted above, Payment Instrument Issuers are permitted to offer traditional
banking services. These entities will need to obtain a license from the NBE to issue payment
instruments (such as electronic money and other instruments that allow the transfer of money).
Existing banks are not required to obtain a new license to offer payment instrument services as their
license is presumed to be sufficient.
As noted above, the Payment Issuance service provision is only permitted for domestic investors
(Ethiopian nationals and the Ethiopian Diaspora). Foreign players are not allowed to engage in this
sector. A minimum paid-up capital of Birr 50 Million (~US$ 1.25 million) is required to obtain the
payment issuance license from the NBE. A single shareholder is not permitted to own more than
20% of the shares of the company. It is also worth mentioning that the Directive requires the
company to have at least 10 shareholders, contrary to the Commercial Code provisions which only
require a minimum of five shareholders for share companies.
Purchase and Sale of Financial Assets: In other countries (such as Kenya), working capital
assets (such as customer receivables) can be sold, including to foreign investors, to provide SME
financing. In Ethiopia, capital markets do not yet exist. Although the new legislation was just
introduced and is in the process of approval, the regulatory and investment climate does not exist to
date. As noted earlier, the new Capital Markets Proclamation recognizes the purchase and sale of
financial assets including cash flows, receivables, and other fixed or revolving securities to be traded
on the securities exchanges. Similarly, the Movable Properties Security regime has recognized the
ability of a wide range of security instruments to be used as collateral. The newly established Capital
128
This company is Ethio-Lease. (www.ethiolease.com)
129
NBE External Loan Directive No. 47/2018
130
Article 5.3. Banking Business Proclamation,

Markets Authority is expected to further regulate such transactions and provide detailed rules on
the implementation of the securities exchanges.
SME Capital Impact: Although it is early, and detailed rules remain to be seen, such core legal
barriers in the process of being removed could be a significant new enabler soon. This could be an
ideal time to plan initiatives that adapt proven SME financing instruments from more developed
capital markets to Ethiopia.
Restrictions on Foreign Company Innovation in Ethiopia: Except for the capital leasing
business, foreign companies are restricted from directly engaging in the banking business, including
the Payment instrument Issuance business. Both equity and loan capital investment are prohibited.
With the full liberalization of the telecommunication sector in 2019, technology and financial firms
anticipated the opening of mobile banking and mobile money services. However, the NBE maintained
the restriction closing of the sector to foreign players.
Legal ‘Workarounds’ to Enable Financial Innovation
Technology Service Providers (TSAs) – including mobile money providers such as Hello Cash, CBE-
Birr, and others -- can offer technology services to financial institutions. Although TSAs may
innovate digital solutions to the financial sector, they are not considered financial institutions and are
not licensed or regulated by the NBE. Rather, they are treated as technology companies that may
operate on contractual arrangements with banks or other entities. TSAs can be both domestic and
foreign.
National Bank rules allow banks and the payment instrument issuers to outsource the provision and
maintenance of technology. Many of the banks in Ethiopia were able to introduce new digital
solutions through the use of foreign TSAs. TSA companies can engage contractually with banks and
payment issuers and offer new and innovative products.
9.2. REGULATORY RESTRICTIONS LIMITING SME ACCESS TO CAPITAL

Bank Lending: Banks are generally permitted to lend to customers of their choice, based on their
policy.131 Such policy is approved and adopted by the board of directors of a bank and notified to
NBE. Microfinance institutions are required by law to extend credit, in cash or kind, to rural and
urban farmers and micro and small urban and rural entrepreneurs.132 State-owned banks such as the
Development Bank of Ethiopia (DBE) are established to provide credits to achieve the development
goals of the country.133 Lender banks are required to maintain:
131
The law provides some prohibitions which are not related to the identity of the borrowers. These include prohibition from granting loans
against the security of its own shares; granting a loan to a person who is appointed as its auditor only in the normal course of business and
at an arm’s length basis; provision of loans between banks and insurance companies are undertaken on the same terms and conditions as
provided to any other person; and purchase of shares of a bank using bank loans or advances.
132
Micro-Financing Business Proclamation No. 626/2009
133
Development Bank of Ethiopia Establishment Regulation No. 83/2003 (as amended).

- A prohibition from granting loans against the security of its shares;
- Granting a loan to a person who is appointed as its auditor only in the normal course of
business and at an arm’s length basis;
- Provision of loans between banks and insurance companies are undertaken on the same terms
and conditions as provided to any other person; and
- Purchase of shares of a bank using bank loans or advances.
Collateral and Security Requirements
There are no mandatory rules that require banks to hold collateral or any mandatory collateral
requirements for lending. This is left to the discretion of the contracting parties. Lenders use their
discretion based on their lending policy to determine the percentage of the collateral. However, in
almost all cases, banks require collateral (mostly immovable properties) or special movables (such as
shares and vehicles) as a pre-condition for lending. Most of the time, lending decisions are made by
the bank board of directors. Relationships and the credit history of the borrower also play a critical
role in the type, manner, and volume of loan that the bank extends.
Qualifying Assets: Individual commercial bank policy and practice determine what assets qualify
for lending. The board of directors of banks approves and adopts lending standards, which include
standards for qualifying assets for lending.134 These policies and standards are notified to NBE. The
standards of banks in this respect are a reflection of the general laws and prevalent lending practices
of the country. The Civil Code of Ethiopia and the Commercial Code of Ethiopia regulates pledges
and mortgages. Movable property such as vehicles and immovable property such as houses, buildings,
and industrial or commercial plants generally qualify as assets for lending. The Commercial Code of
Ethiopia allows for mortgaging of a business.135 Accounts receivable and account deposits also qualify
for lending. With the introduction of the Movable Property Security Proclamation, tangible and
intangible forms of movable property are recognized as qualifying assets for lending. Review and
classification of loans and advances are made under Asset Classification and Provisioning NBE
Directive No. SBB/69/2018.
Valuation of Qualifying Assets: Individual lenders determine the way collateral assets are
valued. The valuation policy and standards of lenders are approved and adopted by the board of
directors of banks and communicated to the NBE. Experts of banks follow their bank policy and
guidelines while valuing qualifying assets. NBE is notified of such guidelines and policies.
Loan Advance Rates (loan amount as a % of qualifying collateral): This generally depends
on the individual lender lending policy and the relationship and credit history of the borrower. Loan
advance rates depend on the type of the borrower and his relationship with a bank (e.g., exporter,
forex generator, etc..) and the discretion of the bank management.
134
Article 4.4.1, NBE Directive No. SBB/69/2018
135
Article 171, Commercial Code of Ethiopia

Foreclosure: Commercial banks are permitted by law to foreclose properties they have obtained
via mortgage or pledge without the involvement of third parties. Previously, Ethiopian law required
that foreclosure of private properties can only be made through formal court procedures. This
policy was changed in 1998 with the enactment of the Property Mortgaged or Pledged with Banks
Proclamation No. 97/1998 (as amended), which authorized banks to directly sell a collateral
property via public auction and to transfer the ownership of the property to the buyer. This law was
groundbreaking legislation that facilitated the lending market allowing banks to control the
foreclosure process.
Unsecured Lending: Banks may provide unsecured loans to borrowers based on their corporate
policy. For instance, the MFI Proclamation provides that loans may be extended without collateral,
secured by collaterals, or guaranteed by a group of individuals.136 Banks normally extend
uncollateralized loans in the form of advances, which are in most cases repaid in a relatively short
period (i.e., 1-3 months, which may be extended up to 6 months). These are extended to customers
of a bank based on the terms and conditions of the concerned bank and the judgment/discretion of
the bank management.
Informal or Other Lending or Capital Provision: MFIs, commercial banks, and capital goods
leasing companies are formal capital providers or lenders in Ethiopia. The individual lending practice
is also common with individual lenders requiring higher interest rates and shorter repayment periods
than those provided by formal capital providers. However, this is a highly risky activity as the law
strictly prohibits the provision of banking services without a license from the NBE.
SME Capital Impact: It is important that there is no legal, regulatory or central bank (NBE)
requirements to hold collateral. This means that banks and other lenders are basing their collateral
requirements on risk appetite and policy, borrower risk assessment, and competitive market
conditions. If their risk could be mitigated or eliminated (for example, through guarantees), banks
would not be restricted by law from lending.
SME borrowers and lenders universally report that Ethiopian bank lenders require 100%, 200%, and
sometimes more in collateral. This collateral is usually required in the form of cash or real estate.
Valuation of real estate can be at replacement cost, which is much lower (often 50% to 75% lower)
than market value, or at market value. As discussed elsewhere, collateral requirements and limited
qualifying capital are presently the largest single barrier we see to increasing capital flows to SMEs.
9.3. LEGAL AND REGULATORY LIMITATIONS ON CAPITAL FLOWS

Under the Investment laws, eligibility for entry into the Ethiopian market by foreign investors is
determined based on whether:
(i) the sector is open for foreign investors.
(ii) the investor fulfills the minimum capital requirement
136
Article 16, Micro-Finance Business Proclamation

As noted above, except for the capital leasing business, the financial sector in Ethiopia is largely
closed off for foreigners. However, the Investment Board, the highest decision-making body related
to investment, is empowered to open up sectors that are restricted by law, if and when it deems
necessary. For those sectors where foreign investment is fully permitted, the investor will need to
commit to a minimum of USD 200,000 (if it is 100% foreign-owned), or a minimum of USD 150,000
for a joint venture with local investors. Some sectors are only permitted on a joint venture basis
where foreigners are permitted to hold only 49% of the share capital of the company.137 And some
sectors are exclusively reserved for joint investment with the government. Foreigner investors are
permitted to fully control and manage their investment. Incoming investments into the country are
facilitated and managed by the Ethiopian Investment Commission.138
The Investment Laws recognize the rights of investors to the repatriation of their profits and
dividends in a convertible currency. All incoming equity investments must be registered with the
NBE to guarantee repatriation later on. Failure to register will result in the rejection of the request
for remittance of dividends.
Domestic investors (which include both Ethiopian nationals and Ethiopian diaspora) are entitled to
the same rights as foreign investors. There are no areas that are restricted for domestic investors.
Ethiopia diaspora are allowed to invest in the financial sector but their investment must be made in
foreign currency. Further, there is a restriction on the Ethiopian diaspora’s ability to repatriate their
investment. Dividends and profits obtained by the Ethiopian diaspora are not entitled to repatriation
and all profits must be retained in-country.
When an investor exits an investment, i.e., by way of selling its shares in the local company, there
are several regulatory and company level approvals to be obtained. The Seller will need to obtain a
merger notification from the Trade Competition and Consumer Protection Authority (TCCPA) if
the capital or turnover of the local company is above 30 million Birr (approx. USD 800K at current
exchange rate). Further, the transaction will need a tax clearance from the tax authority. All share
transfers are subject to a 30% capital gains tax. Also, there are corporate-level approvals that must
be sought when exiting a company. If the Seller seeks to transfer its share to outsiders (and not
other shareholders), then the sale will need to be approved by shareholders holding at least 75% of
the shares. This means any exit attempt by minority shareholders will need to secure the approval of
the shareholder representing 75% of the capital, otherwise, the share transfer cannot be affected.
The sanctity of contracts is recognized under Ethiopian law. All contractual agreements duly and
lawfully concluded have the effect of law as between the contracting parties. Breach of contracts can
be resolved through the dispute resolution arrangements agreed by the parties to the contract. This
could either be local courts or international arbitration.
137
These are sectors such as freight forwarding and shipping agency services, domestic air transport services, cross country public
transport services, advertisement and promotional services, audiovisual services, accounting and auditing services.
138
Except for energy, communication and aviation sectors where foreign investments are administered by the respective sector regulators.

9.4. REGULATION OF LEASING COMPANIES
Capital Goods Leasing, including Financial leasing business, is regulated by the Capital Goods Leasing
Proclamation No. 103/1998 (as amended). NBE is responsible for overseeing the lending limitations
listed above and licensing of capital goods leasing companies. Operating lease companies are licensed
by the Ministry of Trade.
Foreign companies may engage in capital goods leasing business, which includes financial leasing, hire-
purchase agreements, and operating lease agreements. Eligible goods that are the subject of leasing
regulation include “any equipment or machine that may be used to produce products or to provide
services including accessories.”139 Although the law was passed in 1998, to date, there has only been
one company that is licensed by the NBE to provide financial leasing services.
Some of the rules applicable to capital goods financing companies are:
• Capital goods finance company is required to maintain at all times a minimum capital
adequacy ratio of 10% computed as a ratio of total capital to total risk-weighted assets;140
• The aggregate sum of capital goods finance granted to and outstanding at any one time to
any lessee cannot exceed 2.5% of the total capital of the company;141
• The aggregate sum of capital goods finance granted to and outstanding at any one time to
any single Small and Medium Enterprise (SME) cannot exceed 15% of the total capital of the
company provided that the minimum paid-up capital is 400 million Birr;142
• The aggregate sum of capital goods finance granted to and outstanding at any one time to a
large business that does not constitute an SME, cannot exceed 25% of the total capital of the
Company provided that the minimum paid-up capital is 400 million Birr;143
9.5. PROVISION OF GUARANTEES OR OTHER CREDIT ENHANCEMENTS

Guarantee agreements are recognized under Ethiopian law. Unconditional and conditional forms of
guarantee are common in Ethiopia. These are further categorized based on the product type. Some
of the products are performance bonds, bid bonds, advance payment, and customs guarantee bonds.
Unconditional guarantees are given only by banks whereas conditional guarantees are extended by
banks and insurance companies.144
Concerning foreign guarantees, the Banking Proclamation does not include “guarantees” in the
definition of banking business and therefore there are no direct prohibitions against foreigners
extending guarantees to local banks. From previous experience, we are aware of guarantee
agreements between local MFIs and foreign development finance institutions (DFIs). The DFIs
guarantee the loan obligations of an MFI for its loan obligations with a commercial lender in return
for a forex-denominated guarantee fee. The guarantee fees are paid by the MFI to the foreign lender
as an “invisible payment” – a payment recognized under the NBE forex rules. Such guarantee
139
Capital Goods Leasing Business (Amendment) Proclamation No. 807/2013
140
Article 4, Capital Goods Finance Business Directives No. CGFB/042016
141
Article 5.1.1 of Limit on Capital Goods Finance Exposure to a Single Lessee Directive No. CGFB/09/2019
142
Ibid, Article 5.2.1
143
Ibid, Article 5.2.2
144
NBE Directive No. SIB/24/2004

agreements are not required to be pre-approved or registered by the NBE. It is a purely private
contractual agreement made between the local MFI and the commercial lender (Loan Agreement)
on the one hand and the MFI and the foreign bank extending the guarantee on the other. (A
Guarantee Agreement). As part of the guarantee agreement, the foreign bank extends a standby
letter of credit to the commercial lender which the lender may draw on in the event the MFI
defaults in its payment obligations.
Such an arrangement, although common in the MFI space, is not clearly recognized or prohibited by
the banking rules of the country. To our knowledge, most of the transactions of this nature have
proceeded smoothly and the DFIs have been able to extend the guarantee and obtain their
guarantee fees in convertible currency. However, there is a risk that if the MFI defaults in paying its
loan agreement and the commercial lender activates the Standby letter of credit, recourse to the
foreign guaranteeing bank against the MFI is limited. Given the developmental objectives of DFIs,
many of the DFIs are willing to take such risk and rely on their existing relationship with the MFIs to
carry out such transactions.
Financial Innovation: Other Regulatory Considerations
New Asset Classes: New asset classes or forms of collateral do not need to be approved by
anyone other than the lender or capital provider? If two willing parties agree – a borrower with an
asset, and a lender who wishes to lend and accept that asset as security – no other party needs to
be involved. Contractual agreements can be made between the contracting parties. Please note that
under Ethiopian law, securities created over immovable properties (mortgage) must be registered
with the Public Notary. This opens the door to innovative financing solutions, subject to other
sector limitations.

ANNEXES
Annex I
Estimating SME Credit Supply – Methodology and Analysis
We have estimated SME credit supply as follows:
• Step 1. Estimate Share of SME Credit Provided out of total Credit Outstanding for each
Credit Providing Institution
• Step 2. For each of the FIs, use the estimated share of SME finance along with the total loan
outstanding balance of the institution in 2019, and estimate SME capital supply in 2019.
• Step 3. For the years 2020 and subsequent periods, use the average growth rate of
outstanding loans for each FI between 2014-19, calculate growth in SME finance supply from
the baseline 2019 SME finance supply.
Step 1 involves determining the proportion of loans to SMEs by major FIs. The share of SME loans
for CBE, DBE, private banks, MFIs, and CGFCs are separately determined as follows.
Table 9: The share of SME loan from financial instaurations
INSTITUTION SHARE OF BASIS

SME LOAN
CBE 4% to 8% Based on discussion with the MSME division of CBE and the 2014 WB estimates, the share of
SME loans out of CBE’s total outstanding loans is estimated to be 6 %.
(Avg: 6%)
Development 12%-20% In recent years, DBE has increasingly become a key player in the SME financing space. The
Bank (DBE) (Avg: 16%) bank has a dedicated SME division. Following a Branch Rationalization Study in late 2013,
DBE changed its branch operations to one based on an SME lending approach, through a
significant expansion of the number of regional branches (however, the majority of these have
been closed recently). DBE’s Credit Plan for the 2015–2020 period assumes up to 20% of total
disbursements for SME lending and lease financing purposes over the planning period.
Analysis of the bank’s loan portfolio reveals that at least 12% of the Bank’s current portfolio
represents credit given to SMEs. We have assumed that 16% of the bank’s portfolio consists of
lending to SMEs.
Private Banks. 10% to 20% Again, discussion and analysis of data from three major private banks showed that on average
17% of private banks’ loan portfolio represents credit given to SMEs.
(Avg 15%)
MFIs 6% to 12% Based on the Mix database and discussion with interviewed MFIs, we estimated the share of
(Avg: 8%) SME loans to be 8 % of MFIs’ outstanding loan balance.
Capital Goods 60% to 80% CGFCs are required by law to lend at least 60% of their lease finance to SMEs. This
Companies establishes a minimum threshold for the share of SME finance supply in CGF sector. However,
(Avg: 70%) based on discussions with CGFCs it’s has been confirmed that for all practical purposes 60 to

80% of lease finance portfolio of CGFCs can be assumed to be supplied to SMEs. We took 70
for the purpose of calculation.
Annex II
Estimate credit demand for Small and Micro Enterprises in Ethiopia.
We estimated the capital demand as follows.
Step 1: We used two studies IFCs Enterprise Survey conducted in 2015 and validated in 2019, and
MSME Financing Gap in 2017 to estimate the financing gap to the current supply of loans for Small and
Medium Enterprises.
Step 2: We used data from interviews and Enterprise Survey to estimate how much women
enterprises want and what a man-led enterprise wants.
Step 3- We estimated the average credit gap for SMEs in Ethiopia. The SMEs were mainly defined
based on the Ethiopian Government definition.
Step 4- We estimated the credit demand by region based on the credit supply to regional SMEs and
the geographical distribution of Ethiopian SMEs.
The average credit gap/loan supply was estimated to be 273% based on IFC Enterprise Survey and
MSME Financing Gap. We used the supply data to estimate the loan demand by SMEs in Ethiopia.
Table 10: Financing Gap Trends
2015 2016 2017 2018 2019 2020
Loan 82,032
24,321.47 29,541.43 37,994.17 48,153.79 63,498.82
Supply
Financing
66397.61 80648.09 103724.07 131459.84 173351.78 223947.36
Gap
Overall
90,719.09 110,189.52 141,718.25 179,613.63 236,850.61 305,979
Demand
Table 11: Credit Gap per Region
REGIONAL DISTRIBUTION CREDIT GAP OF SMES FROM

THE TOTAL PERCENTAGE
Addis Ababa 18%
Oromia 25%
SNNPR 10.04%

Amhara 25.44%
Tigray 16.44%
Dire Dawa 1.54%
Harari 0.74%
Benishangul 0.142%
Somali 2.22%
Gambella 0.18%
Afar 0.18%
The missing middle and the credit demand amount by enterprises was estimated using WEDP loan
portfolio analysis which estimated the loan demand by MFIs between 5,000 USD-50,000 USD and
the amount of credit most firms interviewed demand in Ethiopia which was less than 100,000 USD.
The amount was converted to the official exchange rate of Ethiopia which was 40 birr per one USD.
Annex III
Strategy #2: Adapt / Replicate Proven Successful SME Lending Products to Ethiopia
How it Would Work
We recommend testing and demonstrating in pilot whether four proven, established short-term
lending instruments widely used in other countries could be adapted to the Ethiopian context to
unlock SME capital flows All four-target working capital, a critical need all SMEs have, which does not
currently qualify due to lack of collateral under current definitions in Ethiopia. All four are short-
term lending mechanisms, with durations of 1 month to 1 year. To enable lenders to take the risk,
in pilot we would guarantee these instruments as though they were fully collateralized per Ethiopian
requirements. Whether guarantees would be required on scale up would depend on pilot
experience, lender experience and risk appetite, and dialogue with local regulators. The four
recommended short-term working capital loan products are:
a. Purchase Order (‘PO’) Financing
What it finances: Manufacturers invariably need to purchase raw materials to produce and ship
orders to customers. Raw materials are part of their working capital.
How it works: Purchase orders provide evidence of cash soon to be received once the order is
fulfilled. The lender provides an advance to a manufacturer on a customer order, to enable the
purchase of raw materials from suppliers. Market-standard advance rates (% of purchase order
loaned) are offered, adjusted as needed within reason for overall enterprise risk.
b. Receivables ‘Factoring’
What it finances: The majority of businesses sell to and collect from their customers on certain
agreed payment terms, commonly ranging from 10 days to 90 days. These are commonly called
‘receivables’ or ‘accounts receivable’, and often represent the largest or 2nd largest working capital
asset for SMEs, particularly those engaged in trading, distribution, and manufacturing.

How it works: Receivables provide evidence of cash soon to be received from customers from a
sale already delivered. The lender provides an advance to their SME client based on the amount of a
specific receivable from a specific customer and takes ownership of the receivable in exchange. The
‘Factor’ (lender) then collects the funds directly from the customer. Market-based advance rates (%
of receivable advanced) are offered, adjusted for the credit risk of the paying customer, and the
length of time to collection.
c. Asset-Based Lending (‘ABL’):
What it finances: Receivables and inventory (stock) are often the largest working capital assets of
SMEs engaged in trading, distribution, retailing, and manufacturing. These sectors represent a large
share of economic activity, and these assets are not presently widely financed. The new ‘Movable
Assets’ regulatory reform creates a great potential to leverage these assets but most Ethiopian banks
have not yet taken full advantage of this opportunity.
How it works: The lender provides a loan based on the aggregate amount of customer receivables
and inventory. Most commonly, a ‘borrowing base’ is established for each, and a loan is advanced
based on an agreed percentage of ‘qualifying’ receivables and ‘qualifying’ inventory. Qualifying
receivables and inventory are adjusted for risk factors such as late paying customers and slow
moving or obsolete inventory. Market-based advance rates are applied, which are typically higher
(60-80%) for receivables than for inventory (30-50%). Most commonly, an aggregate maximum loan
limit is established, the ‘borrowing base’ is adjusted periodically (usually weekly or monthly) and
these loans ‘revolve’, meaning as customer collections are received, loans are repaid, and new
advances are made under the newly calculated periodic borrowing base.
d. Business Plan-Based Venture Debt Financing:
What it finances: Most businesses operate based on business plans, which include projections of
planned future sales, expenses, profit margins, and cash flows. This activity projects the working
capital, equipment, and other capital investments, and other cash outflows requiring financing, and
the projected levels of cash, short-term working capital, and long-term assets the company is
projected to have on its balance sheet. Importantly, the projections show whether, when, and how
the SME can repay the loan.
How it works: These business plan projections, together with the underlying working capital and
other assets, represent the SMEs’ overall creditworthiness and credit risk. The projections enable
lenders to evaluate whether, when, and how the SME is likely to be able to repay the loan, and also
inform how the loan is structured. Typically, term loans are provided, with a duration of 1-3 years,
shorter in the early days of a lending relationship, and often lengthened. These loans can be made in
parts (‘tranches’) and can be performance-based, provided the business achieving certain milestones.
‘Business Plan Based’ Venture Debt Term Loans are likely to expand/unlock equity flows to SMEs.
Banks know how to make term loans – it's the #1 product for most banks. We would recommend:
• ‘Matching’ term debt to leverage new equity raises – coincident timing and linking the
two will drive more equity, and debt, because equity investors will see their commitments
leveraged in real time, and lenders will see additional comfort and collateral in their bank.
Implementation would be enhanced through engaging BASPs as facilitators.
• Recommend 1:2 debt to equity initially, so the lender can have additional equity and cash
cushion, especially in the early days of the relationship.
• Require equity funding and cash to be held at the lender bank, for the same reason and to
provide an additional inducement to the lender to lend.
• Partner with motivated PE/VC firms, to help get this program going
• Consider strategic use of initially de-risking the lenders’ exposure by partial 1st loss guarantee

Annex IV
Example Financial Technology (‘Fintech’) Innovators
o CreditEnable provides a cloud-based platform, enabling SME lenders to improve speed, efficiency,
and portfolio decision-making while also better managing risk. SMEs also benefit from improved
visibility of credit requirements and better, faster access to affordable credit. CreditEnable has
commercial contracts in place with lenders that manage a cumulative loan book of USD $60 billion.
o Pezesha addresses the limited coverage of credit bureaus in Kenya by offering ‘credit-decisioning-
as-a-service’ for financial institutions through its marketplace platform. Through Patascore, its
proprietary credit scoring model that integrates traditional and alternative data with machine learning
algorithms, Pezesha calculates scores for thin-file or no-file borrowers. Of the users that seek out its
SMS application and trusted third-party services in assessing their credit worthiness, 80 percent are
women undertaking informal businesses (MSMEs). Pezesha embraces a hybrid approach, and includes
financial literacy education within the SMS application to frame responsible credit as a wider wealth
creation tool. Its competitive lending structure ensures transparent, affordable interest rates, while its
positive and negative credit data has reduced portfolios’ non-performing loans by up to 20 percent.
To date, Pezesha has connected 100,000+ low-income Kenyans to lenders.
o SmartCoin - In India, over 900 million people have bank accounts but less than 40 million have
access to short-term unsecured credit. Led by former senior managers from global investment banks
and tech startups, SmartCoin specializes in micro-loans for underserved low and middle-income
segments in India through a mobile-first product built on artificial intelligence and machine learning
innovation. Its proprietary models digest billions of data points spanning transactional and behavioral
attributes to go beyond traditional sources to better predict fraud and default risk. More than 1.5
million blue- and grey-collared workers and self-employed entrepreneurs have downloaded
SmartCoin’s mobile application, which boasts approximately 150,000 monthly active users, to access
digital, reliable, and affordable credit. SmartCoin was recently selected by Google for its India
Launchpad Accelerator program.
o AwanTunai provides supply chain financing services to micro-retailers in Indonesia, through
merchant working capital and point-of-sale consumer financing. AwanTunai’s offline model leverages
technologies like artificial intelligence, geo-location tracking and facial recognition, the solution reduces
credit risk, lowers interest rates and contributes to more resilient, reactive supply chains
o Lendable enables leasing companies, retailers and other providers of products on installment sales
basis to sell their receivables to investors, providing immediate fresh cash and capital to SMEs to
reinvest in their growth. They use advanced analytical and modeling technology to assess and price
the risk and are unlocking and attracting entirely new asset classes of investors to the African financial
sector. They serve multiple African countries.
o CreditVidya is an alternative data-based underwriting technology firm that assesses 10,000 data
points to better position traditional financial institutions in pricing thin-file or no-file borrowers.
o Happy disburses working capital loans digitally to mom-and-pop stores and small-scale online
retailers. The lending process leverages a wholly paper-less, human-less and application-less digital
model, with loans as low as ten dollars and repayment terms as short as two days. This innovation is
facilitated by the integration of Happy’s lending APIs and machine-learning algorithms into the
platforms of India’s largest payment providers, including but not limited to point-of-sale networks,
online payment gateways, and e-commerce platforms. Happy has disbursed over 33,000 loans, with
over half of its clientele classified as first-time borrowers in the formal financial system.

o Three Wheels United is disrupting lending to low-income and less-literate clients. Their holistic
AI/data driven loan management system expands the scalability of micro-finance (MFI) across the
Global South, helping to bridge the lending gap between MFIs and banks. Their technology takes a
holistic approach to lending to low-income clients, maintaining the critical human elements required
in this demographic, while using AI and data to drive smart decisions and reduce the high operational
costs of a typical high-touch MFI model.
o Alternative Circle (Kenya) - Nairobi-based Alternative Circle has developed the Shika app, a
solution that enables its users to get affordable loans from curated lenders via M-Pesa.
o Tulaa provides smallholder farmers in Kenya with access to inputs, credit and markets.
o FarmDrive - Using a combination of agriculturally relevant data, Know Your Customer data, and
advanced behavioral analytics, FarmDrive has developed a proprietary lending engine to extend loans
to smallholder farmers.
o Jai Kisan provides low cost and timely financing for rural assets like agricultural and dairy equipment
in India. Jai Kisan utilizes a hyper-local credit scoring model and an innovative approach to
securitization that helps financial institutions lend to farmers at lower risk-adjusted rates. Of India’s
smallholder farmers, only one in eight households can access formal credit, and of total credit flow to
agriculture, only a meager three percent was dedicated to equipment financing. Through its unique
network of rural channel partners including retailers, petrol pump operators, and buyers of agricultural
produce, Jai Kisan can bridge the last mile distribution gap.
o JULO tailors low-interest installment credit products to Indonesia’s unbanked, powered by its
machine learning algorithms to determine users’ creditworthiness instantly. Devised by in-house data
scientists, JULO’s proprietary credit scoring is complemented by partnerships with third-party data
providers that provide new data streams and refine underwriting techniques. Through this approach,
JULO can reach Indonesia’s unbanked, most of whom are tech-savvy young people and micro-
entrepreneurs currently locked out of the formal financial system. With low overhead costs thanks to
a purely digital architecture, JULO offers competitive interest rates to no-file or thin-file borrowers
at 4 percent per month. To date, JULO has approved over 100,000 loans.
• Mosabi drives behavior change in entrepreneurs in India, Kenya, Mexico, Senegal and Sierra Leone
through mobile e-learning, incentives and calls-to-action; data harvested through this process is
then funneled to financial institutions as a new basis for credit scoring. The financial literacy
curriculum is constructed by Mosabi’s local expertise – lessons are customized to users’
environments and available in local languages. Its learners are low-income entrepreneurs in cities,
peri-urban areas, villages and slums, many of whom operate in the informal economy with no
financial identity or footprint. Partner financial institutions can access the data, including KYC
information, e-learning performance insights, questionnaire responses and Mosabi’s alternative
credit score via open APIs – and then offer financial products to borrowers. To date, Mosabi has
on-boarded 20,000 micro-entrepreneurs across five countries.

BIBLIOGRAPHY
Abay Yimer, S. (2011). Financial market development, policy and regulation: the international experience and
Ethiopia’s need for further reform.
Alemayehu G. Addison T. Alemu G. (2017). ‘The Current State of Ethiopia’s Financial Sector And its
Regulation: What is New After a Decade and a Half Strategy of Gradualism in Reform, 2001-2017’.
Department of Economics, Addis Ababa University.
Arkebe Oqubay (2015), Made in Africa: Industrial Policy for Ethiopia, Oxford Printing Press
Appelbaum, E., Batt, R., & Lee, J. E. (2014). Financial intermediaries in the United States: Development and
impact on firms and employment relations.
Asset Classification and Provisioning Directive No. SBB/69/2018
Bank Corporate Governance No. 71/2019
Banking Proclamation (as amended) No. 592/2008
Capital Goods Finance Business Directives No. CGFB/042016
Capital Goods Leasing Business (Amendment) Proclamation No. 807/2013
Capital Markets Proclamation [DRAFT]
Cepheus research & analytics, 2018, A Financing Map of Ethiopia: The funding landscape for future growth
Cepheus Research and Analytics (2019). ‘Ethiopia’s Banking Sector’
Collaborative for Frontier Finance, 2018, The Missing Middle: Segmenting Businesses to understand their
financial needs, Collaborative for Frontier Finance
Commercial Code of Ethiopia
Circular No. FIS/BSD/413/2011
Civil Code of Ethiopia
Deloitte, 2020, 2020 banking and capital markets outlook Fortifying the core for the next wave of disruption
Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex
Database 2017: Measuring Financial Inclusion and the Fintech Revolution. Washington, DC: World Bank
Development Bank of Ethiopia Establishment Regulation No. 83/2003 (as amended)
Digital Ethiopia: 2025: A digital Strategy for Ethiopia’s Inclusive Prosperity
Dutch Good Growth Fund, 2018, Scaling Access to Finance for Early-Stage Enterprises in Emerging Markets:
Lessons from the Field’
Draft Commercial Code No. /2020
Econstor, 2013, Entrepreneurship and the Business Environment in Africa: An Application to Ethiopia
Electronic Transaction Proclamation No. 1205/2020

Electronic Transaction Regulation [DRAFT]
Emerald Insight, Barriers to the implementation of innovative financing (IF) of infrastructure, 2012
Enterprise partners, 2018., A Financing Map of Ethiopia: The funding landscape for future growth.
External Loan Directive No. 47/2018
Fatser Capital, 2020, Supporting Startups and Entrepreneurs in Ethiopia,

<https://fastercapital.com/countries/ethiopia.html>

Financial Sector Development Roadmap [DRAFT]
First Consult and ADA Luxembourg, (?) Small and Growing Businesses in Ethiopia….
FINCA, 2015, Expanding Access to Finance through Mobile Payments Lessons Learned for MFI-Mobile Network
Operator Partnerships
Gebremichael, M., Vaughan, S, 2011, Rethinking business and politics in Ethiopia: The role of EFFORT, the
Endowment Fund for the Rehabilitation of Tigray
G20 Seoul Summit, 2010, Scaling up SME access to developing world
GIZ, Scale Up! The Entrepreneurs guide in Ethiopia, 2020
International Financial Corporation (IFC), 2015, Enterprise Surveys
International Finance Corporation, 2010, Scaling-Up SME Access to Financial Services in the Developing World
IFC EMCompass (January 2017). ‘The Importance of Local Capital markets for Financing Development’; Note
#28, International Finance Corporation.
International Monetary Fund, 2019, The Promise of Fintech: Financial Inclusion in the Post COVID-19 Era
Intelcap, 2018, Exploring New Frontiers in Fintech Investment in East Africa
Ijara Management Company, 2013, Islam Leasing Document
Interest Rates Applicable to MFIs No. MFI/29/2017

Interest Rate Directive No. NBE/INT/12/2017
Interview Notes
International Finance Corporation, IFC, MSME Financing Gap: Assessment of the Shortfalls and Opportunities
in Financing Micro, Small and Medium Enterprises in Emerging Markets, (2017)
Investment Proclamation No. 1180/2020
Investment Regulation No. 474/2020
John Sutton and Nebil Kellow, 2010, Enterprise Map of Ethiopia
Law Institute Victoria, 2018, Mudaraba, Musharaka, Murabaha - new terms to bank on, Salam Contract for
Profit and Loss Sharing.
Leora Klapper and Dorothe Singer, 2017, The Opportunities and Challenges of Digitizing Government-to
Person Payments, oxford university
Licensing and Authorization of Payment Instrument Issuers Directive No. ONPS/01/2020
Licensing and Authorization of Payment Instrument Operators Directive No. ONPS/02/2020
Licensing and Supervision of Banking Business No. SBB/30/2002
Limit on Capital Goods Finance Exposure to a Single Lessee Directive No. CGFB/09/2019
Limitation of Investment Banks Directive No. SBB/65/201
Linda Kambale, digital financial services a case of malawi, Malawi Communication Regulatory Authority
Martin Karanja, 2019, GSMA, The Ethiopia tech ecosystem: A sleeping giant is waking up! <
https://www.gsma.com/mobilefordevelopment/blog/the-ethiopia-tech-ecosystem-a-sleeping-giant-is-
waking-up/>
Marwan Elkhoury, 2008, credit rating agencies and their potential impact on developing countries
Mebrahtu Leake Teklehaimanot, 2014, Is Ethiopia Ready to Commence Capital Market? Analysis of
Potential Beddings, Constraints and the Dubious, International Journal of African and Asian Studies - An Open
Access International Journal Vol.3

Micro-finance Proclamation (as amended) 626/2009
Minimum Liquidity Requirement for MFIs No. MFI/15/2002
Minimum Capital Requirement of Banks No. SBB/50/2011
Minimum Capital Requirements for MFIs No. MFI/27/2015
Movable Security Proclamation 1147/2019
National Entrepreneurship Strategy [Draft]
National Payment System Proclamation No. 718/2011
NBE Yearly Report
Nicolas Fichers and Lamia Naji, 2020, Digitalizing person-to government payments Leveraging mobile to
improve government revenue and access to public services, GSMA
Open capital, 2019, the landscape for impact investing in east Africa
Pragma investment Advisory, 2019, Fintech & digital economy the Ethiopian perspective
Property Mortgaged or Pledged with Banks Proclamation No. 97/1998 (as amended),
Renata Makhoul, 2019, Renew, Building Ethiopia’s Investment Ecosystem,

<https://renewstrategies.com/blog/2019/building-ethiopias-investment-ecosystem>
Reserve Requirements Directive No. SBB/55/2013

Semantic Scholars, 2012, The Latent Demand for Bank Debt: Characterizing Discouraged Borrowers
Senoga E. (2018). ‘Transforming Ethiopia’s financial sector: Lessons from Emerging Market Economies’; African
Development Bank.
Shell Foundation, Omidyar Insights and Deloitte, 2019, SME Fund Performance: Generating Learnings with the
Potential to Catalyse Interest and Action in SME Investing
Think room, 2016, SME Development Ethiopia, Think room, 2016
Tobias Berg, Valentin Burg, Ana Gombović, ManjuPuri, 2018, On the Rise of FinTechs – Credit Scoring using
Digital Footprints, FDIC
UNCTD, 2015, The World of Investment Promotion at A Glance
WEDP Loan Portfolio Analysis, Enterprise Partners, 2017
World Bank, 2014, SME finance in Ethiopia: addressing the missing middle challenge
World Bank Group, 2018, Improving Access to Finance for SMEs- Opportunities through Credit Reporting,
Secured Lending and Insolvency Practice
World Bank Group, 2017, Innovative Experience in Access to Finance
World Bank, 2020, Doing Business Index
World economic forum, 2016, The future of financial infrastructure: An ambitious look at how blockchain
can reshape financial services

Final FSE Report

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Final FSE Report

Uploaded by

Copyright:

Available Formats

FINANCIAL SERVICES ECOSYSTEM

3 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

USAID.GOV USAID REPORT TITLE HERE | 4

5 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

To expand capital flows, this study leads us to believe that

USAID.GOV USAID REPORT TITLE HERE | 6

• Expand practical solutions already successfully tested by Ethiopian FIs.

7 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Strategy #1: Replicate / Scale Practical Solutions Already Successfully Tested by

USAID.GOV USAID REPORT TITLE HERE | 8

b. SME Equipment Leasing by Capital Goods Financing Companies (CGFCs):

9 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

We envision two opportunities:

USAID.GOV USAID REPORT TITLE HERE | 10

a. Leverage recent regulatory reform allowing ‘movable’ collateral

We recommend partnering with two types of private commercial banks:

a. Selective use of partial 1st loss guarantees

11 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

• CreditEnable provides a cloud-based platform, enabling SME lenders to improve speed,

USAID.GOV USAID REPORT TITLE HERE | 12

13 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

3. Explore the Potential for Exporting Financial Assets to Increase Forex

o Lendable enables leasing companies, retailers, and other providers of products on an

LONGER TERM SYSTEMIC IMPROVEMENT RECOMMENDATIONS

2 Global Findex data base, the world bank group, 2017

USAID.GOV USAID REPORT TITLE HERE | 14

2. Accelerated and Increased Investment to Reach Complete Interoperability

15 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

4. APPROACH & METHODOLOGY

4 Global Findex survey, the world bank group, 2017

USAID.GOV USAID REPORT TITLE HERE | 16

SAMPLE SIZE AND SAMPLING DISTRIBUTION

Stakeholders Sample Size Focus Area

SMEs 27 Demand + Enabling environment + Infrastructure

Financial Intermediaries 7 Intermediation + Facilitation

Leasing Firms 3 Supply

Equity Firms 3 Supply + Enabling Environment

Supply Chain Financiers 2 Supply

Multilateral Organizations 2 Supply + Demand + Enabling Environment

Gender and youth organizations 2

5.1. FINANCIAL SYSTEM OVERVIEW

17 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Credit Growth – Mixed.

5NBE, Annual Report

USAID.GOV USAID REPORT TITLE HERE | 18

19 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Overview of Ethiopia’s Financial System: Access, Depth and Breadth

USAID.GOV USAID REPORT TITLE HERE | 20

Furthermore, government plays a completely

Limited, State Dominated Bond Markets.

21 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Figure 6: Capital market activities (sources: NBE, Precise Analysis)

When it comes to bonds, there is no market-

Solid Commodities Market. Ethiopia has a

USAID.GOV USAID REPORT TITLE HERE | 22

23 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

Figure 8: Enterprise financing in Ethiopia (Sources: WB, Precise analysis)

In Ethiopia, it is not just households and

Although FIs involvement in SME lending has

USAID.GOV USAID REPORT TITLE HERE | 24

25 | FINANCIAL SERVICES ECOSYSTEM ANALYSIS USAID.GOV

5.2. DEFINING SMES IN ETHIOPIA

USAID.GOV USAID REPORT TITLE HERE | 26