There is a broad consensus that entrepreneurship is positively linked with innovation, job creation and economic development. The economic growth trajectory of various countries have shown that entrepreneurship, or entrepreneurial firms, have served as springboard to development providing innovation and employment.
In this process, access to financing has played key factor. It is heavily agreed now that (easy) access to finance for small business entrepreneurs and industries has a positive role in promoting entrepreneurial culture in small and medium enterprises (SMEs), or any other businesses for that matter.
This is important considering that small and medium enterprises are fueled by entrepreneurial activity – an important component for their birth and success. While Ethiopia sees the development of its small and medium businesses and industries as pivotal in its grand development agenda, SME owners and entrepreneurs in Ethiopia, as well as many other developing countries, face many credit constraints, chief among them collateral.
It is reported in recent days that Ethiopia is preparing a draft bill whereby its banks will take movable assets as collateral for lending. In light with this move, many are expecting it to make a positive impact in supporting entrepreneurship within the country’s small and medium businesses and industries.
After all, the efficient and effective supply of finance to small business sector and industries is seen by many as the most important influence on their success. According to Ashenafi Melese, Director of Communications at Federal Small and Medium Manufacturing Industry Development Agency, approving movable assets as collateral will provide an easy access to finance for small and medium manufacturing firms, including SMEs.
Given that most ideas do not materialize for lack of finance, as most of them lack the collateral to get access to capital, this move will ignite the entrepreneurial spirit in the small and medium sector, he added. Many agree that lack of financial resource is considered to be one of the main causes for not starting a new venture. Despite the fact that the government has made capital goods’ financing service easier for small manufacturing firms, they enjoy less access to external finance. This has meant that financial constraints on entrepreneurial activity.
Further, mentioning how the mentality to enter the manufacturing sector is not there in the country, as most entrepreneurs with access to capital tend to move into other sectors like the service sector as it involves easier path to profit/ reward and less risk, Ashenafi said that movable asset lending will help trigger entrepreneurial activity in the small and medium sector, and in manufacturing firms in particular.
Dr. Wondaferahu Mulugeta, Economics Associate Professor at Meles Zenawi Leadership Academy, for his part insinuated that access to financial resources is an important determinant of entrepreneurship. He said that given Ethiopia is a developing country, the banks are generally risk-averse, and the credit system collateral-based. To that end, banks here usually are reluctant to lend money to early-stage and seed businesses given their lack of sufficient collateral.
“There are ideas within small-scale entrepreneurs, and the fact that movable assets are allowed as collateral is a good move to unleash their entrepreneurial spirit.” This is crucial considering that entrepreneurial activity represents an important condition for SMEs creation, development, and survival.
Moreover, bank products are plain in terms of the types of loan they provide to the point that small business has limited choice to get credit loan. In this regard, Dr. Wondaferahu believes that microfinancial institutions can serve as an option to small businesses. “Micro-finance institutions have an objective of their own. But given they are closer to small and medium scale businesses and industries, it is effective and makes sense to use them as an alternative finance delivery mechanisms for small businesses entrepreneurs.”
The plan to take movable assets as collateral for lending is a good opportunity for the aspiration of making Ethiopia hub of small scale industries, and to positively influence entrepreneurial activity, which can lead to growing number of startups and firm dynamism and innovation, he concluded.
There is no denying that there is a strong link between access to finance and total entrepreneurial activity, and they agree that the government’s effort to make finance accessible through movable asset lending is the way to go in terms of igniting the entrepreneurial spirit of the country’s SMEs and the people at large.
Herald March 20/2019
BY ROBEL YOHANNES
