BY ABEBE WOLDEGIORGIS
Ethiopia is one of the least urbanized countries in the world and almost 80% of the population lives in the rural part engaged in farming.
The insufficient infrastructure which hampers service provision in this part of the country, limits financial institutions to expand their business. Currently in Ethiopia only 35% of the population gets banking services.
Solomon Zegege is an economist and works as consultant in various firms. According to him, the financial inclusion means having access to and using one or more formal financial services but access does not bring equal inclusion. Some of the mechanisms that can be cited in this regard are savings, credit and insurance Payments.
He further said that, ensuring access to tailored financial products and services needed by low-income individuals in particular and society in general at fair, transparent and equitable mode is essential. According to the World Bank, the segment of the population which is making less than 1.9 USD a day categorized as poor.
In Ethiopia amongst the population, 65% of it is unbanked and most of them are women, poor, rural residents, migrants and low-income household. Financial service for the poor is a critical enabler for the reduction of poverty, increase in productivity and wellbeing.
To alleviate financial constraints in the rural part implementing better policy, regulatory frameworks and identifying high-priority areas for innovation is essential.
Medium and Small-scale Enterprises Play crucial role in Ethiopia’s economy. Despite their profound economic impact, these enterprises face a variety of hurdles and access to finance to these sectors is a huge challenge. Development bank of Ethiopia has 82 branches all over the country and availing credit to SMEs is one of DBE’s core objectives.
Assess the policy environment regarding MSEs access to credit and creating fair playing ground for them is its prior agenda. According to reports through strengthening Banking System domestic credit increased from 26.4% of GDP in 2010 to 35.3% in 2020.
Credit to the central gov’t by NBE amounted to more than 17.6 % of the outstanding credit. Commercial Bank of Ethiopia is the main creditor and more than 60% of or 30 million deposit accounts provided to borrowers mainly small-scale enterprises in which 85.6% of the Banks outstanding credit is given to the public sector. CBE’s 47.7 % of total credit is provided on subsidized interest rate with government guarantee.
The main customers of micro finance institutions are medium and small-scale enterprises. Hence, it may not be wrong if we assume that the highest share of outstanding credit of microfinance institutions goes to these institutions. The credit of micro finance institutions stood at Birr 64.9 billion in June 2021, which is just 6.3% of the outstanding credit by banking system during the same year.
Project and lease financings are the major financing products of Development Bank of Ethiopia. Lending for small scale enterprises carried out through commercial banks and microfinance institutions.
Its credit mainly goes to the private sector which is more than 80%. DBE has been mainly providing credit to the manufacturing sector average 65 percent followed by the agriculture sectors on average 16 percent. Total outstanding loan of DBE at the end of June 2020 is Birr 51.1 billion. Birr 9.2 billion provided to small scale enterprises and Birr out of it 5.1 billion is an on-lending to the micro finance institutions which is 28.5 percent of the total credit.
According to the recent NBE report, it intervened in the credit allocation by issuing different policies at different time. The national bank directive compels private banks to buy NBE bills equivalent to 27% of their disbursement.
Movable collateral registry system is implemented to address the lack of collateral for access to credit of micro and small-scale enterprises. It requires Banks and MFIs to extend at least 5% of their annual credit disbursement in the movable collateral system.
According to Solomon, the top three problems faced by small scale industries are insufficient permitted loan, high collateral requirement and long loan processing periods.
Some of the shortcomings of policies and practices among others, credit disbursement practice by CBE through government guarantee. Common government intervention which is direct lending through state owned banks, capacity building, partial guarantee and issuing a regulation which compel private sector to provide some fixed amount of loan to the sector are essential for their business sustenance.
Some of the policies that aimed to increase medium and small-scale enterprises access to credit by DBE and the Introduction of movable collateral registry system with 5% requirement can be mentioned. Allowing technology provider to give digital financial services and micro finance institutions helps them to grow to the level of micro finance banks.
Some public owned banks through partial public credit guarantee scheme give credit guarantee to the maximum amount with the maximum maturity of 10 years. Banks enabled to increase the number of loans guaranteed as well as the value of guaranteed loans.
Medium size enterprises protected by the credit guarantee schemes accounted for more than 10% of all commercial loans. As mentioned above, Ethiopia relies on agrarian economy to reduce the dominant role of agriculture expanding the development of manufacturing is essential and in this regard medium and small-scale enterprises are the base.
The enterprises are play crucial role in creating employment and value chain through utilizing other enterprises raw materials as inputs. In addition, they have been a source of income to the government through paying tax. However, due to lack of sufficient access to financial credit and working place they are hampered not to unleash their potential in full scale.
It is known that Ethiopia is the second most populous country in Africa next to Nigeria. It has also abundant natural resources such as vast arable land, surface and underground water and mines. Nevertheless, the resource is still untapped because of various reasons. The non-availability of sufficient technology, skilled human power and local and foreign investment attributed to the lagging of the economy behind other developing countries.
The government has aspired to transform the economy from agricultural led to that of industry led economy. It constructed various infrastructures such as hydropower dams, roads, industry parks, air ports, health and medical facilities.
In addition to these, it introduced new laws by revoking old laws which have constraint impacts on the free flow of capital, technology and ideas. So far it was possible to attract foreign investors and the beginning of operation of manufacturing in industrial parks enables to create job opportunities for thousands, helps boosting export and garnering foreign currency, substituting import and utilizing local resources particularly agricultural products as inputs in the manufacturing.
The agricultural sector which is subsistence is still the main stay of the economy and is a means of employment for 80% of the labor force. Therefore, to transform the economy from agriculture led to industry led one, the labor force stranded in the rural part of the country must shift to the non- farming which is the manufacturing and the service sector. Currently rural-urban migration is increasing but the labor force goes mostly to the informal sector and to the construction.
In this regard we can say that the small scale enterprises can have chance to utilize the labor force migrated from rural to urban centers. Currently in urban centers, small and medium scale enterprises are flourishing. They engaged in wood and metal works, beautifying towns, food catering, urban agriculture, poultry, milk production and fattening cattle for meat production.
But as compared to the demand in the urban centers the products supplied by the small and medium sized enterprises is negligible hence, supporting them through providing loan to the enterprises enable them to meet the demand and fill the market gaps.
The Development Bank of Ethiopia recently made agreement with the Ethiopian Cooperative Association Commission to provide the medium and small scale enterprises which planned to engage in livestock farming. Before the provision of the loan it will provides trainings to the borrowing enterprises in how to properly manage the loan. Hence, other financial institutions must follow the foot step of the DBE.
The Ethiopian Herald October 20/2022
