BY ABEBE WOLDEGIORGIS
A country of cherished history and ancient civilization, Ethiopia, could not expand urbanization yet. It remained one of the least urbanized countries in the world and almost 80 percent of its population lives in the rural part making agriculture major economic base.
As a result of scattered life style and insufficient infrastructure provision, this part of the country entertained limited financial services since the institutions could not expand their business.
According to the current report of National Bank of Ethiopia (NBE), only 35 percent of the population has got banking services in the country. Solomon Zegeye, an economist and consultant in various firms said that 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, segment of population which is making less than 1.9 USD a day is categorized as poor. In Ethiopia, amongst the population, 65 percent is unbanked and most of them are women, poor, rural residents, migrants and low-income households. Financial service for the poor is a critical enabler for the reduction of poverty, increase in productivity and wellbeing.
To alleviate financial constraints in the rural part, implementing better policy, regulatory frameworks and identifying high-priority areas for innovation are timely. In the Ethiopian context, Small and Medium-Sized Enterprises (SMEs) Play crucial role in providing access to finance to the rural poor. 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 (DBE) has 82 branches all over the country and availing credit to SMEs is one of its core objectives. Assessing the policy environment regarding SMEs access to credit and creating fair playing ground for them is its priority agenda. According to reports, domestic credit has been increased from 26.4 percent of GDP in 2010 to 35.3 Percent in 2022 through strengthening Banking System.
Credit to the central government by NBE amounted to more than 17.6 percent of the outstanding credit. Commercial Bank of Ethiopia is the main creditor and more than 60 percent or 30 million deposit accounts provided to borrowers mainly small- scale enterprises in which 85.6 percent of the Banks outstanding credit is given to the public sector. 47.7 percent of CBE’s total credit is provided on subsidized interest rate with government guarantee.
The main customers of micro finance institutions are small and medium scale enterprises. Hence, it may not be wrong if it is assumed that the highest share of outstanding credit of microfinance institutions goes to these institutions. The credit of micro finance institutions stood at Birr 64.9 billion in June 2020, which is just 6.3 percent of the outstanding credit by banking system during the same year. Project and lease financings are the major financing products of Development Bank of Ethiopia.
Lending for small scale enterprises are carried out through commercial banks and microfinance institutions. Its credit mainly goes to the private sector which is more than 8o percent. DBE has been mainly providing credit to the manufacturing sector on average 65 percent followed by the agriculture sectors on average 16 percent. Total outstanding loan of DBE at the end of June 2020 was Birr 51.1 billion.
Birr 9.2 billion provided to small scale enterprises and Birr 5.1 billion out of it 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 times. The national bank directive compels private banks to buy NBE bills equivalent to 27 percent 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 Microfinance Institutions (MFIs) to extend at least 5 percent 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 small and medium scale enterprises access to credit by DBE and the introduction of movable collateral registry system with 5 percent requirement can be mentioned. Allowing technology provider to give digital financial services and micro finance institutions helps them to grow to the level of micro finance banks.
Some public owned banks through partial public credit guarantee scheme give credit guarantee to the maximum amount with the maximum maturity of 10 years. Banks enabled to increase the number of loans guaranteed as well as the value of guaranteed loans. Medium size enterprises protected by the credit guarantee schemes accounted for more than 10 percent of all commercial loans.
As mentioned above, Ethiopia relies on agrarian economy and 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 play crucial role in creating jobs and value chain through utilizing other enterprises raw materials as inputs. In addition, they have been 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. Therefore, enhancing the on- going support is vital.
According to Ministry of Labor and Skills’ recent report, regional governments have their own job opportunity creation schemes and thousands of youth will be given some kind of training yearly which enable them to start up their own business. Almost to date, thousands of small and medium sized enterprises are established in order to create job opportunity to more than a million youth.
Some of the fields they engaged in are urban agriculture both animal and sedentary farms, poultry, metal and wood work products, food catering, sanitation and others. But they faced various constraints which hampered their working activities. Lack of sufficient places to expand their production also restricted the enterprises to create more jobs for others, and access to finance. Insufficient market and the heavy collateral requirement also become beyond their capacity.
As it is known unemployment is alarmingly increasing year after year. Students graduate from technical colleges with better skills join the unemployed army. Unless it is mitigated, unemployment poses social crises witnessed by criminal activities. The government pursued market economy which aspires step by step to leave the employing task to the private sector. It also encourages self- employment by startups business with small capital. Hence, to absorb the unemployed labor the private sector must play pivotal role.
The future of the nation depends on utilizing the youth’s labor both skilled and semi skilled. But due to the above mentioned problems, according to CSA /Central Statistics Authority/, there are more than one million unemployed youth at national level. Such situation has its own demerits. For instance, in the country where political upside down is rampant, the unemployed could be a combustive factor for igniting violence and the recent experience showed that such situation is egregiously destructed the nation’s infrastructure and economy at large.
Hence, creating job to the unemployed minimizes the risk of flare might go up to violence. The government in the last two decades and a half has tried its level best to create job to the youth and enabled to reduce poverty. But as compared to the number of the unemployed youth, the registered result in creating job opportunity is insignificant. Therefore, encouraging and incentivizing financial institutions to provide loans that supports job creation and poverty reduction is vital. The ongoing efforts also must be strengthened.
The Ethiopian Herald may 18/203
