Ethiopia has experienced remarkable economic growth in recent years, with its GDP expanding at an average annual rate of over 9% since 2010. A key driver of this progress has been the increased availability of business loans facilitated by the banking sector and the Addis Ababa Chamber of Commerce.
Ethiopia’s banking sector has undergone significant expansion and modernization in the past decade. The number of bank branches across the country has more than doubled, reaching over 6,000 as of 2023. This increased accessibility has enabled more businesses, both large and small, to secure much-needed capital to fund their operations and growth plans.
Leading banks such as the Commercial Bank of Ethiopia, Awash Bank, and Dashen Bank have bolstered their lending activities, with a particular focus on supporting the private sector. In 2022, the total value of outstanding business loans reached 680 billion Ethiopian Birr, a 15% increase from the previous year.
The Addis Ababa Chamber of Commerce has been instrumental in facilitating access to finance for businesses in the capital and surrounding regions. The Chamber maintains close partnerships with the banking sector, serving as a vital intermediary and advocate for its member companies.
“The Chamber works tirelessly to bridge the gap between businesses and financial institutions,” says the statement from the Addis Ababa Chamber of Commerce. It was learnt that the chamber provides advisory services, organize networking events, and even assist in loan application processes to ensure the members can obtain the funding they need to thrive.”
The Chamber’s efforts have been particularly impactful for small and medium-sized enterprises (SMEs), which have traditionally faced greater challenges in accessing credit. Through its SME Development Center, the Chamber offers tailored financing solutions, business development training, and mentorship programs to help these crucial engines of the economy grow and succeed.
As Ethiopia continues its trajectory of robust economic growth, the collaboration between the banking sector and the Addis Ababa Chamber of Commerce will undoubtedly play an even more pivotal role. By ensuring businesses across the capital have the financial resources they need to invest, innovate, and expand; these institutions are laying the foundations for a prosperous and sustainable future for Ethiopia.
Addis Ababa Chamber of Commerce and Sectoral Associations (AACCSA) requested financial sectors to establish an atmosphere to help the business community obtain credit easily.
Speaking at a panel discussion revolving around credit provision, AACCSA President Mesenbet Shenkutie said that although commercial banks, development banks and small financial institutions in Ethiopia are the main providers of loans to commercial companies, the amount of loans offered is small and complicated by various preconditions and red-tape bureaucracies.
Therefore, she called on the financial sector to make available easy credit access for business community. She said, “The private sector has a great contribution to the expansion of trade and investment in the country. Those people who engaged in various business operations in Addis Ababa and other parts of the country have been complaining about the low accessibility of loans. Thus, lack of easy credit access has been negatively impacting the private sector.”
Credit availability and access is the backbone of any business, therefore, in the recent research conducted by the council, 40 percent of the issues that have been mentioned as obstacles to business in the business community are due to lack of financial availability, she added.
As to her, in the annual loan allocation and payment, banks should give a certain amount of quota to the private sector, which is the engine of economic growth, and set up a system that can relax the loan conditions to a certain extent.
Based on their value-adding methods, financial institutions have also requested that they implement a system that makes it possible to make loan collateral free of obligation and provide affordable interest loans to start-up business creators, she noted.
African Financial Integrity and Accountability Program Coordinator, Getachew Tekelemariam on his part said, “To create favorable credit accessible for business community, we should take the best practice of Kenya, South Africa. They have predictable regulatory framework, effective credit monitoring system and interest rate policy aligned to business cycle.” In general, some factors that could help boost loan service and accountability in Ethiopia include; strengthening financial regulations and oversight to prevent corruption and mismanagement of loan funds
Improving transparency around loan disbursement, repayment, and use of funds investing in financial literacy programs to empower borrowers and ensure they understand loan terms
Establishing clear frameworks for lender accountability, including mechanisms for borrowers to report issues, collaborating with international financial institutions to incorporate global best practices
However, without more up-to-date information on the specific context in Ethiopia, It cannot be provided recommendations tailored to the current situation. It be better suggested consulting sources closer to the ground for the most relevant and timely insights.
Liberalizing the banking sector in Ethiopia is seen as an important step for the country’s economic development by the current government. Here’s a summary of the key points:
Ethiopia’s banking sector has traditionally been dominated by state-owned banks, limiting competition and access to financial services. Liberalization aims to attract foreign investment, promote innovation, and improve efficiency in the banking industry.
The government believes that opening up the sector will increase access to credit, particularly for small and medium-sized enterprises, and support overall economic growth. Prime Minister Abiy Ahmed’s government has taken steps to liberalize the banking sector since coming to power in 2018. In 2020, the government passed a law allowing foreign banks to operate in Ethiopia for the first time, though with some restrictions.
Foreign banks are now allowed to open subsidiaries in Ethiopia, but they are limited to a 40% ownership stake and cannot engage in retail banking. The government has also lifted the previous cap on the number of private domestic banks allowed to operate in the country. These reforms are part of the government’s broader agenda to modernize the economy and make it more competitive globally.
However, the pace and extent of banking sector liberalization have been cautious, as the government aims to balance the benefits of increased competition with maintaining stability in the financial system. The gradual approach is meant to protect the existing state-owned banks and allow them to adapt to the new competitive environment.
Overall, the government views banking sector liberalization as a key component of its strategy to drive Ethiopia’s economic development, but it is proceeding carefully to ensure a smooth transition.
Ethiopia has long been viewed as a country in need of development aid and assistance. However, one often overlooked tool for economic growth in the country is access to loans and credit. Loans can play a vital role in empowering individuals, businesses, and communities to invest in their own futures and drive sustainable progress.
In many parts of Ethiopia, access to formal banking and credit services remains limited. This lack of financial inclusion leaves too many citizens without the resources to start a business, expand an existing enterprise, or make critical investments in their farms and homes. By improving the availability and affordability of loans, Ethiopia can unlock tremendous entrepreneurial potential and provide pathways out of poverty.
Studies have shown that access to credit is linked to higher incomes, greater asset accumulation, and improved living standards, especially for the country’s rural populations. Loans enable smallholder farmers to purchase fertilizers, improved seeds, and agricultural equipment to boost their productivity. For aspiring business owners, credit can mean the difference between getting a venture off the ground or remaining stuck in the informal economy.
To reach underserved communities, Ethiopia should explore innovative lending models that go beyond traditional bank loans. Microfinance institutions, savings and credit cooperatives, and digital lending platforms have all demonstrated success in expanding financial inclusion in developing economies.
These alternative lenders often employ group-based lending, flexible repayment schedules, and other tailored approaches to serve clients that commercial banks may deem too risky or unprofitable. By adapting to the unique needs of Ethiopian borrowers, such institutions can inject much-needed capital into the country’s economic veins.
Beyond the direct impacts on household incomes and business growth, improved access to credit can foster a more vibrant entrepreneurial culture in Ethiopia. When people have the means to turn their ideas into reality, it sparks a positive cycle of innovation, job creation, and community development.
The government, financial sector, and civil society must work together to raise awareness of lending opportunities, provide financial literacy training, and reduce the stigma often associated with taking out loans. By stigmatizing entrepreneurship and championing responsible borrowing, Ethiopia can empower its citizens to become the architects of their own prosperity.
Ethiopia has made notable strides in expanding financial inclusion in recent years, but there is still much work to be done. Prioritizing access to affordable credit should be a central pillar of the country’s development strategy moving forward. With the proper policies, programs, and partnerships in place, loans can become a powerful engine for inclusive economic growth and social progress throughout Ethiopia.
BY LAKACHEW ATINAFU
The Ethiopian herald April 19/2024
