Ethiopia’s economic growth over the last two decades has been impressive. Ethiopia is emerging as one of the fastest-growing economies in Africa. However, this progress has been driven largely by large-scale industrial projects and foreign investment, not to mention public spending. The backbone of the Ethiopian economy – its small and medium enterprises (SMEs) – has often been overlooked when it comes to policy support and protection.
SMEs account for the majority of businesses in Ethiopia and provide employment for millions of citizens. These enterprises, ranging from small family-owned shops to medium-sized manufacturers, are crucial for fostering entrepreneurship, innovation, and inclusive economic development. Yet, they face a range of challenges that threaten their sustainability and growth.
To address this, the Ethiopian government has taken several steps in recent years to strengthen the SME sector. In 2019, the then Ministry of Trade and Industry launched the National Micro and Small Enterprise Development Strategy, which aimed to provide better access to finance, business development services, and market linkages for SMEs. The government has also introduced tax incentives and preferential procurement policies to support small businesses.
While these initiatives are a step in the right direction, more comprehensive measures are needed to truly safeguard the future of Ethiopia’s SMEs. One key area of focus should be improving access to credit and financial services. Many SMEs, particularly those in the informal sector, struggle to secure loans from traditional banks due to a lack of collateral or credit history. The government should work to expand alternative financing options, such as microfinance institutions, venture capital funds, and credit guarantee schemes, to cater to the unique needs of small enterprises.
Additionally, the regulatory environment for SMEs needs to be streamlined and simplified. Burdensome bureaucratic procedures, such as business registration, licensing, and tax compliance, can be overwhelming for small business owners, hindering their ability to focus on growth and innovation. Reforms to reduce red tape and ease the administrative burden on SMEs would go a long way in supporting their development.
Finally, the government should invest in building the capacity and competitiveness of SMEs. This could include providing access to training and mentorship programs; facilitating technology adoption and digital transformation; and promoting linkages between small businesses and larger companies or export markets. By strengthening the capabilities of SMEs, Ethiopia can unlock their full potential as engines of economic diversification and job creation.
As Ethiopia continues its economic transformation, protecting and nurturing its small and medium enterprises must be a top priority. By addressing the challenges faced by this vital sector, the government can ensure that the benefits of growth are more broadly shared and that Ethiopia’s entrepreneurial spirit remains vibrant and resilient.
In the existing financial and banking system in the country, Banks provide credit services to those who provide collateral that are high enterprises and industries. Through a small loan provider or Micro Finance Institutions and capacity due to the limited and financial availability of credit they cater to small businesses. The ability of financial institutions to lend to these institutions has limitations. Banks and microfinance, or the World Bank will not lend or support them. Research shows, “missing middle” financing small and medium enterprises delivery, business development, project planning and more financial management training … etc.
The establishment of the Small and Medium Finance Project, according to Yemenzwork Grafe, Coordinator of the Small and Medium Enterprise Finance Project in Ethiopia Enterprise Development, was in 2017 with the aim of increasing production and productivity by supporting these neglected “missing middle” small and medium enterprises with financing, business development, project preparation and financial management training.
Yemenzwork said, “There are three institutions that mainly implement the purpose of the project”. The first implementing institution is Ethiopian Enterprise Development. Since this institution manages, supports, etc., small and medium enterprises, the coordination office of the project has been organized under the institution. In this way, the project is not organized under the institution, but it is going down to the administrative level of the Minister of Industry. Where are the small and medium enterprises? What is their shortcoming (market connection, financial, manpower and financial management, technical and professional deficiency)? What is the obstacle to their growth? etc., from the region to the district, and provides support to fill the gap. Because if the problems of training needs are not solved, the enterprise will not be effective or profitable, it will not grow just by getting money or credit.
The second operator is the Development Bank of Ethiopia. The bank on behalf of the project from the World Bank and other international financial institutions take the money and give it to small and medium enterprises distribute various loan options. The other one that implements the purpose of the project is National Bank of Ethiopia. This bank formulates the policy of banks; overseeing the banks in general as it governs; for small and medium enterprises, it creates a favorable credit environment for enterprises.
Among the comfortable conditions is to guarantee the borrowed funds the information is accessible to the banks and microfinance while registering the dreamed of a communication network. By doing this, banks and microfinance institutions have confidence in small and medium enterprises. She stated that it enables them to provide loans. The project focuses on manufacturing sector, agricultural production processing, and construction, input production and small and medium enterprises engaged in the tourism sector. Yemenzwerk pointed out that the project focuses on supporting small and medium enterprises engaged in the manufacturing sector, agricultural product processing, construction input production and the tourism sector; the main problem of the enterprises not getting a loan to start working is because they cannot get a guarantee.
To solve this problem, the project facilitated ways through the Ethiopian Development Bank that the enterprises get equipment rental loans. The proposals that the enterprises present based on the feasibility study, the equipment will be purchased and given to them. They repay the loan while using the machine as a rental. When they finish paying the debt, the device becomes private property of the enterprise at the end. Accordingly, when the bank lends and the enterprise borrows, there is no question of collateral. Therefore, the project has solved the bottleneck of the Enterprises.
There are two windows the Ethiopian Development Bank present loans for enterprises; the first is equipment lease loan window (capital goods lease finance window). In this window they offer direct and indirect equipment rental loans. When the direct equipment rental loan is given from 10 to 30 million Birr through the head office and branch offices of the Development Bank of Ethiopia; below that, revolving loans starting from 2.5 million Birr are provided by regional equipment rental companies to small and medium enterprises. These organizations provide loans with the money they get from the development bank. Therefore, through the equipment rental loan window, enterprises have the opportunity to obtain both direct and indirect loans.
The second window in which the bank offers loans is the working capital loan window. If the enterprises have only equipment and no operating funds, they will not be able to start operations. So they have to get working capital. The bank will take the money received from the World Bank and other international financial institutions in the name of the project and provide it to banks and microfinance through the second window.
Banks and microfinance also lend to enterprises to operate. Based on this, it is a project designed with the belief that “enterprises will receive equipment rental loans on the one hand and operational financing on the other hand to continue their work in an efficient and effective manner.” Yemenzwork said that it is a project that aims to solve the basic problems of small and medium enterprises and to support them in all fields.
BY LAKACHW ATINAFU
THE ETHIOPIAN HERALD TUESDAY 23 APRIL 2024
