In the existing financial and banking system in the country, banks provide credit services to large enterprises and industries that are able to provide collateral. On the other hand, microfinance institutions provide credit services to small and medium enterprises that have limited capacity and financial availability. Or in other words, they offer small loans. Therefore, while banks support investors and high enterprise that can provide collateral via lending money; microfinance institutions support small and medium enterprises in the same way.
In this center, a World Bank study indicates that neither the banks nor the microfinance institutions will lend or support them though the small and medium enterprises that are playing a major role in the country’s transition from agriculture led to industry led economy and the growth of the country’s per capita production because they do not have the collateral to get loans; because they do not meet the banks’ requirements as a result of the criteria the banks set for giving loans are difficult; and because of microfinance institutions have limited capacity to lend to these institutions.
Thus, The establishment of the Small and Medium Finance Project in 2017 was 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 Grafe, Coordinator of the Small and Medium Enterprise Finance Project in Ethiopia Enterprise Development, said.
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 and supports, etc., small and medium enterprises, the coordination office of the project has been organized under the institution. As a result, apart from the project is organized under the institution; it is going down to the administrative level of the Ministry of Industry. Support to fill the gap is provided from the state to the district level based on inquiries: 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. Because if the problems the 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 will take the money received from the World Bank and other international financial institutions in the name of the project and distribute it to small and medium enterprises through various loan options. The other implementer of the project is the National Bank of Ethiopia. As this bank shapes the policies of banks, controls their procedures and manages banks in general; it creates a favorable credit environment for small and medium enterprises.
One of the most convenient conditions is a communication network or network where the information is accessible to the banks and micro finances while registering their collateral. By doing this, banks and microfinance institutions have gained confidence and enabled them to provide loans to small and medium enterprises.
Yemenzwork 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 collateral. In order to solve this problem, it is facilitated for the enterprises to get equipment rental loans through the Ethiopian Development Bank, which is implementing the purpose of the project.
According to the proposals submitted by the enterprises, the feasibility will be studied and the equipment will be purchased and given to them. They repay the loan while using the machine as a rental. After paying off the debt, the equipment will eventually become the private property of the enterprise. Accordingly, when the bank lends and the enterprise borrows, there is no question of collateral. Therefore, the project has solved the bottleneck of the alarmed guarantee of the enterprises.
There are two windows where the Ethiopian Development Bank provides loans to enterprises. The first is the capital goods lease finance window. In this window they offer direct and indirect equipment rental loans. While 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 this, 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 published every 15 days in cooperation with Ethiopian Enterprise Development.
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 operational money. 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 institutions 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 BACHA ZEWDIE
THE ETHIOPIAN HERALD WEDNESDAY 8 MAY 2024
