Shocking Findings on MSME Financing in Ethiopia
Access to finance for micro, small, and medium enterprises (MSMEs) in Ethiopia is a pressing issue. Shockingly, 70% of the 2.29 million MSMEs in Ethiopia lack access to credit, hindering their growth and impacting the country's economy.
MSMEs face multiple obstacles when seeking financing, including high interest rates, lengthy processing times, collateral requirements, and limited bank branch availability. Ethiopian banks demand collateral values exceeding the loan amount by 234%, making it difficult for MSMEs and households to obtain credit.
A study shows 76% of MSMEs use personal savings and credit cooperatives, while 24% access formal financial institutions, and 39.4% haven't applied for loans.
According to the UNDP, 80% of MSMEs in Ethiopia cannot expand due to a lack of credit access. The funding shortfall for MSMEs is estimated at $6 billion, but a recent estimate suggests a greater shortfall of $31.7 billion, or approximately ETB 1.8 trillion, with an average deficit of ETB 786,270.74 per MSME.
Concerningly, a small number of major borrowers control a significant portion of loans in the banking industry. The top ten borrowers collectively owe 440 billion ETB, raising fairness and access concerns.
The central bank should consider easing restrictions on MSME financing and relaxing regulations on unsecured microloans, collateral requirements, and non-performing loans. Alternatively, regulations supporting credit access, such as incentives to boost MSME lending or credit guarantee schemes, should be formulated.
In light of the sector's challenge, our company, EagleLion, is preparing to introduce an innovative AI credit scoring-based MSME and retail financing solution. This solution aims to provide more accurate risk assessments for MSMEs and individuals, ultimately increasing their access to credit. By leveraging technology, we hope to contribute to the growth and development of the MSME sector in Ethiopia.
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Assistant Manager Funds Transfer at IDB Bank
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