Despite the increase in the number of banks, microfinance, and their branches over the last 25 years, the majority of Ethiopians mainly the very poor and those engaged in micro and small businesses still do not have access to credit, a new report says.
A preliminary report by Precise Consult, a private consulting company in Ethiopia, presented at business reporters training in the capital Addis Ababa shows that lending of the banks is limited to the rich and state-owned companies.
“Despite their profound economic impact, micro and small enterprises face a variety of hurdles. Access to finance to this sector is a huge challenge,” the preliminary report noted.
As a result, the majority of Ethiopians including those tens of million engaged in agriculture are not accessing loans from the banks to expand their business or improve their productivity.
During the discussion on the findings of the preliminary report, it is indicated that unless the government intervenes with new policy measures, the poor in Ethiopia remain neglected by the banks and other financial service providers.
Through policy intervention, the government can create fair playing grounds for medium and small enterprises in Ethiopia to help the enterprises easily access credit from the banks. The introduction of a partial guarantee scheme and digital credit system are among the recommendations made by the preliminary paper, which is expected to be finalized and the public soon.
In addition, having proper regulations that allow venture capital and angel investors to finance small businesses is also among the possible solutions to help the business access finance.
The preliminary paper by Precise also looked into the national credit scoring system and suggested potential areas for improvement.
“The Ethiopian Public Credit Registry is not adding value such as credit scoring and risk ratings, thereby restricting significance of the credit information to the lending decision to a limited extent… Lack of a clear policy roadmap that provides a detailed and clear timeline on how and towards the country is moving with respect to credit information system. In the absence of private credit bureaus, innovation, competition, and, more broadly, product and service quality and diversity decline,” it said.
Reports show that in Ethiopia around 65 percent of the population is unbanked.
A Few Facts:
- CBE is the main creditor
- More than 60 percent
- 30.0 million deposit account vis-a-vis few borrowers (mainly state-owned enterprises).
- 85.6 percent of the bank’s outstanding credit is to the public sector.
- 47.7 percent of CBE’s total outstanding credit is on Ethiopian Electric Power.
- The subsidized interest rate with a gov’t guarantee
Where is the money going?
- In 2010/11
Public sector credit: 9.9 percent of GDP
Private sector credit: 11.4 percent of GDP
- In 2019/20
Public sector credit: 16.2 percent of GDP
Private sector credit: 14.4 percent of GDP
- Major borrowers:
Ethiopian Electric Power, Railway & Housing agencies.