Credit Facilities Overlook Medium Enterprises in Ethiopia

The World Bank (WB) group study on small and micro enterprises (SMEs), which was released on February 19, 2015 at Hilton hotel, indicates that medium enterprises are more credit constrained than micro and large enterprises in Ethiopia.

The findings of the study on demand side shows that SMEs in Ethiopia perform much worse than large firms, they are rejected for loans and more likely to avoid loan applications due to high collateral requirements, which is more severe in medium enterprises than micro enterprises.

The supply side of the study shows that medium enterprises are underserved by micro finance institutions, which cater to micro firms excluding medium firms. Large banks refuse to serve micro and medium firms for fear of lower returns and higher risks.

There is no a credit constraint at micro enterprises level because Micro finance institutions lend them. But after these micro enterprises are transformed into a middle level enterprise, reaching around 1.5 million Br capital, they are hindered from obtaining more capital for their larger projects because of their inability to meet the collateral requirements of banks, Abozench Negash, public relations officer of the Federal Micro and Small Enterprises Development Agency told Fortune.

At the same time, such middle level enterprises are unable to take credit from micro finance institutions due to the institution’s lesser capacity to render higher credit for middle level enterprises, Abozench said, adding that the agency had given emphasis to such constraints and is working with the Development Bank of Ethiopia for it to start access to credit for middle level enterprises.

Showing that in 2007/2008, 96 pc of all firms in Ethiopia’s industrial sector were micro and over half of all engaged persons were on microenterprises, the study conducted on 6,000 Ethiopian firms from 2000 to 2011 showed that large enterprises are the net job creators than medium firms. The findings from the demand side showed that in the manufacturing sector majority of paid employment is found in large enterprises.

According to the study, the reason preventing medium and micro enterprises from creating more jobs is financial constraint; credit constraint in Ethiopia is slightly higher than the Sub Saharan Africa average. The study showed that in 2012, 56 pc of the medium and micro enterprises in Ethiopia thought credit as their most important constraint than the average in Sub Saharan Africa which is 55 pc.

The banking sector in Ethiopia continues to be highly profitable and ranks higher than the Sub Saharan Africa average in profit. However, medium and medium enterprises lending in Ethiopia is on a lower side comprising only 7 pc of bank portfolio. The findings also showed that the manufacturing sector plays a limited role in overall Ethiopian economy comprising only 4.2 pc of GDP in 2012/13 and the service sector created nine times more jobs than the manufacturing sector during the period 2009/2011.

According to the findings, medium enterprises are rejected for loans, with only 1.9pc of them being able to access loans. The access rates by micro, medium and large firms are six percent, 20.5pc and 35.5pc, respectively. Fifty-seven percent of medium firms are fully credit constrained, a rate higher than in any other size group.

In 2011 among firms applying for a lone 57.3pc of the applications submitted by micro firms and 87.9pc applied by medium enterprises were rejected, the report showed.

The study recommended fostering medium and micro enterprise finance culture among banks and stakeholders, promoting innovation in financial products and lending technologies by providing incentives to commercial banks and promoting policies aimed at addressing the limitations of the current collateral regime based on accurate diagnosis of the insolvency of debtors among others to curb the financial constraint of small and micro enterprises.

The investigations and the recommendations of the research have a factual ground, however, the collateral constraints are only one among the multiple problems on the financing of medium enterprises as most of medium enterprises fail to fulfil the minimum credit requirements before reaching the collateral requirements, Eshetu Fantaye, chief executive officer of Bunna International Bank s.c, commented on the research.

SME agencies should support medium enterprises to fulfill the precredit application requirements such as credit history, tax clearances, organized financial statements, legal personality, project feasibility study and budget plan on which most medium enterprises fall short of achieving and attracting the hub of commercial banks, Eshetu added.


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