Alemtsehay Baye is squinting, scrutinizing the finishing touches she has made on the tiny dress she just finished sewing in the early morning light streaming through the window. She, and five employees make baby clothes in a corner she was able to rent from the wereda in Jacros. Five sewing machines crowd around her, squashed into the three square metres she had been allotted by the Bole District. She has three more at home, but cannot use them as much because of the limited space. The business needs to expand in order to better run itself and support her.
That requires a loan but banks require collateral: tangible assets like property, or vehicles less than a decade old. Alemtsehay has none, and her machines cannot be used as collateral. Microfinance institutions (MFI), on the other hand, do not require collateral, but cannot loan her enough to make significant change.
Alemtsehay is not alone. Only 1.9 per cent of small firms in Ethiopia have a loan or line of credit. [Fifty seven per cent of small firms are fully credit constrained, a rate higher than in any other size group.] This rate is much lower than that of micro, medium, and large firms (6.0 per cent, 20.5pc, and 35.5pc respectively), according to a 2013 World Bank study, published in 2015. These statistics corroborate with assertions that small firms struggle the most in obtaining access to finance since MFIs cater to micro-sized firms, and commercial bank clientele are predominantly medium and large firms.
Women like Alemtsehay are called the “Missing Middles”, who are over resourced in some ways and cannot access capital from existing sources.
They have too much to be considered by the microfinance institutions, and not enough collateral to be taken up by the banks, explained Birtukan Gebre Egzi, vice president of operations at Enat Bank. Left without a financial institution that can cater to their business needs, they are stuck in a rut, unable to progress, and unwilling to retreat.
These are the women that Enat Bank has targeted for its Loan Guarantee Scheme. For the past year, Enat has been offering loans to women that do not have collateral. Women that own and run businesses, have employees that depend on them, but are unable to grow because of lack of access to substantial loans.
Ethiopian banks generally do not have a minimum for lending. However, collateral decides if, or how much, a person is able to borrow. Other acceptable forms of collateral are construction machinery, large factory equipment, share ownership, or bank bonds. The ratio of the value of the collateral to the value of the loan will be decided depending on the type of business or business plan.
Items like sewing machines cannot be taken as collateral because there is no government body that can register them as such, explained Lelise Temesgen, director of Credit Management at Enat Bank.
Developing countries have a large number of micro-enterprises and some large firms, but far fewer small and medium enterprises. A study by Ayyagari, Beck, & Demirguc-Kunt entitled, “Small- and medium-enterprises across the globe: a new database,” found that in high-income countries, small and medium enterprises (SMEs) are responsible for over 50pc of GDP and over 60pc of employment, but in low-income countries they are less than half of that: 17pc of GDP and 30pc of employment. This SME gap is another reason for the name “missing middle”.
Other studies show that SMEs are not missing because they would not be profitable: they are missing, despite profitability, because finance is not reaching them in an effective way. Access to finance is a significant barrier, and there is a viable opportunity for those who are able to successfully finance these firms.
Financing is not available for this group of businesses because, according to Harvard’s Entrepreneurial Finance Lab Research Initiative, it is too risky for micro-finance institutions, and too expensive for commercial banks. Small and Medium Enterprises represent larger numbers of smaller loans, and having an experienced officer evaluate each business plan and cash flow estimates is too expensive. It is only viable if transaction costs in screening applicants are low.
This problem was addressed in advanced economies by a change of tactics. Banks finally penetrated the SME segment in the US at a large scale when they shifted from reading business plans to evaluating the entrepreneurs themselves, and did so cheaply by using individual credit histories and automated scoring.
In the Ethiopian context, public banks, which mainly focus on financing large enterprises, dominate the credit market share of lending in the banking sector. A World Bank study released at the beginning of this year showed that the share of private banks in outstanding credit lending has dropped from 39pc of the market share in 2009/10 to 32pc in 2011/12 while that of the public banks rose from 61pc to 68pc during the same year.
The report, “SME Finance in Ethiopia: Addressing the Missing Middle Challenge”, reveals that without adequate support from financial institutions, small and medium businesses are not able to grow, or create more job opportunities.
“Firms in Ethiopia are much more likely to be fully credit constrained than firms elsewhere in the world,” said Francesco Strobbe, World Bank Group senior financial economist.
About a third of SMEs also reported in the same source, that they did not apply for a loan or line of credit because collateral requirements were too high. Collateral rates in Ethiopia are much higher than in more developed African economies. For example, collateral rates are only 120.8pc of the loan value in Kenya (2007) compared to 234pc in Ethiopia. Thirty eight per cent of small firms use personal assets as a type of collateral, according to the study.
In Ethiopia, a firm that is credit constrained has sales growth that is 15 percentage points lower, employment growth that is five percentage points lower, and labour productivity growth that is 11 percentage points lower than firms that are not credit constrained.
Ruhama Getachew was the owner of one financially constrained SME. She has been an entrepreneur since she was in college five years ago. Living and studying around Sidist Kilo, she started business with a juice bar she started in a rented space around the same area. Woking by day and studying by night, she would only be briefly employed after graduation.
Moving on from the juice bar, she and her husband rented the staff lounge at Asay School. With an investment of 200,000 Br and a daily revenue of 7,000 Br, the couple’s business broke even after the first year.
At the end of the second year, the couple closed up shop as managing the staff cafeteria proved too taxing and time-consuming. They then opened Acapulco, a restaurant around Bole Olympia. They had to close that restaurant shortly afterwards, before it even returned its investment, according to her, because the building that housed it had to be demolished to make way for road construction.
Disheartened, but not discouraged, Ruhama moved on to a tiny bakery she had rented before the bust. Situated in a residential area within Addisu Gebeya, the bakery was rented with all the equipment inside; the only thing in her name was the rent agreement.
But the business posed many problems. There were power shortages, weak machinery, and not enough clientele.
“I was born for business,” Ruhama said. But at that juncture, she had found herself at a loss. The bakery needed new equipment, a place that had adequate electricity, and an outlet that could attract more business. All of that screamed CASH.
Lacking that, she joined a free entrepreneurship training programme organised by the government and UNDP, which rekindled her passion.
At that point, enlightened by the training but still struggling with the bakery, she heard of Enat’s Loan Guarantee Scheme, and applied.
“There are prerequisites,” explained Enat’s Director for Women Financial Services Department, Abeba Tesfai.
In addition to attendance at the entrepreneurial training and a review of her business proposal, the Bank required her, as a prospective borrower, to be licensed, at least six months into operation, of Ethiopian nationality, completely unable to provide collateral, and, of course, female.
Of the 2,000 plus women that Enat has helped recruit into the EDC training course, 223 were deemed to meet the criteria. Those women were then advised to engage in another training exercise to develop their business plans, before they applied for the loans.
According to a 2010 survey by Dutch consultant Triodos Facet, 40pc of SMEs in Ethiopia identified inadequate access to credit as a serious impediment to growth. Women business owners, in particular, reported they needed loans for working capital or fixed assets such as equipment and vehicles. When asked why they could not access credit, the business owners cited lack of collateral and said the loans available were too small and the interest rates too high.
As if high interest rates alone were not enough, lack of collateral, credit history, proof of cash flows, among other requirements, are discouraging. What emerges is a situation where the economy in general, is composed of mostly very large or very small firms.
“This market failure creates a missed opportunity for economic growth. Therefore, it is paramount to find mechanisms to bridge the gap between micro finance and commercial lending,” said Carlos Matos, a strategic trade advisor with over a decade’s experience, in an article he published in September 15, 2015.
Enat Bank is providing just such a mechanism by enabling women like Ruhama to be assisted by customers willing to use their assets as collateral for other women unable to meet normal requirements for accessing credit.
At the launch of the Loan Guarantee Scheme in December 2014, two people volunteered to provide collateral. Roman Tesfaye, wife of Prime Minister Hailemariam Desalegn, pledged 100,000 Br and Tadesse Tilahun, CEO of National Oil Company, pledged half a million Birr. Enat’s General Assembly, also voted in favour of pledging one million Birr from the Bank’s profits of the fiscal year that ended in June 2014. This year’s Assembly voted for increasing the risk provision for these loans.
Loan guaranteeing is open to anyone who volunteers to save at least 50,000 at the Bank, and as incentive, an interest rate of 5.5 per cent is offered on the deposits, as opposed to the regular rate of five per cent. The depositor thereby agrees to shoulder the risk for the loan, although the decision about which particular business qualifies for a loan is the responsibility of the Bank. The guaranteed amount is blocked for the duration of the loan.
Selected loan recipients will get the loans at interest rates lower than those of regular loans, 9.75pc, and a grace period of six months, but must finish repayment in five years’ time.
With a loan ceiling of 300,000 Br, one year into action the Bank has, however, been able to lend only 1.7 million Br to eight women-run businesses. The first proposal of crowd funding, a system where numerous volunteers were to support the scheme, did not raise as much as Enat had wished, although the Bank admits that it did not market the product aggressively.
“Institutions generally have more sustainable resources than individuals,” said Abeba. So the Bank started to approach organisations that have an expressed interest in women’s empowerment. Some organisations, however, responded by offering to give cash to the Bank, instead of opening a savings account dedicated for the purpose.
“This is not a charity, it is business,” stressed the President of Enat, Wondwossen Teshome, explaining why the bank did not accept the sponsorships offered by some organisations instead of their making long-term deposits.
Ruhama, after revising her first business proposal that requested 700,000 Br, to a request of 300,000 Br, was given the green light in May. Enat did not directly give her the cash. Instead the Bank paid six months’ rent in advance at a new location around Sidist Kilo, and acquired the industrial scale mixing, baking, and storing equipment of her choice, from both the international and local markets on her behalf.
After the designated grace period, Ruhama has so far made two payments of 10,400 Br each, claiming to be on track to finish repaying the loan in less than two years, significantly reducing the interest she would have had to pay for the five-year term. Once she accomplishes this, she then intends to borrow more, using the assets she has been able to generate from using the loan.
Ruhama has not only been able to sustain her bakery, “Cakery Bread & Sweet Production”, but has also opened a supermarket close by.
“I intend to make this area an entertainment destination,” she said, hinting at other ideas she is cooking up to develop the area around Medhanialem in Sidist Kilo.
Another beneficiary of the Enat scheme is Gelaye Deyas. Having studied handicraft during her stay in India and Egypt, Gelaye was first at a loss on how to make the most of her skills.
She started working from home, sewing, crocheting, knitting, weaving the whole nine yards. But handcrafts are labour intensive, and there was only so much she could produce single-handedly. On the side, she gives handicraft training to other women through NGOs throughout the country.
At first she had proposed borrowing 1.5 million Br. But after a few revisions, she brought the amount down to 218,000 Br. After receiving Enat’s loan, Gelaye was able to streamline the business she started five years ago. She has contracts with 30 of the women she had trained, from whom she collects various crafts as well as processed material. The loan has helped her be more efficient in her work, enabling her not only to buy more materials, collect more products, and meet payments more easily, but she has also been able to buy a car.
The private sector is expected to play a key role in Ethiopia’s journey to become a middle income country in the next decade; and the government has identified the development of micro, small and medium enterprises (MSMEs) as a key industrial policy direction for creating employment opportunities for millions of Ethiopians.
“However, all this is not sufficient and much more remains to be done to unleash the full potential of SMEs,” said Guang Zhe Chen, WBG country director for Ethiopia, in the February report.
As for finance institutions that so far have not approached the SME market, the Initiative Harvard has this to say. “There is a hundred dollar bill lying on the table, it is just a matter of figuring out how to pick it up.”
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