Tackling financial bottlenecks for startups and existing small businesses

Sep 23, 2015

Stakeholders from government, the private sector as well as academics shared experiences in a half day forum that explored challenges faced by business to access finance and brainstormed on possible solutions that could both leverage policy decisions and actions to address the issue.

The 10th Executive Ideas Exchanges Forum (EIEF) under the theme ‘Business Development and Access to Finance in Ethiopia’, was jointly organized by UNDP and Addis Ababa University’s College of Business and Economics’ (AAU/CBE) Department of Management in an on-going policy discussion and research partnership.  Panelists from the Federal, Micro, and Small Enterprise Development Agency FeMSEDA – a government agency; the Ethiopian Chamber of Commerce and Enat Bank (the first women established bank in Ethiopia) led a stimulating discussion on issues and challenges businesses face in Ethiopia and highlighted alternative financing mechanisms for SMEs and development financing.

Small and Medium Enterprises (SMEs) play a major role in Ethiopia in creating employment and enhancing economic development. However, limited access to finance remains to be a major obstacle to the emerging entrepreneurial space. SMEs, startups and other businesses’ development has been constrained by this challenge. Mr Bekele Mengistu, Deputy Director General at FeMSEDA highlighted the government agency’s Micro and Small Enterprise (MSE) Development Strategy which has facilitated MSEs’ contributions in local job creation. Mr Belay Gezahegn, Enat Bank’s Business Development Planning Director highlighted the bank’s strategy to improve women entrepreneurs’ access to financial resources through a partnership between UNDP supported Entrepreneurship Development Programme and the bank. Ethiopian Chamber of Commerce’s Advocacy Division Head, Mr Tamiru Wube shared some of the organization’s proposed alternatives to filling existing financing gaps including a proposal for Ethiopia to establish a dedicated SME bank.

According to the World Bank’s Ethiopia Enterprise Survey (2012) 41 percent micro, 36 percent of small and 29 percent of medium enterprises reported access to finance as the main constraint to their development. They have also reported that they are discouraged from applying for loans due to high collateral requirements. Small firms are also the most likely to use personal assets as a type of collateral, 36.8 percent of small firms reported to use their personal assets. Young and smaller firms are much more likely to be rejected for a loan or a line of credit than firms that are more established or larger. Only 1.9 percent of small firms have a loan or line of credit.

Speaking at the forum, UNDP Ethiopia’s national economist, Mr Haile Kibret, noted that for ‘the SMEs to play a vital role in the economy, it is necessary they are backed up by a strong financial system. Ethiopia’s financial sector is dominated by the banking sector which currently represents more than 90 percent of total assets of the financial sector. But access to financial services remains low and key obstacle for enterprises development.
UNDP Ethiopia and AAU/CBE Department of Management’s partnership on the EIEF was launched in 2014 to influence policy making and business environments through enhanced dialogues that encourage innovation, nurture entrepreneurial skills while boosting talents and capacities of executives and developing seasoned managers, particularly women.

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