Digital Financial Services

Ethiopia Pulsing with Digital Financial Services

Technology is transforming the digital economy, and digital financial services (DFS) are vital facilitators. DFS is expanding access to and use of financial services, emphasizing affordability and improving access to credit through a new digital lending system. As a result, new environments have been established to meet more demanding clients, with neo-banking being the new paradigm threatening brick-and-mortar banking.

Financial service digital technology innovators are driving growth, and the market is changing rapidly. DFSs are a critical enabler of a digital economy in which access to finance is essential. FinTechs, in alliance with commercial banks and microfinance institutions, are increasing access to and usage of financial services while emphasizing affordability. They are also setting new trends by fostering access to credit through a new digital lending scheme.

Ethiopia has 1.3 million registered vehicles, of which 84 Pct are used in the transport business. The ride-hailing industry provides an estimated 90,000 rides daily, using mobile technologies. Petroleum products are imported for USD 3 billion, increasing the demand for gasoline by 14 Pct on average per year. In this article, EBR’s Bamlak Fekadu assesses the landscape of the growing digitalization of the Ethiopian economy with an emphasis on digital payment systems.

On April 1, government officials and ministers from the Ministry of Transport (MoT) and the Ministry of Trade and Regional Integration (MoTRI), gathered at the National Oil Company’s pump station around Sarbet in Lafto District to launch a pilot initiative to fully digitize the fuel retail industry’s transactions.

The program was officially launched by the Minister of the MoTRI Gebremeskel Chala, Alemu Sime (Ph.D.) Minister of Transport and Logistics, and Ethio Telecom’s CEO Firehiwot Tamiru.

The initiative aims to reduce corruption and increase transparency in the fuel retail industry by eliminating cash transactions. Customers will be able to pay for fuel using mobile money, credit or debit cards, or other digital payment methods.

The Fuel and Energy Regulatory Authority, a government regulatory body with full jurisdiction in

the region, has issued an important announcement requiring cashless transactions at the Capital and nearby pump stations starting April 24. This announcement comes one week after the pilot initiative started.

The authority emphasized the need for all gas stations and fuel businesses in the capital to make the necessary preparations for the introduction of digital payment for fuel transactions.

Additionally, all pump stations nationwide must abide by the regulation beginning in July 2023. The government’s effort to modernize the fuel industry will not only improve the country’s fuel retail sector but also support the development of other industries. The government is committed to investing in technology and innovation to drive economic growth and development. By promoting digital financial services, Ethiopia can increase financial inclusion and improve access to financial services for its citizens.

At the official launch ceremony, Alemu Sime said that the initiative was motivated by the need to create a well-organized framework that is integrated with a gasoline allocation and registration system at all of the stations in the nation, allowing the government to control the fuel market, which is rumored to be smuggling fuel into the black market. According to him, this is due to the government’s sizable investment in fuel purchases and subsidies, which lowers the country’s retail price in comparison to neighboring nations. ⁠⁠⁠⁠⁠⁠⁠

In this regard, the Ethiopian Petroleum and Energy Authority is also acquiring a new system to digitally regulate the petroleum market. Once it is fully automated, industry actors such as stations, fuel trucks, and depots will be able to share real-time data with the Authority.

“Electronic payments will modernize the marketing system and control the fuel subsidy to prevent economic pressure,” Alemu said.

According to Frehiwot Tamiru, CEO of Ethio Telecom, the transaction will be made conveniently through the QR code generated by the telecom’s digital payment system Telebirr, which has been upgraded to a super app last month. Frehiwot sees the launch of a digital payment system as having great value. The connectivity coverage of the 5G network reached 99.1Pct, ensuring the infrastructure’s reliability to support the payment system.

“The platform will reduce the risks involved with cash transactions while also improving transparency and accountability,” Frehiwot said. “It is hoped that it will boost financial inclusion in the nation, lower operational costs, and increase efficiency.”

Although several digital payment options have emerged, the retail of gasoline has traditionally been associated with cash-based transactions, which enable theft and fraud. Despite the announcement of the government, the electronic payment modalities dedicated to the fuel retail industry are just two.

As of mid-last year, around a quarter of a million public transport vehicles covered by the fuel subsidy programs had been settling their payments through Telebirr. In the past nine months, more than ETB 30 billion worth of fuel transactions have been made through Telebirr.

Nedaj is an alternative payment platform designed for fuel payments, developed by EagleLion Systems Technology and provided to the Commercial Bank of Ethiopia (CBE) last year. Nedaj is a digital fleet management and fuel purchasing solution that allows the 28 commercial banks to integrate, which adds convenience for both the banks and customers. The Nedaj application features bill generation, GPS, and direct payment from a personal account. So far, the platform has registered over 900 fuel stations nationwide and started operating transactions.

With the introduction of the national digital payment strategy, Ethiopia has started its journey to the fourth industrial revolution. The strategy focuses on the development of a reliable, inclusive, and interoperable infrastructure, building a consistent regulatory oversight framework, and creating an enabling environment for innovation.

The national digital payment system has prioritized achieving efficient ATM and POS interoperability, boosting digital retail payment systems, strengthening consumer protection and cybersecurity, and digitizing government and state-owned enterprise payment modalities In response to the amendment of the ten-year-old payment system proclamation, the National Bank of Ethiopia recently updated the Payment Instrument Issuer (PII) Directive, which has been governing the mobile money industry for the past two years. The revised directive has not yet been tested in practice, but additional modifications might be required to ensure the success of mobile money services in Ethiopia. The government of Ethiopia has also implemented policies to support the growth of the digital economy, including tax incentives for tech startups and investments in infrastructure.

Over the past ten years, a variety of digital-only banks have emerged, converting traditional brick-and-mortar and physical banking to digital. Neobanks, also known as challenger banks, offer modern banking options that are optimized for smartphones and the digital age. Fintech solutions are accelerating the financial industry by introducing premium conveniences for accessing daily banking operations via a computer or mobile device and enabling cashless transactions at a wide range of retailers.

Bank of Abyssinia (BOA), one of the pioneer private commercial banks committed to offering digital services, recently launched a fully packaged neo-banking platform dubbed “Apollo” which allows customers to create their own accounts remotely via smartphones. Apollo features a virtual card, instant settlement, deals, and discounts of up to 15 Pct.

Such interfaces are created with the goal of increasing financial inclusion and assisting banks in cutting costs by minimizing queues, and paperwork while reducing the total number of bank branches and associated costs. The bank also introduced “Banking on Wheels,” an innovative concept that involves the use of mobile bank branches that can move from one location to another, typically providing banking services to groups that would not have access to traditional branches.

Abyssinia’s mobile banking app, BOA Mobile, was upgraded on February 17, 2023. The new version aims to enhance the user interface (UI/UX), simplify activation, and offer biometric verification. Many users, however, preferred the older version of the application and considered the new version to be more troublesome than the previous one. The bank’s app has received over 100,000 downloads from Play Store. Also, the bank transitioned its core system to the latest Temenos T-24, a widely used digital core banking solution.

A preliminary report presented to business reporters by Precise Consult, a private consulting company in Ethiopia, shows that lending by the banks is limited to the rich and state-owned companies. According to recent reports, only about six million of the country’s 110 million residents have access to credit from banks and MFIs, which have the lowest performance rates at 5.45Pct. There are approximately 350,000 commercial bank borrowers, of which most are concentrated in Addis Ababa, making up 0.318 Pct of the total nation’s population.

An industry insider suggests that the reported number of borrowers may not accurately reflect the true number due to business people’s tendency to borrow from multiple banks. This trend of borrowing from multiple banks may lead to a higher number of borrowers than reported, suggesting that the rate may be lower than 0.318 percent.

“Due to the trend, there is a potential need for better coordination and information sharing databases among banks,” an industry insider says. “This concentration of borrowers in Addis Ababa emphasizes the urgency for greater availability of financial services in rural areas.”

This indicates a significant gap in financial inclusion and highlights the need for innovative solutions to expand access to credit for the majority of Ethiopians who are currently excluded from formal financial services.

The adoption of digital lending services by Fintechs has helped the DFS sector grow. Currently, banks and system developers are among the major players setting milestones on DFSs, alongside Fintechs like Telebirr, Chapa, Kacha, and Kifiya. ⁠⁠⁠⁠⁠⁠⁠

DFS in Ethiopia

The growth of DFSs was described as impressive in Cepheus Capital’s publication on the digital economy of Ethiopia. Digital channels are used by commercial banks to process approximately 500,000 customer transactions per day, totaling about ETB 260 billion, or about 8% of the global gross domestic product (GDP).

As of 2020, Cepheus estimated that Ethiopia’s primary group of digital economy companies would generate net revenues of ETB 5 billion, or 10% of the country’s GDP, from the digital economy market, which had a gross transaction value of ETB 350 billion.

Dashen Bank, a pioneer in the private banking sector, has introduced a short-term consumer financing platform through a buy now, pay later scheme dubbed DubeAle, which is among the emerging digital lending platforms developed by EagleLion system technology. The bank is providing the service at all of its branches across the country. Within two months of its launch, DubeAle has received over 20,000 Play Store downloads, and thousands of merchants have signed up. The platform offers a spending cap that permits users to buy large quantities of goods worth up to ETB 700,000. Additionally, subscribers have the option of splitting the cost of their purchases into three to six and a half installments.

According to Bersufikad Getachew, CEO of the EagleLion system technology, Dube (loosely translated to credit) has been a practice in Ethiopian society for centuries, through which merchants provide loans in the form of goods. Thus, the development is an upgrade and integration of this traditional credit system with financial institutions.

“DubeAle was created with the intention of relieving society’s stress caused by the stressful effects of skyrocketing inflation and the sharply declining purchasing power of money, which has caused society to regress,” Bersufikad said.

The number of banks and microfinance institutions located in Ethiopia has increased significantly in the past ten years, but only 10 Pct of households have access to formal credit, and only 1% of people living in rural areas have bank accounts. A consumer financing service known as “buy now, pay later” that connects customers with retailers and the financial industry had a global market size of USD 90.69 billion in 2021 and was expected to grow to USD 3.98 trillion by 2027.

Digital lending, which is characterized by its remotely managed, automated, and fast loan evaluation and disbursement capabilities, has grown significantly in the Ethiopian financial services industry. To cut expenses, loan collection is also automated. However, the availability and effectiveness of supporting frameworks like credit scoring systems and trustworthy forms of identification are essential to the efficient operation of digital lending.

Ethio Telecom is a pioneer in digital lending, with two million users accessing airtime credit every month. In two years, Telebirr has attracted 30 million users, 101 thousand agents, and 28 thousand merchants, connected with 19 commercial banks, and generated USD 1.95 million in foreign remittance. The recently launched Telebirr Mela (microcredit) has disbursed ETB 2.1 billion to 1.4 million users and enabled ETB 1.7 billion in deposits in Telebirr Sanduq. Michu is Ethiopia’s first uncollateralized digital lending product, powered by Kifiya Financial Technology’s Qena, and was able to recoup the 130 million it loaned.

Michu, the uncollateralized digital lending product of the Cooperative Bank of Oromia (COOP), has disbursed over 200 million birr in loan facilities since its launch in May 2022. The loans are intended to meet the operating cash needs of roadside vendors and micro businesses that are underserved by traditional collateral-based lending.

Kacha’s Mobile Money Platform, in collaboration with banks, microfinance institutions, and Saving and Credit Cooperative Organisations (SACCOs), will provide cashless transactions through 30,000 agents in Ethiopia. Services include opening mobile accounts, cashing in and out, fund transfers, bill payments, unsecured microcredits, direct payments, bill payments, airtime top-ups, card payments, international remittances, micro-savings, and micro-insurance.

Chapa, whose name translates to “money” in Ethiopian youth slang, is one of the tenacious and anticipated Fintechs which also pioneered digital lending.

Ethiopia’s digital economy has been hindered by poor financial institution interoperability, cash-based online transactions, a dearth of functional digital payment gateways, and a small selection of FinTech products. Chapa is driven to find solutions to these issues.

Chapa created and launched Eyezon, a fundraising initiative that raised more than USD 6 million for internally displaced Ethiopians and conflict-affected health institutions. This generated 23 Pct of Ethiopia’s foreign exchange inflows in 2021-22. In addition, it raised USD 300,000 for the Great Ethiopian Renaissance Dam (GERD) in collaboration with Ethiopian Electric Power (EEP), Flutter Wave, and Zemen Bank.

Chapa was created in 2020 when the National Bank of Ethiopia (NBE) opened the Fintech field for digital companies. The business acquired its Payment Gateway license from the NBE in May 2022 and has already begun enrolling merchants. It is not without competition, however, as it is the third payment gateway company to receive a license following ArifPay and SunPay.

Chapa formed a partnership with Mila-Quebec Artificial Intelligence Institute, the world’s largest deep learning institute, enabling it to further research within the AI and machine learning world to allow financial inclusion for SMEs and businesses.

The country’s DFS industry and Fintechs are drawing global corporations, organizations, and venture capitalists to invest in these new enterprises, including the UN Capital Development Fund, Mastercard, and others. Only a small sum of money—roughly USD 40 million—has been invested in the digital economy by equity investors, with another USD 20 million coming from donations. Ethiopia’s proportion of global flows has been minimal, and the average quantity of money has been quite small.

According to a report published by Disrupt Africa, African Fintechs received one billion dollars in funding in 2021. 80 Pct of the funding went only to four countries only: Nigeria, South Africa, Egypt, and Kenya.

Ethiopia’s telecom and mobile coverage have significantly increased due to fee reductions for fixed broadband and internet services. By 2025, Ethiopia’s digital economy could account for up to 39 Pct of the nation’s total GDP. Ethio Telecom’s network reached 70 million subscribers by the end of December 2022, with an increase of 9.2 million new customers since the beginning of July 2022.

Cepheus Capital classifies Ethiopia’s digital economy landscape into four segments: finance, ride-hailing, e-classifieds, and media. With these being the are the most successful, they are followed by e-commerce and delivery services. E-government services are among the most successful digital disruptors, followed by B2C business models. Current service offerings are marked by high geographical concentration, narrow technology types, and limited forex generation.

Ethiopians rely heavily on cash transactions despite the recently introduced cash-holding restrictions. The recent currency change has brought over 30 billion birr into the banking system. But by the second quarter of 2021/22, currency circulating outside the banking system reached ETB 158 billion.

“Nowadays, commercial banks are facing severe liquidity issues, limiting customers’ withdrawal,” said an industry insider. “This scenario shows the importance of DFS.”

The Cepheus forecast shows that the size of digitally transacted economic activity will show a nine-fold increase by 2025, reaching just above an ETB trillion or 39Pct of the GDP. The largest revenue pools would likely remain within digital finance and telecom services, followed by marketplace platforms, transportation, and digital media. Several companies in the digital finance, ride-hailing, and digital media space could see ETB 1 billion valuations in a few years’ time.


11th Year • May 2023 • No. 117 EBR


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