Financial Inclusion Hopes

Ethiopia’s financial sector, that had lived under a tight grip of the government for decades, now seems to be undergoing a series of shake ups in the past few years. While some measures by the central bank seem to have a loosening effect on some areas, other measures have been restrictive and demanding with a slew of directives. The most tightly controlled sector in the Ethiopian economy has seen a rise in the number of banks and other financial institutions. More telling is the diversification being seen in availing financial services to previously unreached areas and sections of the population. Here, the sector is registering positive trends towards availing banking services and credit to wider and wider audiences. With such endeavors, however, financial institutions have to enter the risky business of uncollateralized lending—at least in small amounts. In all, lending diversification is most welcome and requires further strengthening, writes EBR’s Bamlak Fekadu.

As of this past June, the National Bank of Ethiopia (NBE) has issued licenses for eight newly established commercial banks which have been under formation. Additionally, two microfinance institutions (MFI) are in the process of relicensing to transform into full-fledged banks as per another NBE directive permitting microfinance institutions’ growth into full-fledged commercial banks. As such, three institutions are underway—Omo, Oromia and Amhara MFIs. More banking licenses are reportedly on the way.

The central bank has also recently granted a permit for Ethio Telecom’s Tele Birr platform with users in excess of 21 million to begin providing microloans and savings services as part of plans to promote digital financial inclusion. The state-owned operator has been launching a slew of products and services in recent months, ahead of incoming competition from the soon-to-be operational Safaricom Ethiopia, which won a telecom operators’ license after bidding USD850 million in May 2021.

“We are working to strengthen the digital economy in order to enable citizens to have an easy system whilst promoting financial inclusion,” said Frehiwot Tamiru, CEO of Ethio telecom in a media press release.

According to NBE, the total capital of the banking industry increased by over 42Pct and reached ETB2 trillion by the midpoint of the current budget year, i.e., January 2022. As of late July, the number of banks reached 22, including the first fully Sharia compliant banks ZamZam and Hijra and the latest entrant, Ahadu Bank. The number of commercial banks’ number of branches has also grown from just 358 in 2002/03 to 6,511 in 2019/20 and 7,344 in 2020/21. Yet, there still is a huge gap in access to credit—one of the most essential elements of financial inclusion.

The World Bank defines financial inclusion as individuals and businesses having access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit, and insurance—delivered in a responsible and sustainable way. The sector in Ethiopia has seen decent improvement in this regard—65Pct of branches are now concentrated outside of Addis Ababa versus 38Pct a decade ago.

Yet, the majority of Ethiopians—the poor, households, and those engaged in micro and small businesses—have no access to credit. With the massive growth of banks and a branch to population ratio of over 15,000, still only 10Pct of households in Ethiopia have access to formal credit and only 1Pct of the rural population has a bank account.

According to NBE, over 75Pct of Ethiopia’s population is unbanked, while nearly 40Pct of all bank branches are concentrated in the capital. In addition, 60 to 70Pct of Ethiopia’s population do not use conventional financial services.   In Ethiopia’s context, access to credit is almost always limited to those with assets that can be collateralized. Apart for certain ‘clean’ loans for banks’ top customers, all loans from financial institutions in Ethiopia—including MFIs—require material indemnity.

Large swathes of the Ethiopian population are neglected from access to both short- and long-term loans. Research shows that Ethiopia’s micro, small, and medium-sized enterprises (MSME) financing to GDP ratio was 2Pct in 2020—lower than South Africa’s 14Pct and Kenya’s 6Pct. The poor ratio can be largely attributed to crowding-out moves by the public sector and high requirements enacted by financial institutions to release loans to MSMEs. Also, the value of collateral attached to secure bank loans is typically twice the loan’s original value.

The central bank recently announced that total deposits in banks have surpassed ETB1.6 trillion while disbursed loans total around ETB1.5 trillion. Customers of depositors now reach more than 350,000 in all banks. But a 2020 study by USAID shows Addis Ababa accounting for 38Pct of all bank borrowers and 69Pct of all outstanding bank loans.

In efforts to curb the situation, NBE introduced the National Digital Payment Strategy (NDPS) aimed at enhancing financial inclusiveness and includes four key areas: strengthening financial and other infrastructure; ensuring the supply of an adequate range of suitable products, services, and access points; building a strong financial consumer protection framework; and improving financial capability aligned with the strategy.

Aligned with Sustainable Development Goals 2020 and the Home-grown Economic Reform Program, it is believed that the strategy will enable ordinary people, farmers, and MSMEs to gain access to credit and financial solutions in a faster, safer, more efficient, and cheaper method.

Some fruits are beginning to bear with mobile wallets and banking applications simplifying shopping and the paying of bills. However, these platforms have not attempted to finance these lower-end customers with softer credit.

Again, there are already steps taken to remedy this malaise. The Cooperative Bank of Oromia (CBO) recently pioneered the provision of an uncollateralized digital lending product dubbed “Michu,” powered by Kifiya’s Qena. Kifiya Financial Technology is credited with enabling Lehulu, the aggregated consumer-to-government payment platform. Michu is a mobile protocol, allowing users to apply for loans without collateral.

The uncollateralized lending application offers credit services in the form of loan and overdraft facilities with microloans aimed towards working capital needs of street vendors and micro businesses with a maximum loan amount of ETB 30,000 and has a repayment period of 4 months. The interface also features loans up to ETB150,000 with a due date of one year for small and medium enterprises (SMEs). The platform manages to process the request from eligibility and verification to analysis, scoring, and loan disbursement within a few minutes based on credit history. The platform uses data to determine credit worthiness providing a flexible payment method. Michu digital lending product is expected to increase the Bank’s borrowers by 30Pct during the   pilot period, as per the bank.

According to Deribie Asfaw, President of CBO, the non-collateralized digital lending product is a new and in-desire loan service characterized by its instant and easy access. “The interface doesn’t require an in-person appearance to apply for a loan,” Deribie told EBR. “Lending cannot be totally risk-free all of the time, but how you manage the risk makes it commendable.”

Paulos Gonsamo is among those who has welcomed CBO’s uncollateralized loan program. Paulos owns a small kiosk in the Bole Arabsa condominium compound in the newly formed district of Lemi Kura in southeast Addis Ababa. Paulos, who came from Wolaita in southern Ethiopia eight years ago, has been working in several domestic jobs until he opened his kiosk.

“It is just sad that financial institutions are more concerned about mobilizing deposits than servicing small businesses,” he complains. He frequently transacts with three commercial banks but none, however, have offered him such services like uncollateralized loans. Also, high interest rates and short servicing periods has scared him away from even entertaining the idea of taking out a loan to support his small business. He looks with anticipation to CBO’s new offering.

The financial sector is also witnessing further efforts by telecom and tech companies in introducing modalities to further resolve the financial inclusion challenge. Among the few emergent technological solution providing firms, EagleLion System Technology has introduced DubePay looking to also offer loans or cash advances without guarantee.

Buy-now-pay-later (BNPL) credit schemes are thus slowly rising, with DubePay a case in point. The tech firm has partnered with Dashen Bank to offer solutions normally featured by credit cards elsewhere around the world. These schemes are classified into two: standard and fixed. Salaried customers will pay on an installment basis on their payday.

The evolving global BNPL market size was valued at USD90.69 billion in 2021, and is projected to reach USD3.98 trillion by 2027. In Africa, where most people are unbanked, BNPL activity is just beginning to pick up. BNPL, a short-term consumer financing that allows shoppers to purchase products and pay in installments with nominal or no fees, is sweeping the global e-commerce sector including ThankUCash of Nigeria and PayFlex of South Africa with 135,000 customers.

Experts add that these platforms can help struggling and working urbanites pay their bills. This has reached a point where banks are worried that they might lose out on this segment which they have discarded for so long.

Hartnell Ndungi is a data expert who has worked in the digital financial sector in East Africa for more than a decade. In a February seminar organized by Kifiya Financial Services Technologies in association with the International Financial Corporation (IFC) and the Mastercard Foundation, Hartnell urges that in order to service the country’s huge MSMEs, Ethiopian lenders must commence small and uncollateralized digital loans in conjunction with IT companies. As per him, there are now over 30 private banks in neighboring Kenya providing uncollateralized loans for MSMEs. Hartnell recommends learning from the services of M-Pesa of Kenya on providing non-collateralized loans to small businesses.

Mastercard Foundation is one promoting financial inclusion in Ethiopia to help MSMEs get access to finance. The foundation also has been disbursing soft loans dedicated for MSMEs aiming to help recover from the impact of the pandemic. According to the foundation, there are a total of 850,000 MSMEs in Ethiopia, which have created a total of 4.5 million jobs.

“Currently. the central bank is also encouraging financial institutions to finance business ideas,” said Frezer Ayalew Director of Bank Supervision at NBE said, adding that his institution already has policies and frameworks encouraging and supporting uncollateralized loans to be provided for the masses.

There is an urgent need to spread the advantages of financial inclusion to the wider public. Banks will have to take on calculated risks in order to serve MSMEs where the bulk of job creation is present. Otherwise, they further risk losing their depositor base in times where interest rates are already negative in real terms. Economic growth without credit is unattainable, thus banks shall disburse manageable uncollateralized loans while mitigating risks and identifying segment with potential all the while offering attractive and low interest rates. EBR

10th Year •July 2022 • No. 109