Although commercial banks have shown significant progress over the years in terms of accessibility, volume of transactions, and technology, they still fall short when it comes to financial inclusion. These financial institutions are accused of focusing only on mobilizing savings and sharing the same pie of the market rather than expanding the scope of their services and financial products. Recently, however, the Ethiopian financial sector is witnessing a vital role being played by Savings and Credit Cooperatives (SACCOs) particularly in the area of financial inclusion. With a better legal framework, digitalization, and managerial experience, these institutions can play an even bigger role in helping Ethiopia’s development journey, writes EBR’s Bamlak Fekadu.
Firaol Samuel, 29, from the southwest fringes of Addis Ababa’s Ayer Tena district, was eating lunch near Bole Rwanda outside a pleasant coffee shop on a muggy, bright day back in January. The welcoming and popular coffee shop had no seats available. Firaol is a driver for a ride-hailing company. When he brings clients to the Bole neighborhood, he frequently stops by the inviting coffee shop, which he chooses due to the reasonable prices of the food. Firaol graduated with a degree in survey engineering from Dire Dawa University in 2018, but was unable to find employment.
Seeing his parents’ frustration after a few months of fruitless job searching, he made a decision to launch a ride-hailing business. His parents accepted the idea, sold their spare house at Adama, a town 100 kilometers from the capital, and bought him a Toyota Corolla, 1986 model, for ETB 267,000. The car model, however, was ineligible for registration with ride-hailing services. So he was forced to change the vehicle to the blue and white taxis, more commonly known as ‘Lada’.
While working as a Lada taxi driver, he joined associations formed to buy new vehicles, and was looking for alternatives to upgrading his car to make it eligible for ride-hailing services. He had hoped that the mayor’s office, under the direction of the then mayor, Takele Uma, would make it easier to import and assemble cars.
“The association requires members to make monthly deposits of at least ETB 7,000, and at the same time I was searching for a bank that can lend me money to buy a car, to no avail,” Firaol said. The excise tax bill was changed in 2020, charging up to 500 Pct on imported cars, which caused the price of well-known cars like the Toyota Vitz to rise from ETB 650,000 to as high as ETB 1 million by the time he was seeking a loan from a financial institution. “I was in desperation at the time I heard about Awach and similar SACCOs that provide auto financing,” he said. After consulting with his parents, he sold his car for ETB 215,000 and deposited more than 80 Pct for more than six months in a SACCO at Kolfe Keranyo District.
“The SACCO in my district offered me a little over double the amount I deposited with a due date of five years, which allowed me to buy a Lifan 520 car for ETB 415,000,” he told EBR. Further cuts on fuel subsidies, which exclude ride-hailing service providers, and the spike in the price of spare parts pushed him to search for a new fuel-saving car. Recently, Firaol repaid his debt earlier than the due date and is optimistic that he can get a better loan to buy a new car with his good credit scores. “Access to collateral-free credit for small and medium businesses is what makes these institutions more accessible than commercial banks,” he explains.
Recently, the ex-governor of the central bank, Yenager Dessie (PhD), revealed that only about six million of the country’s 110 million population have access to credit from banks and microfinance institutions (MFIs), which have the lowest performance rates at 5.45 Pct. According to Yenager, as of present, there are approximately 350,000 commercial bank borrowers concentrated in our capital, making up only 0.318 Pct of the 100 million people.
According to a recent study by USAID, because Addis Ababa is the center of the country’s business activity, in 2020, 69 Pct of loans will have originated there. Addis Ababa also has the most bank borrowers; the city has 38 Pct of all bank borrowers, and these borrowers account for 69 Pct of all outstanding bank loans. The value of collateral attached to secured bank loans is typically two times the loan’s original value. Ethiopia has embarked on a financial inclusion strategy to promote access and use of a range of accessible and affordable financial products regulated by financial institutions for all individuals and enterprises. The strategy includes innovative and convenient channels to promote economic growth, poverty reduction, and financial stability by 2025.
The strategy identified six factors hindering financial inclusion, including insufficient funds to save (78 Pct), distance to financial institutions (12 Pct), cost of service (2 Pct), documentation cost (1 Pct), trust (1 Pct), and religious reasons (1 Pct). As specified in Article 2(9) of the Banking (Amended) Proclamation No. 1159/2019, financial institutions are classified as insurance companies, banks, MFIs, capital goods financing companies, reinsurers, micro-insurance providers, postal savings institutions, money transfer institutions, digital financial service providers, and other institutions as determined by the NBE.
Under this regulation, SACCOs are not considered formal financial institutions, even though they are the ones that primarily serve micro, small, and medium enterprises (MSMEs) and ordinary households in Ethiopia. A World Bank study conducted two years ago uncovered that almost two-thirds of the Ethiopian population is unbanked. A financial inclusion study from the World Bank also shows credit unions and interest-free banking are relatively unknown across the country and have registered higher usage among rural adults than their urban counterparts.
SACCOs are user-owned financial institutions that offer both savings and credit services to their members. SACCOs are an integral part of the financial system by which communities are mobilized to engage in productive activities like those of EQUB (social-based saving and credit system) accustomed in the nation’s tradition to generate income, create employment opportunities, and stimulate the economy of a well-defined area, thereby improving livelihood.
Lack of access to effective and formal financial markets is a severe constraint that prevents low-income households from improving their living standards, which leads to persistent poverty. As of 2022, Ethiopia has 113 union SACCOs, and two federation SACCOs, with a total membership of 6.9 million. Data from the Federal Cooperative Commission (FCC) shows that about 46Pct of the total members are women. The total savings of SACCO’s shares was around ETB 37 billion, of which Addis Ababa took the majority share of ETB 13.5 billion, followed by Oromia with ETB 9.4 billion, and Amhara with ETB 5.2 billion.
Although the majority of Ethiopians live and work in rural areas, most rural dwellers have no access to financial products. As a result, many Ethiopians are members of SACCOs as their primary option for to get access to credit. Birhanu Dufera, director of financial cooperatives at the federal Cooperative Commission, stated that starting in 2002, the central bank has been monitoring SACCOs.
“Currently, our commission is striving to have the central bank consider these cooperatives as financial institutions since they are playing a vital role in fostering financial inclusion,” Birhanu told EBR. The cooperatives do not have a geography-based business model and are willing to serve any client anywhere in Ethiopia with the same credit products as long as they meet the necessary business, technical, and legal requirements. On the other hand, MFIs, whose number rose to 43 during the fourth quarter of the fiscal year, showed 16 Pct growth, reaching ETB 28.3 billion, exhibiting a lag of ETB 6 billion compared to SACCO’s performance. Despite the fact that SACCOs present an opportunity for increasing outreach and the quality of service offered to low-income households and MSMEs, Birhanu observes several weaknesses that limit their potential.
He emphasized “governance” as the primary issue in cooperatives because they are typically run by committees made up of members who lack effective leadership abilities and organizational structure. With the exception of a few, Birhanu observes that automation and digitization are challenges that are faced by most cooperatives. “Financial capacity that satisfies demand is foremost a challenge that stirrs mismatch,” he told EBR. Among successful SACCOs, Awach, loosely translated as “profitable”, is one that is gaining popularity in urban areas for its financial products. The 15-year-old Awach has over 100,000 members and raised ETB 2.3 billion during the last fiscal year, disbursing ETB 1.6 billion to some six thousand members through its 23 branch offices. It is currently the only cooperative that installs the core banking system.
Awach started providing service with ETB 12,064 in 2007 and has created job opportunities for 254 citizens, as well as MSME borrowers. Its popularity started to grow due to its auto financing, which captured many interested in engaging in ride hailing services. Through the establishment of Awach Insurance and the acquisition of over ETB 100 million through a floated share, Awach plans to address financial inclusion beyond credit and saving. “Our company channels its credit products for personal and business use,” Awach’s communication officer, Simret Mulugeta, says. “Perhaps the product for auto financing has increased appeal.” Awach’s credit products include housing, auto financing for personal and business use, and social financing as much as ETB 600,000, which includes financing for education, medical purposes, and weddings, among others. To be eligible for a loan, members must save 25 Pct of their monthly demand for six months. For instance, borrowers for personal vehicles can obtain as much as ETB 1.5 million and up to ETB 2.5 million for business vehicles.
“We also provide finance for housing as high as ETB 3 million, as well as urban agriculture businesses like poultry with rates ranging from 15.5 Pct to 13 Pct,” Simret told EBR. Getu, whose middle name is withheld upon request, is an expert in financial economics. He has been a financial manager at a renowned MFI for over a decade. He has taken a closer look at these cooperatives, and how both MFIs and SACCOs serve MSMEs and households.
He argues that these institutions should be considered financial institutions according to the law. In this case, if the central bank acts as a regulator, treating these cooperatives the way it regulates banks, insurance companies, and MFIs, it could push them to halt their operations. “SACCOs and MFIs are essential and significant tools to achieve the two strategies, including the national digital payment strategy (NDPS), if sufficient attention is given,” said Getu. These institutions provide various types of savings, including compulsory savings, voluntary savings, fixed-time savings, and sharia-compliant services. “Banks are more concerned with mobilizing deposits than financing households,” the expert said. According to Getu, these cooperatives are capable of building a saving culture, facilitating credit with a fair interest rate, and improving the socio-economic conditions of members and other people by equipping them with entrepreneurship and business development skills through training. The establishment of cooperative credit unions and savings cooperatives in Ethiopia began in 1964 and was pioneered by the employees of Ethiopian Airlines. About a decade later, there were 28 such institutions with over 6,000 members. Half a century after its inception, the number of unions has grown to 14,000 with an aggregate capital of ETB 5.2 billion.
The cooperatives operating in the Silte Zone of the State of Southern Nations and Nationalities were the first to introduce these Sharia-compliant services two years ago as part of a pilot program. Almost two dozen cooperatives under Nur Savings & Credit Union, which comprises 142 cooperatives, are among those currently offering interest-free services in the Silte Zone.
Their efforts, however, have been stalled due to a huge gap in awareness in the community, according to Fikadu Tadesse, General Manager of Nur. “Financial services are not equally available to all members of society,” he said. “These services will allow low-income members to participate in the market.” He recommends that the regulator commission and the central bank discuss the authorization and adoption of digital financial services (DFS) like mobile wallets.
From table banking to credit unions, SACCOs sector in Africa is rapidly digitizing to bring financial inclusion to all SACCO members. Members of SACCOs in Kenya, Rwanda, and Uganda’s far-flung areas are now able to transact without needing to visit a physical branch. “Thus, facilitating the adoption of DFS with the rising number of mobile subscribers could be significant,” he remarks.
EBR 11th Year • April 2023 • No. 116