Job creation
through access to finance

Ethiopian small and medium-sized enterprises (SMEs) struggle with financing: less than one per cent have bank loans, 70 per cent use personal funds. For comparison: foreign investment into start-ups in Kenya is more than 100 times higher than in Ethiopia. Only 45 per cent of Ethiopians have bank accounts. Most SMEs rely on informal sources, such as personal savings and cooperatives, for their initial capital. A lack of financial literacy and advisory services exacerbates the issue. Additionally, SMEs face high rejection rates for loans and strict collateral requirements. Neither microfinance institutions nor commercial banks work with SMEs.

This leads to a “missing middle” phenomenon where SMEs are significantly more credit-constrained than both micro and large enterprises. Despite their potential, financial institutions are deterred by potentially higher risks and costs of supporting SMEs.

These challenges highlight the need for improved business models and supportive policies. To grow business and create jobs, SMEs require financial services tailored to their capacities and potential. Invest for Job’s SME Support Facility, a comprehensive package ranging from technical training to financial assistance for over 300 SMEs, supports Ethiopian entrepreneurs to acquire financial literacy and connect them with financial actors.

The SME Support Facility connects SMEs with banks to facilitate commercial investment loans, which will lead to job creation. The target is to capacitate Hibret Bank and Ahadu Bank, the only institutions in the country with dedicated departments for working with SMEs, to develop or improve at least one innovative and effective SME loan product each and to enable access to finance for at least twenty SMEs until 2027 to receive financing of at least 75,000 EUR each. In addition, the SME Support Facility also connects diaspora investors and other foreign investors with Ethiopian SMEs, thereby leveraging loan and equity investments.

On the supply side, the SME Support Facility supports the two SME banks to develop and apply new asset valuation methodologies where not only the traditional fixed assets such as property, vehicles, or machinery can be considered as collateral for loans, but also other values, such as local purchase orders (LPOs), intellectual property rights, cash flow and business prospects. For instance, it supports the newly founded SME department of Ahadu Bank to develop a strategy and operational plan for a more efficient credit analysis, loan product development, and cashflow-based lending. By collaborating with Hibret Bank, the project aims to introduce digital loan provision services for micro and small enterprises. In addition to the target of providing loans to twenty SMEs, the project expects the banks, with the support provided, to facilitate loan services for other small companies seeking financial assistance, resulting in at least 100 additional loans being granted to SMEs.

On the demand side, the project conducts investment appraisals with SMEs to qualify their business model, growth opportunities and financial needs, and supports SMEs in developing pitch decks for diaspora investors. By July 2024, 44 SMEs actively participating in the SME Support Facility were provided technical assistance and machinery support, support in strategic plan development, production improvement, market diversification, business modelling, and financial literacy. These measures help them comply with the loan conditions, whether they are applying for loans from a bank or from investors. Joint appraisals and monitoring of loan processes ensure reduced default risk.

In addition to working with Adahu and Hibret banks, the SME Support Facility has facilitated access to credit for SMEs through multiple Ethiopian commercial banks, including Lion Bank, the Development Bank of Ethiopia and the Commercial Bank of Ethiopia. These efforts have resulted in securing a total financing value of €1.2 million. They were granted to ten Ethiopian SMEs across the country, helping them improve their business outlook, financial standing and operational capacities​​. For example, Nopicho Garment in the rural city of Dilla in South Ethiopia received asset financing from the Ethiopian Development Bank to establish a new product line in the garment factory. At the same time, Maerg General Purpose Machinery in Mekelle, Tigray Region, received a working capital loan from Ahadu Bank. The loan enabled the enterprise to buy raw materials such as metal sheets and increase production.

The cooperation with banks is one key element within the broader access to finance component of Invest for Jobs in Ethiopia. Among others, Invest for Jobs also pilots and connects supported SMEs to equity financing options by the Ethiopian diaspora, leverages impact investment, and works with foreign business organisations that are interested in investing and strategic partnerships with Ethiopian companies. As an example, under the foreign business investors project, during an exposure visit to India in May 2024, Ethiopian start-ups Buy2Go, a last-mile logistics company, and EagleLion, an Ethiopian FinTech, discussed with Indian counterparts’ business partnerships to introduce innovative technology solutions to the Ethiopian market to enhance efficiency and traceability and financial inclusion and digital payment systems.

Overall, the SME Support Facility, the project under which this financial aid is provided, has successfully created 11,877 good jobs in Ethiopia, covering growth sectors such as digital economy, textile, leather, health, coffee, and more​.

The SME Support Facility is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and sequa gGmbH within the framework of the Special Initiative “Decent Work for a Just Transition” of the German Federal Ministry for Economic Cooperation and Development (BMZ).