Digital Lending Platforms

A Step Forward for Financial Inclusion for MSMEs in Ethiopia

January 30, 2024

Ethiopia is one of Africa's fastest-growing economies, home to over 123 million people. However, many face challenges, including poverty, inequality, and limited access to financial services. According to the development agency FSD Ethiopia, only 45% of Ethiopians have a bank account. Rural residents, the less educated, and those with less money often struggle with financial services.

Having access to financial services is key for economic development. It means people and businesses can use services like bank accounts, loans, and insurance. This helps improve lives, invest in businesses, and cope with financial difficulties linked to economic shocks.

In Ethiopia, a big challenge to accessing financial services is getting loans, especially for micro, small, and medium enterprises (MSMEs). These businesses account for about 70% of jobs in urban areas of the country. However, they face challenges when trying to get loans from formal financial institutions such as banks due to burdensome requirements such as high-interest rates, long processing times, heavy collateral requirements, and limited bank branch locations. As a result, many MSMEs resort to informal sources of finance like friends, family, or saving clubs (Equb, Amharic: እቁብ), which are often unreliable and expensive.

It is surprising in Ethiopia that 96% of bank account holders have less than 200,000 ETB (equivalent to $3,580). Moreover,  only 350,000, or 0.28% of people have access to loans from banks. People in Ethiopia often borrow from multiple banks, and each time they do, it is counted as a separate loan. This gives us a misleadingly high number and does not show the true number of different people borrowing money. This highlights the unfair wealth and income distribution in the country. (Note: $1 is approximately 56.0 Ethiopian Birr).

Digital lending platforms offer a promising and potentially transformative solution to this challenge in Ethiopia. These platforms are online or mobile applications that use technology to provide loans without needing physical collateral or extensive paperwork. Examples in Ethiopia include Michu, a credit score-based digital lending platform by the Cooperative Bank of Oromia with Kifiya Financial Technology, and Tele-birr (Mela, Endekise & Enderas) Telebirr's microloan service in partnership with Dashen Bank and Commercial Bank of Ethiopia. By using technological-based algorithms, they allow users to obtain loans without collateral based on their credit score.

These digital lending platforms have advantages over traditional methods, including greater financial inclusion and efficiency gains. Lenders, reduce costs, reach more people, manage risks, and keep customers happy. For borrowers, they offer quicker, cheaper, and easier access to credit, along with teaching financial skills and building credit history. They also help include more people in the financial system, especially women, youth, rural residents, and informal sector workers.

According to the International Monetary Fund (IMF), using financial technology (fintech) helps more people access financial services, especially in developing countries in Africa and Asia. For example, in India, there is a company called Paytm that enables mobile payment transactions and has made significant progress by offering a range of financial services, including loans, through digital lending platforms.

In Ethiopia, digital lending platforms are still a relatively new phenomenon, but they are growing rapidly. According to the National Bank of Ethiopia (NBE), digital lending platforms have shown remarkable growth and impact in the country. In the first nine months of the 2022/23 fiscal year, a total credit of more than 3.6 billion ETB has been provided digitally through a couple of banks in partnership with mobile money service provider Telebirr. This is four times more than the same period in the previous year, suggesting a rapidly evolving sector. The NBE also stated that digital lending and financial inclusion are a top priority for the government in the space of digital finance.

However, like other technologies, digital lending platforms face challenges and risks. These include a lack of proper rules, issues with verifying identities (KYC), concerns about data privacy and security, protecting consumers, guarding against cybercrime, and making sure people do not borrow too much. So, it is important for the government and every individual citizen in charge to create fair rules and promote collaboration to make the financial world better for everyone.

In conclusion, digital lending platforms positively impact financial inclusion for small businesses and individuals in Ethiopia by making it easier for them to access credit. However, there is still more to be done to reach more people. Additionally, creating a regulatory framework that balances innovation, consumer protection, and collaboration among different stakeholders is crucial.

The blog only reflects the views of Yinebeb Bahru. Yinebeb is a Training Associate at the Ethiopian office of R&D Group, a consulting firm based in the Netherlands, which is working with UNDP on the Innovative Finance Lab programme launched with the National Bank of Ethiopia. 

Yinebeb has gained experience as a customer service officer at Awash Bank, one of Ethiopia's top private banks. Yinebeb has a strong passion for technology, start-ups, innovation, finance, economy, writing analysis, political economics, geopolitics, and research & development. The writer can be reached at: