Reflecting on a unique approach to SME support

(Written by Rahel Dejene, IFL's TAF team leader and CEO of R&D Group)

April 5, 2023

I have always believed that Africa, including Ethiopia, has been too dependent on aid for the last century.

However, while aid can provide necessary resources for development, sustainable growth and poverty reduction require the development of a robust private sector that can create jobs, generate income, and contribute to government revenue through taxes.

As a result, for the last 15 years, I have been working towards developing tools and means to stimulate business growth and development in Ethiopia.

Unfortunately, and for too long, the private sector in Ethiopia has not been given the credit it deserves. Even though job creation is a pressing issue in the continent, it is generally a by-product of entrepreneurial activities. Therefore, governments must work towards improving the business environment through policy reforms and regulatory frameworks to create a conducive environment for private sector growth. 

The UN defines development as a multidimensional undertaking to achieve a higher quality of life for all people. Economic development, social development and environmental protection are interdependent and mutually reinforcing components of sustainable development[1].

Traditional development discourse gravitates between the triangle of the state, civil society, and the private sector as entry points for intervention[2]. 

In the international development sector and their approach to private sector development, there is widespread recognition of the urgent need for effective entrepreneurial behaviour to alleviate a myriad of systemic problems including high graduate unemployment, endemic poverty, economic growth inequality, corruption, excessive bureaucracy, ineffective infrastructure, and a lack of enterprise support mechanisms[3].

According to the African Development Bank, the premier financial development institution in the continent, private sector development is identified as one of its fundamental focus areas to “reduce poverty and support sustainable growth in Africa.”

Similarly, the Government of Ethiopia considers the private sector to be a driving force of societal economic well-being as it lays a strong foundation for sustainable economic development. Pragmatic policies are being put in place towards achieving broad-based social and economic development through active private sector participation. 

Nevertheless, being in transition Ethiopia’s private sector comprises micro and necessity entrepreneurs operating mainly in the informal sector. This group mostly consists of low-productive, low -competitive, and largely undifferentiated businesses. This type of entrepreneurship is usually started due to a lack of alternatives and is linked to informal activities, unemployment, underemployment, and poverty[4]. 

Fortunately, the last decade has shown a growing number of (women and young) individuals who choose entrepreneurship as a career path to secure financial and social stability. Different factors, especially the urge to take destiny into their hand and improved access to modern technology, has influenced the attitude of Ethiopians toward becoming more creative and solution-driven entrepreneurs with unique ideas. 

The flexible and compact nature of these startups and high-growth enterprises generally makes them the best place to harness innovation. As such, innovative entrepreneurs are disrupting today’s markets, creating an ever-growing chasm between them and their more traditional, established peers. These entrepreneurs can create a pro-growth business environment and instill a spirit of entrepreneurship that can transform the economic infrastructure of Ethiopia [5].

Unfortunately, most of these entrepreneurs face numerous external and internal constraints. Weak financial and internal management capacity, lack of accurate information, poor market linkages, and lack of skilled labour and adequate training leads to many businesses failing to grow. 

Especially Small and Medium Enterprises (SMEs) - referred to as the “missing Middle” by world bank’s publications also experience unsatisfactory access to financial resources. In the context of Ethiopia, the majority of financing from commercial banks is forwarded to large firms, while micro-financing institutions cater for micro-loan. This leaves them to search for financing from informal sectors, such as “loan sharks” and family members. 

At the same time, poor quality of financial statements, lack of skills in business and risk management, the informality of business management, lack of knowledge in business management, lack of awareness on how to be bankable and lack of adequate collateral hinders them from accessing finance formally. 

Despite the constraints faced, however, they are key contributors to employment creation and sites of economic diversification and innovation. As a result, more emphasis should be given to boosting innovative SMEs and startups by development aid agencies, government, and private sector actors. Because, if stimulated well, they will become the engine for delivering impacts in terms of employment generation, the country’s competitiveness, creation of backward and forward linkages, greater market access, poverty reduction and local capacity development in Ethiopia. 

Relevant stakeholders should make valuable resources available in a more coordinated manner to increase businesses’ willingness to take risks and drive to scale rapidly. As much as access to finance challenges should be solved, entrepreneurs also require access to infrastructure, tailored business development support, access to business networks, industry insights, regulators, data, distribution, process excellence and new technologies. 
It is with this knowledge that UNDP in partnership with NBE launched the Innovative Finance Lab (IFL) in October 2022. IFL aims to address the businesses’ challenges and contribute to Ethiopian economic development. It will forester the growth of SMEs and startups to create decent jobs and inclusive economic growth. 

One pillar of IFL, the Technical Assistance Facility (TAF) was officially launched on the 12th of January 2023[6]. Implemented by R&D Group and MDF, TAF’s pilot program aims to work with 100 carefully selected SMEs that are brought together to learn from one another, develop their internal capacity and accelerate their growth.  It mainly focuses on businesses with significant growth potential and job-creating opportunities, that stagnate in their growth due to a lack of technical knowledge and financial resources. 

Through this comprehensive service, the TAF program aims to maximize the number of enterprises that offer a higher number of decent and gainful employment. While generating wealth for themselves and their families, these businesses will help expand the country’s industrial base to eventually increase foreign exchange earnings, encouraging export and substitute import activities.

Since its launch, the TAF program has selected the first 50 businesses from nearly 300 applicants. In three sub-groups, these businesses will receive tailored, in-company support over a sustained period at both the business leader and organizational level, whilst still retaining the benefits that group learning can bring (e.g. workshops, peer learning, developing relationships and networks).

TAF’s interventions are designed to strengthen entrepreneurs’ inner capabilities and work towards them becoming robust. These targeted Business Development Services will help businesses not only to withstand financial constraints but more efficiently manage their resources to lead flourishing businesses in Ethiopia. 
TAF’s unique approach focuses on business owners becoming more resilient to unexpected business challenges, learning to anticipate risks, and taking strategic action to minimize failures. Unlike the traditional BDS support that focuses on a few days of training, it focuses on developing the entrepreneurial and intrapreneurial skills/competencies of team members and business owners. This leads to growth for the founder, team, performance and company institutionalization, through the sharing of new insights coupled with one-on-one support. 

It is fair to say that IFL’s establishment has come at an important time when the country is preparing itself for the capital market and liberalisation of the financial industry. A more comprehensive approach is however needed to develop a vibrant private sector ecosystem in Ethiopia. It is therefore recommended that all stakeholders work collectively in developing effective strategy as to create a conducive environment for startups and value-adding Small and Medium Enterprises to thrive. 

Because, they have the potential to be (global) engines of shared prosperity: to drive growth, promote sustainability, and support equity - leading to sustainability of economic growth in Ethiopia. 

This requires the commitment of government officials, business leaders, higher-level education institutions, financial institutions, NGOs, development agencies and professional service providers. IFL’s aim should remain to become a centre of excellence, where public-private dialogue is facilitated. Eventually, implement innovative ways to create a hands-on knowledge-sharing platform for sustained growth that can help the country achieve its long-term development and economic goals. 

A collective effort must be put in place to create an enabling environment, including but not limited to providing incentives, access to skills, and reducing red tape, bureaucracy, and legal frameworks that inhibit entrepreneurship and business growth.
Similarly, developing a financial system that is accessible and affordable to growth-oriented small and medium-sized enterprises (SMEs) and startups is critical for the socio-economic development of a nation.

We also need to develop the skill set of entrepreneurs and those working with enterprises to help them integrate an innovative and practical strategy for growth. We should all support entrepreneurship by providing training and technical assistance, access to finance, and mentorship programs to help entrepreneurs develop the skills and knowledge they need to succeed.

It appears that promoting private sector development that addresses the various barriers to growth, requires a holistic approach. Effective results can be realised by working with various stakeholders to promote inclusive economic development in Ethiopia and beyond.

[2] Sharron Kelliher, 2022
[3] Le Pere and Ikome, 2009
[4] (Acs & Amoro ́ s, 2008; Banerjee & Duflo, 2007; Block & Sandner, 2009; Gries, & Naude ́, 2011). (In micro)
[5] Richard Yeboah, Regional Director Africa MDF Global BV’
[6] Access the launch  Video and report