UNDP partners with National Bank of Ethiopia to set up an Innovative Finance Lab for MSMEs
October 18, 2022
Addis Ababa, 18/October/2022 – The National Bank of Ethiopia (NBE) has partnered with the United Nations Development Program (UNDP) to set up an Innovative Finance Lab to test, innovate and grow a new set of services, products and inclusive instruments that will unlock new avenues of financing for the rapidly growing MSMEs sector in Ethiopia.
According to the Ministry of Trade and Industry, Ethiopia has an estimated 2 million MSMEs. Micro, small, and medium enterprises (MSMEs), which can help to stimulate growth and form the backbone of vibrant economies around the world. According to a World Bank study, the financing gap for formal MSMEs is estimated at 1 trillion USD, going up to 2.6 trillion USD when it comes to both formal and informal.
Within the MSMEs, small enterprises have been identified as the ‘missing middle’ as they were found to be more credit constrained than either micro or medium-sized enterprises. Small young firms are more likely to be rejected for loans than larger enterprises, and their capital needs are also bigger than that allocated through regular micro-financing arrangements. In other words, they are too small for banks and too large for MFIs, and thus remain underserved in the credit market.
According to the UNDP-commissioned report on Inclusive and Innovative Finance for Development (2021), 1.9% of small enterprises in Ethiopia access loans or line of credit, while the figure rises to 6% for micro-enterprises, 20.5% for medium enterprises, and 35.5% large enterprises.
The Innovative Finance Lab (IFL), hosted by the NBE, will be helping Ethiopia to address the financing challenges of MSMEs and start-ups by developing innovative and inclusive financial instruments that bridge the financing gap thus playing a strategic and catalytic role in MSME development and growth. The IFL plans to do this by mobilizing the supply of capital, building demand for capital, and bridging the gap for growth-oriented and jobs-rich MSMEs.
The IFL will also pilot an Enterprise Financing Facility (EFF) to address the supply constraints, mobilizing capital and investing in MSMEs through loans with favourable terms, provide loan guarantee schemes that lower barriers for borrowers, de-risks lending through recoverable grants, all enabling them to access finance that would otherwise be out of reach. The medium-term forecast is for the fund to handle up to 100 million USD.
Equally, a Technical Assistance Facility (TAF) will be set up to complement the work of the EFF and help to ensure the credit-worthiness of enterprises through the provision of pre-and post-investment support such as capacity building and business development.
The lab will also strengthen research, advocacy, and data management of market-oriented financing solutions for MSMEs, and use that knowledge to advocate for policy and regulatory reforms to develop capital markets and digital financial services in Ethiopia.
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