The Bank of Abyssinia signed a loan agreement with four private commercial microfinance institutions (MFIs) – Dynamic, Harbu, Metemamen, and Nisir that will create Moveable Loan Collateral opportunities, and unlock access to finance for micro, small, and medium enterprises (MSMEs) in Ethiopia.
The agreement, worth ETB 600 million, is facilitated through the BRIDGES Programme, which is part of the Mastercard Foundation ’s Young Africa Works strategy in Ethiopia, and is being implemented in partnership with First Consult.
Lack of access to finance is often cited as one of the key constraints hindering the growth of MSMEs in Ethiopia. This is mainly because of the shortage of eligible collateral opportunities offered by financial institutions to MSMEs. The difficulty that MSMEs experience in accessing finance is largely due to their lack of fixed assets, such as land or buildings which institutional lenders demand as collateral.
This milestone agreement is part of a larger effort to implement the National Bank of Ethiopia’s (NBE) directive to enforce the operationalization of a moveable collateral registry. The NBE directive seeks to resolve the challenge where banks have greater financial resources but do not adequately lend to MSMEs, and, conversely, MFIs are willing to lend to MSMEs but lack the resources.
The directive has stipulated two options for banks to fulfill their requirements; i) disburse funds to individuals in the agricultural sector, including cooperative unions and MSMES; and ii) partner with MFIs to channel this fund to the identified target groups by setting up a wholesale lending facility.
The Bank of Abyssinia agreement is fulfilling the second option by establishing and operationalizing a wholesale funding platform that will unlock access to credit from MFIs who are willing to service MSMEs through less stringent collateral requirements yet are constrained by a lack of liquidity.
The BRIDGES Programme has consistently worked to identify opportunities that will unlock finance in MSME lending. As such, BRIDGES has undertaken this as a potential intervention area that will create lasting benefits for both banks and MFIs, as well as facilitate additional financing for MSMEs.
“Dynamic MFI is grateful for the technical support and facilitation of the funding by the BRIDGES Programme, which is indeed a milestone in unlocking credit for young people,” said Bewketu Alamirew, CEO, DYNAMIC.
”Thank you to the BRIDGES Programme for the initiative and to the Bank of Abyssinia for the positive response. The time has now come for MFIs to eliminate the prevailing loanable fund challenges that they have experienced over the years,” said Dawit Wakgari, CEO, Nisir.
The agreement will serve to establish longer-term business relationships between the commercial banks and capable MFIs to not only create funding sources, but also build potential collaboration in areas such as establishing linkages for SMEs graduating from MFIs. An additional benefit is that liquidity constraints hindering MFIs ’ ability to increase access to finance for MSMEs will be done on a commercially sustainable basis.
In a statement, the leadership of the Bank of Abyssinia, expressed their gratitude to the BRIDGES programme and the Mastercard Foundation for facilitating the linkages between the Bank and the MFIs. They consider the agreement as a significant breakthrough to unlocking finances for young people and alleviating the hard physical collateral requirements.
