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MSEs the Ethiopian way

MSEs the Ethiopian way

By Bereket Gebru 06-03-16

The World Bank approved a loan of US $200 million to support the growth and development of Small and Micro Enterprises (SMEs) in Ethiopia just over a week ago. The Bank’s press release indicates that its recent study on SMEs finance in Ethiopia finds that financing constraints of Ethiopian SMEs are one of the key obstacles to job creation and growth. Both demand-side and supply-side surveys clearly indicate the existence of a missing middle phenomenon whereby small enterprises are more credit constrained than either micro or medium/large enterprises. The press release goes on to quote Francesco Strobbe, World Bank Task Team Leader of the Project, as saying ‘’this project will address the missing middle challenge by providing financial and technical resources to SMEs and financial intermediaries in Ethiopia.’’

An article entitled “credits to small businesses and microenterprises” states:

Small and microenterprises are generally more labour than capital intensive and have high relative production costs (because raw materials are purchased in small quantities). They lack technical experience in production, accounting, administration and stock control (due to low levels of qualification). Most of the time they are unregistered (or partially registered) and family-based.  

The above mentioned characters of MSEs are indicative of their reduced capacity to come up with the collateral needed to access bank loans. Therefore, there is a general financing problem of MSEs all across the world. The reality in Ethiopia is also along the international trend as the Ethiopian government has stated in the MSE development strategy support framework document that lack of access to sufficient finance is one of the major problems these enterprises face.

Coupled with current plans under the second Growth and Transformation plan (GTP2) to revitalize the role of SMEs as agents of industrialization and ensure their development accordingly, the World Bank credit arrangement seems like a timely and relevant scheme to augment the implementation of the country’s goals in the sector.

In a recent report entitled “Ethiopia’s Great Run: The Growth Acceleration and How to Pace it,” the World Bank indicated that Ethiopia’s rapid growth and development over the past quarter of a century is on track to uplift the country into a middle income economy by 2025. The report also pointed out that the country used a “unique” economic strategy through the course of the protracted economic rise and it called this approach “the Ethiopian way.” The reason behind the label is the adaptive policies Ethiopia has put in place in implementing the recommendations of the world’s biggest international financial institutions.

The reported US $200 million loan by the World Bank can also be seen in the same limelight as the Ethiopian approach to MSEs also has the marks of the developmental democratic ideology it follows. The MSE development strategy support framework document clearly states that there is a political reason behind the priority given to the development of MSEs. The document states that the government is devoted to the fulfillment of the growth demands of farmers as they are the basis for the developmental state it aspires to see flourish. It further states that they would also be influential in the utilization of resources and creation of jobs in urban centers mobilizing the people to developmental efforts along the way. Accordingly, the government intends to promote social and political goals through the use of MSEs as part of its pro-poor policies. In Ethiopia, MSEs are being used as mechanisms of ensuring the equitable distribution of wealth.

 

The success stories of tens of thousands of youth across the country to have managed to come out of unemployment to become business owners through the MSE scheme are corroborative of the pro-poor aspect of these enterprises. The human development aspect of MSEs that involves the training and innovative awakening of those involved also shows the social benefits associated with the scheme.

The article entitled “credits to small businesses and microenterprises” states that supplying credits to small and microenterprises is important for two reasons. “The first one has to do with the idea of market imperfection and it is, without any doubt, the reason favoured by the World Bank and the OECD. The second reason is more general and is related to the belief that small businesses have important functions (mainly social ones) which justify their role in the economic structure. This reason is favoured by the NGOs. There is no strict opposition between the two.”

In explanation of the market imperfection argument by the World Bank, the article notes that most small enterprises start their existence without any institutional help only to find it difficult to grow without the possibility to borrow additional capital from lending institutions. The World Bank and the OECD argue that the difficulty stems from the fact that, in developing countries, the banking system causes "imperfections in financial markets that constrain small borrowers access to credit." The reasons they state are:

1.     Banks are biased in favour of lending to large enterprises.

2.     Lending to small and microenterprises is considered to be risky.

3.     The administrative costs of lending to small enterprises are high and can sometimes reduce the profitability of such loans to (almost) zero.

4.     Small and microenterprises are often unable (or unwilling) to give precise information about themselves.

5.     Small and microenterprises can rarely provide securities or collateral for their loans.

The article then goes on to argue that the so-called informal sector to which pertain most of the enterprises we are talking about, is indeed very important. A 2013 article by the Huffington Post entitled “Focus on Africa’s Informal Economy” stated “the informal economy accounts for 80 percent of new jobs across the continent and is a major contributor to wealth. According to World Bank estimates, informal economies generate 40 percent of GNP in low-income nations.”

The article entitled “credits to small businesses and microenterprises” then concludes “it seems hard to qualify the informal sector as "marginal" and to dismiss its problem of obtaining credit as an "imperfection of financial markets".” The adoption of a pro-poor approach for MSEs in Ethiopia, on the other hand, treats these enterprises as mechanisms of promoting social welfare.

In addition to the social benefit orientation of the MSEs in Ethiopia, the government has put micro finance institutions to deliver loans to MSEs. Through these loans, MSE access loans that would help them develop withstanding the financing problem the World Bank referred to as the missing middle challenge.

By adhering to its own interpretation of the generic policies advocated by the international financial institutions once again, therefore, Ethiopia has managed to portray itself as a reliable beneficiary of loans through the MSE scheme. The approval of the loan by the World Bank Board of Executive Directors is thus a demonstration by the international financial institution of its acknowledgment of “the Ethiopian way.”

 

 

 


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