When officials boast that the 1.3 trillion birr credit is the outstanding balance of banks, it may look like Ethiopia is a country where businesses face little challenges to secure loans from financial institutions. But going through what constitutes this figure; it is crystal clear to see that much of the loans went to finance the public sector, with the share of privately-owned businesses accounting not more than 30 percent.
While this serves as an evidence to prove that getting finance in Ethiopia is no different from wringing water out of stone, the problem is more severe when it comes to startups, which usually perish due to a lack of finance and working capital.
In a country where there is a little more than a quarter of a million borrowers despite the existence of over 25 million depositors, it may not be surprising to see startups die-off from lack of finances, since collateral is key in the financial sector.
Credit managers love to hear about the properties of clients that seek to take out loans and do some more calculations to know how much it is worth, even though they are supposed to spend more time on why they need the finance.
It is a state of affairs that has left startups in the cold, with no financiers willing to hear their idea, let alone finance it. In fact, it would be an understatement to say that someone with a startup idea will become a laughing stock if it tries to get finances from banks without having collateral.
Nasredin Mohammed, an IT professional who has closely followed the startup ecosystem, believes the funding challenges faced by new entrants is an outcome of lack of trusts in businesses as a whole.
Nasredin blames the government, including tax authorities, for creating the perception that businesses have no morale and always seek profits from the public without adding value.
“Businesses are considered like robbers. That is why we still have a draconian tax system, which has soured the relationship between tax officials and businesses, with authorities having no trust in businesses,” said Nasredin, having struggled to finance his digital startup company that is yet to take-off due to financial constraints.
Perception might have killed the appetite of financiers, who usually are not even willing to hear and review what exactly startups want. However, there are more problems that require the attention of policymakers, investors and financial institutions, among others, in order to at least fuel startups struggling to survive. One of these is the absence of a startup funding system in the country, with existing mechanisms for new entrants being difficult for many to start their own business.
To begin with, the loan applicant has to live in the locality where he/she has applied. If it is a group loan and the applicants live in different localities, be it in cities or sub-cities, means they are ineligible. The interest charged by microfinance institutions, which are tasked to finance these startups and small and medium enterprises, is also very high, reaching as high as 20 percent.
It also requires a longer period to process the loan often ending up being waitlisted. The repayment period is also short and credit managers of microfinance institutions are less willing to extend the loan period, even in unforeseen circumstances, a situation that has forced many startups to return their license once they have paid back their first loan.
“Microfinance institutions tend to finance established businesses with a better financial soundness, while they have little interest to provide loans to those with a business idea, no matter its prospects,” said Simon Chernet, whose attempt to open a workspace for startup companies like his failed, after financiers rejected his plea for finance. It is an assertion that can be backed with research.
In a survey conducted by the World Bank, startups and SMEs are among the most credit-constrained in the world. The financing gap for SME’s in Ethiopia is estimated to be approximately USD 3.9 billion (200 billion birr), 2.4 times the current level of SME lending.
The World Bank’s Enterprise Survey revealed that only 11.3 percent of small enterprises in Ethiopia have access to working capital loans, compared to a global average of 26 percent and a Sub-Saharan Africa average of 22 percent. For Simon, to fill such gap, banks must intervene.
“Financial institutions must start to consider financing start-ups as a corporate social responsibility. It is like investing on the future and tomorrow’s big corporations,” said Simon, who believes banks must, at least, dedicate two percent of their profits on start-up funding.
“I am not saying they should simply disburse the money. They can coach, mentor and show startups workable ideas on how they can efficiently use the fund and turn that into a meaningful opportunity,” added Simon.
In the developed world, banks are among the largest financiers of startups. In Europe, for instance, there are banks that offer debt financing for startups. To name a few, Deutsche Handelsbank, European Investment Bank, NIBC, and Silicon Valley Bank are some of the institutions that provide venture banking and offer debt funding to drive company growth, add to capital financing, overdraft facilities, and term loans. Some of them also offer fund banking.
In India, there is a Credit Guarantee Fund Trust Scheme, introduced by the government to provide a framework for Banks to extend up to USD 250,000 in loans for startups without any collateral.
In neighboring Kenya, Equity Bank, KCB, Family Bank and NCBA are among the financial institutions that provide loans to startups, not to mention microbusiness loans given by fintech companies, including those involved in the mobile money market.
For Nasredin, learning from such experience won’t be enough and is certain there is a need to revisit the tax system.
“The creative sector is highly taxed in Ethiopia, with even no willingness to offset expenses incurred to buy items when we pay tax. From the coffee that we consume to the laptop we buy, our costs are not considered like expenses,” said Nasredin.
Biruk Girma, an entrepreneur, on his part, has his own solution for the funding challenges faced by start-up companies. Last week, in a ceremony held at Hayatt Regency Hotel, Biruk launched an app called, Sumuni, in collaboration with East African Bottling Share Company (EABSC), bottler of Coca-Cola products.
Under-development for the last three years, the app connects startups with investors and professionals with experiences in business planning and administration.
“Many startups do not only lack finances but also the business skill to run their establishments, which should be addressed before looking for prospective investors. This is a gap that our platform wants to bridge,” said Biruk, advising startups to be a part of his networking platform to develop their idea and look for the right investors, instead of waiting for a miracle from the government.
The government is also in the process of enacting a start-up code that is expected to bring drastic changes in the startup ecosystem by eliminating the need for collateral for startups with a workable idea.