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BusinessFinance shortage pushes manufacturers out of business

Finance shortage pushes manufacturers out of business

200 businesses have ceased operations

Over 200 businesses are forced to cease operations chiefly due to a lack of access to finance, according to the Ministry of Finance. The manufacturing sector, which is a key to bring a structural change in the economy and achieve an industry-led economy, receives barely 15 percent of bank loans on average.

Up until 2022, the service industry received 27 percent of credit provided by commercial banks operating in Ethiopia, as reported by the Ministry of Industry (MoI). Industry and other sectors account for less than a quarter, showing that banks are focusing less on manufacturing.

Commercial banks prefer short-term loans since there is a stronger interest in lending to exporters, importers, and service industry firms. They prefer lending to businesses requiring working capital because the risks are low and the repayment period is short. In the financial sector, providing a loan for project financing is uncommon.

The Development Bank of Ethiopia (DBE) has provided 90 percent of its loans to the manufacturing sector, outperforming commercial banks, according to the Ministry.  The policy bank stands out from the crowd, given its mandate to issue loans depending on the policy direction it receives from the government.

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Even though manufacturing has been designated as a priority sector, industry players are only receiving a fraction of the foreign exchange they needs to import inputs.

In the first half of the current fiscal year, the manufacturing sector received USD 128 million of the USD 881 million required for raw materials.

Melaku Alebel, Minister of industry, believes the sector is under threat because of the shortage of forex and lack of finance. “The forex allocation is not transparent and this has to be reformed across the banking industry as the current system is based on affiliations,” Melaku said. 

Asfaw Alemu, the president of Dashen Bank, blames the current rule that demand banks to surrender 70 percent of the forex exporters generate as a major cause for the gap. “What we get is only 10 percent, which we also sharing with our clients. This is one of the factors that impacted the forex allocation,” said Asfaw.

The Global Development Network (GDN) says that access to financing is a key factor in growth of businesses, especially for small and medium-sized businesses (SMEs) in developing countries.

For a variety of reasons, including high collateral requirements for bank loans, a lack of access to external capital is regarded as a major impediment to enterprise growth in sub-Saharan African countries. In Ethiopia, the collateral required to borrow can be up to twice the loan amount.

On February 5, 2023, the MoI organized a meeting at the new Haile Grand Hotel for finance stakeholders to discuss how to handle financial challenges in industries. The Ministry’s policymakers believe that finance shortage in the industry sector are a great obstacle for industries, pushing them to produce below capacity, cease production, or even cause closure.

Asfaw argues that banks must quickly refund customer deposits because they are the institutions’ primary resource and they have no pool of fund for substitution. “We have to pay interest on deposit, so providing long-term finance under the current circumstance is difficult,” Asfaw said.

Manufacturing industries do not have a good track record in repayment of loan, according to Muluneh Lema, vice president of wholesale and banking at Commercial Bank of Ethiopia (CBE).

“More loans would be impossible to provide until they improved their ability to repay, because what we borrow is what we collect,” he said.

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