Risk-averse approach of Ethiopian banks criticized as barrier to innovation
Labor and Skills Minister Muferihat Kamil slammed Ethiopian financial institutions for employing a risk-averse approach to business that sidesteps idea funding.
According to Muferihat, banks in Ethiopia are heavily reproached for being risk-averse and sidestepping their duty to finance entrepreneurs’ ideas by imposing unmet demands to finance ventures.
She leveled her criticism at an event hosted at the Science Museum, where representatives from the National Bank of Ethiopia (NBE) were in attendance.
The minister pulled no punches in exposing lenders’ reluctance to back ideas, saying entrepreneurs struggle to get off the ground without financial backing for their plans.
While startups drive innovation, Muferihat said risk-wary banks prefer playing it safe to the detriment of the entrepreneurship ecosystem.
Organized by the Ethiopian Youth Entrepreneurs Association in collaboration with the Ministry of Finance, the event discussed the impact of the upcoming second Home Grown Economic Reform (HGER2.0) on entrepreneurs.
In attendance were several representatives from the private sector and government, including State Minister for Finance Eyob Tekalign (PhD) and the Director General of the Ethiopian Diaspora Service, Mohammed Endris (PhD).
During the discussion about expediting ratification of the long-delayed Startup Business and National Innovation Fund Proclamation tabled before the Council of Ministers, the Labor Minister noted the role financial institutions could play.
“We all want the innovation fund to be implemented, and we will push for that. But we don’t have to wait,” she said, adding, there needs to be an ‘attitude change’ among those leading the financial sector as well. “I’m glad participants from NBE are here.”
Sharing risks in idea financing “is not favoring,” according to the Minister; rather, it is a commitment institutions have to make as part of doing business. She expressed her dream of seeing a shift in mindset within the sector.
Explaining how financial institutions in other countries not only share risks but also transform risks into opportunities, she said assistance in this area could help startups flourish. “I believe there will be no loss of resources; instead, the institutions will gain more savers and profits,” she said.
One top manager from a private bank, who spoke anonymously to The Reporter, did not want to accept the criticism from Minister Muferihat.
Adhering to stringent regulations set by NBE, protecting shareholders’ resources, operating with limited resources, and lacking guarantees of government or organizational support in the event of defaults are what deter the institutions from financing ideas alone, the manager said.
“Pointing fingers at each other isn’t helping anyone,” he said. “Banks’ main task is obviously giving loans to clients, but at what cost? It isn’t just the banks’ responsibility; the government is also accountable.”
“Is there an office committed to supporting banks in the event of defaults when financing ideas? For example, what happened to the 10 billion Birr revolving fund committed for entrepreneurs from the government? Was it given to banks to administer?” he asked further, explaining how defaults are inevitable in a country with limited resources and a huge lack of sector support systems.
For Muferihat, making rules the “alpha and omega of every activity” is the root of problems, as she went on to say risk-sharing is still possible. “I respect rules, but I don’t love them,” she said.
In a panel discussion at the event, Finance State Minister Eyob and Muferihat sat together answering questions raised regarding idea financing.
According to Eyob, the startup funding mechanism should differ from normal banking operations, done by funders with sector knowledge, risk exposure, and forecasting abilities. “That is also how the global experience is,” he said.