Barriers to Agricultural Finance in Ethiopia (2021/22-study by GIZ, conducted by AFC, DOI: 10.13140/RG.2.2.28771.43040) 1
The opportunity: Small and medium enterprises in agricultural value chains All market economies pin their hopes on small and medium enterprises (SMEs) as engine for job growth and wealth creation. The SME sector is regularly more flexible and more resilient than other sectors of the economy, and it bounces back faster after ‘shocks’ such as the COVID19-pandemic. Furthermore, SMEs are often the source of innovation and investment along value chains. Particularly in agricultural value chains in Sub-Sahara-Africa, most producers are smallholders with very limited investment and management capacity. On the other hand, large-scale off-takers often are too removed to manage the relationships along the whole value-chain. Agro-SMEs play an important role here as aggregators and (partial) processors. They link agro-export-businesses and local urban food markets with producers. All the while, they create jobs and build skills in the country.
The challenge: Access to Finance for Agro-SMEs Yet, SMEs regularly have excessive difficulty to access credit to smoothen their operations and to invest in expansion. More specifically, the literature suggests there is a ‘missing middle-phenomenon’ in access to finance: Micro-enterprises are provided loans by microfinance institutions (MFIs), and established corporations are provided large credit facilities by banks. However, few financial institutions anywhere in the world deliberately target SMEs, let alone agricultural value chains. Moreover, the barriers to finance for (Agro-)SMEs have been studied seldom in a systematic way.
Building an effective response: A comprehensive study German International Cooperation (GIZ) commissioned a carefully designed study to qualify the barriers to finance for agricultural SMEs and thus contribute to a unified understanding of the challenges. The study was funded by the innovation fund of Germany’s Federal Ministry of Economic Cooperation and Development (BMZ). The study proceeded in two steps: 1)
An extensive desk review, based on 56 out of 130 pre-screened academic and applied papers, let to a clear definition and prioritization of the barriers that SMEs confront.
2)
A field study surveyed a systematically drawn sample of 61 agro-SMEs; as well as selected representatives from 15 financial institutions across different regulatory classes. To our knowledge, this is one of the most comprehensive qualitative surveys about SMEs working across all stages of major agricultural value chains from Ethiopia, and even from Sub-Sahara Africa. Different from all the papers we reviewed for the desk review, our study excludes micro-enterprises (except for 2 out of the 61 SMEs), i. e. 59 of the SMEs surveyed have 6 or more employees. On average, our responding 61 SMEs employ 25 full-time staff, 10 part-time staff and 37 occasional or seasonal staff.
Highlights from the findings The desk review yielded a clear definition and prioritization of the barriers that SMEs confront: - Policy-barriers arise from gaps and contradictions in the legal and regulatory framework, particularly of Ethiopia’s financial sector. These have been the most important barriers, which are being addressed by an 1
Deutsche Gesellschaft für International Zusammenarbeit (GIZ)’s ‚Supporting Sustainable Agricultural Productivity (SSAP)programme commissioned the study. They competitively selected Agriculture and Finance Consultants (AFC) to carry out the study and manage all related activities. AFC is a member of the GOPA group, a leading German development-consulting firm; AFC is the GOPA-group’s competence centre for financial sector development.
ambitious reform program, including a legal framework for leasing, a credit references system, opening the mobile money sector for foreign direct investment, and a movable collateral registry for the financial sector, as well as easing of regulatory constraints on lending classes. Beyond the financial sector, a warehouse receipt system and opening of the telecommunications sector for foreign direct investment are under way. - Supply-side barriers are erected and controlled by financial institutions (FIs); they make it more difficult for potential customers to open accounts, access or transfer funds, and in particular receive credit. Supply-side barriers are deliberate and conscious in as far as they regulate risks that FIs and their portfolios are exposed to. Moreover, these barriers are often intertwined with policy-barriers, because FIs are asked by the regulator to constrain the way they open accounts (e. g. KYC-rules) and give out loans (e. g. capital adequacy ratios etc.). However, many of these barriers are not expression of management choice but rather of lack of incentives and of concerted interest to invest in financial products, processes or channels to serve Agro-SMEs. - Demand side barriers are erected and controlled by Agro-SMEs; they make the SME appear less attractive as a borrower than they actually are. These are management (and owner) behaviours and systems that do not present a compelling case for lending to this SME. They may stem from lack of skills (and/or experience), lack of awareness about expectations or perceptions of financial institutions; or lack of willingness to share information or decisions. The field research showed that: - In line with conventional knowledge among development practitioners, supply-side barriers are currently the most important hurdle to finance for Ethiopian Agro-SMEs. There are rather easy financial products that FIs could offer but hardly do so far, such as overdraft facilities. These barriers are re-enforced by the credit constraint in Ethiopia. FIs will hence only take up opportunities such as capacity building for value chain finance, if the constraint is eased alongside. - Beyond conventional knowledge, our study suggests that behavioural biases affect the way the entrepreneurs seek finance from FIs: They are over-confident about their financial management practices and hence underestimate financial risks, which can make their loan applications unattractive. They also over-value the informal sources of finance they use, which are limited particularly with regard to expansion of the enterprise.
Where to access the complete study? Read in detail what our study found, how the methodology was designed, which papers where included in the review, how stakeholders reacted to the findings etc.: The full desk-study is available here. The field study is available here.
For further information, please contact Oliver.Schmidt@afci.de