Final Report Sgbs in Ethiopia

Small and Growing Businesses in
Ethiopia
Edited by ADA asbl and First Consult PLC
ADA asbl | External document | Edited by ADA and First Consult | October 2017
List of Acronyms
ACSI Amhara Credit and Savings Institution

ADSCI Addis Saving and Credit Institution
DBE Development Bank of Ethiopia
DECSI Dedebit Credit and Saving Institute
ETB Ethiopian Birr
FDRE Federal Democratic Republic of Ethiopia
FUJCFSA Federal Urban Job Creation and Food Security Agency
GDP Gross Domestic Product
GTP Growth and Transformation Plan
MFI Microfinance Institution
MIS Management Information System
MSE Micro and Small Enterprise
MSME Micro, Small and Medium Enterprise
NBE National Bank of Ethiopia
NBFI Non-Bank Financial Institution
NGO Non-governmental Organization
OCSSCO Oromia Credit and Savings S.C
SGB Small and Growing Business
OSS One Stop Service
PASDEP Plan for Accelerated and Sustained Development to End Poverty
SME Small and Medium Enterprise
SMMIDA Small and Medium Manufacturing Industry Development Agency
SNNPR Southern Nations, Nationalities, and Peoples' Region
TVET Technical and Vocational Education and Training
VFE Vision Fund Ethiopia
WBG World Bank Group
WEDP Women’s Entrepreneurship Development Project
ADA asbl | External document | Edited by ADA and First Consult | 22/11/2017
Table of Contents
Executive Summary ............................................................................................................................ 1

1. Introduction ................................................................................................................................. 3
2. Country Profile and Context ...................................................................................................... 5
2.1 Country overview .................................................................................................................. 5
2.2 The Financial Sector ............................................................................................................. 7
2.3 The MSME Sector ................................................................................................................. 8
3. SGB Characteristics ................................................................................................................. 11

3.1 Personal and Family Characteristics .................................................................................. 11
3.2 Business Characteristics ..................................................................................................... 12
3.3 Financial Service Use ......................................................................................................... 21
3.4 Business Support Services Use .......................................................................................... 23
3.5 Owner Vision on Growth and Perspectives ........................................................................ 24
4. Principal Observations, Conclusions and Potential Implications Going Forward ............. 25

ANNEXE ............................................................................................................................................. 30
Annex 1: Methodology...................................................................................................................... 30
Executive Summary
The MSME sector has been fully recognized by the government of Ethiopia as a driver for economic
growth and job creation. To that end, the government has designed and implemented a National MSE
Development Strategy which facilitates the growth of the sector. However, the sector continues to
perform below expectations due to various challenges including limited access to finance, lack of
appropriate working premises and low quality business development services (BDS).
Given these challenges, this study sets out to provide detailed information on the main factors that
currently affect the growth of businesses which started out as micro and eventually grew into small
and medium sized entities. More specifically, the study answers the following: Who are SME owners?
In which sectors do they operate? What have their growth patterns been? What were the critical
factors that affected their growth/failure? How have they used financial services to support their
growth? What other (non-financial) factors exist that are of significance in shaping SME development?
In line with the above, a methodology was developed whereby a total of 45 Small and Growing
1
Businesses (SGBs ) were selected from a population of 140 urban SMEs in the portfolio of 3 MFIs that
expressed their willingness to upscale their credit provision to SMEs.
In-depth interviews were conducted to gather information on the SGB owners, their business histories
and their use of financial and non-financial services.
The main findings of this study include the following:
 Female SGB owners are older but have less prior business experience than their male
counterparts. This reflects the fact that women have had fewer employment opportunities and/or
have been unable to commit the time required to run a business due to household obligations.
However, women require less time to grow their businesses than men. This could suggest that
women have the skills and commitment required to run a business (more) successfully if given the
opportunity.
 Age and education levels seem to be the key determinants of the speed of business growth.
Younger business owners were better able to grow their business than older business owners.
Similarly, owners with higher levels of education required less time to grow their businesses, which
suggests that the more educated owners are, the better able they are to manage their businesses
professionally, analyse competition and understand market preferences.
 Almost all SGBs are managed by their owners. The main reason given for not having a
professional manager was that the owners wanted to have full control over the day-to-day
operations of their businesses since they were dependent on them for survival. Growth is slower for
business owners that manage more than one business (33% of the sample) than for sole business
owners due to their split commitments.
2
 Loans from families, own savings and Iqqub were the predominant sources of start-up
capital. Excessive collateral requirements and restrictive MFI policies such as demanding clients
1
For the purposes of this study, we refer to the selected businesses as Small and Growing Businesses. This
distinguishes them from the overall MSME population since they have demonstrated the potential to grow their
businesses from a micro level to a very small, small or medium level. This is broadly aligned with the definition
proposed by the Aspen Network of Development Entrepreneurs (ANDE) - http://www.whysgbs.org/whataresgbs/
2
Iqqub is an informal association established by a small group of people in order to provide substantial rotating
funding for members, who take loans on the basis of a drawing of lots.
1
save 15% to 20% of the loan amount over a 6 month period are significant obstacles to acquiring
start-up capital from MFIs. Only 9% of the entrepreneurs studied started out with a loan from an
MFI plus their own savings. MFIs do not appear to take credit history into account when
determining the terms and conditions of subsequent loan requests. Further, since loan amounts are
bounded by the collateral coverage capacity of the client, a loan size bottleneck is ultimately bound
to be created. This in turn limits the growth potential of the SGBs.
 MFIs appear to provide preferential loan terms to female SGB owners. The study revealed that
the average loan size and tenure of both the first and the last loans for female business owners
were superior to those offered to male business owners. This is almost certainly a consequence of
different initiatives including the WEDP (Women’s Entrepreneurship Development Project),which
has been facilitating a cash-flow based loan appraisal methodology for MFIs targeting women
entrepreneurs.
 The benefits of formal registration seem to be well understood by SGB owners. All
respondents stated that they were formally registered either for reasons of having better access to
clients and/or government support. In addition to provision of working spaces and sales centres,
governmental procurement favours legally registered MSMEs. This opportunity has created huge
market linkages for the MSMEs involved.
 SGBs appear to use the entire loan amount exclusively for the purpose stated in the loan
application. Utilization of the loan amount as intended vastly diminishes the risk of default. This
result indicates that SGB clients are more reliable and potentially less risky than micro level clients.
More than two-thirds of the SGBs used the loans to finance working capital. This indicates that
once the businesses are up and running, financing needs predominantly shift towards working
capital.
 All businesses interviewed seem to be growth-oriented. None of the SGB owners had the
intention of changing business, slowing down or stopping. However, access to finance and lack of
adequate working premises were mentioned by owners as challenges that could potentially limit
the volume and speed of growth. Other challenges, such as access to foreign currency, fixed
assets, competition and BDS (Business Development Services) were mentioned as barriers to
growth. Despite these challenges, most SGBs planned to hire more employees in the near future.
 SGBs have one foot in the MFI and the other in the bank. At the MFI level, there is a lack of
MIS software solutions capable of providing non-credit financial services in real time. SGBs
therefore rely on banks to facilitate transactions with their clients/suppliers and cash management.
However, banks do not actively seek out SGBs for financing due to the high transaction costs and
the high risks this would involve. In that sense, despite MIS weaknesses, MFIs are better
positioned to scale-up their small and medium business support than banks would be.
 Business support services provided through government structures are inadequate and
have little impact on SGBs growth. Since the government established One-Stop Shops (OSS) to
serve MSMEs business support services have become available to virtually everyone without
charge. However, due to a lack of incentives to innovate and enhance the level of support, service
provision remains sluggish, bureaucratic, and of uneven quality. To this end, public private
partnerships (PPP) should be tested to pave the way towards a vibrant, organised, vetted, quality-
driven BDS provided by the private sector which responds to the needs of growth-oriented small
businesses.
2
1. Introduction
Micro, Small and Medium Enterprises (MSMEs) have played and continue to play significant roles in
the growth, development and industrialization of developing countries. Accordingly, most developing
countries have formulated and implemented a wide variety of MSME development strategies in order
to support the growth of the sector, thereby transforming economies and generating substantial
employment opportunities.
In line with the above, the Ethiopian government has historically supported the growth of Micro, Small
3
and Medium Enterprises (MSMEs), especially growth-oriented businesses , through various policy
interventions. For instance, the government formulated a national Micro and Small Enterprises
Development and Promotion Strategy in 1997 (revised in 2011) to create an enabling environment for
the sector. Furthermore, MSMEs were placed at the heart of the first industrial policy strategy in 2002.
Similarly, within the framework of the government’s 5 year economic development plans, including
PASDEP, GTP I and GTP II, the expansion and development of MSMEs has systematically been a
key strategic priority.
Despite the importance of MSMEs to the national economy and increasing government support, many
of them remain unable to fulfil their full potential due to limited access to finance. According to a report
4
released by the World Bank (World Bank, 2015) , small firms face greater challenges in obtaining
formal financing than large firms; they are much more likely to be rejected for loans and are less likely
to have external financing due to a lack of collateral and credit history.
Microfinance institutions predominantly provide micro credit to micro enterprises while banks service
medium and large enterprises. Small and medium sized enterprises in Ethiopia are currently excluded
from the banking sector credit due to their size (too small to be served by banks) and inability to meet
excessive collateral requirements (>200% of the loan amount). MFIs, on the other hand, have only
been able to meet a small proportion of the demand from small and medium sized enterprises for
finance due to limited liquidity, restrictive loan ceilings and strict collateral requirements.
Given the challenges and constraints mentioned above, this study seeks to identify and analyze a
particular group of SGBs within 3 MFI portfolios, namely Addis Credit and Saving Institution (AdCSI),
Vision Fund MFI and Agar MFI. More specifically, the study has been designed to provide detailed
information on SGBs that started out as micro and grew into very small, small or medium sized
enterprises.
This study will help stakeholders understand the typical features of these emerging SGBs, their growth
patterns, the mechanisms they depend on to finance their business as well as their future financing
needs for continued growth.
For the purposes of this study, the term MSME refers to Micro, Small and Medium-sized Enterprises.
According to the National MSE development Strategy and the Development Bank of Ethiopia (see
table below), MSMEs are defined by number of employees and net worth. It is also important to note
3
The Government of Ethiopia identified growth-oriented MSMEs based on their potential for job creation, poverty
reduction, local raw material utilization and ease of transformation to medium and large scale businesses in a
short period of time. Accordingly, MSEs engaged in manufacturing (metal, leather, textile, wood work, agro
processing), construction (contractors and construction material producers), urban agriculture (dairy, cattle
fattening, poultry, beekeeping and animal food production), trade (wholesale and retail) and services (hotel,
tourism, solid waste collection, etc.) are considered as growth-oriented MSMEs.
4
World Bank (2015) SME Finance in Ethiopia: Addressing the Missing Middle Challenge. Washington, DC : World
Bank Group.
3
that MSMEs are defined differently depending on whether they operate in the service/trade sector or
the industrial/manufacturing sector.
Micro Enterprises Small Enterprises Medium Enterprises
Economic
Services Industry Services Industry Services Industry
sector
Employees <5 <5 6-30 6-30 31-100 31-100

50,001- 100,001–
< 50,000 500,001 - 7,500,000
< 100,000 500,000 1,500,000
Or Or
Capital Or Or Or
< EUR EUR 20,001 -300,000
< EUR 4,000 EUR 2,001 - EUR 4,001 -
2,000
20,000 60,000
Unfortunately, there is not yet a clear benchmark for the upper capital limit defining medium
enterprises. However, the Development Bank of Ethiopia recently prescribed a definition of medium
enterprises (for its lease financing operations) based on number of employees and total capital
irrespective of the sector in which the enterprises operate. Accordingly, medium enterprises in both the
industrial and service sectors are enterprises with 31-100 employees and/or with a paid up capital or
total assets of ETB 500,001 (EUR 20,000) to ETB 7.5 million (EUR 60,000). The present study uses
both the MSE Strategy and the DBE’s guidelines to select samples from the 3 participating MFIs and
applies the same in its analysis.
The findings are based on a survey conducted with 45 SGBs selected from 3 participating MFIs that
had expressed their willingness to upscale their credit operations. All 3 MFIs are licensed and
supervised by the National Bank of Ethiopia and provide credit and saving services to a wide range of
customers including MSMEs. The following table provides basic information on the MFIs.
AdCSI Agar Vision Fund
Year of Establishment 2000 2004 1998

NBFI, established as NBFI, established as NBFI, established as
Legal Status share company and share company and share company and
licensed by NBE licensed by NBE licensed by NBE
"To promote micro and “To provide fast,
small enterprises to affordable and demand
alleviate poverty and driven financial services "Promoting development
unemployment on a sustainable basis and expansion of
prevailing in Addis to the missing middle in economically viable and
Mission Statement Ababa and surrounding order to improve their sustainable micro-
through provision of wellbeing and generate enterprise through
sustainable financial profit for shareholders quality financial and non-
and other related by deploying qualified financial services"
service with particular and motivated staff and
attention to women" high-tech services”
Number of Active
292,080 11,160 134,405
clients
Outstanding loans (as ETB 2. 38 billion ETB 203 million ETB 520 million
of Dec 31, 2016) [EUR 95.2 million] [EUR 8.1 million] [EUR 20.8 million)
ETB 6,610 ETB 8,153 ETB 5,099
Average loan size
[EUR 326] [EUR 726] [EUR 154]
4
As shown in the table above, there are significant differences between these MFIs in terms of
outstanding loan size and number of active borrowers. This is particularly true of Agar, which has
deliberately opted to deepen its support for the missing middle with larger ticket loans, whereas AdCSI
focuses on a broader approach by supporting both micro and small enterprises with lower average
loan sizes. Finally, VF Ethiopia primarily focuses on micro level enterprises with growth potential and
therefore has the lowest average loan size of the three institutions.
The MFIs provided the study team with a list of 140 SME clients from their respective portfolios
(AdCSI=50, Agar=50 and Vision Fund=40). These SMEs were then contacted by phone to ensure
that they met the selection criteria (see Annex 1). They were asked four essential questions regarding
their start-up capital, number of employees at start-up, current capital and current number of
employees. This information was used to determine whether the SMEs started operations as micro
and eventually grew into small and/or medium sized enterprises. 45 of the 150 SMEs fell within the
sample criteria and agreed to the interviews. The interviews were conducted from April 04 to April 21,
2017 at the SGB work places. All the SGBs included in the study are urban enterprises located in
Addis Ababa.
The rest of the report is structured as follows: Section 2 provides a country profile and a contextual
description of the MSME sector; Section 3 describes the characteristics of growth-oriented small and
medium sized businesses and their owners; Section 4 summarizes the conclusions arising from the
study and puts forward recommendations for financial institutions, governments and other
stakeholders that wish to support the growth of SGBs in Ethiopia.
2. Country Profile and Context

2.1 Country overview
Geography
Ethiopia is a land-locked country located in the Horn of Africa and bordered by six countries; Sudan
and South Sudan in the west, Somalia and Djibouti in the east, Kenya in the south, and Eritrea in the
northeast. The altitude ranges from 148 meters below sea level at the Dallol Depression to 4,620
meters above sea level at the Simien Mountains in the North West. Ethiopia covers a total land mass
th
of approximately 1.14 million square kilometers, making it the 27 largest country in the world.
Climate
Ethiopia is in the tropical zone, lying between the Equator and the Northern Tropic (Tropic of Cancer).
There are considerable variations in climate and rainfall patterns throughout the country. There are
four seasons in Ethiopia; Tseday is the spring season, also known as the harvest season, which runs
from September to November; Bega is the long dry season which runs from December to February;
Belg is the autumn season which runs from March to May; Keremt is the main rainy season running
from June to August. The average rainfall between June and August is 990 mm. The temperature
varies with the topography, reaching as high as 47°C in the Afar Depression and as low as 10°C in the
highlands.
Population
Ethiopia is second the most populous country in Africa after Nigeria and is ranked 13th in the world.
Ethiopia’s population grew at an estimated rate of 2.9% between 2014 and 2016. According to the
Central Statistics Agency, the current population of the country is estimated at over 91 million, with
approximately 19.8% of the population believed to be living in urban areas.
5
Ethiopia has close to 83 ethnic groups speaking a variety of languages with 200 dialects of Cushitic,
Nilo-Saharan, and Semitic language families. Oromo and Amharic are the most common spoken
languages. 44.2% of the population is aged 0-14 followed and 19.95 is aged 15-24. The country’s
median age for both sexes is 17.6 years, which highlights the growing youth bulge in the country. With
regard to religion, approximately half of the country’s population is Christian and one-third is Muslim.
Political context
The official name of Ethiopia is the Federal Democratic Republic of Ethiopia (FDRE) and the current
ruling party is the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF). The FDRE has a
parliamentarian form of government with a bicameral legislature comprised of the House of Peoples’
Representatives (HPR) and the House of Federation (HoF). The House of Peoples’ Representatives is
the highest authority of the Federal Government. Executive power is vested in the Prime Minister,
elected from among the members of the HPR for a five year term. Hailemariam Desalegn is the
current Prime Minister of the country.
Ethiopia is organized into nine autonomous regional states and two chartered cities. The regional
states are Tigray, Afar, Amhara, Oromia, Somalia, Benishangul-Gumuz, Southern Nations,
Nationalities and Peoples (SNNPR), Gambela and Harrari while the capital, Addis Ababa, and Dire
Dawa are chartered cities.
Economy
For more than a decade, the Ethiopian economy grew at a rate between 8% and 11% per annum. This
makes the country one of the fifth-fastest growing economies in the world. Ethiopia's economy is
predominantly based on agriculture, with coffee as the major export crop. Almost 80% of Ethiopia’s
population is still employed in the agricultural sector but services have surpassed agriculture as the
principal source of GDP.
5
In financial years 2015/16 Ethiopia’s economy grew by 8% (NBE, 2016) . The service sector remained
the dominant sector with a 47% contribution to GDP. The share of industry, which mainly comprises
small and medium enterprises (SMEs), grew slightly from 15 to 16% while that of the agriculture sector
declined from 39% to 37%.
Over the past ten years, Ethiopia has shown positive growth in its GDP per capita and has been
growing at an average rate of 15%. Last year the GDP per capita increased by 9.5% to USD 794 (NBE
2016).
Ease of Doing Business

As shown in Table 1 below, the World Bank’s “Ease of Doing Business - 2017” report sheds light on
how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business in
compliance with relevant regulations. According to this report Ethiopia is ranked 28th among 48 Sub-
Saharan African countries and 159th among 190 countries in the world. It is ranked 170th on getting
credit and 179th on starting business indicators. Ethiopia has a better ranking than the regional
average in the following four indicators: Getting Electricity, Registering Property, Enforcing Contracts
and Paying Taxes.
5
National Bank of Ethiopia (2016), Annual Report 2015/16
6
6
Table: Ease of Doing Business in Ethiopia
Global Rank (out of 190 Sub-Saharan African Rank (out of
countries) 48 countries)
Overall Rank 159 28
Starting Business 179 41
Cons. Permit 176 40
Getting Electricity 127 12
Property Regis. 133 23
Getting Credit 170 42
Investor Protection 175 43
Paying Tax 90 20
Cross Border
167 34
Trading
Contract
80 6
Enforcement
Resolving
120 23
Insolvency
2.2 The Financial Sector
The Ethiopian financial sector mainly consists of banks, insurance companies, microfinance
institutions and, more recently, leasing companies. The financial sector is mainly dominated by the
banking industry, which accounts for 76% of the total capital of the sector, followed by MFIs with 15%.
The remaining 9% is held by insurance and leasing companies.
The banking sector consists of 1 development bank (Development Bank of Ethiopia), 1 state-owned
commercial bank (Commercial Bank of Ethiopia) and 16 private commercial banks. As of June 2016,
the private banks had 1927 branches and total capital amounting to ETB 22 billion (EUR 831 million)
7
compared to 1,260 branches and a total capital of ETB 21 billion (EUR 793 million) for public banks .
The Commercial Bank of Ethiopia is still the main actor in the banking sector, accounting for 32% of
total capital, 36% of the total branch network, 53% of outstanding credit and 66% of deposits mobilized
by the banking sector.
There is a total of 35 microfinance institutions with a total capital of ETB 9 billion (EUR 340 million).
MFIs currently serve over 11 million clients all over the country. As of June 2016, the total outstanding
credit and total savings stood at ETB 25 billion (EUR 944 million) and ETB 18 billion (EUR 680 million)
8
respectively . The five largest regional government affiliated MFIs (ACSI, DECSI, OCSSCO, ADCSI
and OMO) dominate the market and account for 84% of total capital, 88% of total credit and 93% of
total savings of the MFI sector.
The government of Ethiopia has recognized that access to credit is key to micro and small enterprise
development. Given their significant financial resources and market shares, the 5 regional government
affiliated MFIs are tasked with a leading role in the provision of credits to MSEs operating in their
respective regions. These MFIs are also expected to develop and adapt their different loan products to
micro and small enterprises at different growth stages (i.e. start-up, growth and maturity) in order
6
World Bank (2017), Doing Business Report
7
National Bank of Ethiopia (2016), Annual Report 2015/16
8
Ibid.
7
better to meet their specific financial needs. In response to the collateral problem, the government has
also established a regional credit guarantee fund with the 5 leading MFIs. The MFIs were able to
provide credit to micro and small businesses against the government guarantee during the GTP I
period.
Despite the promising growth of the sector, MFIs currently face a number of challenges, which include
limited access to funding, high operational costs, weak or inadequate MIS, high employee turnover
and limited management capacity/expertise.
2.3 The MSME Sector
The Micro, Small and Medium Enterprise (MSME) sector has emerged as a highly vibrant and
dynamic sector of the Ethiopian economy over the last decade. MSMEs not only play a crucial role in
providing employment opportunities but also contribute enormously to the socio-economic
development of the country, notably in their role as catalysts for the transition to an industrial society.
MSMEs are viewed as seedbeds for the development of medium and large enterprises. It is reported
9
that there are approximately 800,000 SMEs across the country.
In order to promote a broader, deeper engagement with MSMEs and help them fulfil their full
economic potential, the government published its first National Micro and Small Enterprise
Development Strategy in 1997. The main objectives of the strategy were to promote economic growth,
create sustainable jobs, strengthen collaboration among MSMEs and provide a platform for
transformation to medium and large enterprises.
Driven by the conviction that MSMEs are key to laying the foundations for industrial development, the
Ethiopian government placed them at the heart of successive poverty reduction and economic
development plans, including PASDEP, GTP I and GTP II.
Within the framework of PASDEP (Plan for Accelerated and Sustained Development to End Poverty),
which ran from 2005-2010, MSMEs were seen as the most promising avenue for job creation and
tackling pervasive youth unemployment. To achieve this objective, MSMEs received basic training
(such as business management, entrepreneurship and production techniques), upgraded business
development services and enhanced market linkages. By the end of the plan, a total of 167,835 MSEs
had created approximately 1.46 million employment opportunities (MoUDC, 2011).
PASDEP’s successor, the first GTP (Growth and Transformation Plan), also prioritized MSME
development and sought to scale up support. During GTP I (2010-2015), ETB 16.4 million (USD
689,000) was disbursed in loans to MSMEs and more than 7 million employment opportunities were
created (MoFEC, 2016).
Finally, the second Growth and Transformation Plan (GTP II - 2016 to 2020) continues to prioritize
MSMEs but places greater emphasis on manufacturing, increased productivity and competitiveness.
GTP II aims to disburse ETB 21 billion (USD 904 million) in loans to MSMEs through MFIs and
stimulate the creation of 8.4 million jobs.
In line with the targets and objectives set out in the first Growth and Transformation Plan (GTP I), the
National Micro and Small Enterprises Development strategy was revised in 2011 with ambitious
9
Addis Fortune newspaper (September 2016), Interview with Asfaw Abebe, Director of Small and Medium
Manufacturing Industry Development Agency
8
targets on employment creation and transition to medium size enterprises. This strategy defined the
different stages of enterprise growth and the type of government support required for each stage in the
following manner:
 Startup stage: organization in a group , finalizing of licensing (established as association or

10
private company), development of business plan, receipt of working premises and launch
operations.
 Growth stage: effective use of inputs, competitiveness (price, quality and supply), sustained
profitability, increase in assets and manpower (larger than at start-up), use of book-keeping
system, etc.
 Maturity stage: In addition to fulfilling the above conditions, enterprises make additional
investment and meet the conditions for graduating to the next higher level.
In addition to creating a working environment conducive to the growth of the sector, the government of
Ethiopia provides direct policy support to micro & small business operators through different
implementing agencies. This support includes access to working space (sheds constructed by the
government), access to markets (linkages), access to finance (guarantee provision), access to
industrial extension (various business development services such as market linkages and technical
support) and access to training & advanced technology.
Key Stakeholders
The Micro and Small Enterprises Development Strategy established an institutional framework
whereby MSEs could interact with other stakeholders such as government agencies, MFIs and
Technical Vocational Education and Training (TVET) centers. MSE development in Ethiopia is
therefore promoted through the interaction of these various stakeholders.
As the main actor in the sector, the federal government formulates strategies and policies through the
Ministry of Urban Development and Housing. The main role of the Ministry is to draft and enforce
MSME related policies and regulations, but it is also mandated to provide services directly, including
advisory services, information provision and training to other executing agencies, at both federal and
regional level.
The other key national MSME stakeholders are:

 The Federal Urban Job Creation and Food Security Agency (FUJCFSA), which is responsible for
supporting, coordinating and building the capacity of regional institutions assisting micro
enterprises;
 The Small and Medium Manufacturing Industry Development Agency (SMMIDA), which is
accountable to the Ministry of Industry and is responsible for supporting small and medium sized
manufacturing industries;
 The TVET Agency, which is responsible for the provision of MSME training in the areas of job
11
creation, innovation, KAIZEN management methods, quality control, design and maintenance;
 Microfinance Institutions (MFIs), which are responsible for developing appropriate financial
12
products to MSMEs based on their respective growth stages . They are also mandated to promote
10
The strategy requires that a minimum of 5 people organize as a group and form an enterprise. This would make
them eligible for MFI credit facilities with less stringent collateral requirements.
11
KAIZEN is a Japanese management tool designed to continuously improve organizational activities and
processes to achieve high levels of customer satisfaction through improved quality of products and services. The
Ethiopian Ministry of Trade set up the KAIZEN Institute in 2011 with support from the Japanese International
Cooperation Agency (JICA). Since then KAIZEN has been implemented across different industries and
manufacturing sectors in the country.
12
The Strategy identified 3 types of MSE based on stage of growth: start-up, growth and maturity
9
a savings culture among MSMEs and ensure that MSMEs draw up financial reports in order to
facilitate access to credit.
These stakeholders coordinate with each other to provide MSMEs with the necessary support
packages. For instance, the former Federal Micro and Small Enterprise Development Agency
(FEMSEDA) together with regional micro and small business development agencies and other key
13
stakeholders established One-Stop Shop (OSS) centers in woredas throughout the country. OSS
services are designed to provide the necessary business support at a single point of service. This
includes business registration, credit and saving services, provision of work and commercial spaces
and creation of market linkages. Although there are some differences in the implementation of OSS
support across regions, the three following actors are frequently present in the OSS to provide MSMEs
14
with support :
 MFI loan officers to deal with saving and credit issues;

 Industrial extension experts from TVETs to respond to training needs
 Regional MSME development officers to facilitate and coordinate support packages and to handle
any problems that arise during the day-to-day operations of OSS.
Officers from these institutions combine their expertise to address MSME needs and are able to do so
without any bureaucratic hurdles.
Even with the support packages mentioned above, lack of access to adequate finance remains the
most critical constraining factor for MSME growth. Various studies show that the principal challenge of
creditworthy MSMEs in accessing credit is lack of acceptable and/or sufficient collateral. Furthermore,
most MSMEs do not have a credit history with banks and are not used to dealing with big financial
institutions. Banks are therefore reluctant to provide loans to MSMEs. According to the World Bank
Enterprise Surveys Report (World Bank, 2015), 40% of enterprises included in the survey identified
access to credit as a major business constraint in Ethiopia. The survey also revealed that only 33% of
15
respondents had a bank loan or line of credit .
With a view to improving access to finance for small and medium sized enterprises, the government of
Ethiopia introduced a lease financing mechanism through the Development Bank of Ethiopia in 2016.
DBE restructured its operations in such a way that 70% of its resources are now allocated to providing
lease financing to small and medium enterprises (with a total capital between ETB 550,000 and 7.5
million (EUR 21,000 to 281,000)) engaged in manufacturing, agro-processing, tourism, construction
and mining.
The lease amount ranges between ETB 1 million and 30 million (EUR 38,000 to 1.1 million). DBE
covers 100% of the cost of machinery while small and medium enterprises are required to cover the
working capital (estimated at 20% of the cost of machinery). Lease terms are more favorable than loan
terms for the following reasons:
 No collateral is required
 The interest rate is relatively lower at 9%
13
Districts or woreda are third-level administrative divisions (after regions and zones) and are further subdivided
into wards (kebele) or neighborhood associations, which are the smallest level of local government in Ethiopia.
14
Assefa et al (2014), Identifying Key Success Factors and Constraints of Ethiopia’s MSE Development: An
Exploratory Research, EDRI Research Report.
15
The World Bank (2015), The Enterprise Surveys: What Businesses Experience. Retrieved from
www.enterprisesurveys .org
10
 Tenure: > 5 years
 Smaller down payment requirement = 20%
3. SGB Characteristics
3.1 Personal and Family Characteristics
The study consisted of individual interviews with 45 clients of 3 MFIs: AdCSI, Agar, and Vision Fund
Ethiopia (VFE). The distribution of respondents among the 3 MFIs was as follows:
MFI No. Respondents (n=45)

AdCSI 16 (36%)
Agar 14 (31%)
VFE 15 (33%)
Age and gender distribution

The 45 SGBs included in the study were predominately owned by male entrepreneurs: 38 owners
were male (84%) and 7 female (16%). Female business owners were on average 5 years older than
their male counterparts (41 years old compared to 36 for men). The findings suggest that the age of
SGB owners could influence the time needed to grow their businesses. Older entrepreneurs are more
experienced and have experienced a wider variety of business challenges, but younger entrepreneurs
appear to need less time to grow their businesses.
The average time required for younger entrepreneurs (those less than 37 years old) to “graduate” their
business was 3.2 years compared to 4.5 years for entrepreneurs aged 37 and above. One potential
explanation for the faster graduation time for younger business owners is that they have a greater
appetite for risk and higher aspirations, and are more likely to commit to working longer hours than
older entrepreneurs. The government of Ethiopia also encourages young people to organize
themselves in groups and establish micro and small enterprises. The government may have
contributed to the more rapid growth of MSMEs owned by younger entrepreneurs, notably through the
provision of different types of support, including allocation of work spaces, increased access to
finance and market linkages.
Education levels
Level of education seems to be the key determinant of the amount of time required to grow a business
from a micro to a small or medium sized entity. The average growth time for university educated
business owners was 2.5 years while it took 4 and 4.3 years for college and high school educated
entrepreneurs respectively. This could be because entrepreneurs with higher education levels are
able to manage their firms more professionally and have stronger communication skills than
entrepreneurs with lower education levels. This confirms the findings of the research carried out by
Tiruneh (2011) with 62 MSEs in Addis Ababa, which showed that MSEs owned by entrepreneurs with
TVET education levels and above demonstrated stronger performance (in terms of capital increase
16
from time of establishment) than businesses with less well educated owners (Tiruneh, 2011) .
17
Similarly, a study conducted by Wasihum and Paul (2010) in Addis Ababa reported that
16
Tiruneh Abebe (2011), Analysis of the Success Factors of Micro and Small Business Enterprises in Addis
Ababa (Master’s Thesis), Addis Ababa University.
17
Wasihun R, Paul I(2010, Growth Determinants of women operated micro and small enterprises in Addis Ababa.
Journal of sustainable Development in Africa
11
entrepreneurs with higher education levels were better able to make wise, rational business
management decisions that positively impacted enterprise growth.
Overall, SGB owner education levels ranged from secondary school to university. One third of
respondents were university educated and more than half (58%) did not graduate from college (i.e.
they had primary, secondary or TVET schooling). This indicates that the MSME sector attracts
individuals without college or university diplomas and that most of the owners achieved their current
level of education before establishing their businesses.
Several SGB owners with tertiary education indicated that their education helped them to conduct
market research in order to understand the market and adjust their products & services accordingly.
They claimed that this enabled them to grow their businesses and generate more revenue.
Marital status, children, and dependents

Most SGB owners were married with an average of 2 children and 4 dependents. 69% of the
respondents were married (66% for men, 86% for women) and in 62% of cases their spouse was not
directly involved in the business and worked outside the home. The average of 2 children per
household is in line with the decreasing trend in fertility rates observed in Ethiopia since the 1990’s
18
and is also consistent with the estimated fertility rate of 1.7 in Addis Ababa (BBC, 2015) . Therefore,
the number of children/dependents does not appear to be a factor contributing to business success
outside the fact that fewer dependents generally means that owners can spend more time on business
activities.
Prior business experience

Most SGB owners started their business after gaining experience in similar fields. 39 respondents
(87%) indicated that they had prior business experience either as employees in private and
governmental organizations or in running their own micro businesses (other than the business they
were currently operating). 24 respondents (62%) reported that they gained experience by working for
companies engaged in economic activities similar to those offered by their current businesses.
The average prior business experience was 8 years although there is a significant discrepancy
between men (7.6 years prior business experience on average) and women (3.3 years).This finding
reflects the fact that women in Ethiopia tend to carry the burden of household obligations, which limits
the amount of time they can allocate to economic and other productive activities. Women also have
limited access to and control over resources. Although women have less business experience, they
19
were able to grow their businesses faster than men which suggests that given the same
opportunities, they may be better able to manage and grow a business.
3.2 Business Characteristics
Owner = manager?
The SGBs surveyed were managed by their owners. The interviewees indicated that they did not trust
others enough to allow them to manage their business. They expressed a clear need to maintain
complete control over business operations, including purchasing, marketing, sales and employee
management. This feedback is common when interviewing businesses in Ethiopia as it is still rare to
find an MSME that is managed by a salaried professional manager.
18
BBC (2015), Why Ethiopian women are having fewer children than their mothers. Retrieved from
http://www.bbc.com/news/world-africa-34732609
19
A little less than 3 years for women compared to a little more than 4 years for men
12
Managing multiple businesses
Owners of more than one business managed two businesses on average and took a full year longer to
graduate their core business than single business owners (4 years vs 3 years). Because of this
diversification and lack of delegation, multiple business owners cannot focus as much on their core
business.
Sample distribution across economic sectors

The economic sectors of the businesses surveyed were distributed as follows:
Economic sector Percent respondents (n=45)

Trade 20%
Service (23 SGBs) = 51%
Services 31%
Manufacturing 36%
Industry (22 SBGs) = 49%
Construction 13%
As indicated in the table above, all of the SGBs interviewed were engaged in governmental priority
sectors due to their huge potential for urban employment creation. The government believes that the 5
priority sectors (manufacturing, construction, urban agriculture, trade and service) play a crucial role in
reducing poverty, promoting entrepreneurship and laying the foundation for industrial development.
Enterprises organized through OSS and the MSE Development agency and engaged in priority
sectors are entitled to receive multifaceted government support such as business registration, credit
facilitation, work space provision, market linkages and industrial extension services.
Years of operation of current business

The overall average time for which businesses have been in operation is 7 years, with an average of 7
years for male respondents and 6.4 for female respondents.
From Maid to Made: At the beginning, she had nothing, not even hope…
20
Aynalem never believed that she could make a good life for herself working in her homeland.
Instead, she decided to fulfil her dream of travelling to the Middle East to engage in domestic work
and earn a better living. Aynalem worked in Beirut for 4 years as a maid for a rich family. However,
since she did not have a valid visa, her employer refused to pay her the salary she had
accumulated over 2 years and eventually reported her and had her arrested by the police. She was
sentenced to 6 months in prison for working without proper documentation and deported to back to
Ethiopia in 2015.
"At first, I thought I was going to change my life and that of my family. Unfortunately, I ended up in
prison and came back home empty handed.”
Unlike her employment history, her time in jail proved to be a fortunate turn of events. While she
was in prison, she received vocational training in fashion design and sewing. She was smart
enough to make use of the training as soon as she returned home. She started her business with
ETB 15,000 (EUR 565) worth of savings by acquiring a sewing machine and the necessary raw
materials. She began making t-shirts and tights for women in rented premises.
At that time, the government started an initiative to help returnees from Middle East by organizing
them as MSEs and providing them with workplaces (sheds) and other support services (facilitating
access to finance, business registration, training etc.). The idea seemed absurd compared to her
dreams of earning a better salary in Beirut, but she steeled herself and pushed the business
20
The name of the SME owner has been changed to protect clients’ identities.
13
forwards with the support of the government and MFI.
To expand her business, she borrowed ETB 170,000 (6,400 EUR) from a close friend and invested
in more sewing machines and raw materials. She subsequently recruited 30 female returnees and
trained them in fashion design and clothes making and gave them the opportunity to work in her
business. Her factory became a haven for returnees who were confused and did not have any idea
what they were going to do next. To date, she has created job opportunities for 42 young people
who returned empty handed from the Middle East.
Early on, she had difficulties selling her product in the local market due to branding. She used to
label her products “Made in Ethiopia”. Due to
customer perceptions about the quality of
Ethiopian products, her product was not
selling in large quantities. After recognising
the problem, she changed the label from
“Made in Ethiopia” to “EKO Fashion”. Thanks
to the change in label and the high quality of
her products, she gained acceptance from
the market in a short period of time and
sales shot upwards.
Aynalem borrowed for the first time in 2015

with a loan of ETB 400,000 (about EUR
15,000). She used the entire amount to
purchase sewing machines and raw
materials. Although the tenure of the loan
was 36 months, she was able to pay it back
within 4 months. She only borrowed twice. The last loan she took out was for ETB 700,000 (about
EUR 26,000) and she utilized the entire amount to purchase raw materials. She claimed that the
collateral requirement was the biggest bottleneck in accessing credit from MFIs.
Aynalem is now in her mid-thirties and is passionate about her job. She spends most of her time
managing her business. She acts as manager, purchaser, trainer, machine operator and designer.
21
Based on the graduation recognition system of the Regional SME Development Agency , it took
her only 1 year and 9 months to graduate the business from a micro to a medium enterprise. She
received advanced training from TVET in fashion design, machine operation, business management
22
and KAIZEN . She has a Certificate of Competence (CoC) in garment and apparel from the Addis
Ababa TVET Bureau.
Aynalem lives with her 2 children and mother in a condominium she bought a year ago. She used
the condominium as collateral when she took out her last loan in 2016. She covers the living costs
of her children, mother and 3 other family members.
Aynalem aspires to expand her business and hire up to 40 additional employees. To do that she
would need a loan of ETB 1.5 million (EUR 56,500). However, she does not think that she will
obtain the amount she needs from MFIs due to strict collateral requirements.
Start-up financing
An overwhelming 91% of respondents started their business with either their personal savings or a
combination of savings and family support. Only 4 respondents (9%) indicated they started out with a
21
In terms of total capital/assets MSEs in the industry sector are required to have more than EUR 60,000 while
MSEs in the service sector should have more than EUR 20,000 worth of capital.
22
Kaizen is the Japanese word for "continual improvement ". In business, kaizen refers to activities that
continuously improve all functions and involve all employees from the CEO to assembly line workers.
14
loan from an MFI plus their savings. Some of the respondents disclosed that they borrowed from close
friends or family free of interest. From the findings of the study, it can be concluded that loans from
friends/families, personal savings, and Iqqub (informal saving associations established by a small
group of people in order to provide substantial rotating funding for members) are the major sources of
finance for start-up businesses. Given that it is the policy of almost all MFIs only to serve businesses
that have been in operation for at least six months and have saved 20% of the loan amount over a
similar period, this finding is not unexpected. Start-up seed money must come from outside financial
23
institutions. This supports the findings in Haftu et al , which looked at 1,000 micro and small
enterprises in 6 regions of the country and found that personal savings (58%) and family support
(15%) were the main sources of start-up capital.
Domestic vs. international markets

The vast majority of the SBGs interviewed sell their products exclusively to the domestic market. Only
one SME, engaged in the production of finished leather, serves both domestic and international
markets. This is also the only company which indicated that sales did not grow over the past 12
months. The respondents in the manufacturing sector were asked about the main constraints that
prevent them from selling their products in the export market. Almost all declared that lack of export-
related information and shortage of capital were the main entry barriers. This corroborates the findings
of Yehualashet and Chiloane-Tsoka (2015), who find that lack of market information, logistics and
more functional factors (i.e. lack of managerial capability and lack of financial resources) are the main
obstacles to greater MSME involvement in exports.
Main start-up challenges

The main challenge faced by 89% of respondents in establishing their business was access to finance
due to insufficient collateral. This barrier to entry explains why such a high percentage (91%) not only
launched their business with their own savings, Iqqub, and family support but almost certainly had to
self-finance the entire start-up phase before they could access formal finance.
Formal registration
The SGB owners interviewed appreciated the benefits of formalization and registration. All the
respondents stated that they were formally registered because registration improved access to
suppliers, clients, and government support services; in certain cases it was due to a fear of penalties
from the authorities.
The findings of this study accurately reflect the reality of the Ethiopian MSE sector. According to a
study conducted by the Ethiopian Development Research Institute (EDRI, 2014), most MSMEs in
Ethiopia are formally organized and properly licensed. As a result, informal firms are being organized
and provided with working space and business development services. According to the 2011 Urban
Employment survey conducted by the Central Statistics Agency (CSA 2011), MSE owners indicated
that they were unable to exploit their full production capacity due to inadequate work and storage
spaces. The government of Ethiopia formulated a strategy to alleviate these problems. This was
achieved through the construction and provision of standard work and commercial premises (sheds) to
a number of formally registered enterprises. The premises are located in close proximity to the
industrial clusters where medium and large scale enterprises are located. This was done in order to
facilitate market linkages between micro & small enterprises and medium and large enterprises.
MSMEs are encouraged to participate in government procurements and benefit from exemptions in
terms of payments for bid documents and in the provision of bid guarantees issued by banks. For
these reasons, most Ethiopian MSMEs are formally registered and licensed.
23
Haftom and et al (2009), Financial Needs of Micro and Small Enterprises in Ethiopia, Occasional Paper No 24,
AEMFI.
15
Length of time to graduate from one business size to another
The average time taken to graduate from a micro to a small or medium sized business was 3 years. 37
of the 45 respondents (82%) stated that the time to graduate was no longer than expected. For this
group, the average time to graduation was 3 years. For the 8 SGBs who felt that it took them longer
than expected, the average time to graduation was 7 years. For 75% of the respondents in this group,
the main critical factors leading to graduation were non-financial factors (including character (hard
work, resilience and trustworthiness), support from family and friends, and external government
support (increased access to work spaces and market linkages)). The other 25% cited both financial
and non-financial factors as critical for graduation.
Under the MSE Development Strategy, micro and small enterprises are supposed to graduate to
medium size in 5 years as from start-up. Therefore, the maximum period for which enterprises are
allowed to operate in the government-provided shed is 5 years. Those enterprises which are able to
grow into medium-size enterprises will be provided with another working space in an industrial zone or
will be provided with land at an affordable lease price on which they can build their own workshop.
Those that do not grow into medium-size enterprises must leave the cluster, but other support services
such as provision of finance, training, information, and market linkages continue for another 2 years.
The regional MSE Development Agency is mandated to follow-up on the growth stage of MSEs and
act in accordance with the directions stated in the strategy.
16
“Where there is a will, there is a way”: Amazing transformation
Noises from different machines can be heard inside a big compound which contains a number of
sheds constructed by the government for MSEs engaged in wood and metal work. One of the sheds
is owned by the visionary entrepreneur, Dereje Gizaw, who started his wood and metal work
business as a micro-sized enterprise 12 years ago.
24
Dereje is 41 years old. He was raised in a poor family whose entire lives were dependent on the
income from his father’s job as a security guard in a private company. Dereje attended a nearby
public school and continued his education until the age of 10. He dropped out of school at 17 to
work as a taxi driver assistant and later as a taxi driver. It was the best he could do to financially
support his family. He earned 20 to 50 birr per day (EUR 1 to 2) and used the whole amount to
cover the cost of his family’s daily basic necessities.
Like many taxi drivers and their assistants, he

started to consume khat and alcohol at a young
age as a way to cope with boredom at work. Over
time, he was drawn deeper into this habit and
finally became addicted. He was no longer able to
provide financial support to his family as the
income he earned was not even enough to buy
khat and alcohol for his daily consumption.
“I was a cigarette, khat and alcohol addict. For a

long time, my addiction dominated my life and hurt
myself and the people around me.”
His parents, frustrated by his addiction, made him

quit his taxi driving job and asked a neighbour who
had a furniture making business to hire Dereje as a
driver. The neighbour agreed and hired Dereje as a
driver and salesperson. While he was working
there, he used to see how workers were making
furniture and doing other woodwork. He acquired
some skills and experience in furniture making, but the owner fired him after a year because of his
addictions and poor performance at work.
After he lost his job, his father borrowed ETB 700 (EUR 26) from a close friend for Dereje to buy
some basic carpentry tools and start making simple wood products for household use at his parents’
house. However, his addiction continued to consume him and he spent the advance payments
received from customers to satisfy his needs for khat and cigarettes.
Despite these repeated failures, his family did not give up on him. They helped him to recover from
his addictions. Once he understood that his addictions were causing great pain to his family, he
decided to try and find himself. After a long, hard struggle, he finally succeeded in overcoming his
dependence.
In 2005, he established his woodworking business with an initial capital of ETB 5,000 (EUR 190),
24
The name of the SME owner has been changed to protect clients’ identities.
17
which he received in the form of a loan from a close family friend. After the registration of his
business as a micro enterprise, the Wereda MSE Development office provided him with a work
space. He produced different types of wood and metal products for households and cafeterias. He
started out with 2 employees who had been trained in woodwork from TVET. The products were of
high quality and were accepted by the market within a short period of time. In 2011, the total capital
of the business reached over ETB 1.5 million (approx. EUR 56,000) and the business graduated
from a micro to a medium-sized enterprise.
For his accomplishments in the business, Dereje was presented with a certificate of recognition
from the hands of the late Prime Minister, Meles Zenawi. He was also given the opportunity to
2
acquire the usage and construction rights on a 1,000 m plot of land from the government at a price
of ETB 280,000 (EUR 10,500) to build his own workshop. Currently, the total capital and annual
turnover of the business stands at ETB 4 million (EUR 150,000) and ETB 2 million (EUR 75,000)
respectively. The business now employs 16 people.
For his first loan, Dereje borrowed ETB 50,000 (EUR 1,900). The whole amount was used to
acquire fixed assets and raw materials. Last year, Dereje borrowed ETB 500,000 (EUR 19,000)
from the same MFI to buy additional machinery and lay down the foundations of a workshop that he
is building on a 1,000 sq. meter plot of land he acquired from the government.
Today, Dereje is married with four children. His wife works in his company as an assistant
accountant. She is studying accounting and will become head accountant of the company upon
completion of her studies. Dereje received assistance from the Wereda OSS (One-Stop Shop) in
the form of working space and training on business development, Kaizen, bookkeeping and
entrepreneurship.
Dereje envisages borrowing ETB 2 million (EUR 75,000) to complete his expansion plans. He
anticipates finishing the construction of the workshop within the next couple of years and wants to
expand to manufacturing car bodies. However, he believes that it’s unlikely that he’ll be able to
finish the workshop within the expected timeframe as the collateral available to him to pledge is
insufficient to borrow the amount needed.
Employment Creation
The businesses surveyed were launched with an average of 3 employees and have multiplied their
workforce by a factor of 6. Out of the 769 job opportunities created by these businesses, 44% were
created in the service sector, 38% in manufacturing, 9% in construction and 8% in trade. Most
importantly, 93% of the total number of jobs created are for non-family workers, indicating that these
businesses have demonstrated the will and ability to manage employees and are also capable of
handling the associated costs and risks. Finally, the majority of these jobs are occupied by
unemployed youths whose wages are primarily determined by their level of experience.
Initial Start-up Current Change

Sector Total # of Average # Total # of Average # of Total # of Average #
Empl. of Empl. Empl. Empl. Empl. of Empl.
Trade 14 2 65 7 51 5
Service 68 5 338 24 270 19
Manufacturing 41 3 295 18 254 15
Construction 13 2 71 12 58 10
Total 136 769 633
18
29 respondents (65%) indicated that they considered only prior experience as a basis for determining
employees’ wages, and 14 respondents (31%) stated that they used a combination of education level
and experience. The remaining 2 respondents (4%) used neither experience nor education level nor a
combination of both to determine salaries. These enterprises usually hire unemployed youths (whose
ages range from 18 to 25) and determine wages based on personal judgement. The respondents
indicated that permanent employees were part of a pension plan where employers contributed the
equivalent of 11% of the gross wage and employees 7%. All employees are entitled to overtime
payments. Respondents in the service sector also indicated that they paid commission to employees
who brought in new clients. However, none of the respondents appeared to provide housing
allowances and/or health insurance.
“When one door closes another opens” – A story of bouncing back from failure
25 th
When Helina discovered her career and business interest five years ago, she was an 11 grade
student. She was born and raised in a poor family who struggled greatly to meet their daily basic
needs. Helina is a visionary who was able to recognise her natural gifts so she did not hesitate to
base her life on her dream. After high school, she enrolled at Addis Ababa University to study
marketing management. However, she dropped out of university after 1 year to pursue her dream
26
of establishing a successful “Enjera” making business.
“On my way back from school, I used to see people buying “Enjera” from local shops every day. I
understood that “Enjera” is a daily need for 95% of Ethiopians. I developed a strong interest in
entering the business. I remember how jealous I was of the people who were in the business. At the
time, I was thinking that it would be me making the “Enjera”- I did not know that I would have to hire
a professional “Enjera” maker; above all, I couldn’t imagine that gaining a client’s trust would be
such a big challenge as long as I produced quality “Enjera.”
Helina contacted the Wereda MSE Development office to support her with work premises and
financial support. The officials at the MSE Development office requested that she partner with other
people and register as a formal (micro) business. She mobilised two partners who shared a similar
ambition and they launched their first cafeteria in 2013 with a total capital of ETB 15,000 (EUR 566)
(each partner contributed ETB 5,000 (EUR 189). At that time, Helina had ETB 2,000 (EUR 75) in
her savings account and borrowed the remaining ETB 3,000 (EUR 112) from friends.
Upon submission of all the required documentation and proof of establishment, the MSE office
allowed Helina and her partners to use the Wereda’s cafeteria along with the equipment and
furniture. They began serving beverages and good quality food at fair prices. Although the original
plan was to make and sell Enjera, Helina temporarily set aside her idea due to a lack of adequate
finance and proper working premises. Therefore, the only option she had was to start the café
business and save enough money for the Enjera business.
A few months later, Helina borrowed ETB 50,000 (EUR 1,900) for the first time from her MFI. The
loan was used to acquire raw materials for the cafeteria. Although the loan tenure was 24 months,
she was able to pay it back within a few months and took out a second loan of ETB 100,000 (EUR
3,800) from the same MFI.
“The loans we received from the MFI helped us to increase our service provision capacity but also
accelerated our business growth as we became a small sized enterprise in less than a year.”
25
The name of the SME owner has been changed to protect clients’ identities
26
Enjera is Ethiopian flatbread made out of “Teff” flour. It is consumed daily in almost all households.
19
Before their business celebrated its first year, Helina and her friends were able to increase their total
capital to ETB 500,000 (EUR 19,000). With this capital amount, their business graduated from a
micro to a small-sized enterprise. Following this graduation, the Wereda MSE development office
ordered them to hand over the Wereda’s cafeteria to other micro enterprises. This unexpected
decision by the Wereda office put the business at risk of liquidation due to the fact that the capital
they had at that time was insufficient to cover 6 months’ rent along with the necessary furniture and
equipment expenses. Unfortunately, with no solution in sight, the business came to an end after
operating successfully for 15 months.
Although the failure was a painful experience and knocked the wind out of her sails, it opened up
new opportunities for her to start over and refocus on her dream. Helina was not discouraged by
what happened. Instead, she immediately launched an “Enjera” making business in her family’s
small kitchen using a single “Enjera” making stove. She hired 2 employees to help her in “Enjera” in
producing and distributing the Enjera to customers. The initial production capacity of the business
was 300 “Enjera” per day.
Socio-cultural stereotypes towards young female business owners were the most difficult challenge
that she faced at the initial stage of the business. Her family did not trust that she would be able to
run the business, customers hesitated to buy from her, and friends advised her to go back to college
instead of spending precious time on this ‘ridiculous’ business idea.
Despite the negative feedback, Helina continued pushing her business forward. Her nephew was
the only family member who always stood by her. Helina says that her strength lies in her capacity
to face criticism and overcome challenges. As a result of her determination to live her dream, the
total capital of the business reached over ETB 800,000 (EUR 30,000), with an annual turnover of
ETB 500,000 (EUR 19,000).
Currently, she runs the business in rented premises and employs more than 20 previously
unemployed youths including “Enjera” makers, drivers, sales staff, and an accountant. She supplies
4,000 “Enjera” daily to hotels and embassies. She supported her business with a loan from her MFI.
Her last loan amounted to ETB 100,000 (EUR 3,800), which she utilized to purchase raw materials.
The business is growing and now requires a larger work space and additional vehicles for product
delivery. She currently requires ETB 1 million (EUR 38,000) in loans to acquire working space and
additional “Enjera” making stoves. If she could obtain the amount she needs, she would hire an
additional 20 employees. However, she does not think that she can secure the funding from MFIs
as she does not have sufficient collateral to meet the requirements.
Helina, who is just 23 years old, is the bread-winner in the family. She lives with her parents and
financially supports her brothers and sisters. Once she made sure that her business could stand on
its own two feet, she returned to college to finish her studies. She will earn her degree in Marketing
Management within the next 3 months.
20
3.3 Financial Service Use
Amount and tenure of first loan

The average amount for first time loans among all respondents was ETB 120,285 (EUR 4,810), with
averages of ETB 142,500 (EUR 5,700) for the industry sector and 132,500 (EUR 5,300) for the service
sector. The average loan term was 20 months. The table below summarizes the amounts and tenures
of first loans per sector:
Loan Amount Tenure (in months)

Sector
Average Max Min Average Max Min
Industry (Manuf. & Const.)
142,500 500,000 5,000 22 36 6
n=22
Service (trade & service)
99,043 500,000 5,000 17 36 6
n=23
Total
120,285 500,000 5,000 20 36 6
n=43
The average loan amount for female-owned enterprises was ETB 178,286 (EUR 7,130), with a tenure
of 24 months. The corresponding figures for male-owned enterprises were ETB 109,605 (EUR 4,380)
and 19 months respectively. The higher average loan amount for women is almost certainly
27
attributable to the WEDP project (Women Entrepreneurs Development Project), which has been
facilitating a cash-flow based loan appraisal methodology for MFIs targeting women entrepreneurs.
In terms of loan size, more than half of the SGBs reported that the amount of their first loan was
greater than ETB 50,000 (EUR 1,900). 86% of women stated that they accessed more than ETB
50,000 for their first loan while for men the figure was 50%.
Amount of first loan

< ETB 50,000 > ETB 50,000
All SMEs 20 SGBs (44%) 25 SGBs (56%)
n=1 n= 6
Female-owned SGBs (n=7)
14% 86%
ETB 30,000 ETB 203,000
Average loan size for Female
EUR 1,200 EUR 8,120
n=19 n = 19
Male-owned SGBs (n= 38)
50% 50%
ETB 31,500 ETB 187,600
Average loan size for Male
EUR 1,260 EUR 7,504
Ethiopian MFIs primarily determine loan size based on the value of collateral as opposed to the
creditworthiness or cash flow potential of the client and project. One SGB owner reported that he was
able to access ETB 500,000 (EUR 20,000) from AdCSI in his first loan application against collateral of
a residential building and vehicle worth more than ETB 2 million (EUR 75,000). He claimed that the
amount was well above the usual first loan amount provided by the MFIs because of the value of the
collateral he had pledged.
27
WEDP is a USD 50 million World Bank project scheduled over a 5 year period (2013 to 2017). The objective of
the program is to increase the earnings and employment of Micro and Small Enterprises (MSEs) owned or partly
(+50%) owned by women entrepreneurs. The World Bank provides concessional loans to the Development Bank
of Ethiopia, which in turn provides wholesale loans to MFIs to finance women-owned MSMEs.
21
28
However, several projects (such as CapitaLink and WEDP) have provided comprehensive capacity
building services (including tools and training) to MFIs for the implementation of cash-flow-based loan
appraisal methodologies. This has led some MFIs to lower their collateral coverage levels, particularly
for long-term clients, increase first-time loan amounts (prior to 2005 MFIs would only provide a
maximum of ETB 10,000 (EUR 400) for a first loan), and maintain their portfolio quality (as measured
by PAR).
Number of loans taken

Twenty-two respondents (49%) indicated that they had borrowed 1 to 3 times while the remaining 23
respondents (51%) had borrowed between 4 and 10 times. The average number of loans accessed by
a single business was 4. Furthermore, the respondents all indicated that they intended to borrow
again. Since these businesses are expanding and growing, continued access to finance is
undoubtedly necessary. However, it would be worth studying at what growth stage, if any, a business
either sporadically needs external finance or no longer needs it at all. More specifically, does this
mean that MSME “drop-outs” (i.e. clients that either stop borrowing or cease to “chain-borrow”) are
businesses that are in decline, or are they businesses that have reached a level of self-sustainability
and are able to finance their growth needs internally? As the current economic growth ratio in Ethiopia
remains in double-digits, the opportunity may be ripe to delve deeper into these questions.
Loan purpose
44 respondents (98%) claimed that they used 100% or at least more than 80% of the loan amount for
business purposes (i.e. working capital or fixed asset financing). Only a single respondent indicated
that half of the loan was used to finance other family businesses. It is quite common for micro
businesses to divert a large portion of a loan towards household consumption, but this study indicates
that SGBs can basically be counted upon to use the entire loan amount for the purpose stated in the
application. For a lending institution, knowing that their financing will be used as intended vastly
diminishes the risk of default due to misuse or deviation of funds, further underlining that small and
medium sized business clients are potentially more reliable and less risky than micro level clients.
Respondents were also asked about the purpose of the last loan that they had accessed from MFIs. A
sizeable portion of the respondents (69%) indicated that they borrowed to finance their working capital
needs. Respondents also mentioned that savings (retained earnings) were the primary source of
financing, followed by credit from MFIs and advance payments from customers.
Amount of last loan

The average amount of the last loan received by the 45 respondents was ETB 316,000 (EUR 11,900),
with ETB 554,000 (EUR 21,000) for female-owned enterprises and ETB 276,000 (10,400 EUR) for
male-owned enterprises. The average loan term for all respondents was 24 months. SGBs in the
industry sector received an average of ETB 366,000 (EUR 13,800) while their counterparts in the
service sector accessed an average of ETB 268,000 (EUR 10,000). The significant difference in the
average loan sizes can be explained by the fact that SGBs in the industry sector invest more in
capital-intensive activities such as acquisition of fixed assets (machinery and equipment) than service
sector SGBs, which primarily need financing for working capital. The table below summarizes loan
amount and tenure by sector and gender:
28
CapitaLink is a EUR 6 million microfinance refinancing guarantee facility funded by KfW and implemented by a
consulting consortium comprised of First Consult and Enclude B.V. The project provided partial guarantees to
banks to provide wholesale loans to MFIs to strengthen their lending to MSEs The guarantee facility was
augmented by a mandatory technical assistance to participating banks and MFIs.
22
Tenure of Last loan
Sector/Gender
Average Average
Industry (n=22) 366,000 26

Sector
Service (n=23) 268,000 23
Female-owned (n=7) 554,000 29

Gender
Male-owned (n=38) 276,000 23
Ease of Access to Loans

18 respondents (40%) reported that they had been denied loans from MFIs due to a lack of adequate
collateral and inability to meet the pre-loan saving requirements. Similarly, 23 respondents (51%)
claimed that loan terms had become more restrictive over time, particularly in terms of loan size and
collateral requirements.
When pressed further, the respondents clarified that the MFIs did not seem to take positive credit
histories or business performance into account when determining the terms and conditions on
subsequent loan requests. Despite good past repayment records, MFIs continued to require the
equivalent collateral coverage levels and frequently approved and disbursed lower loan amounts than
requested. MFIs justify this policy as a way of serving as many clients as possible with limited
resources. Unfortunately, this approach creates a cat-and-mouse dynamic whereby the client ends up
asking for more than is needed knowing that the MFI will approve a lower amount. Ultimately, perhaps
things even out. However, since loan amounts are still bounded by the collateral coverage capacity of
the client a loan size bottleneck is created, possibly limiting the growth potential of SGBs.
Use of non-credit bank services

All the respondents indicated that they used services provided by banks. 40 of the 45 SGBs (89%)
have at least a savings account at banks, while 44 of the 45 SGBs (98%) have a current account, use
transfer services, and have a debit card for access to ATMs. However, none of the respondents
accessed credit from banks.
The main reasons given for using non-credit bank services included: (1) MFI not offering the services
needed; (2) closer proximity of the bank branch; and (3) the relative higher quality of service provided
by banks. Interestingly, even though all MFIs offer saving account services, SGBs prefer to save at
banks due to ease of access and better service.
These findings are consistent with those of other global SGB studies which show that as businesses
become larger and more sophisticated they tend to move away from cash-based transactions, both
with suppliers and increasingly with clients. Another emerging trend is the shift from holding cash on
the business premises to keeping it in current accounts – a service clearly not provided by MFIs.
These non-loan business services, along with ease of access to funds via ATMs, are clearly essential
to MSME operations and financial management.
3.4 Business Support Services Use
Accounting records
All the SGB owners surveyed appeared to keep accounting records for their businesses. With regard
to whether accounting is kept in written or electronic format, 64% responded they used both formats,
while 36% only had written records.
23
The vast majority (78%) use an outsourced, paid accountant. Out of the 35 SMEs that resort to a paid
accountant, 29 (or 83%) keep their records in an electronic format, and they all use the services of an
external accountant. If this finding is reflected over a broader scale, this is very promising news for
financial institutions seeking to finance the SME sector since they will be able to access financial
records.
Use of One-Stop Shops (OSS)

Only 9 of the 45 respondents (20%) claim to have used the services of the One-Stop Shops available
to enterprises at all Kebele levels.
However, there appears to be a difference between OSS use and economic sector. None of the SGBs
in the trade/service sectors have ever used the OSS facilities, whereas 9 of the 22 SGBs in the
industry sector (41%) have used them. Furthermore, all 9 SMEs indicated that they planned to
continue using the OSS services in the future. A likely reason for this difference between economic
sectors and OSS use is that manufacturing SGBs commonly seek out government support for the use
of subsidised working space and access to machinery available in “industrial sheds” or incubator
parks.
Concerning business support services other than OSS, 11 of the respondents (24%) stated that they
benefited from assistance, mostly in the form of technical training from professional private and
governmental organisations. Furthermore, although 100% of the respondents indicated the need for
increased access to finance, 58% also stated that they still needed support in other areas covering
technical training/coaching, accessing or expanding premises and market linkages.
3.5 Owner’s Vision on Growth and Prospects
Growth Plans
Without exception, all 45 respondents expected their businesses to continue growing and none
intended to change business, slow down or stop. Access to sufficient capital was perceived by all the
respondents as the main challenge that could potentially limit the scale and speed of growth. Access
to adequate business premises was also mentioned by 31% of the respondents. Other challenges,
such as access to foreign currency, fixed assets, and competition (again, in addition to capital) were
mentioned by 16% of the respondents.
Plans to hire more employees were expressed by 31 of the respondents (69%). All 14 respondents
(31%) who stated that they did not plan to hire more employees in the future said that this was
because they currently had sufficient personnel for their current operations.
As shown in the table below, 58% of the SGBs planning to hire new staff operate in the industrial
sector and 42% in the service sector. This confirms the more labour intensive nature of industrial
activities and explains why the government prioritises sectors with greater employment potential such
as manufacturing, agro-processing, and construction.
No plans to hire in future Plans to hire in future

N=14 / 31% N=31 / 69%
Service/Trade Industry Service/Trade Industry
10 4 13 18
(22%, n=45) (9%, n=45) (29%, n=45) (40%, n=45)
(71%, n=14) (29%, n=14) (42%, n=31) (58%, n=31)
(43%, n=23) (18%, n=22) (57%, n=23) (82%, n=22)
24
With regard to gender, 74% of the male-owned SGBs planned to hire more employees in the future
compared to just 43% of the female-owned SMEs.
Although the data sample is small, the results suggest that SGBs in manufacturing and construction
are more bullish on growth and expansion in the future, while SBGs in services and trade have a more
prudent outlook.
Growth factors
The most frequent response (69%) to the question of what were the most critical factors needed to
succeed and grow was personal effort and hard work. In most cases, however, this response had
access to finance attached to it. Only 31% of the respondents attributed growth to a combination of
other factors such as family support, government support, knowledge and experience. Nevertheless,
even these respondents usually included access to finance as a component.
Overall, the results indicate that the prime success factors for the growth of an SME are 1) access to
capital; 2) adequate premises; and 3) hard work.
4. Principal Observations, Conclusions and Potential

Implications Going Forward
Ease of doing business vs. entrepreneurial success
Despite Ethiopia’s low ranking in the World Bank’s “Doing Business Report” and poor performance in
29
the so-called “distance to frontier” score , none of the respondents indicated these factors as being
top challenges during either start-up or growth. Out of the 11 indicators measured in the framework of
regulatory efficiency and quality, only the “getting credit” indicator was mentioned as a challenge by
the respondents. Without further probing it is impossible to determine whether regulatory issues are
indeed challenges or whether the respondents simply take these inherent difficulties for granted as
‘normal’ and inevitable. Perhaps “ease of doing business” is overrated? Perhaps a certain amount of
difficulty is a good way of “testing the mettle” of an entrepreneur? Is it a case of survival of the fittest
where less resilient entrepreneurs will drop out or give up when faced with difficulties, leaving only
dedicated “success-bound” entrepreneurs to build the economy and become employment generators?
Obviously, this study is not advocating less developed or even weak business environments or having
things too easy, especially in an economy where the demand for credit is still far from being met (as is
the case in Ethiopia), but perhaps a certain level of administrative and regulatory difficulty does not
entirely put the “dampers” on success. The low ranking in the latest edition of the “Doing Business”
Report clearly did not deter our 45 respondents from their pursuit of success and prosperity.
Conversely, it could also be argued that a more favourable “doing business environment” might have
enabled our 45 respondents to grow to a higher level of success and prosperity than they have
achieved today. However, business growth is seemingly less dependent upon the ease of doing
business: appetite for growth, management skills, market forces, and non-financial services (working
premises, market linkages etc.) also play significant roles.
One foot in the MFI and the other in the bank

The universal use of non-credit services provided by banks by all 45 respondents has significant
implications for MFIs. Today in Ethiopia, not a single MFI runs an MIS software solution capable of
29
Relating to starting a business (also including the minimum capital requirement indicator), dealing with
construction permits, getting credit, obtaining electricity, registering property, paying taxes, trading across
borders, enforcing contracts, and resolving insolvency.
25
providing non-credit financial services in real time, or of connecting to mobile / network platforms and
technologies. To be blunt, MFIs are lagging far behind in this regard. SMEs which are not ‘plugged in’
to their suppliers and customers will fall behind the competition. Therefore, access to connectivity
technologies for transaction and cash management services is a matter of survival for contemporary
SMEs. Consequently, SMEs have one foot in the MFI and the other in the bank – the MFI for credit
and the bank for (electronic) business management services. To what extent then should MFIs be
upscaling? Should they simply let businesses go to banks when they become too sophisticated to
serve? Or should MFIs collaborate with banks so that they keep providing loans while outsourcing
non-credit services to banks? In some countries and financial environments the answer could be a
simple “yes”.
In Ethiopia the reality is that there is more demand for credit than can be met across the entire
financial system. In other words, it is a seller’s market for finance. Banks are not actively or
enthusiastically seeking out MSMEs to finance – there are so many of them and the ratio of
transaction costs to potential loan amounts is not sufficiently attractive. Despite the lack of modern
MIS solutions currently in use by MFIs, they are probably better positioned to scale-up their services to
small and medium sized clients than banks are to scale-down to clients that they hardly know and pay
little attention to. Furthermore, almost every MFI in Ethiopia is actively seeking to acquire core banking
systems that will enable them to offer the same network-based services as banks. Even though many
challenges remain, it is not inconceivable that in the next 3-8 years a large number of MFIs will be able
to offer small and medium sized enterprises a more highly developed supply of non-credit services
alongside credit products, including leasing.
The challenge of collateral

All of the respondents still need credit to grow and create jobs but the amounts that they require are all
too often well above the value of the collateral they own. In light of this situation, neither MFIs nor
banks are easy options. Financial resources in the MFI and banking sectors are already being
stretched by current demand. A business without sufficient collateral is therefore not necessarily a
priority for either MFIs or banks, no matter how viable the business or trustworthy the client. Certain
MFIs have lowered their collateral coverage in recent years, mainly for long-serving, reliable
customers. Nevertheless, the coverage is still capped at a minimum of 80% of the requested capital
and with collateral valued at 50% of market value access to credit is still out of reach for many
customers. On the other hand, banks do provide “clean” loans (loans without collateral) although such
privileges are normally applied only to big-ticket customers and more often than not those which are
involved in exporting (hence giving the bank access to highly-prized foreign currency).
In short, the access-to-credit environment is not conducive to businesses that are struggling for
growth, require external finance, and are short of the collateral amount demanded by financial
institutions. Ironically, it is precisely such businesses that have the greatest potential to create
sustainable job opportunities and the capacity to contribute to priority sectors such as manufacturing
and processing (i.e. import-substitution enterprises).
To date, MFI portfolios have been overwhelmingly comprised of micro enterprises (most of which have
been served through the group-lending methodology) while banks have focused on lending to large
enterprises, with medium enterprises serviced mainly if they are engaged in export activities.
Moreover, the prevailing government policy leans towards the promotion of start-ups (especially those
founded by recently graduated and/or unemployed young people) and micro businesses. There is, of
course, nothing wrong with fostering an enabling environment conducive to start-ups and micro
enterprises: on the contrary, start-ups are extremely crucial in bringing innovative and ground-breaking
ideas into all value-adding sectors in an economy. However, when looking to stimulate job-creation in
an economy as well as to increase growth and the importance of import-substitution enterprises,
26
bolstering the enabling environment to facilitate expansion of small and medium enterprises may have
a greater overall impact in both areas. Perhaps the preferred option is to consider micro enterprises as
part of a value chain (i.e. comprised of micro, small and medium enterprises) and establish value
chain financing.
This could be achieved by extending lines of credit to small or medium enterprises large enough for
them to accommodate micro enterprises within their value chains. This would very much depend upon
supply chain dynamics (i.e. whether small or medium businesses can act as suppliers to or buyers of
inputs from micro enterprises) but if done successfully it could reduce the risks and transaction costs
associated with direct lending to micro enterprise borrowers.
It might be worthwhile for MFIs, banks, and even government policy-makers to recognise the potential
power of the SME sector in sustainable job-creation and the strengthening of high potential sectors.
However, it is both unlikely and imprudent to expect financial institutions to substantially lower or
eliminate collateral requirements for SGBs, so a more practical solution to the collateral challenge
could lie in the creation of a national guarantee facility. Such facilities are common in hundreds of
countries around the world, and would enable financial institutions to cover the collateral gaps that
exist among SGBs if (and only if) the viability of the SGBs and proposed projects are deemed
creditworthy. Highlighting the potentially powerful contribution to the economy that SGBs can have,
and providing financial institutions with appropriate approaches and tools to make servicing SGBs
more efficient and effective, could help to foster positive change with regard to current MFI and bank
attitudes and increase resource allocation to the sector.
Homogeneity of the SME sample

Readers of this study will undoubtedly note how all the SGBs in the sample are seemingly robust,
successful and growing. Despite the randomness of the sample selection and the use of 3 different
MFIs (1 with government support and 2 private), the homogeneity of the sample stands out and can be
explained through several factors.
First of all, most MFIs in Ethiopia do not serve start-ups. A business client must be in operation for at
least 6 months (WEDP loan) before lending can be considered. In addition, a client must be able to
prove that it can save, usually by making regular monthly deposits into a savings account over 6
months prior to requesting a loan. The savings must be equivalent to 15-20% of the loan amount
requested. This mandatory saving requirement continues until the client fully repays the loan. The
savings are primarily used to guarantee part of the loan of the borrower. To a certain extent, these MFI
policies create a sort of “natural selection” process by weeding out weaker or prone-to-fail businesses
before the loan application stage. In this regard, start-ups have to make it under their own steam (own
savings and/or financial assistance from friends/family) before they can apply for a loan; therefore it is
not entirely surprising that the SGBs in the sample, which have all succeeded in becoming small or
medium in size, are successful and growth-oriented.
Secondly, MFIs in Ethiopia, by contrast with numerous other countries, are regulated, inspected, and
gaged against high portfolio quality and financial prudential norms by the National Bank of Ethiopia
(NBE). As a result, MFIs cannot afford to experiment or cater to clients with weak business prospects
or management capacities.
Finally, the economy in Ethiopia is, and has been, growing at double-digit rates. Any business that has
managed to secure a market should be faring well and have growth potential. Since the first two
factors mentioned tend to steer MFIs towards businesses that have already made it to a certain level
of success through hard work and self-finance, it is logical for all the SGBs in the sample to share
growth-oriented prospects.
27
Business support services and the impact of government
The reader will notice that the government plays a significant role in supporting MSMEs (through
registration, provision of work spaces, directing MFIs towards funding, and non-financial support
services), especially for start-ups and early-stage growth businesses organized and registered by
Micro and Small Enterprises Development Offices. In the past, before any government intervention in
this area, business development services (BDS) were only available on an ad-hoc basis from various
international and national NGOs. When the government established One-Stop Shops (OSS) in all
primary-level administrative districts (“Kebele” level), business support services became available to
virtually everyone without charge.
Despite the general success of OSS services (as evidenced in this study by the SBGs that have used
the services and plan to continue using them), the fact that they are provided by government
employees through government structures does have its drawbacks. Notably, government officials
have no structured incentive to develop or innovate the services that they provide to businesses.
Services are all too often sluggish, bureaucratic, and of basic or even low quality. Furthermore, due to
government policies stemming from the 5-year Growth and Transformation Plans, certain production
sectors are promoted over others, creating potential service gaps for businesses outside the priority
sectors.
The study indicates, however, that all the SGBs in the sample avail themselves of accounting services
from private service providers (the OSS system does not provide business accounting services).
Fiscal policy no doubt has a strong influence in making SBGs seek to keep viable accounting records,
and so accounting services can really be considered more as business “equipment” than as an SBG
demand-driven service.
Apart from private accounting services, the study sample did not indicate use of any other non-
government business support services. A focused study in this area would need to be launched to
unveil the reasons, but it is known that private business support and consulting services in Ethiopia
are rare, weak, unorganised, and vetted. Whether this is due to government provision of free BDS or
lack of strong demand this study is not in a position to comment. However, the fact remains that
private BDS is not developed in the country and so the options for businesses are severely limited in
this area.
OSS services are generally used by micro and small sized businesses organized by MSE
30
Development offices as cooperatives (government-backed) . However, the services are also provided
to independent businesses free of charge. According to a study conducted by MoUDH (2013), 67% of
31
government-backed enterprises were found to benefit from OSS services. Assefa et.al (2014)
conducted a qualitative study on enterprise support schemes in the 6 main cities. They found that
independent or self-started businesses perceive government-backed enterprises as unfairly benefiting
from OSS services, particularly in terms of better access to infrastructure and market linkages with
massive government owned projects. Such support services are believed to have an impact on
business growth, but this does not mean that all businesses which received the services were
30
There are two types of MSE in Ethiopia: government-backed and independent. Government-backed MSEs are
usually cooperatives with at least 5 members and are organized and registered by Wereda MSE offices. They are
entitled to receive BDs from OSS free of charge. Independent MSEs, by contrast, are established by
entrepreneurs individually or as a group. They can receive services from OSS. However, most self-founded MSEs
are not aware of the existence of such services.
31
Assefa et al (2014), Identifying Key Success Factors and Constraints of Ethiopia’s MSE Development: An
Exploratory Research, EDRI Research Report.
28
32
productive and successful. According to a study conducted by Girum (2015) in 13 major cities in
Ethiopia, government backed enterprises are neither more productive nor more technologically
advanced than independent enterprises.
The study also revealed that there is a selection bias for OSS support services. The services target
government backed enterprises, which have naturally have a smaller chance of being led by true
entrepreneurs. As a result, they end up contracting in size after start-up.
Nevertheless, the fact that businesses do use OSS services indicates that such services are generally
needed. Whether or not SGBs would be willing or able to pay for such services from the private sector
is another issue, though the low quality and lack of innovation typical of OSS services cannot serve
the market for too long. Testing a public-private partnership (PPP) based on responding to the exact
BDS needs of SMEs may pave the way towards a more vibrant, organised, vetted, and quality-driven
BDS private sector.
32
Girum Abebe (2015). State-induced versus self-initiation: A Comparative Study of Micro and Small Enterprises
in Ethiopia. EDRI Working Paper 13.EDRI
29
Annexe
Annex 1: Methodology
Objective
The objective of the study is to assess SMEs that have graduated their business from micro level to
small and medium level. The assessment focuses on understanding their growth patterns and
identifying the critical factors that have influenced their successes and/or shortcomings. The study
also seeks to identify and recommend key intervention areas that need to be addressed in order to
promote greater financial inclusion for Ethiopian SMEs.
To meet the objective stated above, the study uses primary data collected directly from a sample of
SMEs through semi-structured, face-to-face interviews. The data obtained from the SMEs is further
supported by interviews held with loan officers at the 3 MFIs (i.e. AdCSI, Agar and Vision Fund)
selected for the study.
Sampling Framework
The first step to collect qualitative data for the study was to secure a sampling framework that
consisted of the population of emerging SMEs within the portfolio of the MFIs. The population for the
study was selected from the databases based on the following criteria:
 Total number of employees = 6 to 50 (for those MFIs which do not hold such information in their
database, a proxy criteria based on loan size was used)
 Started as micro and graduated to small/medium business
 Have been in business for at least 3-5 years (this enables us to follow a longitudinal approach in
examining the growth and growth-critical factors of the enterprises over a period of time and
capture the growth trajectory of the SMEs)
Sampling
Based on the above criteria a list of 140 SMEs with their contact details was collected from each MFI
(50 from AdCSI, 50 from Agar and 40 from Vision Fund). The random sampling method was used to
select the sample for the study in order to give every SME in the target population an equal chance of
being selected. This approach ensures an adequate spread and representation of all SMEs working in
the various sectors of the economy.
Once the pre-selection process was completed, each SME was contacted by telephone in order to
confirm whether they fell within the sample criteria and whether they agreed to the interviews. Out of
the 140 SMEs, 45 fulfilled the criteria and their managers/owners gave their consent to the interview.
After the 45 SMEs for the study were selected, they were contacted again by phone to schedule the
interviews. The interviews were conducted at their workplaces.
Data Collection
In-depth, face-to-face interviews were conducted with the selected SMEs to gain insight into their
performance, their growth trajectory, and the challenges involved therein. The in-depth interview
method was selected not only because it enabled us to explore the current situation in the SME sector
in more detail but also to enable interviewees to express their opinions in their own words. Thus, the
study has a wealth of information to draw upon for a meaningful understanding of the subject matter.
With a view to ensuring consistency between interviews and thus increasing the reliability of the
findings, an interview guide that lists questions or issues to be explored during the interviews was
developed. The interviews with the SMEs focused on the following aspects:
 Identify the characteristics of emerging SMEs and document the profile of their owners.
30
 Understand the growth trajectory of each SME and identify factors that determine success and
failure.
 Understand their access to finance and the challenges that they are facing in the process.
 Identify the type of support services that they are currently using.
 Identify the type of support services (both financial and non-financial) that they require to expand
and grow their businesses.
The interviews were conducted in the local language (i.e. Amharic) and the feedbacks were captured
on an audio recorder. The audio-taped interviews were then transcribed into English.
Data Analysis
A data analysis tool was developed in Excel format. The interview transcriptions were then transferred
to the Excel spreadsheet to conceptualize the responses and draw conclusions. In addition, pivot
tables were applied to identify any correlations, characteristics, and profiles.
31

Final Report Sgbs in Ethiopia

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Small and Growing Businesses in

Edited by ADA asbl and First Consult PLC

ACSI Amhara Credit and Savings Institution

Executive Summary ............................................................................................................................ 1

2.2 The Financial Sector ............................................................................................................. 7

2.3 The MSME Sector ................................................................................................................. 8

3. SGB Characteristics ................................................................................................................. 11

3.2 Business Characteristics ..................................................................................................... 12

3.3 Financial Service Use ......................................................................................................... 21

3.4 Business Support Services Use .......................................................................................... 23

3.5 Owner Vision on Growth and Perspectives ........................................................................ 24

4. Principal Observations, Conclusions and Potential Implications Going Forward ............. 25

The main findings of this study include the following:

Micro Enterprises Small Enterprises Medium Enterprises

Employees <5 <5 6-30 6-30 31-100 31-100

AdCSI Agar Vision Fund

Year of Establishment 2000 2004 1998

2. Country Profile and Context

Ease of Doing Business

2.2 The Financial Sector

2.3 The MSME Sector

 Startup stage: organization in a group , finalizing of licensing (established as association or

The other key national MSME stakeholders are:

 MFI loan officers to deal with saving and credit issues;

MFI No. Respondents (n=45)

Age and gender distribution

Marital status, children, and dependents

Prior business experience

3.2 Business Characteristics

Sample distribution across economic sectors

Economic sector Percent respondents (n=45)

Years of operation of current business

Aynalem borrowed for the first time in 2015

Domestic vs. international markets

Main start-up challenges

Like many taxi drivers and their assistants, he

“I was a cigarette, khat and alcohol addict. For a

His parents, frustrated by his addiction, made him

Initial Start-up Current Change

Amount and tenure of first loan

Loan Amount Tenure (in months)

Amount of first loan

Number of loans taken

Amount of last loan

Industry (n=22) 366,000 26

Female-owned (n=7) 554,000 29

Ease of Access to Loans

Use of non-credit bank services

3.4 Business Support Services Use

Use of One-Stop Shops (OSS)

3.5 Owner’s Vision on Growth and Prospects

No plans to hire in future Plans to hire in future

4. Principal Observations, Conclusions and Potential

One foot in the MFI and the other in the bank

The challenge of collateral

Homogeneity of the SME sample

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