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Access to finance in Ethiopia’s manufacturing sector

Access to finance is a key factor determining firm expansion, especially for small and medium‐sized enterprises (SMEs) in developing countries. A lack of access to external finance is thought to be a key bottleneck for enterprises’ growth in sub‐Saharan African countries, for a number of reasons, including high collateral requirements for bank loans. In Ethiopia, the value of the collateral required to borrow can be up to twice the value of the loan.

This study, titled, ‘Access to Finance and Growth-Oriented Investments in Ethiopia’s Manufacturing Sector’ confirms that Ethiopian firms have limited access to external finance: 26% of firms had obtained finance from formal sources, mainly banks, with a quarter of these firms complementing with informal financing from family, friends of acquaintances. Just 3% obtained finance from informal sources only and 1% obtained finance from private equity funds. Access to debt finance to fuel company growth did not vary significantly according to firm size. Small firms are more likely to reply on informal sources, while medium and large firms have better access to bank lending. High collateral requirements are reported as the main barrier to accessing bank loans. Firms had very little access to formal equity investors: 76% of the companies who did not seek external equity funds were unaware of the existence or function of private equity funds. Capital was growing or stable for the majority of the firms, while a larger share of firms reported declining worker headcounts.  

The study was part of a joint program run by the European Investment Bank and the Global Development Network, initiated in 2016, that deployed African researchers to assess the development impacts of the EIB’s work in African and Caribbean countries, allowing the bank to enhance its contribution to sustainable and inclusive development while simultaneously enhancing local research and evaluative capacity.

Name of the Asset | The impact of private sector projects in Africa Studies from the EIB-GDN Program (Study from Cycle II: Access to Finance and Growth-Oriented Investments in Ethiopia’s Manufacturing Sector)

Type of Asset | Paper in the Volume: The impact of private sector projects in Africa: Studies from the EIB-GDN Program (Cycle II).

Date | 2020

Authors | Sied Hassen and Muhammed Usman

Country and/or Region | Africa, The Caribbean and The Pacific (ACP) countries

Name of the Program | EIB-GDN Program in Applied Development Finance

Download the Full Report | Cycle II

 

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