Growing Small and Medium-Sized Businesses in Ethiopia


ADDIS ABABA, February 19, 2015 -- The private sector is expected to play a key role in Ethiopia’s journey to become a middle income country in the next decade. However, Ethiopian firms face significant financial constraints, because financial institutions do not accommodate their needs, a new World Bank Group (WBG) study found.

The report, “SME Finance in Ethiopia: Addressing the Missing Middle Challenge,” reveals that without adequate support from financial institutions, small and medium businesses are not able to grow, or create more job opportunities.

" Firms in Ethiopia are much more likely to be fully credit constrained than firms elsewhere in the world "

Francesco Strobbe

WBG senior financial economist

This gives origin to the so-called missing middle phenomenon whereby small enterprises are more credit constrained than either micro or medium/large enterprises,” said Francesco Strobbe, WBG senior financial economist. 

The study used both supply and demand research to offer a complete picture of small and medium enterprises’ finance practices in Ethiopia. While there was already anecdotal evidence that small firms were lacking suitable access to finance, the study was able to provide empirical evidence of the existence of a “missing middle phenomenon.” The study also offers recommendations to help reduce financial challenges and promote the growth of small and medium enterprises (SMEs). Those recommendations were discussed after the launch of the study during a two-day forum with high-level policy makers and stakeholders. The forum also enabled participants to learn from global best practices from Turkey, Nigeria and Ghana, which were able to successfully implement financing activities for SMEs.

The WBG supports the Ethiopian government’s efforts to create jobs through analytical studies and investment operations. The Ethiopian government has prepared a private sector development strategy to improve the productivity and modernization of the agricultural sector, and boost the technological sophistication and economic input of the industrial sector. It has also identified, the development of micro, small and medium enterprises (MSMEs) as a key industrial policy direction for creating employment opportunities for millions of Ethiopians. However, all this is not sufficient and much more remains to be done to unleash the full potential of SMEs, said Guang Zhe Chen, WBG country director for Ethiopia.

“To help fill in some of the gap through microfinance institutions, the World Bank Group, in cooperation with DFID and CIDA is supporting the Women Entrepreneurship Development Project,” Chen said. “In addition, through the $250 million Competitiveness and Job Creation Project, the WBG is also helping to create dedicated industrial zones.”

The government’s second Growth and Transformation Plan (GTPII), currently under preparation, will place even more emphasis on the importance of private sector development and therefore on easing access to finance for SMEs. The government has put in place helpful public support programs but much more is needed to properly address the missing middle challenge. 

“By increasing the capacity of the financial sector to properly serve the segment of small enterprises with adequate financial products, we hope to address lack of access to finance which is a key obstacle that is currently preventing small enterprises from fully playing their role in the industrialization process of Ethiopia and in contributing to the job creation agenda as envisaged in the GTP I and GTP II” said H.E Ato Desalegn, state minister of Urban Development Housing and Construction.

Taking into consideration the findings and recommendations of the study, the WBG will help support the government in designing new initiatives to better serve the financial needs of  SMEs and create an “SME finance culture.”  These interventions will complement the positive results of ongoing operations such as the Women’s Entrepreneurship Development Project and the Competitiveness and Job Creation Project by linking SMEs with larger enterprises in the industrial zones and contributing to the creation of a “private sector ecosystem” around the industrial zones.

“The SME finance study contains important policy recommendations that will need to be taken into account in the design of a new SME Finance project,” Desalegn added. “I’m confident that the inputs will help promote an SME finance culture in Ethiopia that will greatly contribute to the industrial policy objectives of the GTP and ultimately to the well-being of our country.”