Yitbarek Birhanu, a 29 -year-old resident of Mekelle who owns a small shop, observes the sluggish economic conditions. He realizes that simply saving his hard earned money in banks is not a viable option as inflation chips away at its value each day. Yitbarek understands the importance of investing in assets or businesses as a way to safeguard his future.
It was in this spirit that he attempted to buy property through a government housing lease program in Mekelle and some of the small towns surrounding the regional capital. However, Yitbarek quickly discovered he could not compete in the auctions due to his limited means. Financial constraints also cut short his aspirations to purchase a heavy truck for what he had hoped would be a successful transportation business.
While spending time in Addis Ababa, where many of his friends run their own businesses, Yitbarek was introduced to the car rental market, which one of his peers was using to earn as much as 1,500 birr a day by leasing his vehicle to a taxi driver. The steady income was tantalizing, and Yitbarek decided he would invest in a Toyota Corolla and enter thel business himself.
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However, his ambitions were once again thwarted by a lack of funds and the inability to secure a loan from one of the dozens of commercial banks operating in Addis Ababa. These banks were unwilling to give Yitbarek a line of credit without collateral.
Undaunted, he began asking friends and acquaintances for advice. This is when he learned about microfinance institutions and cooperative savings societies, which offered loans without the traditional collateral requirements.
Yitbarek discovered that in Mekelle, there were institutions like Qemer Saving & Credit Coop Ltd., a cooperative that had been operating for just over a year, which could provide him with the credit he was so desperately seeking.
Qemer’s services include various loan packages tailored to meet the needs of its members. For instance, with a savings deposit of 30 percent over one month, members can borrow up to 150,000 birr. With a longer savings period, members can borrow larger amounts—up to 500,000 birr with a 16 percent service charge repayable over 18 months. The cooperative also offers even more hefty lines of credit, up to five million birr at 11.5 percent interest, with a five-year repayment period. For those looking to purchase a vehicle or a house, Qemer offers loans of up to five million birr at 14.5 percent interest, with repayment terms extending to seven years, provided the member saves a percentage of the desired loan amount over a specified period.
What excited Yitbarek most was the realization that he could secure a loan without having to provide traditional forms of collateral. The cooperative accepts a car’s title deed as collateral, eliminating one of the biggest barriers he faced.
Yitbarek has decided to borrow two million birr to purchase the car and start his taxi business. He is now in the process of raising one million birr to deposit in the cooperative, which would enable him to qualify for the loan. To access the loan, Yitbarek will have to purchase a share in the cooperative, equivalent to 10 percent of the loan amount.
In Ethiopia, microfinance institutions (MFIs) and cooperative savings institutions have proliferated rapidly, especially since 2021. This expansion has been fueled by the urgent need to provide access to finance for the underserved segments of the population. As of today, the National Bank of Ethiopia (NBE) has licensed 55 microfinance institutions. Twenty-one of these came into existence over the last four years, while 34 were formed between 1997 and 2019.
Among the new generation of MFIs is Yegna Microfinance Share Company, which began operations three years ago with an initial paid-up capital of 40 million birr. Today, Yegna’s capital has quadrupled to 160 million Birr, according to Derash Behailu, the deputy chief of credit.
Yegna currently operates through three branches in the capital’s Megenagna, Kebena, and Figa neighborhoods, with plans to further expand both within Addis Ababa and beyond. The institution focuses on providing loans to women, youth, and disabled individuals—groups that are often marginalized in traditional banking systems. It also provides micro loan to SMEs as working capitals. In places like Shola Gebeya and Kotebe 02 Kebele, many women have secured loans from Yegna to start small businesses.
Yegna works with government agencies such as the Ministry of Women and Social Affairs, as well as non-governmental organizations, to identify those in need of financial support. Beyond providing loans, Yegna offers training and skill development to ensure that its borrowers are well-equipped to manage their businesses. Currently, Yegna serves 900 clients/borrowers and has 14,000 depositors. However, the demand for loans far exceeds Yegna’s capacity to supply, a common challenge in the microfinance sector. Derash notes that while Yegna is actively mobilizing savings to increase its capital, the mismatch between demand and supply remains a significant hurdle.
This challenge of meeting high demand with limited resources is echoed across the microfinance sector in Ethiopia. Despite impressive growth in paid-up capital—from 30.8 million birr in 2013 to 2.85 billion birr in 2023, representing an annual growth rate of about 44 percent—the supply still falls short. Similarly, while the number of savings accounts in MFIs has grown from 1.1 million in 2013 to over 3.6 million in 2023, the increase in borrowers has been much more modest. The number of borrowers grew from 784,606 in 2013 to just 970,561 in 2023, indicating a slow annual growth rate of a little under two percent. Even though gross outstanding loans have risen from 3.65 billion birr in 2013 to 31.47 billion birr in 2023, the demand continues to outstrip the supply.
Another new player in the sector is Semien Microfinance Share Company, established in January 2024 by 102 shareholders with a paid-up capital of 25.9 million birr and a subscribed capital of 60 million birr. The CEO of Semien, Muuz Haileselassie, emphasizes that the institution is dedicated to supporting youth in starting small businesses and creating employment opportunities. So far, Semien has provided over 10 million birr in loans to 49 clients. The institution offers loans of up to 250,000 Birr with flexible requirements, often without the need for collateral. However, Muuz points out that the primary challenge facing MFIs like Semien is the lack of liquidity/capital, which limits their ability to meet the soaring demand for loans. To address this, Semien is actively working on selling shares and mobilizing savings to boost its capital and enhance its lending capacity. Muuz also notes that the proliferation of MFIs is driven by the lucrative nature of the business and the relatively low capital requirements compared to traditional banks.
Tana Microfinance, another recent entrant, was established by 2,550 shareholders with a paid-up capital of 54 million birr and began operations in August 2022. Tana has rapidly expanded, with seven branches—six in the Amhara region and one in Addis Ababa. Since its inception, Tana has provided 172 million birr in loans to 931 clients and currently holds 40 million birr in savings from 9,605 depositors.
Tana’s CEO, Endale Markos, argues that MFIs have a transformative impact on individuals’ lives by providing much-needed financial support to start businesses and improve livelihoods. Like other MFIs, Tana is working on increasing its capital, with plans to raise it to 500 million birr by selling additional shares. Despite the sector’s growth, Endale acknowledges that there remains a significant gap between the high demand for loans and the limited supply available, which continues to drive the emergence of new MFIs.
Access to finance has long been a crucial driver of economic growth and entrepreneurship, enabling individuals to secure loans and start businesses. However, in Ethiopia, conventional banks have historically concentrated their lending on a small, powerful segment of the population, leaving the majority without access to the financial resources. This imbalance has partly perpetuated inequality and stifled the potential for widespread economic development.
The NBE’s Financial Stability Report released on April 11, 2024, highlights this worrisome trend. The report reveals that the banking sector’s loans and advances are increasingly concentrated in the hands of a few large borrowers. As of June 2023, the top ten borrowers alone controlled 23.5 percent of the total loans and advances within the banking industry. This represents a significant increase from the previous year when the top ten borrowers held 18.7 percent of total credit. Despite making up just 0.5 percent of all borrowers, those with loans over 10 million Birr control nearly 74 percent of the total loans issued by banks in Ethiopia. This concentration of credit in the hands of a few is further compounded by the fact that virtually all loans (99.8 percent as of June 2023) were allocated to borrowers in urban areas, leaving rural populations with limited access to financial services.
In this context, microfinance institutions have emerged as a vital alternative, offering a more inclusive and accessible avenue for securing finance. Unlike conventional banks, MFIs focus on providing small loans to individuals and small businesses that would otherwise be excluded from the formal banking system.
Microfinance institutions have had a significant impact on development over time, says Dawit Tadesse, managing director at Leadplus, a consultancy firm, and an assistant professor of finance. He points out that MFIs have been instrumental in providing financial services to underserved communities where traditional banks offer little loan services. However, Dawit also highlights the challenges facing the sector, particularly the lack of capital, which limits the ability of MFIs to meet the growing demand for loans.
To address these challenges, Dawit suggests that the government should step in and introduce policies that require conventional banks to allocate a portion of their lending to small and medium-sized enterprises (SMEs). This would not only support the growth of these businesses but also help diversify the lending portfolios of traditional banks. Additionally, he recommends that MFIs explore partnerships with non-governmental organizations (NGOs) and joint ventures with larger organizations to pool resources and expand their reach.
Looking ahead, Dawit anticipates that the upcoming launch of Ethiopia’s capital market will create new opportunities for accessing finance. By selling equity, SMEs could raise capital more easily, providing them with the financial backing needed to grow, he argues.
