Innovative Finance Lab to Unlock 10M dollars Financing for Ethiopian Startups, MSMEs

Aiming to create a hub for piloting and scaling up flexible and innovative financial instruments that respond to Ethiopia’s startups and MSMEs capital needs, the UNDP and the National Bank of Ethiopia (NBE) have launched the Innovative Finance Lab today, October 18, 2022.

The joint initiative, which aims to facilitate access to finance for startups and MSMEs via innovative financial instrument solutions, aims to unlock 10 million dollars of capital financing in the next two to three years.

The innovative lab is set up to explore and experiment with alternative financial instruments that can work for MSMEs in Ethiopia. It will also serve as a knowledge hub to address financing supply and demand gaps and design solutions responsive to growth and innovation-focused startups and MSMEs.

In Ethiopia, close to two million businesses are registered as MSMEs. According to the UNDP-commissioned report on Inclusive and Innovative Finance for Development (2021), only 1.9% of small enterprises in Ethiopia have access to loans and credit from the traditional banking system.

The figure rises to 6% for micro-enterprises, 20.5% for medium enterprises, and 35.5% for large enterprises. MSMEs in Ethiopia are often called the “missing middle” as they are too big for microfinance institutions and too small for banks.

According to Nebil Kellow, Managing Partner at First Consult, out of 1.5 trillion birr outstanding loans given by financial institutions in Ethiopia, 95pc of the capital is going to 5pc of the borrowers.

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“MSMEs are the backbones of successful, dynamic, and inclusive economic growth. We want to go beyond what has been done so far,” said Turhan Saleh, UNDP Ethiopia Resident Representative, during the inaugural ceremony of the Lab held at the Sheraton Addis Hotel.

The Lab aims to achieve its goal by addressing the supply constraints, mobilizing capital and investing in MSMEs through loans with favorable terms, providing loan guarantee schemes that lower barriers for borrowers, and de-risking lending through recoverable grants, all enabling them to access finance that would otherwise be out of reach.

The UNDP is covering the setting up of the lab with one million dollars, which took almost a year. In the first phase, the lab aims to set up a finance facility of 10 million dollars that will gradually reach the second phase of 100 million dollars.

The sources of the financing will be contributed by UNDP, donors, venture capitalists, the development bank of Ethiopia, commercial banks, and then refunds of the money. The Lab has brought on 17 people from the public and private sectors to serve on the advisory board. This board approves the financial modalities that will be forwarded to the MSMEs.

MSMEs that meet the requirements set by the Lab, will be eligible to join the lab’s Technical Assistance Facility (TAF). TAF will do the due diligence and select MSMEs and startups based on their growth potential. The team will also provide MSMEs with comprehensive pre and post-investment support tailored to their business needs.

Meanwhile, the enterprise financing facility wing of the Lab mobilizes capital by generating supply through diversified streaming sources to develop MSME-targeted innovative financing products.

The Lab has a temporary life cycle upon whose target accomplishment is meant to gradually diminish with its innovative financial modalities being adopted by the financial sector.

The open call for startups and MSMEs will be made before the end of 2022.

Besides the Lab, the UNDP has signed a Letter of Intent with the National Bank of Ethiopia (NBE) to support the establishment of Capital Market Development.