The United Nations-backed initiative spearheaded by the IFL represents a step toward resolving the financing challenges SMEs and startups face. The program seeks to build a robust venture capital system through innovative financial instruments and strategic partnerships to support the country’s economic ambitions. With the anticipated launch of the ESX and ongoing regulatory developments, Ethiopia aspires to become a more attractive destination for domestic and foreign investors.
A United Nations-backed initiative is set to inject hundreds of millions of dollars into nearly 150 small and medium-sized enterprises in Ethiopia, aspiring to bridge the financing gap that has long frustrated startups and businesses underserved by traditional financial institutions. The Innovative Finance Lab (IFL) under the United Nations Development Programme (UNDP)and in partnership with the National Bank of Ethiopia (NBE) and Ethiopian Capital Market Authority (ECMA), is preparing to launch a groundbreaking funding facility that could reshape the entrepreneurial scene.
From an initial pool of 600 applicants, the IFL has identified around 150 SMEs and startups demonstrating scalability. According to Dagmawit Shiferaw, the IFL’s director, the Initiative focuses on leveraging the private capital market to expand access to venture capital.
“We’re building the venture capital system,” she told Fortune, expressing optimism that the Enterprise Financing Facility (EFF) will catalyze sustainable economic growth.
The program plans to operate within the private capital market, directly investing funds into high-potential businesses or channelling them through fund managers. The approach is designed to ensure that resources are allocated to ventures with robust growth potential, spurring innovation across multiple industries.
An international bidding process was launched over three months ago. Nine companies participated in the selection process, and two were shortlisted. The IFL is currently negotiating with one of these firms, whose identity remains undisclosed, and hopes to reach a final agreement soon. The selected fund manager is expected to contribute up to two percent of the investment and attract additional investors to the Initiative.
The fund management firm selected by the IFL will play a crucial role in collecting funds, maintaining accurate accounting records, implementing investment strategies, and managing trading activities. It will also be responsible for selecting businesses worthy of investment and attracting investors. The IFL plans to establish a finance facility with an initial capital of at least 10 million dollars, gradually increasing to 100 million dollars. The lab hopes to attract development financiers, along with contributions from the government and private sector.
The Ethiopian Capital Markets Authority (ECMA) is developing a collective investment scheme directive to govern the funds in the upcoming capital market. As the draft undergoes ratification, the funding scheme will be tested in a regulatory sandbox to ensure its readiness. The sandbox provides a controlled environment for innovative firms to experiment with their products and gather consumer feedback. Investment funds allow investors to benefit from economies of scale and potentially generate higher returns through private equity investments within five years, making them attractive options.
Ethiopia faces a trap known as the “missing middle”, businesses too large for microfinancing yet too small to qualify for traditional bank loans. These enterprises often struggle to access credit, limiting their growth despite strong business models and high demand for products or services. A World Bank study estimates the global financing gap for formal micro, small, and medium enterprises (MSMEs) to be one trillion dollars, increasing to 2.6 trillion dollars when including informal businesses.
There are an estimated two million MSMEs in Ethiopia alone. According to a 2021 UNDP report, only 1.9pc of small enterprises have access to loans or lines of credit, compared to six percent for micro-enterprises and over 20pc for medium-sized enterprises. In contrast, 35.5pc of large enterprises can secure loans, exposing the disparities in access to finance.
Dagmawit and her team at the IFL seek to address these gaps through innovative financial instruments, including loan guarantee schemes, recoverable grants, and favourable loan terms tailored to the unique issues MSMEs face.
“We aim for more than just financing businesses,” Dagmawit told Fortune.
According to her, the Initiative wants to promote long-term success among funded enterprises. The lab combines financial support with technical assistance, offering capacity building, training, and business development services through a Technical Assistance Facility (TAF).
One of the companies eligible to benefit from the Initiative is E Mecce Engineering & Agro-Industry Trading Plc, a medium-sized enterprise incorporated in 2020. Despite an initial capital of five million Birr, the company has struggled to secure sufficient financing to expand its operations.
“We want to increase our production capacity,” said Ephrem Melaku, the company’s general manager and major shareholder.
E Mecce specialises in manufacturing feed processing machinery and has secured six patents for its trademarks. However, traditional banks have provided limited assistance, converting only two patents into financing. Banks have also demanded collateral and small processing payments, discouraging the company’s growth plans.
The banking industry has faced a liquidity crunch recently, with several banks struggling to meet weekly liquidity requirements and comply with real-time gross settlement system (RTGS) payments. According to a recent financial stress report by the Central Bank, the top 10 borrowers in the banking industry account for nearly 23.5pc of the total 1.9 trillion Br — 21.7pc of GDP — in loans and advances, revealing the high concentration of credit in a small number of entities.
This concentration has made it difficult for smaller businesses to access loans. Worku Lemma, an investment banker, observed that stringent monetary policies, such as high bond requirements of up to 21pc and a 14pc cap on loan portfolio growth, have limited banks’ ability to lend to MSMEs. According to Worku, loan applications have been stranded as banks seek to curb their risk exposure, preferring to lend to a few companies with high levels of collateral. He suggested that banks take on more risks by offering non-collateralized loans and accepting movable assets as collateral.
“There is a huge fund shortage in banks,” he said, urging for innovative solutions like the EFF to address the credit constraints faced by SMEs like E Mecce.
Nearly a year ago, E Mecce submitted a proposal for 200 million Br in funding through the IFL. Ephrem hopes to secure this financing to double production and explore related business opportunities in the long term.
Mered Fikireyohannes, founder and CEO of Pragma Capital, praised the Initiative for offering desperately needed funding to help businesses grow from venture investments to public listings. He believes that a strong financial ecosystem, objective company valuations and tax incentives for capital investments are critical to driving the growth of the capital market. He also stated the importance of hands-on regulation from the ECMA to ensure smooth operations.
“Regulatory oversight will be crucial,” he said.
The Ethiopian Securities Exchange (ESX) is expected to play a defining role in attracting private-sector investment as the capital market expands. State-owned enterprises, including Ethio telecom and Ethiopian Shipping & Logistics, are preparing for listing on the Exchange, and foreign investors have shown interest in participating. A total of 17 institutional investors have invested in the ESX, where the federal government holds a 25pc stake through the Ethiopian Investment Holdings (EIH), a sovereign fund managing a portfolio of state-owned companies valued at 38 billion dollars.
Tilahun Kassahun, CEO of ESX, is upbeat about the future of Ethiopia’s capital market, expecting substantial growth over the next four years.
“We’re ready to begin soon,” he said, disclosing that the ESX has already completed the necessary infrastructure for launching the debt market and that further regulations and participants to support equity market activities are in the pipeline.
Source: UN-Backed Fund…
