Starting a new business is thrilling but securing financing can be a major obstacle for many entrepreneurs. While venture capital and angel investing receive a lot of attention, banks and financial institutions also play a key role in funding startups – especially in developing economies. However, limited collateral and lack of credit history can make accessing traditional business loans difficult for young entrepreneurs and startups.
In Ethiopia, securing financing from banks without collateral is especially challenging. But new initiatives are emerging to address this gap. Recently, the Ethiopian Youth Entrepreneurs Association (EYEA) partnered with the Commercial Bank of Ethiopia (CBE) to launch two new financial products aimed at supporting startups. CBE’s new “idea finance” product provides loans to early-stage entrepreneurs and startups without requiring collateral. To qualify, applicants need a patent from the Ethiopian Intellectual Property Agency and a detailed business plan. By removing collateral requirements, this innovative loan product helps get innovative business ideas off the ground. CBE has offered similar financing for over a decade, but uptake has been low. This highlights an opportunity for expanded marketing and education to raise awareness.
EYEA and CBE also initiated an advisory service called KENA to provide capacity building and mentorship to young startup founders. Programs like KENA are crucial to setting entrepreneurs up for success by building their skills. EYEA’s networking platform Zelela connects young founders with stakeholders like government officials and investors. These connections are invaluable for securing financing and other support. Zelela conferences have focused on topics from information access to policy advocacy.
More institutions should follow CBE’s model and develop creative financing solutions for startups. Alleviating collateral requirements can unlock funding for young entrepreneurs to turn ideas into reality. In Ethiopia, financial technology and digital lending are expanding access to financing for small businesses and startups. Traditional collateral requirements have been a major obstacle, but new digital platforms are using alternative data for credit scoring to provide loans without collateral.
Promising Progress Through Fintech
Alongside these efforts, financial technology and digital lending are also expanding access to capital for small businesses and startups nationwide. New platforms are applying alternative data and algorithms to provide collateral-free loans.
For example, Michu (ሚቹ) from the Cooperative Bank of Oromia leverages artificial intelligence (AI) to assess creditworthiness and offer micro, small, and medium-sized enterprise (MSME) loans without collateral. By removing this barrier, Michu helps address the unmet financing needs of underserved micro and small enterprises.
Dube Ale (ዱቤ አለ) from Dashen Bank is another digital credit product reinventing lending by making it more convenient, accessible, and affordable. Customers can get approved for lines of credit up to 700,000 birr based on income and credit history, without collateral. Easy access to working capital can help MSMEs better manage cash flow.
Other new platforms like Alegnta (አለኝታ) from Lion Bank also provide collateral-free loans tailored for diverse needs, from rideshare drivers to SMEs. Alegnta’s 500 million birr revolving fund demonstrates growing investment in digital finance.
These innovative services showcase how fin-tech is driving financial inclusion in Ethiopia. By using alternative data and digital delivery, lenders can serve MSME segments once considered too risky. Financial regulators should continue updating frameworks to enable responsible digital credit while protecting consumers.
Expanding access to finance helps MSMEs and startups invest, create jobs, and build resilience. Digital lending still has room for growth in Ethiopia, but early movers like Michu, Dube Ale, and Alegnta provide promising models for how technology can democratize financing for unserved entrepreneurs.
Other countries are also pioneering collateral-free small business financing. In Kenya, microfinance institutions like Kiva leverage crowdfunding and technology to provide low-interest loans. Creative models like these help African startups access seed capital.
The R&D Group, in collaboration with UNDP and the National Bank of Ethiopia (NBE), is actively engaged in capacity building for Ethiopian SMEs. As part of their efforts, they are implementing the Technical Assistance Facility (TAF) program, which aims to provide support to innovative small and medium-sized enterprises in Ethiopia. The primary objective of the TAF program is to assist SMEs in growing and developing their businesses while also contributing to job creation and the overall Ethiopian economy.
To enhance their support for SMEs in Ethiopia, the Innovative Finance Lab (IFL) from UNDP and NBE have partnered with the R&D Group. This partnership aims to strengthen the implementation of the TAF program, which is a joint initiative between NBE and the UNDP. Through this collaboration, technical assistance will be provided to small and medium-sized enterprises (SMEs) across Ethiopia.
Conclusion
The challenges of securing financing for startups in Ethiopia are significant, but there are a number of innovative solutions emerging to address these challenges. By leveraging fintech and digital lending, entrepreneurs can gain access to capital that would otherwise be unavailable to them. This is good news for the Ethiopian economy, as it will help to spur innovation and job creation.
