Banks in many African countries still favour lending to governments and large companies, resulting in less finance for small and medium-sized enterprises (SMEs), according to Banking in Africa, published by the European Investment Bank on February 27.
Ethiopia: Foreign financial firms will need air to breathe
Ethio Lease this month became the first foreign-owned company to secure a financial services license in Ethiopia. Simplifying the country’s forbidding bureaucracy would help the country’s leasing market to reach its full potential.
Ethio Lease was able to obtain the license because “we were the last man standing,” says Frans Van Schaik, chairman and CEO of parent company Africa Asset Finance. The process took almost two years, he says.
- “We probably have as much a first mover disadvantage, in navigating a bureaucracy that is not used to having a leasing company around as we have a first mover advantage in that there is not much choice,” Van Schaik says.
The advent of foreign leasing in Ethiopia will speed up business financing, argues the Economist Intelligence Unit (EIU) in London.
- Yet the EIU notes that financing faces “major bureaucratic hurdles” in Ethiopia.
- The World Bank’s 2019 report on the ease of doing business in the country ranks Ethiopia at 159 out of 190 globally.
Obtaining credit is identified by the World Bank as a major problem, with Ethiopia given the lowest possible score for the depth of credit information available. In terms of its insolvency framework, Ethiopia scores only five points out of a maximum 16.
According to analysis from Stratfor in April, Prime Minister Abiy Ahmed is likely to make some progress toward liberalizing the economy.
- But Ahmed will likely “encounter resistance from a bureaucracy that favour growth fuelled by the state rather than the private sector,” Stratfor says.
“The market being created by Ethio Lease’s operations could have a transformative impact on the country,” according to the EIU. This will “allow companies to generate revenue without having to invest heavily in equipment, while also freeing up liquidity for investments in other areas of the economy.”
The government expects to achieve 11% year-on-year economic growth in 2019/20. The EIU predicts that it will miss that target, but still sees solid average annual growth of 7.6% from 2019 to 2023, driven by investment in infrastructure such as roads, power projects and industrial parks.
- Ethio Lease plans to import about $600 million of equipment in the next three years. Van Schaik says the company will focus initially on the medical, agricultural, energy, IT, food processing and general industrial sectors.
- Leasing will help to meet pent-up demand for capital goods in private sector, which is not being met due to ongoing foreign-currency shortages, the EIU says.
- Van Schaik expects that further leasing licenses will be granted and that the market will become more competitive.
- The government will also eventually allow other financial services by both foreign and local-owned firms, he predicts.
Bottom Line: The license for Ethio Lease is a positive step, but Ethiopia still needs to take an axe to its red tape culture.