Redefining MSMES financing through uncollateralized digital lending

With only 0.5 percent of depositors in the country having access to credit, a knowledge sharing session has suggested expansion of uncollateralized digital lending to make micro, small and medium enterprises (MSMES) beneficiaries. During the knowledge sharing session organized by Kifiya Financial Services Technologies in association with the International Financial Corporation (IFC), and Mastercard Foundation, Ethiopia was stated to have a very poor provision of uncollateralized credit.

Munir Duri, The CEO of Kifiya Financial Technologies PLC, stated that there is huge potential for Ethiopia to increase its lending to MSMES using artificial intelligence based uncollateralized digital lending. “Reducing the transaction costs, digitizing the credit operation and expanding the use of technology based credit scoring models at the credit reference bureau in the regulatory and financial industry is crucial. This is necessary for us in order to alleviate the shortcomings in this space so as to provide financing for those who badly need it for their operation and economic growth of the country,” said Frezer Ayalew, Director for Banking Supervision Directorate of National Bank of Ethiopia. Kifiya is pioneering a unique approach to the challenge through its digital lending technology, Qena, which connects businesses to credit without the need for collateral, leveraging new approaches to credit scoring.

There are a total of 850,000 MSMES in Ethiopia, which created a total 4.5 million jobs, while only about 130,000 have access to credit and the total financing gap is estimated to be approximately USD 4.2 billion.

Frezer highlighted that there is about 350,000 credit accounts in the country which is a drop in the ocean when compared with the 72.3 million deposit accounts registered in the various financial firms.

“Of the stated credit accounts, 44 percent of the borrowers are duplicating borrowers of the entire banking sector credit,” he says, adding, “when it comes to the number from the borrowers 0.6 percent only takes the great chunk of portfolio.”

Frezer said that the regulatory body is initiating policy frameworks to flourish the credit provision for MSMES including the use of the uncollateralized schemes. Currently, MSMES are mainly accessing credits from microfinance institutions. “This is the beginning of a knowledge series that seeks to convene experts to debate, share ideas, experience and lessons to provide digital financial services to small businesses and smallholder farmer,” Kifiya’s CEO expressed as he suggested way forwards in bridging the knowledge gap in the sector.

The knowledge sharing session saw policymakers, sector actors and MSMES share a flurry of ideas for the betterment of the sector.