Issue 002 – September 2015 Financing Women Entrepreneurs in Ethiopia Francesco Strobbe and Salman Alibhai1 Enterprise Surveys access to finance is perceived as the main business environment constraint by micro Background: The challenges faced by women-owned (41%), small (36%), and medium (29%) enterprises in enterprises in the developing world are substantial. Ethiopia, compared to a Sub-Saharan Africa average Only one-third of the world’s SMEs in the formal of 24%, 20%, and 16% respectively. sector are currently run by women, and women- owned businesses typically underperform men’s. Across countries and contexts, access to finance is continuously identified as the leading constraint faced by women entrepreneurs. While finance is a challenge for male and female enterprises alike, the difficulties are amplified for women, who are less likely to own assets which can serve as collateral and are more likely to suffer exclusion based on unequal property rights or discriminatory regulations, laws and customs. An estimated 70% of women-owned SMEs in the formal sector in developing countries are unserved or underserved by financial institutions. A female entrepreneur electrician in Addis Ababa who This amounts to a financing gap of $285 billion.i participated in entrepreneurship training offered through the Women’s Entrepreneurship Development Program (WEDP). She used to be in communications but switched professions after A diverse range of economic research shows that discovering that electricians earn more money. addressing this financing gap and investing in women-owned enterprises is one of the highest- At the same time, opportunities for women return opportunities available in emerging markets. entrepreneurs in Ethiopia lag far behind those of As they grow, women-owned enterprises enhance men. In The Economist’s Women’s Economic labor participation and boost broad-based economic Opportunity index, Ethiopia occupies the 107th rank growth. In particular, due to higher female out of 112 countries. Most growth-oriented women unemployment rates and the fact that women are entrepreneurs fall into a ‘missing middle’ trap, in more likely to hire other women, the growth of which they are served neither by commercial banks female-owned enterprises can be a key driver in nor by microfinance institutions. High minimum loan reducing high overall unemployment rates. sizes and excessive collateral requirements restrict women’s access to loans from commercial banks. Women Entrepreneurs in Ethiopia: Over the past Microfinance Institutions (MFIs) primarily cater to decade, Ethiopia has achieved high economic micro-firms with group lending schemes that growth, averaging 10.7 percent per year, establishing provide very small loans, and tend to have low the country among the fastest growing economies outreach to women (30%). Growth-oriented women- both in Africa and the developing world. However, owned enterprises are therefore starved of the Ethiopia is falling behind its peers in the area of credit investment they need to thrive. to the private sector. According to the World Bank’s 1 (AFRGI), World Bank. This Quick Lesson was cleared by Francesco Strobbe, Finance and Markets Global Practice (GFMDR), World Bank. Salman Alibhai, Africa Region Gender Impact Evaluation Simon Bell, Head, (GFMDR). Women’s Entrepreneurship Development Project: The following figure illustrates the actual flow of WEDP is a $50 million IDA investment lending funds and organizational arrangements under operation designed to address the key constraints for WEDP: growth-oriented women entrepreneurs in Ethiopia. DFATD Canada and UK’s DFID are key development World Bank partners funding part of the project’s activities with an additional $13 million. The project became MoFED effective in October 2012. Bank loan is passed through MoFED to DBE WEDP’s objective is to increase earnings and DBE provides medium-terms Development Bank of Ethiopia Tier 1: lines of credit to eligible PFIs wholesaling employment for women-owned enterprises in Ethiopia. It created the first ever women- entrepreneur focused line of credit in Ethiopia in Mandatory TA Mandatory Mandatory TA Tier 2: TA 2013, and the demand has been staggering. The PFI 1 PFI 2 PFI 3 retailing PFIs on-lend to WEDP line of credit is disbursing roughly $2 million female-run MSEs USD in loans to growth-oriented women entrepreneurs every month, far exceeding initial Sub- Sub- Sub- Sub- Sub- Sub- borrower 1 borrower 2 borrower 3 borrower 4 borrower 5 borrower 6 targets. In tandem, several hundred women participate in the project’s cutting-edge Top Achievements: WEDP is changing the way the entrepreneurship training program each month, microfinance sector caters for micro and small which draws lesson from modern cognitive entrepreneurs and is reaching previously psychology and equips participants not only with underserved segments of the population. WEDP business skills in the traditional sense, but also with disbursed $22 Million USD in loans to female the ability to ‘think like an entrepreneur’. entrepreneurs in 2014, against a target of $16 Million USD, with very healthy repayment rates (99.6%). As of August 2015, the project has provided loans to over 3,000 women entrepreneurs and An embedded impact evaluation component, entrepreneurship training to 4,500. The project has designed through a partnership between the Finance exceeded most of its own forecasted plans and & Markets Global Practice and the Gender Innovation expectations, and is amongst the highest-disbursing Lab, is capturing key learnings and results of the and highest-rated projects in the region. The project project. was awarded a Vice Presidential Unit (VPU) Team Award in 2015, based on its achievements in rapidly Some key achievements are as follows: responding to the needs of women entrepreneurs in Ethiopia. 1. Reaching the underserved: WEDP is successfully reaching its target segment of under- How it Works: WEDP’s line of credit involves a served women entrepreneurs, who have the market “up-scaling” operation where the desire and potential to grow their businesses. Development Bank of Ethiopia (DBE) acts as a 76% of WEDP clients have never taken a loan wholesaler and MFIs act as retailers. The project uses before. an incentive approach aimed at (i) helping DBE developing a new business line involving 2. Unlocking needed capital: One of WEDP’s wholesaling of MSE subsidiary loans and provision objectives was to increase loan sizes, since most of related technical support to participating MFIs; Ethiopian women-owned enterprises were stuck and (ii) helping the MFIs build up a high quality MSE in a ‘missing middle’ trap where loans offered by loan portfolio based on credit techniques that have microfinance were too small to meet their needs. been developed and validated under successful For repeat borrowers, loan sizes have increased micro and small loan programs in other countries, on average by 870%. introduced through downscaling or upscaling approaches to microfinance. September 2015 · Number 002 “With WEDP, the microfinance institutions’ appetite for risk has increased. Previously, they provided loans in small amounts of $1000 - $1500. Now, they are making WEDP loans averaging over $10,000. Plus, they have taken part in a capacity building program, which helped them assess these larger loans using cash flow analysis and risk mitigation techniques. So the MFIs are strengthening both in terms of loans disbursed as well as in their knowledge of lending” (Beimnet Foto, Principal Appraisal Officer, Development Bank of Ethiopia) 3. Catalyzing growth: According to initial surveys, 5. Underwriting innovations in the sector: the average WEDP loan has resulted in an Through partnership between the World Bank’s increase of 24% in annual profits and 17% in net Finance & Markets Global Practice and the employment for Ethiopian women Gender Innovation Lab, WEDP is introducing entrepreneurs, one year after taking the loan. innovative credit technologies to lenders, such as These female-owned businesses are continuing to psychometric tests which can predict the ability grow, as the impacts of capital investments play of a borrower to repay a loan and reduce the need out. Repayment of loans stand at 99.6%. for collateral. This technology allows entrepreneurs who do not have collateral to take an interactive test on a tablet computer which predicts their likelihood to repay. If they score highly, they can borrow without traditional collateral. The test is being piloted under WEDP and subjected to a rigorous impact evaluation. Other banks are asking for the technology already, and scaling-up this technology could have a sea-level change on access to credit in Ethiopia 4. Improving capacity of lenders: Through a dedicated technical assistance component, WEDP is building the capacity of Ethiopia’s leading microfinance institutions (MFIs) to deliver loans to women entrepreneurs. The MFI’s improved ability to appraise, resulted in their capacity to reduce the collateral requirements from an average of 200% of the value of the loan to 125%. At the same time, WEDP microfinance institutions are adopting and diffusing new techniques to reach and serve women entrepreneurs better. They are developing new loan products and recognizing new forms of collateral such as vehicles, personal guarantees, and even business inventory, to secure loans. This is all the more relevant in a country where there is no existing collateral registry. September 2015 · Number 002 Top Challenges time, women who participate in WEDP’s entrepreneurship trainings tend to rate them Unlocking the growth potential of Ethiopia’s women very highly and recommend them to others. entrepreneurs involves addressing a number of Entrepreneurship training needs to be of high intractable constraints. To date, the project has quality, in accessible locations, and at convenient encountered several important challenges and hours, in order to attract busy women learnings: entrepreneurs. Marketing the benefits of training programs is critical. 1. Lenders need help too. Helping lenders move away from traditional collateral-based lending and adopt innovative (and likely more effective) forms of appraisal is a powerful way of expanding access to women entrepreneurs. Improved appraisal can be easier and more profitable for lenders, but changing the way a bank makes loans takes time, and most lenders are cautious when reforming these fundamentals. Flexible, responsive, long-term technical assistance to lenders is critical in bringing about sustainable changes. A female entrepreneur who owns an animal husbandry business “WEDP’s Access to Microfinance component in Addis. She borrowed a WEDP loan to expand the shed for her animals. provides excellent experience to show financial institutions that women entrepreneurs can be good borrowers and that with good cash flow analysis and lending procedures, collateral requirements can be relaxed” (Independent Review of WEDP, July 2015). 2. Engaging men is critical. When women entrepreneurs grow their businesses, dynamics in the household and the family can change. Contact SME CoP: Engaging husbands, partners, and male family Simon Bell, Head, GMFDR, The World Bank members to ensure their buy-in and support is SME Quick Lessons Team: critical. Linking women entrepreneurs with Gillette Conner, Omer Karasapan and Mark trusted male mentors and role models in other Volk sectors can help them transition into more Tel #: (202) 473 8177 profitable businesses. The SME Quick Lessons are intended to summarize lessons learned from SME and other Bank activities. 3. Training is hard. While most women The Notes do not necessarily reflect the views of the entrepreneurs say that they want to enhance their World Bank Group, its board or its member skills, many don’t register for training programs. countries. Women usually cite time constraints or concerns about quality as the main reasons why they won’t attend entrepreneurship trainings. At the same i Goldman Sachs Global Markets Institute, Giving credit where it is due: How closing the gap for women-owned SMEs can drive global growth, February 2014. September 2015 · Number 002