Investment_Sector and Market Strategies

1. 1

2. Investment Sector Strategy
March 2017
2

3. Table of Contents
1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
3

4. 1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
4

5. 1. Sector Overview
Private sector development is part of the strategic
direction for the government
Unmet Demand
Cotton production in Ethiopia
meets less than 50% of demand
from industrial companies, with
demand expected to increase
threefold.
Government Priority
A strategic sector for the
Ethiopian economy:
 Private sector financing
 Employment targets 99,653
persons 2019/20
Private sector defintion
How many enterprises are out there?
Contribution for GDP?
Importance of private sector
TP II targets
Finance is a key obstacle for private sector development
Source: Nash International BV (2016); WTO (2014); Innovision (2016), GoE (2016) 5

6. Sector Overview
EP investment strategy focuses on equity financing
and debt financing
6
Target
market
Debt Financing Equity Financing
Small and medium enterprises Medium and large enterprises
This is not part of the sector overview. It is pa
of the strategy section 4. The strategy needs t
be explained also. i.e. the SMEs are too small fo
most FDIs, larger enterprises are better served
by banks for their debt financing needs, etc.

7. Foreign
Indirect
Investment
FII
Overview
Capital sources for private enterprises segmented in
four major categories
7
Direct
Indirect
Local Foreign
Local Direct
Investment
LDI
Foreign Direct
Investment
FDI
Local Indirect
Investment
LII
SME

8. 8
Sector Overview
Local Direct Investment Market
Business Diversification
Local Direct
Investment
Vertical integration
Horizontal Integration
Local Financial InstitutionsSMEs
Working Capital financing
Leasing
 Integration (vertical) whereby family-owned company expand the business operation through cross or whole ownership of companies within its supply
chain for backward or forward linkage, each company within supply chain produces a different product or service, design to strengthen its supply chain,
reduce its production costs, capture upstream or downstream profits, or access downstream distribution channels.
 Integration (horizontal) or lateral integration, is merger or an acquisition of companies along the production process line designed to increase its size,
diversify its product or service, achieve economies of scale, reduce competition, or gain access to new customers or markets.
 The integration can be via buyout, merger, share purchase or equity swap.

9. Sector Overview: Debt Financing
The credit market is dominated by the public sector
Source: WB (2015) 9
• Public sector dominates the credit market with 64% market
share and annual growth of 37%;
• Private sector credit market trails behind at 28% of the credit
market , decreasing annually from 14.5% in 2014 to 5.7% in
2015;
• With no bond market, the debt market mainly comprises
treasury bills and government bond;
• Treasury bills are mainly supported by mandatory purchase of
bills equivalent to 27 % of new loan disbursements of private
banks;
• With a mandate to hold 40% of bank portfolio in short-term
credit, Banks are experiencing liquidity crunch;
• Public sector debt is increasing and less available capital
aggregated for long-term investment; and
• Large-scale public investments financed domestically squeezes
the availability of credit for the rest of the economy.
Composition of Domestic Credit Stock

10. Sector Overview: Financing and firm size
Financing needs vary by firm size and stage of
development
10Source: SME Finance Forum website
Micro Small Medium Large
Long
Term
Me
dium
Term
Short
Term
Financing Needs
Firm
Size
Private Equity
Leasing Finance
Trade Financing / Factoring
Capital
Markets
Bank
Financing
Available
Financing
Options

11. Sector Overview: SME finance
Finance plays a key role in the establishment and
growth of the SME sector
11
Source: Fanta (2012)
*’Equb' being a local term for ROSCAs (Rotating Credit and Savings Association)
Source of
seed
money
Source of
funds for
operations
Source of
funds for
growth
• 76% of SMEs surveyed identified access to finance as the most serious challenge to
establish a business
• More than 50% use own savings and only 2% bank loan to start their business
• Limited start-up capital, inability to achieve desired size upon start up
Financing working capital remains as challenging as raising start-up capital
More than 45% of SMEs raise operational finance through retained profits, while
33% raise it through ‘equb’*
Only 4% of SMEs manage to access bank overdraft facilities and short-term loans
• 75% of SMEs finance business expansion from retained earning. While 3% from
‘equb’ and 12% from bank loans.
• Retained profits often too small to invest in capacity expansion or diversification
into new markets
• Lack of assets for collateralisation means limited growth and continued
disenfranchisement for SMEs
A study conducted on 100 SMEs from the manufacturing sector in Ethiopia revealed the level of
financing constraint faced by SMEs as they launch and try to grow their business:

12. Sector Overview: SME finance
Enterprise credit needs are not met by the financial
sector
12
Micro
(6% have a loan)
Small
(only 1.9% have a loan)
Medium
(20.5% have a loan)
Large
(35.5% have
a loan)
Enterprise size
18 banks
35 MFIs
Credit provided by The missing middle
Too small for banks and
too large for MFIs:
Small enterprises are
underserved in the
credit market
Source: World Bank (2016)

13. 13
Sector Overview
SME needs for loan capital
Stages of Business Lifecycle
Capital source Incubation/Seed Start-up Growth Established Expansion Mature
Equity X X
X X X X
Debt
X X X X X
This is better illustrate
Y Diagram. Lots of ex
of this in other
studies/documents

14. 1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
14

15. New market segment and diversification of risk
Value added of non-financial services, additional income and customer loyalty
Provision of non-financial services and additional income
One of the fastest growing sectors of the economy
Leverage on enabling environment improvements
(i.e. credit bureau, asset registry)
Opportunities
SMEs are an untapped market for financial institutions
15






16. Opportunities
Injection of additional liquidity is an incentive to enter
new markets
16Source: IMF (2015)
Liquidity in the banking sector has been declining
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Mar-15
Liquid assets to total assets 32.7 32.7 20.6 23.2 16.2 10.9
Liquid assets to short-term
liabilities
42.7 43.4 26.7 30.1 21.5 14.7
Total loans and bonds to total
deposits
- - 94.0 93.9 100.6 107.3
As a result, financial institutions have little incentive to innovate, enter new markets or take
additional risks. The sector conditions are:
 Highly illiquid
 Minimal competition
 Highly profitable
 Standard products, with minimal innovation

17. Opportunities
A credit line with impactful technical assistance can be
a catalyst for additional funds
17Source: WEDP
Original credit line from the World Bank:
845,732,694 birr
DBE has revolved 65,709,488 birr
MFI’s own funds:
241,586,048 birr
Global Affairs Canada:
69,812,840 birr
Italian Development Cooperation:
~ 370,590,390 birr approved
JICA:
~1.1 billion birr expected
Evidence from WEDP

18. Opportunities
Lease finance market creates an opportunity for
businesses who have been unable to provide collateral
18
According to a survey conducted by the World Bank, SMEs are discouraged or voluntarily exclude
themselves from applying for a loan
• A third of the respondents did not apply for a loan because collateral requirements is too high
(Collateral rates at 234% in Ethiopia compared with 120.8% in Kenya).
 Lease financing provides opportunity for SMEs to overcome the collateral issue as the equipment
acts as a collateral. The regulatory framework and establishment of leasing companies is the first
step in creating a vibrant lease finance sector.
2013:
Revised Capital
Goods Finance
Business
Proclamation
2013 onwards:
Development
of new leasing
directives (5 of
18 directives
issued)
2014:
Establishment of 5
regional leasing
companies
(amounts of up to
1m birr)
2016:
Establishment of
leasing unit
within DBE
(amounts from
1m to 30m birr)
Leasing companies have liquidity. However, have very low capacity to utilize funds with bottlenecks at
the customer application stage and procurement of lease equipment.
Timeline: Lease finance sector development

19. 1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
19

20. Constraints
Access to finance is the top business environment
constraint identified by firms in Ethiopia
20Source: World Bank Group, Enterprise Survey (2015)
0
10
20
30
40
50
%ofFirms
Ethiopia: Top Ten Business Environment Constraints (percentage of firms)
Ethiopia Sub-Saharan Africa

21. Constraints
Both supply side and demand side issues are
contributing to the low level of financing to SMEs
21
Supply side
constraint
Demand side
constraint
 Low liquidity
 Ability to provide necessary
documentation
 High collateral requirement  Bankable business plan
 Under utilised credit bureau  Inability to meet collateral
requirement
 Lack of asset registry system  Information (especially on
leasing)
 Standardised products /
minimal innovation
 Capacity gaps in back office
operation (MIS/risk
management)
 Skill gap

22. 1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
22

23. Vision
Increased deployment of equity and loan capital
stimulating investment and job creation
Coherent private capital deployment (both equity and debt financing)
engaging all capital provides
 £130M invested by 2020
 5,000-7,000 job by 2020
Please see Annexe for Theory of Change
EP Targets:
23
Foreign Indirect
Investment
Foreign Direct
investment
Local Indirect
investment
Greater investment in local and foreign businesses
Growth of companies leading to employment creation
Local Direct
investment

24. Strategy
EP provides technical assistance in support of a larger
intervention framework
24
Financial Services
to SMEs
Enabling
Environment to SMEs
BDS to SMEs
Technical Assistance
 DBE
 Leasing Companies
 MFIs & Commercial
Banks
Line of Credit DBE:
 Leasing Window
 Lending Window
Diagnostic on
insolvency and
creditor / debtor
regime
Collateral Registry
(hardware &
software)
Standard BDS to
SMEs
Specialized
Advisory Services
(e.g. market
linkages etc.)
Increase access to finance for SMEs

25. Strategy
A snapshot of current SME interventions
25
Women Entrepreneurship
Development Project
Financial Institution TA
SME Finance Project
Financial Institution TA
MSE Guarantee Fund
Assessment and Design

26. 1. Sector Overview
2. Opportunities
3. Constraints
4. Vision & Strategy
Annexes
26

27. Annexe
Financial Sector Profile
27
Micro
Banks
MFIs
SACCOS
Informal
Leasing
Companies
• 18 banks, of which 2 are state owned (1 development bank)
• Significant growth in branch network reaching 3,045 branches by early 2016, of which 34.5% are
located in Addis Ababa. On average 30,281 people served per branch
• Total capital 41.12b birr (49.6 % public)
• Highly profitable, mostly from trade finance
• 35 MFIs, of which 5 of the largest regional MFIs XYZ
• 3.5m active client, of witch 45% are women
• 34.7 billion in assets
• 18,000+ SACCOs, with presence in most Kebele’s
• 529,000 members of which 47% are women
• Outstanding loan portfolio of 245m birr
• Vibrant informal sector with iqub (rotating savings and credit groups) and idirs (mostly used for
funerals)
• 5 regional leasing companies established in 2014 (Addis Ababa, Amhara, Oromia, SNNPR &
Oromia). Serving enterprises with up to 1m birr equipment requirement
• Leasing product also offered by DBE for amounts between 1m to 30m birr
• Only type of financial institution open to foreign investment
Insurance
Companies
• 17 insurance companies, of which 1 is state owned
• Total capital of 3.1b birr
• 414 branches, 54.4% in Addis Ababa
Source: NBE (2014/15)

28. Annexe
Financial Sector Profile contd.
28
Meso
Associations
GoE
Donors/NGO
s
Ethiopian Bankers Association: A membership organization representing 16 private and 2 state
owned banks. It provides knowledge and information sharing, capacity building and lobbying of
policies for the banking sector.
• The Government of Ethiopia, through the Ministry of Finance and Economic Cooperation and the
National Bank of Ethiopia plays a key role in setting policy, regulation, supervision, advisory
services and support for the overall development of the financial sector in the country. The right
enabling environment reduces cost of transactions and can encourage innovation.
• Donors and NGOs play a key role in the development of the financial sector.
• Donors with significant activity in the sector include: World Bank, DFID, IFAD, UNCDF, USAID, etc.
• Active NGOs include: Master Card Foundation, Bill and Melinda Gates Foundation, CARE, etc.
Macro
Association of Ethiopian Microfinance Institutions: A platform for the MFIs for knowledge
management, research, training, performance monitoring, lobbying, benchmarking and provisions
for technical assistance. Expected to play an instrumental role in the growth of the microfinance
industry through the newly established training institute and support for the development of
management information systems.
Source: NBE (2014/15)

29. JobsInvestmentNo.ofFIConstraintsAssistance
Increase jobs created in the wider economy
Additional investment in SMEs through increased
access to finance
Annexe
Theory of Change: Financial Services for SME
Appropriate
Products& services
on offer for SMEs
FIs skill to provide
leasing/working capital
to SMEs
DBE institutional
capacity
Better allocation of investment to the SME
sector
Improved
targeting of
SMEs
Improved asset
quality
Increased demand
from SMEs
FIs skill to manage
leasing/working
capital portfolio
Effective
utilization of
funds
Increased funds for working
capital and leasing
Improved
institutional
capacity to manage
resource
Innovative
products
Better risk
management
Better
portfolio
management
Increased
disbursement to
FIs
Better product to
serve SME sector
Lease equipment
management
process
Improved
sourcing and
management
Increased wealth and growth for SMEs
Initiative
OUTPUTOUTCOME
Increased disbursements by FIs to SMEs
IMPACT
TA SoW to be determined
FIs disburse to better SMEs.
DBE skill to serve
wholesale
leasing/loan market