The Future of Digital Lending in Ethiopia The traction that met Michu and Telebirr early on highlights the massive demand for uncollateralized digital credit in Ethiopia. New entrants such as Kacha Digital Financial services have also announced they’re eying the micro-credit market. The impending entrance of Safaricom’s M-PESA is undoubtedly going to have an impact, but the telecom operator must wait until the National Bank of Ethiopia (NBE) sets rules before it can enter the fray. Among the most significant recent developments in the digital lending sphere is credit cards. Awash Bank has announced it will start issuing credit cards to its clients in both secured and unsecured loan forms. Clients will be able to access as much as a few hundred thousand Birr in credit from the bank, with limits depending on the loan type. It is a significant milestone for the Ethiopian financial sector, and the development is likely to be followed up by even more big changes. Central bank regulators are working on a digital lending framework that will likely see micro-credit providers gain a step up in the financial sector. As it stands, mobile money providers are the only non-traditional financial institutions allowed to engage in micro-credit service but are still required to partner with banks or MFIs to access loanable funds. The central bank, however, has recently expressed intentions to allow fintechs to loan out funds sourced from entities other than banks or MFIs. Common practice in other countries indicates that these other sources are usually private equity firms, individuals or development institutions. This model is practiced in various countries across the globe. For instance, In Kenya, Digital Credit Providers (DCPs) were not regulated by the central bank until recently and sourced funds from various sources without having to disclose them to the central bank. Nonetheless, close to 300 DCPs have applied for licenses from the Kenyan central bank this year after regulators put out a call following a decision that compels lenders to disclose their source of funding. Ten of them have already been licensed. Development Financial Institutions, commercial banks, private equity firms and high-net-worth individuals are some of the popular sources of funding that Kenya-based DCPs use for lending. The implementation of various models of lending come with their own advantages and disadvantages. Here are the possible opportunities and threat that the Ethiopian market will experience as a result of the upcoming changes: Opportunities Encourages the development of new lending models such as peer-to-peer (P2P lending). Countries with advanced digital lending models have progressed to be able to offer a slew of innovative lending products. Diversifying the source of funds would allow creditors to experiment with innovative use cases based on their own risk appetite as they’ll be able to retain the risk on their own. Provides a more attractive business case for

1. Financial Policies: Rules of the Game
for Local Governments
By Shayne Kavanagh, GFOA

2. Topics
 What are policies?
 The reasons for policies
 Common policy areas
 Making financial policies relevant

3. What Are Financial Policies?
 Rules of the game set by the people in the
organization
 Baseline standards for financial
stewardship that everyone agrees to

4. Why are policies important?
 Institutionalize good financial management
 Define boundaries
 Promote long-term & strategic thinking
 Manage risks to financial condition

5. Example: Reserves Policy
 We will maintain reserves equal to 20% of our regular
operating revenue
 We will not use reserves to fund recurring expenditures,
except in emergencies
 When we use reserves, we will seek to replenish them
as quickly as practicable.

6. Key Concept
Accountability vs. Flexibility
 Accountability: The requirements of responsibility to
the public and to follow regulations
 Flexibility: The ability of managers to take action in
pursuit of public goals
Policies can provide varying levels of discretion to
public officials.

7. Accountability vs. Flexibility
Investment
Capital Budgeting
Operational Budgeting
Reserves
Revenue & Expenditure
Debt
Accountability
Flexibility

8. Policy Areas We Will Examine
 Reserves
 Revenues
 Budgeting and Financial Planning
 Capital Planning
 Debt
 Investment

9. Reserves
S9

10. How much is enough?
Current
services?
Preparing
for Risk?
Reserves are a Hedge Against Risk

11. Consider Your Risks
 More is not necessarily better. Too much reserves can
erode public confidence.
 Helps you find the “just right” amount
 Helps elected officials better appreciate why you have
reserves
 Risk analysis process produces other ideas for mitigating
risks
11

12. Extreme Events
S12

13. Recessions
S13

14. Triple-A Approach Uncertainty
 Accept
• Uncertainty is inevitable
 Assess
• Find potential impact, using reference cases
 Augment
• Uncertainty will usually be underestimated!
14

15. S15
Assess Sales Taxes

16. S16
Assess Monthly Revenues

17. S17
For more
information see
GFOA report on
Colorado Springs
(Google “GFOA
Colorado Springs”)

18. When Can Reserves Be Used?
 Generally, limit to one-time uses
 Avoid using for on-going commitments
 Exception could be where there is a plan in place
S18

19. Who Can Authorize Use?
 City Manager, Council?
• Right answer depends on your structure, but have an answer
 Creative approaches…
• Staff have authority up to a point, but council approval required
if reserves get to low
• Supermajority required to use
reserves past certain point
S19

20. S20
What are the biggest risks your
government faces? How confident are you
that your reserves are sufficient to address
them?
1 minute to think about it
2 minutes to talk with a neighbor
Optional 4 – minutes to talk with three others

21. Revenue
S21

22. What is the Proper Use of One-Time
Revenues?
 One-time revenue should be used for one-time uses
• Buy a capital asset
• Build reserves
• Pay down debt
 Think about volatile revenues…
• Should usually large yields be
considered one-time revenues?
S22

23. How Do We Set User Fees?
 Set cost recovery goals. Higher recovery goals
may be appropriate when…
• Service benefits individual, not general public
• People can be excluded from the service
• Service is elective
 Periodic review of fees
• Regular review and update
• Review how services are provided
S23

24. How Can We Make Sustainable Use of
Grants?
 Grants should align with your community’s goals
• Don’t be enticed into things you wouldn’t otherwise do
 Address what happens to grant-funded programs after
the money runs out
• Grant funded programs shouldn’t automatically be rolled into
the regular budget
S24

25. Budgeting and Financial
Planning
S25

26. What is a “Balanced” Budget?
 Is it “sources equal uses”?
• Would using this to pay staff salaries be sustainable?
 Better definition
• Ongoing revenues = on-going expenditure
• One-time revenues = on-time expenditures
S26

27. What is our Time Horizon?
 Commit to Preparing a long-term plan
• How far in the future the plan will look
• Funds to be considered
 Find Imbalances
• Where and when do imbalances occur?
 Find Solutions
• Develop a balanced long-term plan
S27

28. Capital Improvement
Planning

29. What will the Scope Be?
 Go for a long-term time horizon
• 5 year minimum
 Define what counts as a “capital asset”
• Minimum dollar threshold – different from accounting
standard for a capital asset
• Consider maintenance projects that extend the useful
life of the asset
S29

30. What are the Operating Impacts?
The cost to operate and maintain an asset
often exceeds the original acquisition price
S30
The capital plan
must take this
into account

31. Are we Going to Maintain our Assets?
S31

32. Debt Policies

33. What are Acceptable Conditions for Debt?
 Fundamental: Debt should be used for capital
assets and not operations
 Compare debt to desire for cash financing
• Wake County: “80/20 rule”
 Permissible instruments
• Avoid or limit risky instruments
oWake county limits VRD to 20% or less

34. What Maturity is Acceptable?
 Maximums on life of debt
 Address back-loaded payment schedules
Wake County Policy:
Repay 70% or more of principle within 10 years
S34

35. How Much Debt Can We Afford?
Wake County Policies
 General & debt service fund balance at least 30% of revenues
 Debt at less than 2.5% of County AV
 Debt service at 20% or less of total expenditures
 Repay 70% or more of principle within 10 years
 80/20 rule
 20% or less VRD
S35

36. Investment
S36

37. The Foundation: Scope
 Which funds are subject to the policy?
• Usually all but could be some exceptions…
oComponent units?
oFunds held in trust?
oBond proceeds?
 Objectives
• Safety
• Liquidity
• Yield
S37

38. Standard of Care
 Authority to Invest
• Who is responsible for investment?
• Charged with creating detailed procedures
 Conflicts of interest
• Prohibit them!
• Disclosure of financial interests
 Prudence
• Prudent person or prudent expert rule
S38

39. Portfolio
 Authorized Investments & Diversity
• State law is a starting point, but address extent to
which instruments could be used
oPromotes safety, liquidity, yield
 Prohibited Investments
• Some may be allowed by state law
but still may not be a good idea…
oDerivatives?
oVariable rate debt?
S39

40. Keeping Policies Relevant
S40

41. S41

42. S42

43. Making Policies Relevant
 Pay attention to compliance with policies
• Consider a compliance review checklist
 Use policies to guide important decisions
 Show how policies solve problems
 Regular review and revision
 Orient new elected officials

44. Example of Policy Self-Assessment
Policy Statement Status Comment
Utility Rates & Fees. The City will set fees and user charges for each utility fund at a
level that fully supports the total direct and indirect cost of the activity. Indirect costs
include the cost of annual depreciation and overhead charges.

An annual review of
the utility rates was
completed.
Accounting. Maintain a liquidity ratio of at least 1:1 
Reserves. The City will establish a Golf Course Improvement Reserve for costs
associated with capital improvements budgeted in the Golf Course Fund. The reserve
will be maintained at a level at least equal to the projected five-year costs.
--
Reserve =
($510,000) for FY
2005-06

45. Using Policies to Guide Decisions
Dashboard from Wake County’s Debt & and Capital
Financial Model
Helps decision-makers visualize current &
expected position relative to policies.
Includes scenario analysis.
S45

46. Policy Solving a Problem
Tempe’s Golden Cone of Prosperity
S46

47. S47
What steps could you take, within your
existing power and resources, to make
policies more relevant in your
government?
1 minute to think about it
2 minutes to talk with a neighbor
Optional 4 – minutes to talk with three others

48. The End
If you liked the presentation, get the book
Financial Policies