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Awet Teki, an economic expert who presented his study on access to credit and private sector development in Ethiopia at an event organized by the Addis Ababa Chamber of Commerce and Sectoral Association (AACCSA), stated that the private sector and financial institutions have to change their strategy to expand access to finance and to boost economic activity.
The Nation’s banks and the private sector need structural change and a lot of work in order to make access to finance easier. Currently only two out of 1,000 businesses that request loans have access to finance from banks. The private sector is not supported by financial intuitions, because they are affected by lack of dynamism and have not been able to develop new ways to provide finance. The low amounts of loans are not only because of the regulatory body, it is because the banks are weak.
His study that is based on data from last year indicated that the number private sector businesses securing loans from financial institutions was only two out of every 1,000 requests.
He said that lack of modern innovation and continuing with the usual market system has affected the dispersion and distribution of finance but that the regulatory body also plays a role.
He went on to say that in 2013 private banks only dispersed 20 percent of their total deposits, which indicates that private banks are failing to provide as many loans to the private sector as they are capable of.
The study indicated that only 10 percent of the private sector’s working capital is covered by banks, in addition banks have only provided eight percent of investment capital to the private sector in the past year.
“This indicates that banks are not serving the private sector and it shows that access to credit for the private sector is very inconsistent,” the expert said.
His report states that the country’s loan system is not innovative, because it is only based on a collateral scheme. “Because of this access to credit is very difficult for the private sector, and bank’s risk management assessment is very weak,” Awet said. He explained that in the current system private banks demand 240 birr in collateral to disperse a 100 birr loan.
His study mentions several other challenges including credit caps like the 27 percent bond imposed by the National Bank of Ethiopia. “However the private banks have to work dynamically and develop innovative ways to provide loans within the rules and regulations of the regulatory body,” he stressed.
He stated that lack of dynamism from private banks is the major challenge for access to finance and financial institutions need new expertise. He said that most leaders of private banks come from public institutions and still follow older ways.
“Banks need improve their capacity with modern expertise to expand the credit scheme,” he said.
He argued that the private sector needs to improve to secure more finance.
“The private sector itself comes with weak financial proposals,” Awet explained. He stated that the private sector in the country is going by traditional means. “The private sector is unable to identify the government policy and other strategies, which is one of the key mechanisms to get finance, even though it is now changing,” he explained.
As part of his recommendation he stated that financial institutions and regulations need restructuring and the capacity of experts needs to be improved in regulatory bodies and financial firms.
According to the expert, the road maps for the provision of foreign banks have to be undertaken until they join the local business. “Dynamism from banks that use different financial instruments other than the usual trend are needed,” he suggested.
The private sector on the other hand has to create a corporate governance level structure. It has to be very educated about the country’s situation and the direction of the government although he has observed some things changing for the better.