In Ethiopia, approximately more than 87% of the population lacks access to formal credit. For a young entrepreneur in Addis Ababa with a viable business idea but no collateral, or a rural farmer seeking capital to invest in equipment, the barrier is unbeatable. This is not a minor gap it is a structural failure that leaves millions of capable individuals and small businesses locked out of economic opportunity. Lending policy plays a central role in shaping who gets access to finance and who remains excluded.
In most banking systems, credit naturally flows toward established clients: those with collateral, steady income, and proven repayment histories. While this approach protects banks from risk, it also creates a self-reinforcing cycle of exclusion. New borrowers: no matter how capable cannot access credit because they lack the very markers that the system uses to measure creditworthiness. As a result, financial inclusion remains limited, and economic opportunities are unevenly distributed across the population.
Institutions such as the National Bank of Ethiopia (NBE) and policymakers including the finance minister play a decisive role in shaping how credit is allocated across the economy. Lending policies are not merely technical tools they reflect national priorities, whether that is stability, growth, or inclusion.
The challenge is real: How do policymakers balance the legitimate need to maintain financial discipline and protect the banking system with the equally pressing imperative to expand access to those who have traditionally been excluded? This tension is not unique to Ethiopia. Across the developing world, central banks and finance ministries face the same question.
A Concrete Solution: The 15% New-Borrower Requirement
What if lending policy went a step further?
Imagine a system where banks are required to dedicate at least 15% of their lending portfolio to new borrower individuals or businesses with little or no prior access to formal credit. Such a rule would directly challenge the status quo by ensuring that first-time entrants are consistently included in the financial system.
Banks would be required to define “new borrowers” using clear, auditable criteria for instance, individuals with no prior loan history in the formal banking system, verified through credit registries. To prevent gaming, regulators would monitor approval rates and portfolio performance, ensuring banks are genuinely extending credit rather than simply approving trivial loans. Banks that fail to meet the 15% target within a defined grace period would face proceeded penalties: first, mandatory reporting and corrective action plans; eventually, regulatory sanctions or penalties that increase the cost of non-compliance.
Banks will resist this requirement, and their concerns deserve serious engagement. A 15% new-borrower mandate could increase default rates, as inexperienced borrowers present higher risk. It may also require banks to invest in new infrastructure training credit officers, developing alternative assessment tools, and building systems to manage higher transaction costs for smaller loans. These are real costs that will likely be passed on to consumers through higher interest rates or fees.
However, the social return on this investment is substantial. Research from similar interventions shows that default rates for new borrowers stabilize within 2-3 years as borrowers develop repayment discipline, and that the net benefit of increased economic activity, job creation, business growth, tax revenue far exceeds the cost of higher credit losses.
The specific percentage is worth debating. Some might argue for 10% to reduce bank burden; others propose 20% to maximize inclusion. The ideal number depends on a country’s banking infrastructure, the baseline default rate, and the size of the unbanked population. The important point is that some binding requirement creates accountability, whereas voluntary guidelines rarely move markets.
For example India offers instructive evidence. Under the Reserve Bank of India’s priority sector lending framework, banks must allocate 40% of net bank credit to priority sectors, including agriculture and small businesses. Between 2010 and 2020, this requirement helped expand formal credit access to over 300 million previously unbanked Indians. While not all borrowers succeeded the overall impact was transformative. Agricultural productivity increased, rural entrepreneurship surged, and millions moved from informal to formal credit systems.
For individuals, the benefits of formal credit access are direct: capital to start businesses, pursue education, or manage financial shocks without resorting to predatory informal lending. For the broader economy, the impact would be multiplied. Research from the World Bank shows that each percentage point increase in financial inclusion correlates with 0.5-1% additional GDP growth over five years, driven by increased entrepreneurship, job creation, and a more inclusive growth trajectory.
In Ethiopia specifically, with youth unemployment exceeding 25% in urban areas and agricultural productivity stagnating, financial inclusion is not a poverty relief program it is an economic imperative.
A successful 15% requirement would require complementary measures:
– Capacity building: Regulators and banks would need to invest in training staff in alternative assessment methods analyzing transaction data, cash flow patterns, and social collateral rather than physical assets.
– Credit registry development: A robust credit information system is essential to identify new borrowers and track their repayment behavior.
– Gradual phase-in: Rather than implementing the requirement immediately, policymakers could phase it in over 2-3 years, allowing banks time to build capacity.
– Regular review: The policy should be evaluated annually, with adjustments made based on implementation experience and evolving financial conditions.
A new-borrower requirement is not a hypothetical policy proposal it is a proven lever for expanding financial access when thoughtfully designed and implemented. The evidence from India, combined with the urgent need for inclusion in Ethiopia, points toward a clear policy imperative: lending rules that incentivize banks to move beyond their traditional comfort zones can unlock economic opportunity for those who have long been left out.
The question for policymakers is not whether financial inclusion is important, that is settled. The question is whether they have the will to reshape lending policy to make it real. In doing so, they would not only lift millions out of exclusion; they would unleash growth that benefits the entire economy.
Gedion Belete is a journalist and communications manager and can be reached via gedionb4@gmail.com
