The Association of Ethiopian Capital Goods Finance (AECGF) was officially launched on May 23, 2024, marking a significant milestone in Ethiopia’s efforts to unlock finance for youths and micro, small, and medium enterprises (MSMEs). In emerging economies like Ethiopia, MSMEs play a crucial role, accounting for the absorption of 7 out of 10 jobs. However, various constraints have hindered their access to financing, leading to a substantial financing gap of USD 6.1 billion in the country.
One major barrier faced by MSMEs in Ethiopia is the high collateral requirement set by financial institutions. Insufficient collateral is the primary reason for loan application rejections, accounting for 58.6% of cases. Currently, commercial banks dominate the credit circulation in the economy, holding a 94% share, while microfinance institutions and capital goods finance companies account for 4% and 1% respectively. To address the collateral constraint and provide an alternative financing option for MSMEs, a vibrant leasing sector becomes crucial.
The AECGF, established in February 2022, and developed with technical assistance from the BRIDGES Programme (a partnership between the Mastercard Foundation and First Consult) which supported the creation of foundational documents, including a 5-year strategic plan, organizational structure, human resource manual, finance policy, and procedure manual, has been developed to support the growth of MSMEs in Ethiopia. With its establishment, the AECGF is well-positioned to deliver significant benefits to the vast number of micro, small, and medium enterprises that form the backbone of the country’s manufacturing sector.
Before the association’s formation, Ethiopia’s leasing landscape consists of five region-based capital goods financing companies and the state-owned Development Bank of Ethiopia, all operating independently. Recognizing the need for greater coordination, these institutions have now come together under the umbrella of the AECGF. The association aims to facilitate industry coordination, develop strategies to mitigate common risks, establish a centralized hub for capacity building, research, and advisory services, and provide a unified voice to influence relevant policies.
Capital goods finance providers in Ethiopia are actively engaged across all sectors of the economy. Manufacturing equipment represents the largest share of the total leased finance outstanding for all capital goods finance providers. It is estimated that the institutions will reach a total lease financing of Birr 10.8 billion in the fiscal year 2023/24.
Looking ahead, the AECGF has set an ambitious vision to become a leading force in capital goods financing across Africa by 2035. By coordinating efforts, implementing effective strategies, and leveraging its influence, the association aims to create growth opportunities for Ethiopian enterprises and contribute to the broader economic development of the country.