A New $10M Fund Launched For Startups In Ethiopia, Courtesy Of Innovative Finance Lab
The UNDP and the National Bank of Ethiopia (NBE) have established the Innovative Finance Lab, with the goal of creating a hub for piloting and scaling up flexible and innovative financial instruments that respond to Ethiopia’s startups and MSMEs funding needs.
The collaborative project intends to unleash $10 million in capital funding over the next two to three years by facilitating access to finance for startups and MSMEs through new financial instrument solutions.
The innovative lab was established to investigate and test novel financial instruments that might benefit Ethiopian MSMEs. It will also act as a knowledge centre, addressing finance supply and demand shortages and designing solutions for growth and innovation-focused startups and MSMEs.
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MSMEs account for about two million enterprises in Ethiopia. According to the UNDP-commissioned research on Inclusive and Innovative Finance for Development (2021), just 1.9% of Ethiopian small businesses have access to traditional banking loans and credit.
The percentage increases to 6% for micro-enterprises, 20.5% for medium-sized businesses, and 35.5% for large businesses. MSMEs in Ethiopia are sometimes referred to as the “missing middle” since they are too large for microfinance organisations yet too small for banks.
According to Nebil Kellow, Managing Partner of First Consult, 95 percent of the money in Ethiopia’s 1.5 trillion birr outstanding loans is flowing to 5 percent of the borrowers.
“MSMEs are the backbones of successful, dynamic, and inclusive economic growth. We want to go beyond what has been done so far,” said Turhan Saleh, UNDP Ethiopia Resident Representative, during the inaugural ceremony of the Lab held at the Sheraton Addis Hotel.
The Lab intends to accomplish its goal by addressing supply constraints, mobilising capital and investing in MSMEs through favourable loan terms, providing loan guarantee schemes that lower barriers for borrowers, and de-risking lending through recoverable grants, all of which will allow them to access finance that would otherwise be out of reach.
The UNDP is funding the lab’s construction, which took nearly a year to complete. The lab intends to establish a 10-million-dollar financial facility in the first phase, which will progressively grow to a 100-million-dollar facility in the second phase.
The finance will be provided by UNDP, donors, venture capitalists, the Ethiopian Development Bank, commercial banks, and then refunded. The Lab has appointed 17 members of the public and commercial sectors to its advisory board. This board decides the financial terms that will be communicated to the MSMEs.
MSMEs that fulfil the Lab’s standards will be able to join the lab’s Technical Assistance Facility (TAF). TAF will conduct due diligence and choose MSMEs and startups based on their potential for development. The team will also provide extensive pre- and post-investment assistance targeted to the needs of MSMEs.
Meanwhile, the Lab’s enterprise finance facility mobilises cash by producing supply via several streaming sources in order to build novel financing solutions for MSME-targeted businesses.
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The Lab has a short life cycle, with its new financial modalities being absorbed by the financial industry eventually decreasing its aim achievement.
Before the end of 2022, an open call for startups and MSMEs will be issued.
Aside from the Lab, the UNDP has signed a Letter of Intent with the National Bank of Ethiopia (NBE) to help build Capital Market Development.
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Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert.
As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard. You can book a session and speak with him using the link: https://insightsbyexperts.com/view_expert/charles-rapulu-udoh