Uncollateralized & Digital Credit in Ethiopia: How Far Has it Come and Where is it Heading?

The last few years have witnessed the rise of a seminal phenomenon in the Ethiopian financial sector that goes back more than a century – digital lending. Although digital credit has immense potential in serving the underfinanced Ethiopian population, there is no lack of impediments holding that potential back. Among the hurdles are the lack of digitized identification and credit rating systems, a heightened fear of risk due to the absence of efficient risk mitigation methods, and difficulties in loan collection. 

The last few years have witnessed the rise of a seminal phenomenon in the Ethiopian financial services sector – uncollateralized and digital lending. 

Digital credit is distinguished by its remotely managed, automatic, and immediate loan appraisal and disbursement features. Loan collection is also automated in order to lower any associated costs. However, the smooth operation of digital lending depends on the availability and efficiency of supporting frameworks such as credit scoring systems and dependable means of identification.  

Although digital credit has immense potential in serving the underfinanced Ethiopian population, there is no lack of impediments holding that potential back. 

Among the hurdles are low connectivity & digital skills, the lack of digitized identification and credit rating systems, a heightened fear of risk due to the absence of efficient risk mitigation methods, and difficulties in loan collection. 

Ethiopia’s first experience with a fully digitized form of lending came in 2018 with the launch of Ethio telecom’s airtime credit scheme. The operator’s customers had the option to borrow up to 100 Birr in airtime credit, although the credit limit would be determined by usage history. The state-owned firm set no repayment deadlines but charged a blanket 10% interest fee. 

The scheme appears to have been a success, partly because defaulting was not a tenable option for borrowers as Ethio telecom remained the country’s sole telecom operator at the time. A lack of digital options for airtime top-up was also a contributor to the credit scheme’s early success.  

According to a 2020 report, two million users access airtime credit from Ethio telecom every month with an aggregate monthly loan value of 1.1 billion Birr. The company reportedly earned 200 million Birr in net revenues from the scheme that year. 

Although digital lending is novel in Ethiopia, the concept of uncollateralized credit goes further back. Over the years, there have been several uncollateralized loan products mostly designed by development agencies and government entities in partnership with financial institutions. 

Among these are repeated attempts at government-sponsored revolving funds. The federal government, as well as regional administrations, have been allotting billions of Birr into revolving funds aimed at addressing the pressing issue of youth unemployment. 

In 2017, federal authorities approved a 10 billion Birr fund to be disbursed to close to three million youth across the country. Two years later, the Addis Ababa City Administration allocated a two billion Birr fund to be disbursed in the form of uncollateralized loans through the Addis Saving & Credit Institution – a microfinance institution (MFI). 

Potential beneficiaries were required to organize into groups and propose business ideas in order to qualify for the credit. Businesses engaged in manufacturing, urban agriculture, construction, services, and trade were prioritized. 

Still, the schemes ran into trouble in the face of rising default rates that put pressure on the partnering financial institutions.  

The challenges have not deterred officials, however, as the state-owned Development Bank of Ethiopia (DBE) recently launched an “idea financing” scheme with an allocation of four billion Birr to be disbursed to startups free of collateral. According to sources, DBE has begun processing applications having accepted over 200 applicants thus far. 

The World Bank has also been experimenting with psychometric analysis to assess the creditworthiness of potential beneficiaries. This was implemented with the Women Entrepreneurship Development Program (WEDP), which works to support women-owned micro, small and medium enterprises. 

The Legal Grounds Behind Credit

Ethiopian law permits several categories of traditional financial entities to disburse loans, including banks, MFIs, SACCOs, and capital goods financing firms. Each of these are governed by a corresponding legal framework with the exception of SACCOs, which are not considered financial institutions and are overseen by the Ethiopian Cooperative Commission. 

As it stands, none but capital goods financing firms are open to foreign investment, while collateralized loans remain by far the most prevalent form of credit provided by banks and MFIs. 

Where are We Now?

The scene is changing, however, as directives governing the operation of mobile money services (payment instrument issuers) were issued by the central bank in 2020. The move gives way to a new model of lending, where fintech firms can engage in microcredit. 

In early 2022, the Cooperative Bank of Oromia and Kifiya Financial Technology announced they will be launching an uncollateralized digital lending product. The product – dubbed Michu – is powered by Kifiya’s Qena uncollateralized lending platform and geared towards addressing the financing needs of micro, small and medium enterprises. According to the duo, over 40,000 MSMEs have taken small-sized loans totaling more than 450 million Birr thus far. Over 300 million Birr of the total has been repaid, indicating a promising return rate.

MSMEs are Michu’s primary focus because their financing needs are rarely serviced by traditional financial institutions like banks and MFIs. Through Qena, Kifiya wants to expand the product’s use case to satisfy individual needs to access finance. 

In early August, Ethio telecom’s mobile money service Telebirr launched the first fully digital microcredit services equipped with automatic disbursement and notification features. The services are Mela (a lending option) and Sanduk (an overdraft credit service where customers can make payments via telebirr and settle later). 

Powered by mobile money tech from Huawei, Telebirr uses customer telecom usage data as well as Telebirr history to determine creditworthiness and credit limits.  The platform now offers daily, weekly, and monthly lending options for any amount. Borrowers are charged between 1 to 10% as a facilitation fee. 

Source: https://www.ethiotelecom.et/mela-micro-credit/

Telebirr reported over 50,000 borrowers a few months after the launch of these services. 

The Future of Digital Lending Products

The growing demand for innovative lending solutions has pushed many in the financial sector to begin piloting their own digital lending products while others are rushing to develop platforms. 

Bank of Abyssinia’s Apollo – a digital banking platform undergoing testing – has also begun availing microloans. 

Financial institutions’ competition for a share of the digital credit market creates opportunities for new partnerships and products. Still, a clear demarcation of the responsibilities that various firms play in the ecosystem is needed; perhaps the digital lending framework that the central bank is investigating will provide precisely that.

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:


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 fintechs. With the current arrangement, fintechs are limited to partnering with 30 commercial banks and some 40 MFIs, which also can develop their own lending products. Recurrent liquidity crunches in the financial sector also pose a threat to the growth of fintechs, while they are also charged with the task of convincing skeptical potential partners to take on the level of risk that digital lending could carry. Bypassing this step would expedite the time it takes to go to market. 

Offers alternative lending options to individuals and businesses. It’s evident that there remains a sizable financing gap for MSMEs and individuals who cannot provide collateral. Allowing fintechs to source funds from multiple sources will ease the financing constraints consumers are financing. Reports from the National Bank show only 300,000 people have taken out loans from banks. Proliferation of digital credit in the market could benefit millions in a short time. 

Competition in the market could lead to lower cost for consumers. The monopolistic nature of the banking industry has given way to uncompetitive pricing. The state-owned Commercial Bank of Ethiopia (CBE) is the main trendsetter, with private banks adjusting rates based on decisions made by CBE executives. The proliferation of digital lending products could lead to competitive pricing. However, In real terms, the fees associated with digital credit can surpass that of traditional ones. 

Risks and Bottlenecks

Over-indebtedness and Debt Culture

The adoption of digital credit is not without its risks. Kenya and Tanzania are among the countries that have seen the rise of an unhealthy debt culture, and the consequent over-indebtedness (particularly among the youth), as a result of widening digital lending.

A study conducted by CGAP assessing lending activities in the East African countries found that almost half of 7,700 borrowers were delinquent on their digital debt. The most common reasons for borrowing were household needs, followed by business needs and mobile airtime.

Experts advise that over-indebtedness can be decreased through the encouragement of productive lending to MSMEs. They also caution that transparent and understandable terms and conditions are necessary to minimize unmanageable debt, allowing potential borrowers to comprehend the full scope of any agreement with digital lenders. 

Insufficient Credit Data 

Among the challenges facing the Kenyan digital lending scene was the absence of a complete and reliable database for borrowers’ financial records. These types of data would help lenders identify borrowers with outstanding loans or past defaults before making decisions. 

In Ethiopia, a government-run credit reference bureau (CBR) was established in 2012. The bureau is supposed to serve as a repository of borrowers’ credit history and financial institutions were required to provide full credit information before disbursing any loans. However, this system, which is managed by the NBE, is not yet integrated with digital credit provision. 

If the country is to have a successful digital lending market, there needs to be a data-sharing mechanism among lenders while also putting in place data protection principles. The National Digital ID project which is under implementation, is expected to be a major enable for this as it designates a single digital identifier for registrants. 

While the availability of an identifier is important, there needs to exist a credit information sharing system creditors can reference delinquent loans from. 

Stringent Regulation, Capacity 

The concept of regulating a digital lending market is not simple, and a central bank must strengthen its human and technological capabilities in order to do it right. This holds true for the NBE, which is already tasked with overseeing banks, insurance firms, and MFIs. Shortfalls in capacity can have serious consequences – the Kenyan central bank’s move to compel DCPs to disclose their sources of funding and revoke the licenses of some was necessitated by suspicions of money laundering. 

The proliferation of DCPs can also prove to be a challenge in controlling the money supply.  Floated money in electronic accounts, as also required by the NBE, must be backed up by real cash held in a bank account. This can be a daunting task unless rigorous supervision is put in place.

2 Responses

  1. An interesting article that pointed out Ethiopia’s quest for digital credit. Even though it didn’t discuss the schemes contribution to financial inclusion to the poor households and pastoral communities of the country yet, it’s an outstanding article worth to read.

    Many Thanks to author

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