- Lease Financing for Competitiveness and Expansion of SMEs in Tigrai: Challenges and Strategic Solutions
In Tigrai, Ethiopia, small and medium-sized enterprises (SMEs) face distinct barriers to success within the overall business environment, particularly related to access to finance. As part of the process to address these challenges, the Center for International Private Enterprise (CIPE) supported a public-private dialogue process in Tigrai; in May 2020, the research study from this process was published in the Branna Journal of Engineering and Technology (BJET). This report, which was spearheaded by representatives from the Tigrai Chamber of Commerce and Sectoral Associations and Mekelle University, examines the primary barriers to small and medium–sized enterprise (SME) development in Tirgrai. The analysis places a particular emphasis on SMEs operating in key manufacturing sectors including producers of wood, metal, textile, and construction materials in Mekelle, the capital city of the Tirgrai regional state, and their ability to access lease financing. Lease financing, a crucial aspect of access to finance for SMEs, refers to the process of delivering finance through the provision of an asset by the lessor to the lessee for a specified payment amount within a bounded period of time. For manufacturing SMEs in Tigrai, this allows them to access new equipment and financing for their work without requiring the up-front capital needed to purchase equipment directly or the high-value collateral frequently required for those attempting to access credit from traditional financial institutions. In addition to providing an analysis of the findings gathered through focus groups, interviews, and desk research, the report provides clear strategic solutions to reduce the identified barriers and improve the ability of manufacturing SMEs in Tigrai to access lease financing. The removal of these barriers will allow for greater access to capital and new equipment, which in turn will lead to an increase in the ability of Ethiopian SMEs to start, grow, and flourish within the manufacturing sector.
Following the initial research, representatives from the Tigrai Chamber and Mekelle University worked alongside CIPE to organize a public-private dialogue event in Mekelle where over 60 stakeholders gathered to discuss the report’s findings and their recommendations. Representatives of the SME community were able to speak with policymakers, government officials, and scholars about their struggles accessing lease financing and the drastic impact it has had on their ability to grow and sustain their small businesses. At the public-private dialogue event, stakeholders presented a list of eight binding constraints on access to lease financing for manufacturing SMEs, including an overall lack of awareness of lease financing within the SME community and poor access to lease financing for those that do attempt to use it. The authors of the report were then able to propose strategic solutions developed in advance of the event that targeted multiple levels of the lease financing process and encouraged accountability from both policymakers and the business community.
Public-private dialogue processes are a fixture of CIPE’s work around the world, and have seen significant success in Ethiopia. CIPE provides the technical foundation for a process rooted in evidence-based research and participatory dialogue that local actors can then adapt and mold to fit their context and reflect their realities. In Tigrai, it was the local Chamber of Commerce, University, and business community that identified lease financing as one of the most pressing issues facing the growth and development of manufacturing SME‘s in Mekelle, and their strong collaboration that allowed for constructive dialogue with government to find solutions. Since the publication of the research study and the success of the public-private dialogue event, the Tigrai Chamber of Commerce and Sectoral Associations has continued to monitor commitments from the public sector and leverage their membership and advocacy capacity to continue striving to level the playing field for SMEs in Tirgrai.