Development Bank of Ethiopia

Policy Environment Awareness

Creation Workshop
On
SME Financing

June 2021
Table of Contents
1. Introduction......................................................................................................................................1
1.1 Definition .......................................................................................................................................2
1.2 Importance .....................................................................................................................................3
1.3 Objectives ......................................................................................................................................4
2. Policy and Enabling Environment ...................................................................................................5
2.1 Overview of Lease Process Workflow ..........................................................................................5
2.2 Eligibility Criteria ..........................................................................................................................8
2.3 Requirement Checklist...................................................................................................................8
2.4 Taxation and Depreciation ...........................................................................................................11
2.5 Production Areas/Shades/ ............................................................................................................11
2.5.1 Provided by Regional Government ......................................................................................11
2.5.2 Owned by the Lessee. ...........................................................................................................12
2.6 Type of Leasing ...........................................................................................................................12
2.7 Areas of Leasing ..........................................................................................................................12
2.8 Mode of Leasing ..........................................................................................................................12
2.8.1 New Lease ............................................................................................................................13
2.8.2 Additional Fund ....................................................................................................................13
2.8.3 Expansion Lease ...................................................................................................................13
2.9 Exposure Limit ............................................................................................................................13
2.10 Service Charge Rate ..................................................................................................................13
2.11 Grace Period ..............................................................................................................................14
2.12 Lease Payment and Period .........................................................................................................14
3. SMEs Development in Ethiopia ....................................................................................................14
3.1 National Strategy .........................................................................................................................15
3.2 SMEs Target ................................................................................................................................15
3.3 Implementation Strategy ..............................................................................................................15
3.4 Cluster Development ...................................................................................................................16
3.5 HRD and Technological Growth .................................................................................................16
3.6 Source of Finance ........................................................................................................................17
 3.7 Production and Sales Center Supply............................................................................................17
3.8 One Center/Shop Service .............................................................................................................17
3.9 Government Support to SMEs .....................................................................................................18
3.9.1 Maximum Support Package ..................................................................................................18
3.9.1 Minimum Support Package ..................................................................................................18
3.10 Regulatory Requirements ..........................................................................................................19
3.10.1 Tax Law ..............................................................................................................................19
3.10.2 Recording and Auditing ......................................................................................................19
3.10.3 Social Environment .............................................................................................................19
4. Major Internal Problems and Challenges Faced ............................................................................20
4.1 Internal Problems .........................................................................................................................20
4.2 Weak Implementation of Government Support ...........................................................................20
4.3 Challenges faced ..........................................................................................................................21
 1. Introduction
Small and medium enterprises (SMEs) account for about 90 percent of businesses and more
than 50% of employment worldwide. SMEs cover more than 90% of all firms in Sub-Saharan
Africa and 99% in all developing countries combined.

SMEs are key engines of job creation and economic growth in developing countries and greatly
contribute to economic diversification, social stability and play an important role in the
development of the private sector;

Cognizant of this fact, many governments, key multilateral development finance institutions
such as the World Bank, EIB, other organizations and institutions provide a variety of support
to SME’s. The objective is to facilitate growth and enhance economic contribution to respective
countries as SMEs attracted attentions as important drivers of economic development

Despite all these , however, the sector is confronted with challenges such as lack of
coordination ( overlaps and duplication), market linkage, accesses to credit, technical and
managerial skills, high cost of utilities, productivity and competitiveness; underdeveloped
infrastructure and lack of enabling business environment ,limited access to productive
resources, limited coordination among stakeholders, weak SME sector, lack of business culture
and unfriendly environment for growth among others;

Therefore, there is a growing concern and focus on putting in place appropriate polices and
strategies by governments and the need for consistent and continuous support to create self
The intention is creating enabling environment to enable SMEs play rightful role in the
development of the economies;

Ethiopia too came up with SME strategy in 1997 and updated in 2011 by evaluating the
historical developments and the potential against the backdrop and international experience
.Previous attempts tended to focus on employment developments for livelihood improvement
but not strategic enough to create a cadre of local entrepreneurs .reliance and unleash the
entrepreneurship potential of the people;

SME designs were short lived without mechanism of sustainability and scaling up and efforts
were limited. Thus no viable and competitive enterprises were created to be backbone of
industrial growth ;

Policy and Enabling Environment Page 1

Hence , impact was limited and did not inspire political commitment until SMEs national
strategy was drawn in 1997 which was updated in 2011;

The government is very serious and committed to implement its policies and strategies to
enable SMEs become engine of development to play an indispensable role in the
industrialization process;

To this end the necessary institutional building and relationship is established and a
remarkable progress is made inspiring confidence that SMEs will play prominent roles
consistent with the overall economic policy pursued by the country.

As part of its ongoing strategic development endeavor in support of the national development
agenda, DBE has recognized that SMEs, especially the “missing middle” ones are currently
under-served in the Ethiopian financial market. To meet the credit requirement of this
important market segment in the Economy, the Bank has developed a strategy to provide lease
financing services to SMEs through its District and Branch Offices.

Currently, SME is one of government’s priority areas which are established to support
economically missed middle societies of the country. The major concern of Ethiopian
Government to the establishment of this program was, assuring the economic growth of the
country by fostering the local economy supporting with small and medium sized enterprises
through the lease financing modality.

1.1 Definition
SMEs are firms managed in a personalized way by owners/partners with small share of the
market and not sufficiently large enough to access the financial market for raising capital
.Thus; they need interventions and support particularly at their early stages;

In the mean time, there is no universal definition of SMEs that can fit for all situations.
Hence, prevailing definitions classify SMEs into different categories using different criteria
across countries and organizations/institutions and individuals;

SMEs stand for small scale and medium enterprises. However, when micro enterprises are
involved the abbreviation becomes MSMEs which stands for micro, small, and medium
enterprises.

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Some of Criteria to define SMEs/ MSMEs:

 Historical value of investments in plants /machinery;

 Turnover, staff head count and amount of Balance sheet in EU;

 Level of technology (manual/motor operated);

 Total assets, amount of paid up capital;

 Fixed assets excluding land and building (Bangladesh);

 South Africa defines SMEs into micro, very small, small and medium using number
of employees, annual sales and total assets as criteria; and

In Ethiopia, capital, and number of employees are used to determine the level of enterprise.

Small and Medium Enterprises (SMEs) in the context of DBE shall mean an enterprise in
the Agriculture, Agricultural Mechanization Service, Agro-Processing Industries,
Manufacturing Industries, Construction Industries, Mining and Quarries and Tour Industries
that operates with above 6 employees and has total capital from Birr 500,000 to Birr 10 million.
However, farmer unions/cooperatives whose paid up capital above Birr 10 million and apply
for Agricultural mechanization service will be entertained through the lease financing service.

1.2 Importance
Contribution to GDP and Employment Generation

 SMEs have far reaching and strategic importance for the development of any country
apart from livelihood improvement and poverty reduction alone;

 SMEs are known by high labor absorptive capacity and low average capital cost and a
springboard for growth;

 Diversification through dev. new and unsaturated sector of the economy ;

 Thus, they contribute to job creation and social progress enabling equitable income
distribution and activate competition and value additions.

Exploit Niche Market

 Enhance productivity and technological change with a combined effect of stimulating

economic development;

 SMEs provide goods and services with adequate quality and reasonable price
particularly for rural areas and instrumental for an overall development;

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Bring about Economic Transition

 SMEs are vital to achieve economic development objectives;

 SMES contributes to accelerating industrialization, value additions;

 Facilitates transition from agricultural or other sectors led economy to industrialized

export sector development;

 Bring about economic diversification;

 Offers linkage to large industries; and

 Support to the rural economy in supplying income generation activities.

Create Entrepreneurs and Entrepreneurs

 SME’s are the natural home of entrepreneurs and provide ideal environment to
optimally exercise talents to attain personal and professional goals;

 Besides, service providers will feel the spirit of entrepreneurship while they are
involved in the process of supporting SMEs;

 The different training programs and exposures by way of TOT, BDS advisors
training, Entrepreneurship training etc. will develop the culture of Entrepreneurship
and generate potential entrepreneurs and entrepreneurs

Overall Socio -Economic Development

 SMEs don’t require high level training, large sum of capital, or sophisticated
technology unlike the large enterprises that require these things dearly:

 They generate income and assist in the distribution of wealth and bring about social
progress, poverty reduction and improvement in livelihood by creating wealth and
prosperity;

 Enables marginalized groups such as disabled, youth female-headed households to

meet basic needs.

1.3 Objectives

 To pave the way for Industry base establishment

 To realize Job creation and reduce unemployment.

 To enhance engagement of professional graduates(Linkage of university and Industry)

 Support structural transformation objective;

 Promote import substitution;

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  Promote export promotion objective of the country and support foreign exchange
earnings and

 Create access to finance for SMEs particularly the missing middle

2. Policy and Enabling Environment

Economically, SMEs can boost economic growth and accelerate socio-economic progress by
providing traders with the resources to exploit market opportunities and further accelerate the
development of rural regions. Socio-economically, SMEs benefit deprived communities with
the financial stability to afford a better quality of life.

Small and Medium sized enterprises (SMEs) have usually been perceived as the dynamic force
for sustained economic growth and job creation in developing countries. They play
multifaceted role such as boosting competition, innovation, as well as development of human
capital and creation of a financial system.

2.1 Overview of Lease Process Workflow

Among the trainees who have successfully attended the national Training for SME arranged
by the Bank and got certified are eligible for lease financing services after fulfilling the Bank’s
Requirements per standard Checklist including the business plan .The lease process major
milestones are:

1. Lease Application receiving and Declaration of information by Lease Application

format(LAF)
• Branch offices will receive the full filled lease documents as per checklist will be
confirmed in terms of physical and content wise of the documents.
• The lessee will fill in responsible manner the disclaimer agreement, the newly
designed Lease Application format (LAF) witnessed by three respective branch
staff members
• Branch offices send the completed documents together with properly collected credit
information from NBE to district office for further processing of the lease financing
services.
2. Lease Appraisal
• The lease appraisal unit shall propose financing of technically feasible, financially
viable and socially desirable projects after undertaking comprehensive project
appraisal focusing on technical, marketing, financial, managerial and

Policy and Enabling Environment Page 5

 environmental aspects of the project by reviewing the submitted business
plan/feasibility study with help of Bank data and other local sources

3. Quality Assurance and control /loan Review/team

• The team reviews and evaluates the lease request on the basis of the presented
summarized application and appraisal reports for report for appropriate
recommendation

4. Lease Approval committee

• The lease approval committee deliberates on the lease request having the review
and the appraisal reports;
• The committee pass appropriate decision with related terms and conditions based
on its deliberates findings
• The Branch office will communicate the lessee in written form the decision of the
committee to the lease with its terms and conditions.
5. Lease Contract and/or and mortgage agreement
• Before contract signing, the lessee is expected to block the required to deposit 20%
costs of capital goods as equity contribution in block account in the respective
branch office.
• The branch office prepares lease contract by using standard contract format
prepared for the intended purpose;
• The lease contract shall be signed off between the Bank and the lessee by
authorized persons to do so.
• The contract shall be registered at appropriate registry organ with the additionally
pledged collateral (If any).
6. Capital goods and raw material procurement process
• The capital goods shall be procured as per the requirement /specification/ and
choice of the lessee. The Bank carries out overall technical revision and advices
about the capital goods to be procured and procurement shall be made based on
the consensus of the two parties by the name of the Bank.
• The Bank may procure capital goods in bulk based on lessee’s demand.

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 • In case of local procurement, the Bank may pay advance payment to the
manufacturer or supplier not exceeding 30% of the value of the capital goods
against unconditional bank guarantee.
• The Bank has the obligation to facilitate L/C opening with 100% own fund source
for importing the capital goods, installation and commissioning.
• The 20% cost of capital goods as equity source will be release to supplier/Lessee
depending on its appropriateness as per the planned fund utilization plan stipulated
in the lease agreement. The procurement of major raw material will be planned to
legitimate local or international supplier as appropriate.
• The capital goods will be procured in the name of the Bank and will be transferred to
lessee up on settlement of the total leased amount.
7. Grace period

The Bank may grant grace period for its lessees after commissioning and receipt of Acceptance
Certificate of the leased capital goods based on the nature of the project. However, the
maximum grace period granted after commissioning shall not exceed 6 months.

8. Service Charge Rate

• The Bank will require all lessees to pay service charge of 11.5%.
• The Service Charge rate shall be applied starting from the date of commissioning or
date of acceptance of the capital goods.
• The Bank may revise the service charge rate as deemed necessary.
9. Lease Payment and Period
• The payment period of the lease shall be determined based on the cash flow of each
project and the economic life of the capital goods.
• Service charge which is accrued after commissioning within the grace period shall be
paid monthly from the project’s cash flow.
10. Project Follow up and Monitoring

The Bank will conduct strict follow up and monitoring of its operational projects regularly.
Any deviations from agreed terms and conditions will be considered as event of default and
the Bank will reprocess the capital goods immediately.

11. Appeal Handling

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The Bank will carefully consider appeal of its lessee and stakeholders on its lessee’s decision
within the intent, spirit and context of the Lease Policy.

2.2 Eligibility Criteria

The Bank, as appropriate, shall select prospective customers for lease financing based on
the following eligibility criteria:

▪ The customer shall be of Ethiopian citizen/ foreign nationals of Ethiopian origin who
have lived for at least three years in Ethiopia.

▪ SME’s having a paid up capital from ETB 500 thousand to 10 million

▪ Has to contribute 20% of the cost of machinery

▪ Create job opportunity for more than six employees

▪ Need to be engaged in one of the areas of financing

▪ Has government or own production area/shade/.

2.3 Requirement Checklist

The Bank advises all applicants to review the checklist in order to ensure that their documents
are complete. By doing so, the Bank will be able to process applications timely and efficiently.
On top of that submitting complete and genuine documents help the Bank to avoid bureaucratic
practices and ensure speedy project implementation at latter stages. The requirements are listed
below as mandatory and optional requirements:

Part 1: Mandatory Requirements

1.1 Application
1.1.1 Lease Application
Beneficiaries of lease finance are required to submit their lease applications by stating the lease
amount and type of capital goods required and its purpose.

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 1.2 License (For already in Business)
1.2.1 Trade License
1.2.2 Principal Registration
1.2.3 Tax Payer Identification Number(TIN)
1.3 Production Area/Shade

Provided By ፡-

• Government Shade
• Private Ownership

1.3.1 If Private Ownership

• Free of any obligation and willing to provide title deed for same purpose
• Lessee has to submit written confirmation letter that the privately owned shade is ready
to be provided as equity and be pledged as part of the project willingly for the same
purpose. Please note that the pledge of such assets don’t replace the required equity
contribution 20% cost of capital goods.

1.3.2 If Provided by Government

• Rental period of shade should be aligned with capital goods lease period and be
registered by concerned body.
• Government body should permit the installation of the capital good and should be
incorporated in the lease agreement.
• Government body should allow transfer of the use right of the shade to third party in
case of default by the lessee should be incorporated in the lease agreement

N.B ፡- Regional Government offices in collaboration with DBE District Managers have the
responsibility to arrange production areas/Shades for lessee.

1.4 Pro-forma Invoice

If possible three complete Performa invoice are required. If not, one complete Performa
invoice from legitimate manufacturer for budget purpose to undertake lease appraisal is
mandatory.
1.5 Certificate of participation፡-Lessees are required to submit certificate of
participation for the training arranged by the Bank.
1.6 Business Plan/Feasibility study has to be submitted.

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 1.7 Equity contribution of the lessee
1.7.1 Confirmation letter on the readiness to raise in cash 20% of cost of capital
immediately after lease approval that will be held in block account for the purpose
of working capital.
1.7.2 Confirmation letter on the readiness to utilize the blocked equity per the Bank’s
utilization plan to the supplier or lessee as appropriate.

Part Two: Additional Optional Requirements

2.1 Power of attorney

• All loan applications submitted through agents or third party require power of attorney.

• The power of attorney is required to check if the Bank is dealing with an authorized

agent/third party or not.

2.2 Business Track Records

The lessee

Has existing business

Start up business

If the applicant has existing business, the required documents are:

✓ Tax clearance
✓ Provisional/Audited Financial statements
If the lease applicant has no existing business and approaching for start-up finance, tax
clearance and financial statements submission are not required.

2.3 Environmental Friendliness

-Production Area/Shade to be provided by ፡-

• Government Shade
• Private Ownership

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If the lessee will operate on own shade, depending on the nature of the project and status
confirmation letter from concerned body is required. However, for lessee operating on
government shade are not required to submit such confirmation.

2.4 Taxation and Depreciation

▪ Depreciation allowance shall be for the benefit of the lessee;

▪ Payments made to the Bank/Lesser under capital goods finance shall be exempted
from Value Added Tax / VAT/;

▪ An authorized dealer or the Bank shall be exempted from customs duties and taxes on
capital goods imported from abroad

2.5 Production Areas/Shades/

The Regional Government Steering committees have the responsibilities to avail the necessary
production area/Shade/, utilities and infrastructure for the lessee. On the other hand, DBE is
expected to provide capital goods for production by covering 100% cost up to installation and
commissioning and the lessee is expected to raise 20% cost of capital in cash for revolving
working capital purpose and put in block account in the branch offices and will be released to
suppliers and/or customers as appropriate after installation and commissioning. The District
Managers who are members of the Regional government steering committees are expected to
facilitate the provision of necessary production area/Shade/, utilities and infrastructure for the
lessee not only to their District areas but also to other Districts within the Regional Government
by interfacing to Regional Steering committees who have the responsibilities to do so. Among
the district office, Diredawa District Manager participates in the steering committee of Somalia
Regional State, Harare Regional States and Diredawa City Administration because it is the
only District office in the area. For this Special program lease financing services will be
provided only for lessee with production areas/Shade/;

2.5.1 Provided by Regional Government

The teams are expected to visit the readymade shades at once and precede the lease
processing services. Besides, required commitment or confirmation letters regarding the
facilities in the production area can be requested from stakeholders for smooth execution
of the program as deemed necessary.

Policy and Enabling Environment Page 11

 2.5.2 Owned by the Lessee.
The lease applicants that have their own production area or shade will be considered as
equity of the lessee and the assets will be pledged as first degree collateral. After installation
and commissioning if the required working capital is not covered by the 20% equity source
in block account, the Bank may provide additional working capital to the extent of the value
of the production area or shade based on the fund utilization status. Besides, required
confirmation letters regarding the facilities in the production area can be requested from
stakeholders for smooth execution of the program as deemed necessary.

2.6 Type of Leasing

 DBE shall provide capital goods finance in the form of Hire Purchase for SMEs.

 The total amount of lease includes all costs until commissioning i.e. hard and soft
costs.

 The Bank shall finance brand new capital goods.

 The Bank shall not entertain request for refinancing for already purchased capital
goods.

2.7 Areas of Leasing

The Bank shall finance capital goods from the priority areas of the Government for SMEs.
Priority area projects for SMEs Lease Financing are:

i. Agriculture;

ii. Agro-processing industries;

iii. Construction materials production industries;

iv. Manufacturing industries;

v. Mining and Quarries ;

vi. Agricultural Mechanization services; and

vii. Tour Industry

2.8 Mode of Leasing

The Bank shall extend lease financing in the form of new, additional or expansion to projects
in the priority areas of the government for lease financing upon fulfilment of its requirements.

Policy and Enabling Environment Page 12

2.8.1 New Lease
 A new project to be established or under implementation (i.e. projects which did not
commence operation).
 An existing (operational) project/enterprise graduated from micro enterprise and
request for project expansion through lease financing.
 Existing SMEs which are not customers of DBE and have been involved in
production and approaching the Bank for expansion in lease financing scheme.

2.8.2 Additional Fund

Additional fund may be granted only to projects under implementation being financed by the
Bank. Additional lease may be granted to projects under implementation to purchase additional
capital goods acceptable to the Bank that may result from items overlooked during
appraisal, price escalation due to currency fluctuation and to replace damaged items.

2.8.3 Expansion Lease

 The Bank may provide an expansion lease for all priority area projects under Lease
financing which have been properly implemented and proved to be successful
financially as well as in the areas of project management/administration.
 The Bank shall not provide expansion lease for projects carrying non-performing
lease and/or making losses for the last two consecutive years.

2.9 Exposure Limit

 The total liabilities to a single lessee resulting from extension of one or more lease
financing including special working capital loan shall be limited to Birr 35 million.
 The minimum amount to a single lessee resulting from extension of lease financing
shall not be less than Birr 2 million.
 The maximum lease portfolio of the Bank at any time shall be limited to 20% of the
total loan and lease portfolio of the Bank.

2.10 Service Charge Rate

 The Bank shall require all lessees to pay service charge and other necessary charges on
lease financing services. Currently, the service charge is 11.5% p.a
 The Service Charge rate shall be applied starting from the date of Commissioning date
of the procured machineries and equipments (After signing of certificate of acceptance)

Policy and Enabling Environment Page 13

2.11 Grace Period
The Bank may grant grace period for its lessees after commissioning and receipt of Acceptance
Certificate of the leased capital goods based on the nature of the project. However, the
maximum grace period granted after commissioning shall not exceed 6 months.

2.12 Lease Payment and Period

 The payment period of the lease shall be determined based on the cash flow of each
project and the economic life of the capital goods.
 Service charge which is accrued after commissioning within the grace period shall be
paid monthly from the project’s cash flow.

3. SMEs Development in Ethiopia

✓ After the emergence of the new government lead by EPRDF, SMEs sector is given prime
importance and became a priority;

✓ The government enacted the 1997 strategic paper which was updated in 2011 as a
favorable environment for MSEs to prosper and expand and meet the challenges of the
global economy;

✓ Thus multifaceted support and attention is provided on a case by case basis depending
upon the stages of SMEs and economic importance of the sectors which in turn is
governed by the economic policy pursued by the country.;

✓ A policy framework is put in place to reach potential enterprises to support the sector’s
development;

✓ Support interventions to reach the potential as an “engine of growth”;

✓ The major types of supports/ initiatives in Ethiopia , like other governments these days,
is to strengthen support to SMEs in the following areas:

✓ Training on entrepreneurship development, technical and managerial skills;

✓ business development Services;

✓ Provision of working premises;

✓ Access to finance and create market linkages etc. ;

✓ Create conducive business environment based on the dev’t stage of SMEs,

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3.1 National Strategy
Primary objectives of the policy framework:

✓ Facilitate economic growth and bring about equitable development;

✓ Create long term jobs;

✓ Strengthen cooperation amongst SMEs;

✓ Provided the basis for medium and large scale enterprises; and

✓ Balance preferential between SMEs and bigger enterprises.

3.2 SMEs Target

✓ SMEs development is key industrial policy for the structural transformation of the
economy;

✓ Expand the quality and quantity of SMEs;

✓ Support 3 million people;

✓ Training of trainers-10,000 operators- technical and vocational skills ;

✓ Capacity building and basic skills training;

✓ Provide 15,000 ha of land for working premises, construction of sheds and buildings for
SMEs;

✓ Micro credit and marketing information- identify bottlenecks by working with SMEs
and give the necessary support;

3.3 Implementation Strategy

✓ Strengthen regulatory support based on growth stages but also policy
environment to nurture entrepreneurship and competitiveness;

✓ Promotion of savings through training and complimentary support to increase

capital of owners and employees;

✓ Support based on the growth stage and priority of sectors but also based on
entrepreneurship drive and competiveness;

✓ Put in place transparent accountable and efficient mechanisms to access credit;

✓ Put in place mechanisms to access production and marketing premises to ease

capital problems ;

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 ✓ Provide BDS and supportive market mechanism such as export incentives,
linking SMES with medium and large scale manufacturing industries and access
to agricultural outputs;

✓ Continuous training and awareness initiatives to business owners to nurture

entrepreneurship;

✓ Expansion of industrial extension services in urban areas; and

✓ Provide training service in skills and technology transfer.

3.4 Cluster Development

✓ Collective efficiency;

✓ Competitive in the wider market through proximity low “search and reach “costs;

✓ Cluster development program introduced and implemented (2005 -2009) foot

wear, garment,

✓ Industrial clusters neutralize market failures;

✓ Avoid High transaction cost and enable Specialization;

✓ Creates Social capital- close acquaintances, trust based relationships, good

friendship and networking.

3.5 HRD and Technological Growth

• Responsibility and function of TVT:
• Technology institution transfer technology:
• Development of entrepreneurship problem solving skills , training and consultancy
service and technology information sources and development;
• Recognizing, sampling, and producing products to substitute import;
• Clear intention to create industrialists to run the country’s development by educated or
youth in general;
• Chang of perception through training and youth activities by associations and families ;
• Sense of self initiation by the youth , developing entrepreneurship thoughts, knowledge
and freedom from dependency; and
• Updating and transferring technology and expansion of modern mgt system.

Policy and Enabling Environment Page 16

3.6 Source of Finance
➢ Start ups are responsible to mobilize own sources (saving / family for initial capital;
➢ Regional and city administration/municipality facilitate credit services;
➢ Leasing and supply of finance in special condition will be facilitated;
➢ Youth innovators will be facilitated to get credit;
➢ Business and market centers, work centers facilitated by city administration will save
cost of capital;
➢ Lease machine and raw materials support will be provided.

3.7 Production and Sales Center Supply

 Cluster development to resolve bottlenecks of production sites, promote technology
supply, market opportunity, solve capital requirements, production and sales center
with reasonable rental charges;
 Graduates to medium level will be supported by work sites , credit and sustainable
market to contribute to industrial development as a source of incubation centers;
 Access to market information both for local or export market;
 Market opportunities through marketing systems by organizing SMEs in association
and group;
 Commodity producers for domestic /foreign market that contribute technological
transfer will be supported to expand; and
 Market linkages and subcontracting shall be facilitated.

3.8 One Center/Shop Service

✓ Data registration for job seekers systematically identify employed /unemployed;

✓ Facilitate formalization individually/in groups within a clusters or not using own

capital or credit;

✓ Provide sustainable capacity building service to support initiation, moral to

develop work culture and holistic personality;

✓ Industry extension service;

✓ TVETs and other supporters are responsible to build modern management,

capacity and technological level;

✓ Strengthen Support Providers;

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 ✓ Creating enabling environment;

✓ Political leadership to solve SME challenges; and

✓ Support should not lead to dependency but based on interest on legal basis.

3.9 Government Support to SMEs

Cognizant of the strategic importance of SMEs for the overall development of the country:

✓ Government provides all round support to SMEs to enable them play their
rightful role;

✓ The type of support is based on the level of growth by SME and the type of
sector involved;

✓ Support will be provided consistent with the SME strategy pursued by the
country;

✓ The purpose of the support is to enable SMEs resolve common problems

affecting their development; and

3.9.1 Maximum Support Package

✓ Working premises with least leasing price;

✓ Product display center with least leasing price;

✓ Technical and business management training;

✓ Counseling service;

✓ Loan provision; and

✓ Market linkage, particularly with government development program (e.g housing

development) ;

✓ Exhibition, trade faire organization ;and

✓ Access to technology

3.9.1 Minimum Support Package

While the maximum support is given to those SMEs that are engaged in strategic sector and
best performers, the rest will also enjoy minimum support as depicted below:

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 ✓ Loan provision;

✓ Exhibition, trade fair organization;

✓ Technical and busiest management training and counseling service;

✓ One center/ shop service and industry extension;

✓ Strengthen support providers; and

✓ Creating enabling /work environment.

3.10 Regulatory Requirements

3.10.1 Tax Law

• Identify duty free incentives and
• Taxable and non-taxable incomes
• Other tax issues

3.10.2 Recording and Auditing

• Properly record your transactions as per IFRS
• Prepare financial statements regularly
• Conduct audit & submit reports to the Bank
• Others as per national financial regulations.

3.10.3 Social Environment.

The Bank shall ensure that at a minimum the projects to be leased are environmentally
friendly and socially acceptable. Furthermore, the Bank shall:

• Ensure that its financed projects avoid adverse impacts to the environment and human
health and safety occurring from the production, procurement, use, and disposal of
hazardous material, including organic and inorganic toxic substances, pesticides and
persistent organic pollutants;
• Not Finance projects that do not comply with the country’s environmental and social
law and regulations;

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 4. Major Internal Problems and Challenges Faced

4.1 Internal Problems

 Tendency of dependency on outside support;

 Inadequate capacity to carry out market studies and business plans;
 Poor identification and attracting competent clients;
 Low level of loan utilization and lack of mobilization of savings ;
 Lack of willingness to accept technology and readiness for change;
 Lack of acquisition of skills and managerial experience;
 Lack of entrepreneurial culture, skills , perseverance and commitment;
 Poor record keeping system and mixing personal and business resources and even
worse lack of using bank accounts;
 Limited ability to tap economies of scale and small domestic market;
 Attitudinal problems( belief in what they do);
 Lack of skills in business management and record keeping;
 Lack of strategic focus on planning and monitoring results;
 Structural weaknesses, poor quality and productivity;
 Tendency to work illegally, wrong outlook and capacity to pay Gov. taxes;
 Attitude towards credit and dependency on outside help;
 Cultural problems regarding transparency and use of professionals in business;
 Incidence of sickness and Bankruptcy; and
 Low income in the face of rising living expenses in cities.

4.2 Weak Implementation of Government Support

Experiences in South Africa show government support will fail to produce expected
results/impacts due to reasons as explained below:

 Lack of awareness/outreach by SMEs;

 Uneven distribution / concentration in metropolitan areas;
 High cost of searching for support – no system on “how” “where” to access support;
 Cumbersome administrative requirements leading fatigue and high level of
disappointment;
 Poor delivery system- incompetence of people in the government delivering the
support; and
 Barriers to financial inclusions – attitudinal or perception by nature.

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4.3 Challenges faced
Products
 Similar products lacking diversification- copy mentality;
 Lacking sufficient range of product design;
 Lack of improvement in some items (pottery, handicrafts furniture, metal products,
kitchenware etc.);
 Deteriorating quality of products due to defective raw materials and unskilled
employees;
 Same products available from SMEs and medium sized enterprises that have
economies of scale as an advantage; and
 Inappropriate locations and premises for sales/production

Technical Aspects

 Inefficient use of technology , obsolescence and low productivity;

 Lack of technical, managerial skills, know-how and –inadequacies;
 Inappropriate technology;
 Lack of willingness to accept technology and readiness for change; and
 Low level of structural development.

Marketing

Who is the Target Customer?

 Track records of customers( the five “Cs”);
 Why do customers buy the product or service?
 Inability to carry out market surveys;
 Most SMEs are in the informal sector and don’t know their customers/suppliers; and
 Don’t have a data base for repeat customers.
Competition
 SMEs competing with medium sized enterprises are at disadvantage;
 Pricing below cost due to existence of larger enterprises selling similar products with
reduced price is very hard to beat;
 Overlooking not only existing competitors but new once that will follow suit and
establish similar business in the future;
 Competition from highly subsidized goods in developed countries;
 Competition from raw materials hoarding and swaying skilled manpower; and

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  Competition to hire experienced and qualified employees.

Pricing
 Lack of basic costing knowledge and book keeping skills;
 Overlooking overhead costs as expenses;
 Failure to consider family labor as cost of production;
 Lack of knowledge regarding raw materials – input-output ratio to arrive at unit
prices;
 Lack of skills to set competitive price; and
 Inability to work out the unit cost of products

Market Information

 Lack of information to locate the best market (input/output);

 Inability to analyze respective markets;
 Inadequate Market information and network;
 Inadequate information on government and other assistance and sources of financial
resources;
 Lack of CIC to appraise loan requests by SME’s;
 Lack of sustainability in jobs in construction companies and failures to think of other
opportunities ; and
 Inability to effectively promote products

Distribution, Market Linkages and Premises

 Lack of retail outlets -at times resorted to market days;

 Lack of accessing premises in good locations and faire lease fees/rent;
 Irregular and erratic supply of raw materials;
 Lack of working capital ( raw materials shortages and ineffective marketing practices)
are obstacles for expansion of the sector;
 Lack of subcontracting and foreign market linkage;

Finance/Funding

 Finance is determinant to business growth and enable s SMEs to play their

prominent role in the economy;
 However, according to studies no access to finance was reported 41% in LDCs,
30% in Middle Income and 15% in High income countries;

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  Banks have started considering SMEs as important line of businesses these days but
basic financial services are still limited ;
 Banks have traditionally viewed funding SMEs as a challenge due to:
✓ Information asymmetry;
✓ Lack of collateral;
✓ Higher cost of serving smaller transactions etc.
• SMEs financial requirements are too large for micro finance but are too small to be
effectively served by corporate banking models
 Limited number of competent personnel to work with SMEs in a customized way
using simplified approach suitable to SMEs;
 Using straight jacket products and want of easy risk ;
 Weak determination of the right amount of credit;
 Immediate loan repayments and under filling of credit;
 Inadequate monitoring and supervision of extended credit
 Lack of access to financing is consistently cited by SMEs as one of the main barriers
to growth;
 Stringent credit policies and high interest rates;
 Tight repayment program leading to working capital constraints;
 Resort to collateral due to excessive transaction costs; and
 Declining level of loan repayments.

Management and Organization

 Some owners don’t trust employees or other people to work with and are reluctant to
use professionals;

 Hiring relatives, close friends that don’t have the right skills;

 In availability of the required human resources and lack of resources to hire the right
personnel;

 Lack of modern business management skills and low level of educational

background / illiteracy in some cases;

 Lack of consistent HR policy and procedures; recruitment system, contractual

agreements, performance rating etc.

 Lack of transparency and accountability; and

 Attitudes towards trust and confidence between owners and staff etc.

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The major Problems/Challenges

✓ Lack of entrepreneural capability of the operators and poor technical & technology
support in the sector as a Whole.

✓ Huge gap between the demand & supply of credit service.

✓ Weak saving culture.

✓ Limited of outreach of MFIs.

✓ Budget constraint to prepare working premises for MSEs.

✓ Miss utilization of working premises.

✓ Poor productivity & less quality product.

✓ Lack of access to market for their goods and services.

✓ Lack of market information due to poor information technology utilization,and

✓ Poor managerial skill.

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