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Ethiopian Bank Trials Revenue-Based Financing 

By Antony Maina | Wed Jun 26 2024
Cooperative Bank of Oromia has made 18 collateral-free loans for female and male entrepreneurs as part of a first-of-its-kind pilot in the country
  • Innovative Lending -  The Cooperative Bank of Oromia introduces revenue-based financing to support entrepreneurs in Ethiopia, with a focus on women.
  • Collateral-Free Loans -  Revenue-based financing allows loan approval based on evidence of income rather than collateral. 
  • Supporting Women - A significant portion of the loans disbursed under this pilot program have gone to women.
In the bustling streets of Addis Ababa, Betelhem Tamene, the dynamic entrepreneur behind a small-scale garment production company, embodies the resilience and ingenuity of Ethiopia's burgeoning small and medium sized enterprise (SME) scene.  
Tamene's journey epitomizes the challenges faced by women-owned businesses in accessing traditional financing. Armed with determination and a 100,000 ETB ($1,700) revenue-based loan from the Cooperative Bank of Oromia (CBO), she recently embarked on a mission to procure inputs for her diverse product line, ranging from trendy t-shirts to essential student uniforms. 
Unlike conventional loans with rigid repayment structures and high thresholds for credit history and collateral, Tamene gravitated toward the flexibility of the revenue-based financing (RBF) model. The new lending product is spearheaded by CBO in collaboration with the World Bank's Africa Gender Innovation Lab, Renew Capital and Rise Addis Advisory.
Tamene is excited about the new loan product: “This loan offers a great deal of flexibility as repayment is tied to revenue, which is especially beneficial for businesses like mine that experience seasonal fluctuations [and] often struggle to meet the collateral requirements of traditional bank loans.”
With the aid of “Souqpass,” CBO's newly launched digital platform, Tamene digitized her financial management. This platform provides a transparent and efficient system that aligns loan eligibility with actual business performance, providing an alternative to collateral-based financing for entrepreneurs like Tamene. 
On the other side of Addis, Emebet Abit owns a children’s boutique and school accessory shop and noted that she feels she now has an edge over her competition. She also received a collateral-free loan for 100,000 ETB ($1,700) loan and used Souqpass as part of the process. Since using the platform to track her expenses, revenue and inventory, she has consolidated insights about her business through the user-friendly summary dashboards. 
Using the Souqpass platform unlocks access to a loan application portal where entrepreneurs can qualify for loans based on the actual performance of their business. The increased visibility into operations reduces the need for the bank to rely on collateral as a risk mitigation measure.
Bridging Capital With Innovation
Bank financing has long been a roadblock for many entrepreneurs, especially women entrepreneurs who often do not have the collateral that banks need to access financing. In addition, a fixed loan repayment schedule is unresponsive to fluctuating macroeconomic realities and the natural seasonality that some industries experience. 
In basic terms, RBF means that entrepreneurs can pay as they earn. In its simplest form, there are no fixed payments. Their revenue dictates the amount they pay. If a business has a rough month when they do not generate revenue then they do not have to pay.
This type of financing is common in the world of venture capital and fintech providers but CBO has pioneered the approach in Ethiopia with support from World Bank's Africa Gender Innovation Lab, Renew Capital and RiseAddis Advisory. To the delivery team’s knowledge, CBO is the first traditional bank to deploy the model. 
A Step Towards Inclusive Finance
So far, loans have been disbursed to 20 entrepreneurs, with a majority of them being women. There are two repayment options available:
  • The pure RBF model where companies repay 20% of their revenue each month (no payment if they have no revenue).
  • A hybrid model where companies repay 20% of their revenue each month along with a small fixed payment (3% of revenue projections at the time of loan approval). 
The project team is monitoring loan performance and plans to refine repayment structures and risk management approaches as the pilot progresses. 
CBO’s revenue-based financing pilot program is still in its early stages, but this could very well become a key innovative strategy for banks to close the financing gap for entrepreneurs across the continent. 
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.

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