New Guarantee Helps Coop Unlock Billions in Collateral-Free Loans for MSMEs

After securing a half-billion-birr (10 million dollars) portfolio guarantee from FMO, the Dutch Entrepreneurial Development Bank, the Cooperative Bank of Oromia (Coopbank) is deploying at least 1.7 billion birr in collateral-free loans for MSMEs in Ethiopia.

This initiative, targeting underserved groups such as agricultural, youth, and women-owned small entrepreneurs, was announced on July 8, 2024. Through a risk-sharing arrangement, the guarantee covers potential credit losses resulting from MSMEs not repaying their loans.

Coopbank, which has been actively lending to MSMEs in Ethiopia, views the guarantee as a transitional facility to help it further scale its collateral-free lending. The bank aims to unlock at least three times the guaranteed amount.

“The only source of funds for banks is customers’ deposits, and a majority of these deposits go to a few corporates in loans. If you want to deploy a system saying you want to shift to the masses, you need transitional facilities. This needs time. You can’t turn into collateral-free lending overnight. You need successful uncollateralized loan pilots to deploy more capital,” said Abdi Fekede, Senior Director of Digital Financial Service at Coopbank.

Coopbank, which has 13.3 million customers, has so far only provided traditional bank loans, backed with collateral, to around 20,000 people and businesses. Meanwhile, through Michu, the nation’s first uncollateralized digital lending app by Coopbank and Kifiya Financial Technology, the bank was able to reach 230,000 MSMEs and disburse over five billion birr in two years.

“These types of guarantees enable us to shift to MSMEs. When a guarantee is there, that means you can do a clean loan. The demand could also increase significantly,” added Abdi.

The guarantee, which lasts for five years, is provided through NASIRA is a collaborative effort supported by the European Commission and the Dutch government. Launched in 2020, it has facilitated 17 transactions with financial institutions across Central Europe, the Middle East, and Africa. Its partnership with Coopbank marks its first entry into Ethiopia.

“We view Coopbank as an innovative partner and highly appreciate the bank for being one of the few in the country actively lending to MSMEs, cooperatives, and individual farmers,” stated Huib-Jan de Ruijter, Co-Chief Investment Officer at FMO.

According to Abdi, a portion of the funds will be available through Coop’s new Revenue-Based Financing (RBF) model. Coopbank, supported by the World Bank Gender Innovation Lab, Renew Capital, and Rise Addis Advisory, has been piloting this RBF model, another novel financial product in Ethiopia.

Revenue-based financing allows loan approval based on evidence of income rather than collateral. Unlike conventional loans with rigid repayment structures, this new lending product offers flexibility as repayment is tied to revenue.

According to Renew, utilizing “Souqpass,” Coopbank’s newly launched digital platform, MSMEs can digitize their financial management. This platform provides a transparent and efficient system that aligns loan eligibility with actual business performance, offering an alternative to collateral-based financing for entrepreneurs. As part of the pilot project, Coopbank has given 18 collateral-free loans.

Additionally, Coopbank is developing a new loan automation system to expedite the loan application process, which was previously slow, according to Abdi. The bank is employing a brick-and-mortar model where MSMEs loan officers are deployed at branches, and utilizing the new system, loans are disbursed. However, the new funds won’t go through Michu as “the guarantee facility fits more with loans having at least six months maturity”, stated Abdi.

“MSMEs are central to our operations at Coopbank. We have gone the extra mile to integrate MSMEs through digital solutions alongside our traditional financial services. This partnership with FMO marks a new chapter in the Ethiopian banking landscape and will significantly boost our efforts to provide credit to underserved MSMEs,” said Deribie Asfaw, CEO of Coopbank.