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Selam, mentioned by only her first name, is a small business owner that runs her operations from a makeshift plastic shop on the streets of Addis Ababa. In her late 20s, she works from Sunday to Sunday with a budget of 10,000 birr. Serving an average of 20 customers a day, Selam gets to take home only 200 birr by the end of the night.

Though the business is not the most ideal, she gets up every day to her job, as the business provides a livelihood for her and her sister. She is sure that an additional 100,000 birr can help her expand her business and earn more money. But for her, the idea of getting that amount of money is a far-fetched concept, and applying for a bank loan never crosses her mind.

The story of Selam, a reality shared by many Ethiopian entrepreneurs, was the opening speech at an event held two months ago where representatives from 18 banks, policymakers, and Micro, Small, and medium businesses (MSMEs) came together to discuss how to make capital more accessible to entrepreneurs through Qena, Ethiopia’s first and unique approach to the challenge.

Hosted by Kifiya Financial Technology Plc, a homegrown technology firm, in partnership with MasterCard Foundation and International Finance Cooperation (IFC), the program presented the digital lending technology that opens doors for MSMEs to access capital through an uncollateralized loan.

Qena, an AI-driven platform developed by Kifiya, enables banks to offer lending solutions to MSMEs through a credit scoring system that unlocks new markets to financial institutions while helping the roots of the Ethiopian economy, MSMEs, grow.

Why MSMEs? 

Recent figures show that Ethiopia is home to an estimated 800,000 MSMEs and before the COVID-19 Pandemic, these businesses employed 5 million people generating billions of birr in monthly revenue.

“We are only small and medium-sized businesses in the eyes of banks. The many lives of Ethiopians are dependent on the products and services of MSMEs and we fulfill their daily lives and needs,” said Thomas Bekele, owner of John Bag, a leather goods-producing enterprise and a representative of MSMEs at the event.

Scattered through Ethiopia, MSMEs cover diverse geographic and economic areas providing opportunities for disadvantaged groups such as unskilled workers, young people, and women, holding a key role in inclusive development.

Despite their important role, MSMEs face various institutionalized hurdles delaying or denying their growth, with access to credit being one of the major ones.

According to a World Bank Report, access to finance has consistently remained one of the top constraints for businesses in Ethiopia, where enterprises surveyed identified that as the major constraint to their development, far ahead of any other constraint.

Another study by Enterprise Partners (EP) a former market system development programme in Ethiopia, has found that out of the 800,000 MSMEs in Ethiopia, only about 130,000 have access to credit. The study further estimated the total financing gap to be around $4.2 billionWhile various factors drive the gap, the main reason small business owners are unable to access finance from banks is that they don’t have a property that they can collateralize.

“It feels as if everybody trusts us except for banks,” Thomas added.

Thomas Bekele, owner of John Bag, a leather goods-producing enterprise speaking about the financing challenges of MSMEs in Ethiopia at the event held on February 21, 2022, at Sheraton Addis Hotel.


Old Problems 

Ethiopian banks use a traditional rule called the five C’s of credit to assess loan requests.

These five C’s of credit are used to convey the creditworthiness of potential borrowers. The five C’s asses borrowers’ charactercapacity– the amount of revenue the applicant gets, capital– the amount of money an applicant has, condition– the purpose of the loan, the amount involved, and prevailing interest rates, and finally, collateral—an asset that can back or act as security for the loan.

Invented around a century ago, these principles are still relevant to this day and despite MSMEs’ smaller loan needs, Ethiopian banks have failed to accommodate small businesses due to their collateral requirements.

“It’s because of such reasons that in a country with a population of 113 million, there are only around 260,000 active loans in the country while 80 pc of them are returning borrowers,” said Munir Duri, CEO of Kifiya Financial Technologies Plc.

Modern Solutions                                                            

Financial lenders worldwide have adopted credit scoring mechanisms to determine the creditworthiness of a person or a small business. While Credit scoring also assesses the other rules of the five C’s of credit, it mainly bypasses the need for collateral to issue loans.

Applying qualitative and quantitative analysis, credit scoring estimates the risk associated with granting a loan using data provided in the loan application and data obtained from other sources, profiling a borrower’s ability to repay their loans.

The calculations being based on factors such as payment records, frequency of payments, amount of debts, credit charge-offs, and the number of credit cards held; the data points for credit scoring are easy to come in the developed countries.

But in a country like Ethiopia, where data is scarce, coming up with credit scoring models holds a unique challenge, and it’s what Kifiya has been working for the past years to solve using technology.

Local Takes 

Kifiya’s AI-enabled credit scoring system, Qena, designed for the Ethiopian context, utilizes alternative data to power its algorithms.

Qena finds answers to the lenders’ ultimate questions of ability and willingness to pay through enterprise information, such as the number of employees, sales, business registration details, historical business data together with psychometric tests.

The few structured data that exists in Ethiopia, air time purchase and utility bill payment history, are also taken into account by Qena in setting credit scores. Its psychometric tests dwell into the psyche of a loan requester, assessing their character.

Banks can use Qena to launch uncollateralized digital lending services for MSMEs, making the application process available via web-based and app-based platforms. Bypassing the old traditions, Qena eliminates the human factor and ensures objectivity, reduces risk, speeds up the credit process, and unlocks vast markets.

Taking into consideration around 300 data points, the current accuracy rate of Qena is between 85 to 87pc.

Out of the 800,000 MSMEs in Ethiopia, only about 130,000 have access to credit, and the total financing gap is around $4.2 billion.

Taste Run 

At the beginning of this year, Cooperative Bank of Oromia partnered with Kifiya to launch an uncollateralized digital lending product called Michu. Powered by Qena, Michu is the first loan product by an Ethiopian bank that doesn’t require collateral.

“As part of a trial test, we randomly selected individuals that have previously taken small loans from COOP and run them through Qena. The platform had an accuracy rate of 100pc in identifying who played their loan and who defaulted,” said Munir.

Moreover, Qena grows with usage. As the AI is used to give out loans, the transaction data that comes from it, such as the time and frequency of loan payment, as well as information from those who default, are data points for Qena, which it learns from.

Hartnell Ndungi, Chief data officer at Absa bank Kenya, who has overseen the development of many AI-enabled uncollateralized digital lending platforms across Africa, urges Ethiopian banks to deploy the system and experiment with it.

“In uncollateralized digital lending, the goal is to go from no data to limited data and then is to full resource and using the platform is the best way to do it,” said Hartnell.

“Give out loans in smaller ticket sizes. Start experimenting. Test and learn” added Hartnell who hails from neighboring Nairobi, Kenya where around 180,000 small business owners take uncollateralized digital loan every day to finance their daily operations and pay it back too.

New Horizons 

Multiple banks are in talks with Kifya about using Qena to launch their own customized collateral-free loan products. On the other hand, the regulator, the National Bank of Ethiopia, is also trying to catch up with the technology and plans to provide a formal regulation to service setting rules such as interest rates.

Meanwhile, MSMEs are eagerly awaiting Qena’s deployment.

“We plan to seize the opportunity and expand our business by opening an outlet and buying a vehicle for delivery,” said Thomas.





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1 Comment

  • Eskinder Mekonnen, December 21, 2022 @ 9:56 pm

    The application is doesn’t work why

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