The Challenges to the Development of Micro and Small Enterprises (MSEs) in Ethiopia

1. Overview of the Ethiopian MSEs Sector

It is an obvious fact that the high rate of unemployment and multi-dimensional glitches in the deprived economy of an under-developed nation cannot easily be resolved by establishing huge factories and manufacturing units. If the government somehow prefers to do so, however, the country will enter into a massive amount of foreign lending. The suitable solution to facilitate job creation for millions and improving the nation’s economy is establishing micro and small enterprises (MSEs).

With the intention of increasing the role of MSEs in national development, the government of Ethiopia prepared the first National Micro and Small Enterprises Strategy in 1997. In order to further boost their impact on the industrialization of the country, MSEs were given a crucial role in the Plan for Accelerated and Sustained Development to End Poverty, which was effective from 2005-2010. By the end of the plan, a total of 167,835 MSEs had created approximately 1.46 million employment opportunities. With its successor, the first Growth and Transformation Plan (2010-2015), more than four folds of employment opportunity was created. The second Growth and Transformation Plan (2015-2020), which still has more than a year to be completed, aims to disburse USD 904 million in loans to MSEs through micro financial institutions and stimulate the creation of 8.4 million jobs. MSEs in Ethiopia are the second largest employment generating sectors next to agriculture. The requirements to be categorized as micro and small enterprises in Ethiopia are tabulated below:

Table 1: Definitions of Micro and Small Enterprises in Ethiopia (Ministry of Urban Development and Housing, 2012)

2. Challenges to the Ethiopian MSEs Sector

Although the government of Ethiopia has put special focus in developing MSEs, the achievement of the effort has not been satisfactory. This is mainly due to the fact that the development of MSEs is not a smooth process and has been constrained by internal as well as external challenges.

2.1. Internal Factors

2.1.1 Educational Background

In Ethiopia, most of the owners of MSEs do not possess formal education. For example, a survey conducted by Alemu Hawando (2017) in Oromia, the biggest region of the country, revealed that among 384 individuals assessed for the study, more than one third of the interviewees have only basic or no education at all.   

Such lack of formal education has a significant negative impact on the performance of the enterprises. This is because the owners fail to properly plan and assess their businesses, keep records to track their daily transactions and account for their expenses and benefits in a timely manner.

2.1.2 Resources Management

Apart from lack of education, the other internal factor which can be considered a challenge to the performance of MSEs in Ethiopia is the owners’ propensity to mix the property, revenue and expenses of the business with their own personal property. It is customary to see business funds utilized to settle personal issues rather than investment into plans that can upgrade their businesses. This will play its own role for ineffectiveness of the enterprises.

2.1.3 Lack of Business Information

Lack of updated business information supported by information technology regarding buyers’ requirements, regular prices and the supply and demand chain is also one barrier for the MSEs. Failure to produce demanded products at a fair price and the incapability to establish interconnections with other enterprises can result from lack of information.

2.2. External Factors

2.2.1 Access to Finance

Perhaps one of the major external challenges for MSEs in Ethiopia is the constraint to access loans. As it is well known, the seed money to start MSEs can be drawn from various sources, mainly loans obtained from financial facilities like micro finance institutions (MFIs). The other sources can be from personal savings and family support. However, not all MSEs that approach MFIs will get loans. Most of them will be denied loans from the institutions due to lack of adequate collateral and inability to meet the pre-loan savings requirements. Not only this, the terms and conditions of loans to be secured from MFIs have become more restrictive over time, particularly in terms of loan size and collateral requirements.

2.2.2 Production and Marketing Places

Though the government provides production and selling places for many of the MSEs, a significant number of the rest of the MSEs have to use either their home or rented premises as their production and marketing venue. Due to advancement and expansion of cities in the country, owning a premise to carry out business is becoming a challenging factor for the enterprises. Consequently, this has led to high production and hence, high selling costs and low sales of products, leading to negative cash flow. In this regard, many of the MSEs are pushed to the periphery of the cities, seeking a place with lesser rental/owning cost.

Even the enterprises for which the government has provided production and marketing places are still not relieved from problems. The sufficiency of these government-provided places to accommodate all the machineries and products and their suitability for ease of market access is questionable. Access to infrastructure like transportation and telecommunication services, particularly in places located outside the capital city, is another constraint that hampers the development of the enterprises.

2.2.3 Market Access

Micro and small enterprises have the opportunity to sell their products only if suitable market accesses are provided. However, many MSEs in Ethiopia have limited market networking as most sell their products to the local market in their vicinity and only some have the access to sell their products at the national level. Furthermore, most of the enterprises sell their products directly to the customer. In doing so, they use the traditional methods of word of mouth and sign boards for advertisement purposes. Although the government provides exhibitions during holidays to enable the enterprises to display their products to the consumer, they are not effective since the exhibitions are usually held in very confined pedestrian walk ways, usually blocking traffic.

2.2.4 Training and Capacity Building Programs

Through the Technical Vocational Education and Training agency, the government provides numerous trainings for MSEs. Such trainings and capacity building programs are essential for the successful development of the enterprises. As many of the owners of the enterprises come from different social, educational and business backgrounds, some of them even having no educational or business background at all, the trainings fill qualification gaps, helping create a fair platform in which the enterprises can compete in the market. Although the trainings are given to most of the enterprises, their effectiveness and relevance is far from desired. This is due to the fact that training materials are sometimes complex and contain irrelevant contents. Absence of qualified trainers who can equip the trainees with sound technical and practical skills is also another constraint. In some instances, these trainings are not delivered in a continuous manner and are given only when the owners start their business.

2.2.5 Occupational Health Problems and Injuries

Whether we like it or not, we can never fully eradicate occupational health problems and injuries occurring in work places. However, the number of health complications and physical injuries can significantly be reduced by implementing safety and health programs which primarily focus on prevention. These occupational health hazards and physical injuries are more pronounced in micro and small enterprises compared to large scale enterprises as less focus is given to the former due to lack of budget or absence of awareness. In a study focusing on MSEs in the capital, Addis Ababa, by Yodit Gebreyohannes (2015), it was revealed that more than half of the survey respondents do not have personal safety equipment at their work place. To add to this, a little below half of the respondents expressed that they had experienced injury in their workplace. The factors that are attributed to occupational health hazards in the survey are chemical, heat, sound and air emissions. 

Figure 1: Emissions of manufacturing MSEs by sector, Yodit Gebreyohannes 2015)

3. Conclusions

Though the government of Ethiopia has devised a handful of plans and strategies and invested a lot of resources to make the business environment suitable for the development of MSEs, the effect is not to the desired extent as there are many constraining challenges. The government, along with all other non-governmental and private stakeholders, should make every effort so that MSEs have access to finance, equitable markets and adequate production and marketing premises. Furthermore, the concerned offices of the government should provide extensive trainings and capacity building programs and also make sure that health and safety are ensured in workplaces.

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