Digital Credit and Borrowers’ Welfare and Resilience in Ethiopia

Context

Ethiopia lags behind Sub-Saharan countries in terms of key financial inclusion indicators. For example, roughly 81% of the rural adult population was unbanked as of the most recent World Bank Global Findex Survey. Micro and Small Enterprises (MSEs) have not fared much better. Around 70% of MSEs do not have access to credit and 60% had never ever applied for a loan owing to a lack of collateral. Nearly all (95.7%) reported using their savings to establish their businesses.

With small businesses so credit constrained, the Ethiopian government has taken steps to promote digitization of financial services and to introduce new players to the sector, such as the large Kenyan firm Safaricom. The introduction of mobile money and digital credit services offers promising potential to improve living standards by smoothing consumption for consumers and alleviating liquidity constraints for farmers and small businesses. Cooperative Bank of Oromia (COOP) launched the first bank-based digital credit in Ethiopia in January 2022, it received over 160 thousand digital credit applications from MSEs, and offered uncollateralized digital credit to 100,000 customers since its launch. While this extension of capital may benefit MSEs, it may also have negative impacts due to loans’ high interest rates, short credit periods, and low financial literacy among lenders.

Study Design

Researchers will aim to study the welfare effects of digital credit loans and financial skills training for MSEs. To do this, the team has partnered with COOP, who as of the start of the study period, has more demand for business loans than funds to provide them, which has created a waiting list. Researchers will randomly assign qualified MSEs that have applied for a digital loan with COOP into one of three groups. The control group will not have their application for credit approved for at least four months; Treatment Group 1 will receive access to a digital loan; Treatment Group 2 will receive access to a digital loan plus a financial literacy training, which may help improve their ability to repay given some evidence that shows that addressing a bundle of constraints simultaneously has a multiplier effect, greater than the sum of the effects of addressing each constraint separately.

The research team will then evaluate how access to credit and the financial literacy training effect profitability for the borrowers’ businesses, as well as consumption, employment, and other outcome variables.

Results and Policy Lessons

Results from this project are forthcoming.