| Abstract:
| Financial services are a critical enabler for sustainable economic growth and therefore poverty reduction and food security in Ethiopia in general and in the agricultural sector in particular. Credit is used for investments to increase the productivity of agricultural operations or to diversify the economic activities of rural households. Savings products ensure safe and productive "storage" of money and ensure excess capital can be channeled to its most productive use. Payment products facilitate the ease of exchange of agricultural goods and insurance products help to spread risks of agricultural players in an efficient way. Thus, in short, financial services are essential for protecting and improving the livelihoods of rural populations. However, the financial service offerings to agricultural sector players in Ethiopia face gaps in terms of access to financial services, product quality, and quantity. In terms of access, only few financial institutions serve rural areas in Ethiopia, leading to low levels of financial inclusion. In terms of product quality, gaps exist for all major product categories, including credit, savings, insurance, and payments, and all major types of agricultural players, including producers, traders, and manufacturers of all sizes. Key issues include lack of input credit for agricultural technologies and insurance for smallholders, lack of inventory financing for traders, lack of export financing for exporters, as well as lack of long-term credit, cash-flow-based lending, attractive deposit products, and reliable payment products for all players. In terms of product quantity, the overall Ethiopian economy is significantly credit constrained, with credit supply roughly USD 3 billion short of credit demand. Agriculture is strongly affected by this credit crunch compared with other sectors of the economy. |
