The effects of lease financing on small and medium-sized enterprises and inclusion in Ethiopia

Although small and medium-sized enterprises (SMEs) can be significant contributors to economic growth, their innovation potential is often constrained by economic conditions. Lack of adequate financing is one of those challenges, especially for enterprises in regions where access to capital is difficult to obtain and costly to borrow. This capital constraint, coupled with limited collateral to secure loans, prevents SMEs from investing in new employees, technology and capital equipment. When enterprises do manage to obtain financing, it often comes at a high cost.

To overcome this constraint, governments and development agencies have supported lease financing schemes. Lease financing is an asset-based lending mechanism where the leased equipment is the collateral for a loan. This feature makes it an attractive option for SMEs wanting to invest in their innovation capabilities. Despite policy interest in ways to overcome the financing gap for SMEs, there is limited evidence in low-income settings on the impact of lease financing on firm performance and the heterogeneous effects across gender, geography and sector.

This study will investigate these effects based on the experience of a national program managed by the Development Bank of Ethiopia. Led by the Policy Studies Institute, the research team will compare the performance of firms receiving training and lease financing with a control group. The team will provide awareness training to underrepresented firms in the lease-financing scheme (i.e., women-led, rural-based SMES) to see if this improves their participation in the scheme. The findings will be used to inform future directions of this scheme to promote inclusive innovation in the SME sector.

This project was awarded a Stage 2 grant through the 2020 Evidence for Innovation open competition.