Ethiopia's financial sector may welcome a specialised bank targeting small and medium-sized enterprises (SMEs), including those commonly referred to as “the missing middle”, if a proposal tabled to the administration receives a positive nod.

Ethiopia has yet to have a bank dedicated to small and medium enterprises; a proposal by the Federal Urban Job Creation & Food Security Agency will be tabled to the Council of Ministers, sources disclosed to Fortune. The authors of the proposal want to see the SME bank established as a share company, a process which is expected to be facilitated by the Agency. A board of directors follows up on the public offering of shares, with state ownership of shares suggested, though its equity depends on the number of shares that will be floated, according to persons who have seen the proposal.

A recent directive from the central bank requires banks to meet a threshold paid-up capital of five billion Birr in a few years.

Part of the equity could come from state-owned enterprises where some have already shown interest, Bekele Mengistu, deputy CEO of the Agency, confirmed to Fortune. The par value of shares will be decided once the proposal is approved.

"Many SMEs are suffering from a shortage of finance," said Bekele. "We're way behind even neighbouring countries, such as Kenya, where there's been an SME bank for over a decade. It's better late than never."

There is no consensus on what constitutes small and medium enterprises, but the Agency considers enterprises having below 100,000 Br in registered capital as micro-enterprises. Those having more than 100,000 Br but below 1.5 million Br are identified as small. A little over 110,000 micro and small enterprises were registered last year, providing job opportunities for close to 900,000 people, claims data obtained from the central bank.

Medium enterprises, however, must register capital between 1.5 million and 20 million Birr, qualifying them to borrow from over 40 microfinance institutions (MFIs). Although these institutions' amount of credit disbursed has reached 64.9 billion Br, the outstanding credit by the end of the last fiscal year showed a 10pc increase. Nonetheless, almost half of the enterprises in Ethiopia face a lack of access to finance, an enterprise survey carried out by the World Bank revealed.

"Micro-finance institutions have played a big role in meeting the credit demand of SMEs," says Bekele. "But, there's still a gap which requires attention and can easily be addressed by an SME bank."

The formation of the new SME bank will be initiated once the Office of the Prime Minister gives the nod, upon which the Ministry of Finance will follow up the responsibility of the establishment process.

The National Bank of Ethiopia (NBE) has already provided its feedback on the plan to establish the SME Bank and its senior officials have welcomed the decision, emphasising the need to form a specialised bank to meet the credit demand of businesses, according to an official who wants to remain anonymous for a lack of authority to make public statements.