Fortune News | Aug 19,2023
It was a five-seater Suzuki S-Presso model, boasting a sleek exterior and eye-catching inside. It marks the owner’s determination to keep it spotlessly clean. Getachew Mitiku, 34, left his home in the Asko area early in the morning last week, driving this shiny blue-black vehicle. After a few minutes on the road, he picked up the day’s first customer. The passenger hopped in.
Thus Getachew began his job of navigating Addis Abeba’s traffic-clogged streets. He makes his living as a driver in the booming ride-hailing industry. It has been two months on the job. However, Getachew has experience working as a chauffeur, including at Centro Aiuti per l’Etiopia, a non for profit organisation (NGO). Undoubtedly, his previous work serves him well. It required him to travel often outside the capital to an area that has been witnessing instability in recent years.
Worrying for his life, Getachew quit two years ago. He joined his wife, who used to work as a housemaid in the Middle East at the time. He continued to work as a chauffeur in Saudi Arabia and opened a savings account at Sheger Saving & Credit Cooperative. He had hoped to one day own a car.
“Owning my own business has been coming long,” he said, smiling into the rearview mirror.
Within a year, Getachew had saved 360,000 Br, enough to receive a one million Birr loan from Sheger and buy a brand-new ride imported from an assembler in India. Following a federal ban on the imports of used cars, Addis Abeba has been flooded with newly assembled vehicles of Suzuki brands brought in over the past two years. Hundreds of taxi-hailing drivers have bought them, obtaining loans from micro-finance institutions such as Sheger.
Incorporated two years ago, Sheger provides up to 1.5 million Br in credit to eligible borrowers who save a minimum of 20pc of the loan value. Although the company’s policy requires borrowers to save for at least a year, those who saved for eight months have received these loans. Sheger financed last year the purchase of 14 vehicles valued at 14 million Br. Getachew was one of these borrowers who took up loans with 15.5pc interest.
With 170 million Br in paid-up capital and four branches, Sheger Cooperative caters for no less than 1,700 people who have saved with it. They hope to land a loan to buy a car; once the credit is approved, they must make fixed monthly payments until the loan is fully repaid in five years. Certificates of ownership remain in the hands of Sheger as collateral.
Drivers like Getachew may face painful consequences of foreclosure if failed to make the payments.
“We sell the vehicle in default to recover our investment,” said Zerihun Yimer, director for credit.
There have not been any hiccups yet for Getachew. He pays 21,000 Br a month for the next two years. He picks up over a dozen passengers on a good day, earning as much as 2,800 Br before factoring in expenses.
“I haven’t missed a single payment,” he said.
The growing popularity of loan schemes by microfinance institutions coincides with cutthroat competition in the ride-hailing industry, visibly dominated by RIDE and Feres.
The Uber-style business model was introduced to Ethiopia in 2017 when ZayRide established itself as an e-taxi company. Incorporated with Habtamu Tadesse as its major shareholder, ZayRide broke the ice for app-based taxi-hailing services, providing the capital’s residents with the option to call a taxi through their smartphones. The industry has since boomed as the number of platforms offering the service has nearly doubled to 40 over the past two years.
RIDE, co-founded by Samrawit Fikru as a subsidiary of Hybrid Technology, and Feres have emerged as the industry’s top players. They operate with more than 20,000 vehicles both have registered on their platforms.
The boom brings Getachew into competition with an estimated 30,000 drivers roaming the city to get a piece of the lucrative ride-hailing pie. More drivers with ‘Code 3’ vehicles are joining the business; many are signing up by renting cars and paying up to half of their income for the lease.
Last month, two ride-hailing companies – ZayRide and WEZ – submitted a joint proposal requesting federal transport authorities to allow ‘Code-2’ vehicles to provide transport services. Their management claims the move was prompted by an apparent shortage of vehicles available to provide the service.
“The authorities are still on the fence,” said Habtamu Tadesse, the founder of ZayRide. “This is despite a solution we’ve provided to solve the tax issues that come with the operation.”
The company has over 10,000 drivers registered with it. It is importing 200 vehicles, partnering with commercial banks, disclosed Habtamu. He cautions that the banking industry can only meet a fraction of demand as more people looking to access credit to buy a car.
Oromia International Bank is among these commercial banks that provide loans for acquiring brand new or used automobiles not older than eight years from the date of manufacture. It finances 80pc of the value of a brand-new car, with a repayment period of seven years; the financing drops to 10pc for used cars, hence the repayment period of five years.
Banks such as Zemen, known for providing auto loans, usually require repayment of the full loan in no longer than five years.
According to Selam Assefa, a senior customer service officer at Zemen Bank, which disbursed 4.2 billion Br in loans last year, credit requests from prospective car buyers are rising. Consumer loans, including credit granted against vehicles, account for 5.5pc.
Incorporated in 2008, Zemen lends clients who deposit 20pc of the value of a new car and save an additional 20pc over a year afterwards.
Commercial banks only address the credit needs of 300,000 medium and large enterprises and individuals with high loan needs. Last year, the banking industry disbursed 329 billion Br in loans, 21pc higher than the preceding year. The state-owned Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) accounted for a little over a third of the credit provided.
Microfinance institutions like Sheger and AwachSaving & Credit Cooperative Society, another firm, are catching up in this nitch market. They have mobilised 52.5 billion Br in deposits from over five million people, disbursing 69.3 billion Br in loans last year. It is a recent trend whereby microfinance companies focus their attention away from households in rural areas and small towns. Recently, they have begun expanding to urban areas to reach underserved market segments.
It is a segment commercial banks have little appetite to lend without collateral. The value of the collateral decides if - or how much - can be borrowed. On average, banks demand collateral equivalent to 234pc of their approved loans.
Experts see microfinance companies as handy for buying cars for commercial purposes, for they have flexibility. But they face a higher risk than their cousins in the financial sector. Sewale Abate (PhD), a lecturer of finance and investments at Addis Abeba University, observes that the high rate of accidents makes it unviable for banks to provide credit for vehicle buyers looking to join the transport sector.
Albeit the worrisome risk from the increasing rate of accidents, microfinance institutions are thriving in the capital. No other firm than Awach can demonstrate this success than Awach Savings which has been in business for 15 years, having 84,000 shareholders and operating in 18 branches. It advanced over 355 million Br in credit to 590 borrowers last year.
To access credit from Awach, borrowers must buy at least two shares and save for six months, covering 40pc of the car’s value. A client can borrow up to one million Birr, although the ratio of the advance payment and the interest varies depending on the vehicle’s manufacturing date (only used cars manufactured after 2005 are eligible) and customers’ saving history. The risk grows with the years the car has been in service, according to Endeshaw Yibeltal, risk and audit manager.
Interest rates on loans can reach 14.5pc for used cars, and the repayment period is five years for brand-new and used vehicles.
Other microfinance institutions have a more rigid financing scheme. Nisir Microfinance Institution demands customers to save up to half of the vehicle’s market value before approving credit requests. Borrowers who default on their loans face a four percent penalty, disclosed Libanos Tenker, saving and credit officer.
“The institution issues a 90-day notice before foreclosing on the vehicle,” he told Fortune.
Nisir disbursed 142 million Br credit to 368 clients last year. Incorporated in 2020 with 169 million Br paid-up capital, it operates with six branches.
The vehicle financing business is growing, and the executives of microfinance institutions that are evolving into fully-fledged commercial banks want to maintain the auto loan services in their portfolio. A requirement set by the National Bank of Ethiopia (NBE) compels them to continue carrying out their regular services following their transition.
“We’ll continue serving our clients after the transformation,” said Damtew Alemayehu, managing director of Addis Credit & Saving Institution (ACSI).
Alongside Amhara, Oromia and Omo, ACSI awaits approval from the central bank to serve as a commercial bank. It operates with over 52 billion Br in deposits, financing 440,000 clients.
It is welcome news to many like Getachew, who are often left out in the cold by a banking industry that caters primarily to borrowers with high-valued assets. Microfinance institutions offer small businesses a chance. It remains to be seen how many of them keep up with the strict repayment regime.
PUBLISHED ON
Sep 10,2022 [ VOL
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