Funding the Lenders Who Reach the Unreached

Funding the Lenders Who Reach the Unreached

Jul 25 , 2026. By Dawit Alem ( Dawit Alem (dawit.alene88@gmail.com) works in financial-sector development and has a strong professional interest in the microfinance industry. The views expressed in this article are entirely his own and do not necessarily reflect those of any institution with which he is affiliated. )

Ethiopia's microfinance model is running out of room as bank funding becomes more expensive. The new capital market can help if it is built to serve both the small and the large.

The microfinance institutions active in the domestic market reach the people the banks miss. Every day they lend to smallholder farmers living on seasonal income, informal traders without collateral, women-owned enterprises kept off formal records and young entrepreneurs taking their first step into business.

By June 2025, the sector served more than 7.1 million savers and 752,000 borrowers, with 48.9 billion Br in outstanding loans. For many of these clients, it is the only real link to the formal financial system. Yet as demand for inclusive finance climbs, the model that funds it is running out of room, and the new capital market is the obvious place to look, provided it is built to serve the small as well as the large.

The pressure is visible in a single ratio apparent in the National Bank of Ethiopia's (NBE) Financial Stability Report. The sector's loan-to-deposit ratio was 126pc, revealing that microfinance institutions lend far more than they take in as deposits. To cover the gap, they have long borrowed wholesale from commercial banks, development partners and other outside sources, a model that the shift toward market-based monetary policy is quietly making harder.

Bank financing is already dear, with borrowing costs of 14.5pc to 20pc depending on the collateral pledged. There are lenders that sometimes demand cash collateral worth as much as 50pc of the loan, cutting the real value of the money received. As interest rates come to follow market signals, wholesale funds are likely to grow costlier and less predictable. The banks that supply them are themselves adjusting to new instruments and competing claims on capital. Overreliance on borrowed bank money leaves the sector exposed to every shift in monetary conditions.

The cost of that exposure falls on the borrowers, not the balance sheets. When a microfinance institution's funding tightens, credit grows dearer or scarcer, expansion into underserved areas slows, small firms defer investment and farmers cannot finance inputs or equipment. If monetary policymakers are serious about financial inclusion, job creation and broad-based growth, the question should no longer be whether microfinance matters but how it can access sustainable sources of capital.

That is where the emerging capital market enters. Most of the debate about it has centred on large firms, such as banks and state enterprises. But a capital market is ultimately a way of channelling savings into productive investment, and it cannot do that job serving only the biggest players. It has to reach the institutions that finance bottom-up growth. For microfinance, it should not be treated as a single source of money but as a toolbox.

A mature institution may eventually raise capital through a public listing, strengthening its capital base and easing its dependence on debt, with fresh money funding branch expansion, investment in digital infrastructure and the development of new financial products. Access to outside investors tends to press for stronger governance, better disclosure and improved transparency. But equity is not for everyone. Many institutions are not ready for public markets, and others are unwilling to dilute ownership. A strategy fixed on listings alone would pass over much of the sector.

For most smaller lenders, even paying the transaction advisers required by the Ethiopia Capital Market Authority (ECMA) to register their shares is an uphill battle. The Association of Ethiopian Microfinance Institutions (AEMFI) could help by setting up shared market-readiness programmes, coordinating advisory support and driving down the costs that currently keep so many of them out.

Corporate bonds can offer the medium- and long-term funding that better matches the nature of microfinance lending, though their price will move with monetary policy, since investors naturally demand higher returns as policy rates rise, and the cost of issuing a bond will respond in kind. Their advantage is reach, a wider pool of investors and longer tenors than a bank loan usually allows. Among these debt instruments, thematic bonds may suit microfinances best, since their business model is built around social impact rather than pure profit maximisation, aligninig naturally with investor seeking measurable social returns alongside financial ones.

Where portfolios already carry that impact, structuring green, gender and sustainability-linked bonds is easier than building a pipeline from scratch. They also broaden the investor base to development finance institutions, ESG-focused funds, and impact investors that actively seek measurable social outcomes alongside financial returns, which can translate into more favourable pricing and lower coupon payments than a conventional bond, reducing the cost of capital.

Morocco, with Attawfiq Microfinance, a subsidiary of Banque Centrale Populaire, shows what is possible. It issued Africa's first gender bond, raising 25 million dollars to support women entrepreneurs and financing more than 17,000 loans to women borrowers. Its meaning ran beyond the sum raised. It proved that capital markets can mobilise substantial resources for financial inclusion when an issuer is able to pair a strong social mission with credible reporting and robust governance.

For lenders in Ethiopia, whose clients so often include women-owned enterprises and underserved households, a similar instrument could fit closely.

However, the toolbox does not end with equity and bonds. As the market deepens, more advanced instruments may become practical, among them securitisation. This lets an institution bundle a pool of loans and raise funding against the cash flows those loans are expected to generate, giving investors exposure to a diversified portfolio rather than a single borrower. It can help recycle capital, improve liquidity, and free resources for additional lending.

Linking securities directly to identifiable loan portfolios provides investors with greater transparency. However, it demands strong data systems, legal clarity and firm investor protection. It is no short-term solution, but as the markets deepen it deserves consideration as part of the long-term financing kit.

Partial guarantees, first-loss facilities and anchor investments by development finance institutions can reduce the risk investors perceive and pull in a broader field. The purpose here should not be to subsidise weak institutions indefinitely but to establish confidence, back credible first movers and create a track record that encourages others to take part. Even that is not enough on its own.

A working market for microfinance securities also needs the supporting infrastructure around it. These may include, but are not limited to, independent credit ratings, credible second-party opinions on thematic issues, reliable trustees and custodians, experienced transaction advisers and robust post-issuance reporting. These are the institutions that enable investors to weigh both financial risk and social impact and to narrow the information gaps between issuers and buyers.

The promise of Ethiopia's capital market should not be measured by the count of listings or the volume of securities traded alone. It should be judged by whether capital actually reaches productive enterprises, underserved communities and emerging entrepreneurs. Microfinance institutions already perform the arduous task of financing those the traditional lenders overlook. The task now is to ensure they can reach the capital themselves to grow sustainably.

Get that right, and the market becomes more than a platform for raising money. It becomes a bridge between the country's savings and inclusive development. In that process, microfinance can play a critical part in carrying the gains of growth to the people who have long been left at the margins.

PUBLISHED ON Jul 25,2026 [ VOL 27 , NO 1369]