Ethiopia Small and Medium Enterprises Finance Project Additional Financing

Public Disclosure Authorized
Document of
The World Bank
FOR OFFICIAL USE ONLY

Report No: PAD4143
INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT PAPER
ON A
PROPOSED ADDITIONAL CREDIT
IN THE AMOUNT OF SDR 139.0 MILLION

(US$200 MILLION EQUIVALENT)
TO THE
FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
FOR THE
ETHIOPIA SMALL AND MEDIUM ENTERPRISES FINANCE PROJECT
March 15, 2021

Finance, Competitiveness and Innovation Global Practice

Eastern and Southern Africa Region
This document has a restricted distribution and may be used by recipients only in the performance of their
official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS
(Exchange Rate Effective {February 28, 2021})
Currency Unit = Ethiopian Birr (ETB)
ETB 40.35 = US$1
SDR 0.69 = US$1
FISCAL YEAR
July 8 - July 7
ABBREVIATIONS AND ACRONYMS
AF Additional Financing
AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism
BDS Business Development Service
BOM Board of Management
CBE Commercial Bank of Ethiopia
CBS Core Banking System
CRB Credit Reference Bureau
COVID-19 Coronavirus Disease 2019
CPF Country Partnership Framework
CRMD Compliance and Risk Management Directorate
DA Designated Account
DBE Development Bank of Ethiopia
DFI Development Finance Institution
DRF Derisking Facility
EIB European Investment Bank
EDC Entrepreneurship Development Center
EMC Executive Management Committee
EPS Ethiopian Postal Service
ESMS Environmental and Social Management System
FeSMMIPA Federal Small and Medium Manufacturing Industry Promotion Authority
FI Financial Intermediary
FIG Financial Institutions Group
FM Financial Management
FSSP Financial Sector Strengthening and Access Project
GDP Gross Domestic Product
GFMC Guarantee Fund Management Committee
GoE Government of Ethiopia
GRS Grievance Redress Service
GTP Growth and Transformation Plan
HGER Homegrown Economic Reform Program
IFC International Finance Corporation
IFR Interim Financial Report
IMF International Monetary Fund
IPF Investment Project Financing
IT Information Technology
JV Joint Venture
KYC Know Your Customer
MAS Manufacturing, Agribusiness and Services
M&E Monitoring and Evaluation
MFI Microfinance Institution
MoF Ministry of Finance
MoTI Ministry of Trade and Industry
MSMEs Micro, Small, and Medium Enterprises
NBE National Bank of Ethiopia
NPL Nonperforming Loan
PDO Project Development Objective
PforR Program-for-Results
PFI Participating Financial Institution
PIU Project Implementation Unit
PMT Project Management Team
PPSD Project Procurement Strategy for Development
PSB Project Advisory or Steering Board
PSNP Productive Safety Net Program
SOE State-owned Enterprise
SMEs Small and Medium Enterprises
SMEFP Small and Medium Enterprises Finance Project
STEP Systematic Tracking of Exchanges in Procurement
TA Technical Assistance
WBG World Bank Group
WEDP Women Entrepreneurship Development Project
Regional Vice President: Hafez M. H. Ghanem

Country Director: Ousmane Dione
Regional Director: Asad Alam
Practice Manager: Niraj Verma
Task Team Leader(s): Mengistu Bessir Achew, Anuradha Ray
TABLE OF CONTENTS
I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING ........................................ 7

II. DESCRIPTION OF ADDITIONAL FINANCING .................................................................... 17
III. KEY RISKS ..................................................................................................................... 25
IV. APPRAISAL SUMMARY .................................................................................................. 26
V. WORLD BANK GRIEVANCE REDRESS .............................................................................. 30
VI. SUMMARY OF MAJOR CHANGES ................................................................................... 31
VII. SUMMARY TABLE OF CHANGES .................................................................................... 34
VIII. DETAILED CHANGE(S).................................................................................................... 34
VIII. RESULTS FRAMEWORK AND MONITORING ................................................................... 39
ANNEX 1: DBE DUE DILIGENCE ............................................................................................. 47
ANNEX 2: FINANCIAL MANAGEMENT ................................................................................... 50
ANNEX 3: PROCUREMENT.................................................................................................... 57
ANNEX 4: DERISKING FACILITY AND PROPOSED INNOVATIONS UNDER THE CREDIT LINE ...... 61
ANNEX 5: DETAILED DESCRIPTION OF COMPONENT 3 .......................................................... 68
ANNEX 6: E-COMMERCE THROUGH ETHIOPIAN POSTAL SERVICES (EPS) ............................... 70
ANNEX 7: WORLD BANK GROUP RESPONSE TO COVID-19 IN ETHIOPIA................................. 71
The World Bank
Ethiopia Small and Medium Enterprises Finance Project - Additional Finance (P175045)
BASIC INFORMATION – PARENT (Ethiopia: SME Finance Project - P148447)
Country Product Line Team Leader(s)

Ethiopia IBRD/IDA Mengistu Bessir Achew
Project ID Financing Instrument Resp CC Req CC Practice Area (Lead)

P148447 Investment Project EAEF1 (9552) AECE3 (247) Finance, Competitiveness and
Financing Innovation
Implementing Agency: National Bank of Ethiopia, Development Bank of Ethiopia, Federal Small and Medium
Manufacturing Industry Promotion Authority
ADD FIN TBL1
Is this a regionally tagged
project?
No
Bank/IFC Collaboration
No
Expected
Original Environmental
Approval Date Closing Date Guarantee Current EA Category
Assessment Category
Expiration Date
17-May-2016 31-Aug-2022 Financial Intermediary Financial
Assessment (F) Intermediary
Assessment (F)
Financing & Implementation Modalities Parent
[ ] Multiphase Programmatic Approach [MPA] [ ] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)
[ ] Performance-Based Conditions (PBCs) [ ] Small State(s)
[✓] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict
[ ] Deferred Drawdown [ ] Responding to Natural or Man-made disaster
[ ] Alternate Procurement Arrangements (APA) [ ] Hands-on, Enhanced Implementation Support (HEIS)
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Development Objective(s)
The project development objective is to increase access to finance for Eligible Small and Medium Enterprises in the
Recipient's territory.
Ratings (from Parent ISR)

RATING_DRAFT_
NO
Implementation Latest ISR
13-Jun-2018 12-Dec-2018 08-Jun-2019 17-Dec-2019 18-Jun-2020 14-Jan-2021
Progress towards
achievement of S MS S S S S
PDO
Overall
Implementation S MS S S S S
Progress (IP)
Overall
Safeguards S S MS MS MS MS
Rating
Overall Risk S S S S M M
Financial
Management S S S S S MS
Project
Management S S S S S S
Procurement MS MS MS MS MS MS
Monitoring and
Evaluation S S S S S S
BASIC INFORMATION – ADDITIONAL FINANCING (Ethiopia Small and Medium Enterprises Finance Project -
Additional Finance - P175045)
ADDFIN_TABLE
Urgent Need or Capacity
Project ID Project Name Additional Financing Type
Constraints
P175045 Ethiopia Small and Scale Up Yes
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Medium Enterprises
Finance Project -
Additional Finance
Financing instrument Product line Approval Date
Investment Project IBRD/IDA 29-Mar-2021
Financing
Projected Date of Full Bank/IFC Collaboration Joint Level
Disbursement
28-Mar-2025 Yes Complementary or
Interdependent project
requiring active
coordination
Is this a regionally tagged project?
No
Financing & Implementation Modalities Child
[ ] Series of Projects (SOP) [ ] Fragile State(s)
[ ] Performance-Based Conditions (PBCs) [ ] Small State(s)
[✓] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict
[ ] Deferred Drawdown [✓] Responding to Natural or Man-made disaster

[ ] Alternate Procurement Arrangements (APA) [ ] Hands-on, Enhanced Implementation Support (HEIS)
[ ] Contingent Emergency Response Component (CERC)
Disbursement Summary (from Parent ISR)
Net
Source of Funds Total Disbursed Remaining Balance Disbursed
Commitments
IBRD %
IDA 200.00 169.94 33.44 84 %
Grants %
PROJECT FINANCING DATA – ADDITIONAL FINANCING (Ethiopia Small and Medium Enterprises Finance Project -
Additional Finance - P175045)
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PROJECT FINANCING DATA (US$, Millions)

SUMMARY -NewFi n1
SUMMARY (Total Financing)
Proposed Additional Total Proposed

Current Financing
Financing Financing
Total Project Cost 276.00 300.00 576.00
Total Financing 276.00 300.00 576.00
of which IBRD/IDA 200.00 200.00 400.00
Financing Gap 0.00 0.00 0.00
DETAILS - Additional Financing

NewFinEnh2
Private Sector Investors/Shareholders
Equity Amount Debt Amount

IFI Debt 200.00
IDA (Credit/Grant) 200.00

Commercial Debt 100.00
Unguaranteed 100.00
Total 0.00 300.00
Payment/Security Guarantee
Total 0.00
IDA Resources (in US$, Millions)
Credit Amount Grant Amount Guarantee Amount Total Amount

Ethiopia 200.00 0.00 0.00 200.00
National PBA 200.00 0.00 0.00 200.00
Total 200.00 0.00 0.00 200.00
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COMPLIANCE
Policy
Does the project depart from the CPF in content or in other significant respects?
[ ] Yes [ ✔ ] No
Does the project require any other Policy waiver(s)?

[ ] Yes [ ✔ ] No
INSTITUTIONAL DATA
Practice Area (Lead)

Finance, Competitiveness and Innovation
Contributing Practice Areas
Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks
PROJECT TEAM
Bank Staff
Name Role Specialization Unit
Team Leader (ADM
Mengistu Bessir Achew Financial Sector Specialist EAEF1
Responsible)
Anuradha Ray Team Leader Sr. Financial Sector Specialist EAEF1
Shimelis Woldehawariat Procurement Specialist (ADM
Sr. Procurement Specialist EAERU
Badisso Responsible)
Financial Management Sr. Financial Management
Meron Tadesse Techane EAEG1
Specialist (ADM Responsible) Specialist
Social Specialist (ADM Sr. Social Development
Samuel Lule Demsash SAES2
Responsible) Specialist
Environmental Specialist (ADM
Tamene Tiruneh Matebe Sr. Enviromental Specialist SAEE2
Responsible)
Social Development
Addis Bekele Simie Team Member SAEE2
Consultant
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Aly Salman Alibhai Team Member Sr. Financial Sector Specialist EEAF2
Bartol Letica Team Member Sr. Operations Officer CF3A6
Bisrat Teshome Mekonnen Team Member BDS Component Lead EAEF1
Elaine MacEachern Team Member Senior Operations Officer CFGAI
James Walter Hammersley Team Member Derisking Facility EMNF2
Jean O Owino Team Member Finance Officer WFACS
Jotework Gudeta Ayele Team Member Associate Operations Officer CF3A6
Justin Piers William Hill Team Member Sr. Private Sector Specialist ETIFE
Luz Maria Salamina Team Member Principal Operations Officer CF3A6
Margaret Png Team Member Lead Councel LEGAM
Marius Vismantas Team Member Program Leader - EAEDR EAEDR
Matthewos Shamo
Team Member Consultant EAEF1
Humbamo
Senidu Fanuel Team Member Sr. Private Sector Specialist EAEF1
Shiny Jaison Team Member Operations Support EAEF1
Solomon Soroto Tanto Team Member Social Development Specialist SAES2
Tewodros Makonnen
Team Member Consultant EEAF2
Gebrewolde
Yohana Girma Wudneh Team Member Team assistant AECE3
Extended Team
Name Title Organization Location
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I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING
A. SUMMARY
1. This project paper seeks the approval of the Executive Directors for an additional financing (AF)
in the amount of SDR 139 million (US$200 million equivalent) to the Federal Democratic Republic of
Ethiopia for the Small and Medium Enterprises Finance Project (SMEFP) (P175045). The AF is requested
to leverage the SMEFP’s proven project experience and infrastructure to scale up the provision of
financing and business services to viable small and medium enterprises (SMEs) that have the potential to
grow but are unable to access financing or that have been adversely affected by the coronavirus disease
2019 (COVID-19) pandemic but remain viable if supported through this difficult downturn period. The
segment of firms being targeted are crucial for Ethiopia’s growth, in terms of their contribution to jobs,
innovation, key role in supply chains, and trade logistics. Not supporting this vital part of the economy will
likely mean loss of jobs; a slower path to economic recovery; and loss of financial, social, and institutional
capital as firm-level liquidity constraints which could have been addressed for the otherwise viable firms
turn to solvency issues. The AF aims to support liquidity, including through leveraging US$100 million
private capital through a mix of financial instruments while also building for the future through
investments in technical assistance (TA), market infrastructure, enabling environment and demand-side
interventions to enhance productivity. The SMEFP has a rating of ‘Satisfactory’ for progress towards
achievement of the project development objective (PDO) and overall implementation progress. It is also
compliant with all project covenants, including audit and financial reporting requirements. The project’s
disbursement from its initial International Development Association (IDA) financing stands at 85 percent
and the project is on track to fully disburse the remaining balance well ahead of the end date of the parent
project (August 31, 2022). The AF will be prepared under OP 4.03 (Performance Standards for Private
Sector Activities), as for the original project. To facilitate the deployment of AF, a three-year extension
until August 31, 2025, is requested for this AF while the closing date for the parent project remains August
31, 2022.
B. COUNTRY CONTEXT
2. The COVID-19 pandemic threatens Ethiopia’s gains in growth and poverty reduction, with
micro-enterprises and SMEs expected to be among the ones significantly affected as a result of the
economic slowdown. The first confirmed case of COVID-19 in Ethiopia was reported on March 13, 2020.
However, the effect of the pandemic started to be felt around the beginning of the year with sharp
declines in textile exports, decline in travel and transport services, and later on a decline in remittance. As
the pandemic started to intensify, the Government of Ethiopia (GoE) declared a state of emergency under
Article 93 of the Constitution on April 8, 2020. Despite measures taken, the spread of COVID-19
accelerated in Ethiopia in the calendar year 2020 and negative economic impacts increased rapidly.
Results from the World Bank’s high-frequency phone survey 1 show that COVID-19 has substantially
impacted firms’ operations. At the onset of the pandemic, over 42 percent of the 645 firms surveyed (most
of which are micro and young) reported that they had completely ceased operations and 37 percent of
businesses reported no revenues in the last complete month (March or April 2020). However, companies
1 https://hubs.worldbank.org/docs/ImageBank/Pages/DocProfile.aspx?nodeid=32490423.
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have gradually reopened, with about half of the firms surveyed in Addis Ababa being operational on a full-
time basis by mid-July 2020. Nonetheless, less than half of the firms in the sample are opened full time,
and over one-quarter of businesses remained closed and even where business resumed, the gradual
resumption of activity has not translated into a full rebound in firm earnings. The economic and social
impact of COVID-19 in Ethiopia is therefore expected to be significant. An estimated 1.4 million jobs 2,
accounting for 19 percent of current employment, are threatened due to the crisis.
3. COVID-19 transmission channels to the economy include both demand and supply side
elements through supply chain disruptions, decline in demand, depressed commodity prices, decline in
remittances, and restrictions in global trade, travel, and tourism making impacts more pronounced.
Restricted movement of workers and closure of marketplaces are other channels through which the
pandemic and related containment measures have affected firms. At the same time, as banks turned
progressively risk averse, liquidity for firms, especially SMEs, has tightened considerably. Macroeconomic
conditions are expected to rebound in the medium term. The International Monetary Fund (IMF) has
characterized the impact of the pandemic on Ethiopia’s economy as ‘large but temporary’ 3.
4. Ethiopia’s economic growth status pre-COVID-19 was robust and was being further
strengthened by the Homegrown Economic Reform Program (HGER). Building on and complementing
reforms already in progress under the Growth and Transformation Plan (GTP) II, the HGER’s main purpose
is to rebalance sources of growth and remove structural obstacles, in particular, to promote private sector
investment, address macroeconomic imbalances, and reduce distortions. Key goals of the macroeconomic
reforms are to curb inflation, improve private enterprises’ access to credit and foreign currency, and
ensure debt sustainability. It also puts forth reform measures to address structural bottlenecks
particularly in the areas of access to power and telecom services, improved logistics, efficient bureaucracy,
and more. The government’s underlying objectives are to restore and sustain the growth momentum of
the past decade and, in particular, to create jobs for the country’s young and growing population, a crucial
imperative given the labor market’s need to absorb two million new entrants annually, an endeavor where
the role of SMEs which have been engines of growth and job creation for many countries worldwide, will
no doubt be crucial. Therefore, the government has taken some structural measures. Some of the key
structural reform measures to enhance competitiveness include: (a) a new Investment proclamation
which allows increasing participation of the private sector, (b) establishment of the Ethiopian
Telecommunication Authority and progress made to liberalize the telecom 4 and other sectors which is
expected to enhance competitive efficiency, (c) introduction of market-based treasury bill auctions to
enable better price discovery and lay the foundations of a primary government debt market as the country
gradually lifts financial repression, (d) e-Transactions law that provides the legal validity for electronic
based transactions/commerce/governance, (e) a slew of ongoing central bank initiatives to spur use of
mobile money and digital financial services including through enabling interoperability between and
among banks and nonbanks, and (f) a recent capital markets proclamation approved by the Council of
Ministers (that builds on earlier work on establishing securities markets) can enable better risk sharing
and foster financial market development including long-term finance. In parallel, ongoing measures to
2
Estimates from the Jobs Creation Commission based on expected impacts in economic sectors.
3
Federal Democratic Republic of Ethiopia, IMF Country Report No 20/150, May 2020.
4 Network externalities multiply potential economic benefits of telecom liberalization.
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correct Ethiopian currency (ETB) overvaluation is narrowing spreads between parallel and official foreign
exchange rates.
5. The success of the HGER is predicated on a more private sector-led model of growth wherein
the emergence of a strong SME sector that can boost job creation is vital and has become all the more
important in the context of COVID-19. Sustained GDP growth in recent years has not been matched by
similar gains in economic productivity, and formal employment is struggling to accommodate the close to
two million youth who enter the job market each year. With 70 percent of formal jobs in developing
countries created by small and medium size firms, according to World Bank estimates, SMEs have a key
role to play in expanding employment opportunities. ‘Building vibrant and growth-oriented SMEs’ is
therefore one of the pillars of the new National Plan of Action for Job Creation, unveiled in October 2019,
which seeks to create 14 million 5 new jobs by 2025. Ethiopia’s first National Entrepreneurship Strategy,
presented in August 2019, similarly emphasizes the importance of start-ups and SMEs to the realization
of job-rich growth.
C. SECTOR CONTEXT
6. The financial system has been a key pillar of the state-led development model and continues to
record impressive growth in deposits and credit though it remains shallow.
Figure 1. Growth in Outstanding Credit and Figure 2.Financial Soundness Indicators of the
Deposits Commercial Banking Sector
In %
Source: National Bank of Ethiopia (NBE). Source: IMF.
7. The commercial banking sector, which is the largest component of the financial sector, has one
state-owned commercial bank, the Commercial Bank of Ethiopia (CBE), (with a capital and asset share
respectively of about 44 percent and 58 percent of the sector) along with 16 private banks. The CBE is the
key institution to finance long-term public investments through state-owned enterprises (SOEs) even as
it supports private sector activity, albeit a relatively small share, and is a systemically important deposit-
5 Pre COVID-19 target.
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taking institution. The private banking sector comprising 16 banks accounts for one-third of banking sector
assets and over 40 percent of deposits. They operate on a commercial basis and have reasonable liquidity
following repeal of the 27 percent rule 6. Levels of (potential) losses and capital at risk are low. Even so, in
light of severe liquidity shortages in late 2019 and early 2020 due to a combination of seasonal and
structural factors, the NBE injected liquidity in private banks and the CBE to preserve the integrity of
payment systems and financial stability. Following currency demonetization in Ethiopia effective
September 2020, the banking sector liquidity recorded a comfortable increase and combined with
sluggishness on credit demand due to COVID-19 impacts, liquidity risks have declined. Foreign exchange
shortages however remain among the key sources of risk even for otherwise productive and credit-worthy
borrowers by constraining access to imported inputs.
8. Low levels of financial intermediation and inclusion suggest significant upside potential from
market reforms. Despite robust growth over the past 10 years, financial intermediation has remained
narrow with a limited range of products and channels to serve broader business needs. A lot more needs
to be done to address credit market failures and facilitate meaningful increases in outreach and scale
through leveraging the private sector. Private sector credit as a share of total credit remains modest at 30
percent and, at 13 percent of GDP, is in sharp contrast to the 20 percent of GDP median for Sub-Saharan
Africa. Ethiopia has one of the highest densities of bank branches in Sub-Saharan Africa at 8.5 per 100,000
in 2018 and above the Sub-Saharan Africa average of 5. Despite this, financial access and inclusion
indicators are relatively weak with the branch network being leveraged mostly for deposit mobilization.
Payment systems in Ethiopia were modernized in 2011 but the use of digital instruments has been virtually
nonexistent barring the use of automated teller machines (ATMs). In addition to the e-Transactions law
which gives legal validity to e-commerce and e-governance transactions, recent directives on payment
instrument issuers and use of agents now allow non-bank providers (such as telecom companies) to issue
mobile money and other e-payment instruments and also enable agent-based delivery models to unlock
the potential for digital financial services. These have been key deterrents to deepening the digital
footprint and market development earlier.
9. As part of COVID-19 response measures, the NBE injected liquidity into the banking sector (given
the preexisting liquidity conditions before the COVID-19 shock); introduced forbearance measures,
namely regulatory reprieve on provisioning, supervisory ratings, prudential norms on asset classification,
and reporting of credit default data to the Credit Reference Bureau (CRB) while continuing to provide full
supervisory data; and temporarily waived the restriction on banks’ share of medium and long-term loans.
Extension of forbearance measures is being evaluated on evidence of their effectiveness, trajectory of
non-performing loans (NPLs), and the likely trade-offs between immediate response and medium-term
stability risks and for now remain in place. Response measures have been combined with more structural
measures including advancing the pace of state-owned banks reform to aid an orderly recovery through
addressing core sector vulnerabilities.
10. On capital markets development, more than one year of T-bill auctions is helping establish market
yields at 5.88 percent, 6.43 percent, and 7 percent for 28-day, 91-day, and 182-day treasuries,
respectively. The first 364-day T-bill issued recently offers a yield of 8.7 percent. 7 Though it is early days
6 The 27 percent rule refers to a directive that mandated all banks to purchase NBE bond in the amount equivalent to 27 percent
of their loan disbursement. The mandate has been discontinued.

7 Relative to a bank deposit rate at 7 percent.
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yet, a deepening market for public securities sets the foundation for development of money markets as
well as capital markets more broadly with better price discovery and its attendant benefits of improving
contestability in funding markets. The Capital Markets Proclamation once approved by the House of
Representatives, will provide a legal framework for orderly development of the market.
11. With private credit-to-GDP ratio of 13 percent, Ethiopia’s private sector was already highly
credit constrained. In general, the Ethiopian financial sector is shallow and is characterized by low levels
of intermediation. However, the financial constraint is even more pronounced for SMEs. A World Bank
study 8 found the ‘missing middle’ phenomenon at work in Ethiopia whereby SMEs are found to be more
credit constrained than either micro or large enterprises. In particular, SMEs in Ethiopia perform much
worse than large firms across a host of financing indicators. SMEs are much more likely to be rejected for
loans and are less likely to have a loan, line of credit, or overdraft facility. These firms are also more likely
to avoid loan applications altogether due to high collateral requirements. The Enterprise Survey (2015)
also reveals that only 11.3 percent of small enterprises in Ethiopia have access to working capital loan
from banks, compared to a global average of 26 percent and Sub-Saharan Africa’s average of 22 percent.
12. The already acute credit constraint faced by SMEs has been further compounded by the COVID-
19 pandemic as financial institutions turn risk averse and/or skew their lending even more toward larger
firms. As a result, starved of the liquidity they need, viable SMEs in Ethiopia are struggling to keep afloat.
This affects not only their growth trajectory and expansion but also their ability to maintain employment
and, more broadly, makes Ethiopia’s path to economic recovery more difficult.
13. Women-owned SMEs are especially disadvantaged in accessing finance, primarily because they
have less access to collateral. According to the Enterprise Survey (2015), the number of female managers
who use bank financing for investment purposes is merely 8 percent compared to 13 percent for their
male counterparts in Ethiopia and 25 percent for female managers in other African countries. Similarly,
the ratio of female managers who consider access to finance a key obstacle to growth (49 percent) is much
higher than the ratios for both male managers (19 percent) and female managers in Africa (27 percent).
Limited access to collateral is crucial in this context, with most financial institutions in Ethiopia only
considering land titles and fixed assets, chiefly, buildings as collateral for business loans. However,
unequal access to property rights means that women are much less likely to own and control these assets
than their male counterparts. According to a recent study by the Gender Innovation Lab, women are not
only less likely to own land than men but also own plots that are on average 30 percent smaller. 9 What is
more, only half of those women who do own land have their name on a title deed. In a context of high
collateral requirements, this means that a large section of women entrepreneurs is shut out of formal
financial markets.
14. Ethiopian SMEs also confront challenges related to access to markets, infrastructure (clusters
networks), and skills gap. A background study 10 for this intervention by the WBG in August 2020 identified
that SMEs’ production processes coupled with lack of quality business management trainings affect
product quality and productivity and their access to international market. Use of information technology
tools for accessing markets was observed to be very low. Lack of access to local quality assurance services
8 World Bank. 2014. SME Finance in Ethiopia: Addressing the Missing Middle Challenge.
9 World Bank. 2019. Ethiopia Gender Diagnostic Report: Priorities for Promoting Equity. World Bank, Washington, DC.
10 World Bank. 2020. “Addressing Challenges of Ethiopian SMEs’ Access to Markets and Production Facilities.” Background Paper.
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is also a bottleneck for exporting quality products. Government and private sector procurement
procedures often exclude SMEs from participating in bids, thereby narrowing down their market
opportunities. SMEs are also constrained by limited business information which otherwise could have
improved their business decisions. Lack of adequate production facilities is chronic, leading to
overcrowded production sheds—this is partly a reflection of inadequate government policy attention to
developing SMEs. The study also identified that there is poor management of allotment of working
premises and overall coordination failure among different government bodies.
15. Addressing these myriad development challenges and creating viable entrepreneurs requires a
well-functioning business ecosystem through the expansion of market access, provision of business
development services, and building of a robust SME network. The policy dialogue on building successful
entrepreneurial ecosystem requires attention to three focus areas: scaling up SME firm capability, building
business-to business relationships, and getting the institutional and policy framework right.
Simultaneously, targeted approaches are needed to address SMEs’ challenges based on effective
diagnosis of needs and the market failures to be addressed.
16. Ethiopia has immense potential for broadening access to market for SMEs through e-commerce,
relevant not just as a response to COVID-19 but also in terms of building for the markets of the future.
Digital economy diagnostics indicate that digital financial services and e-commerce have high potential to
create direct and indirect jobs in Ethiopia. A study commissioned by the World Bank in February 2020
shows that there are 68.3 million mobile phone users and 17.8 million active internet users in Ethiopia.
To support Ethiopia’s digital economy which is at an early stage of development with few private sector
players offering digital services and some government initiatives driving digitization agenda, the GoE
launched an economic reform program that aims at better utilizing online platforms for businesses. The
electronic transaction law enacted in March 2020 has created an enabling regulatory environment for
businesses to operate online. This law forms part of a broader Digital Transformation Strategy of Ethiopia
that lays the road map for creating a ‘Digital Ethiopia’ by 2025. The strategy underlines the importance of
strengthening the capacity of Ethiopian Postal Services (EPS) to serve domestic and cross-border e-
commerce. An efficient e-commerce platform can play a big role in serving the untapped local market. It
will enable SMEs and large enterprises to sell and move their products and services across borders.
D. SME FINANCE PROJECT
17. The SMEFP is a sustainable, long-term intervention helping to transform the way that Ethiopia’s
financial institutions serve SMEs. The SMEFP aims to increase access to finance for SMEs in Ethiopia
through:(a) providing credit lines that through demonstration effect helped create new markets, (b)
delivering business development services (BDS), and (c) enhancing the enabling environment for SME
finance. The line of credit for the parent project has two lending windows: (a) a leasing window which
provides capital goods lease finance to SMEs directly through the Development Bank of Ethiopia (DBE)
and (b) a working capital window that provides wholesale finance to banks and microfinance institutions
for on-lending to SMEs. To complement the credit line, a tailored TA is given to all participating financial
institutions (PFIs) to help them serve SMEs better. The target beneficiaries for the project are SMEs in
manufacturing, agribusiness, tourism, and construction sector. The project is financed by an IDA US$200
million investment lending operation, with an additional €70 million of co-financing from the European
Investment Bank (EIB).
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18. The overall implementation progress of the project is rated ‘Satisfactory’. The total
disbursement of the project stands at US$218 million, out of which US$170 million is from IDA while the
remaining US$48 million is from EIB. The project is well on track to fully disburse the credit line in FY21,
ahead of the project end date of August 2022. By December 2020, a total of 1,452 SMEs benefited from
the SMEFP’s credit line and 218 SMEs benefitted from business development services. SMEs under the
project have demonstrated their ability to grow and contribute to the economy through a range of
activities including manufacturing, agro-processing, and construction. In total, these firms employ about
50,000 workers apart from forward and backward links with large firms and suppliers, which further
enhance the economic impact. A total of 92 percent of the capital goods lease finance went to SMEs in
the manufacturing and agribusiness sector which plays an important role in boosting the productive base
of the country.
19. While a rigorous impact evaluation on firm-level impacts is under way, loan applications and
project monitoring data reveal that on average, SMEs financed by the project created two new jobs for
every US$25,000 investment. Based on this estimate, the project helped SMEs create more than 17,000
jobs to date, apart from helping retain more than 50,000 existing jobs. As the funding revolves and gets
rechanneled for multiple rounds of loans, the project creates an asset that creates multiplier effects. The
average loan size from the project is US$285,000 for lease finance and US$76,000 for working capital loan,
enabling support of growth-oriented firms.
20. Another key objective of the project was to expand access to long-term finance, because most
loan tenors on the market did not exceed 24 months. The tenor for 93 percent of loans from the leasing
window is five years or above providing access to long-term finance to SMEs which was previously
nonexistent in the market thereby creating a new market both in terms of the tenor as well as the product.
21. The project contributed to efforts towards building a robust market for SME finance by
developing capacity and links with 15 participating banks, nine MFIs, and one leasing company after
providing tailored TA in developing appropriate loan products and appraisal processes for SMEs, among
other topics. The TA has helped by building the capacity of financial institutions to better serve SMEs
which were largely ignored previously. Though more remains to be done, the project helped initiate the
path for the financial sector to better serve the SME market. For instance, to serve SMEs trapped in the
‘missing middle’, the project supported participating MFIs to ‘upscale’ their operation from their primary
focus on micro enterprises and for banks to ‘downscale’ their operations from their primary focus on large
enterprises, filling the gap which was left in the middle from both ends. Out of the 15 participating banks
in the project, nine established new ‘SME finance’ units, thereby enhancing the foundations to build
market capacity to serve the SME segment.
22. The project also supported market infrastructure, a crucial ingredient to foster sustainable
financing of SMEs. A key achievement for the project was the launch of an electronic movable collateral
registry. The project financed hardware and software for the movable collateral registry and this registry
went ‘live’ in March 2020. The value of collateral required for loans in Ethiopia is astoundingly high at 323
percent for small enterprises as reported in the Enterprise Survey (2015). Moreover, financial institutions
rely excessively on fixed assets (which SMEs often lack) as a collateral. The operationalization of electronic
movable collateral registry will help diversify the collateral options for SMEs and also help reduce the
value of collateral required.
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23. Lessons learned from the implementation of the project provide useful guidance on improving
implementation of the AF. Targeting and frequency of TA can be improved to ensure smooth
implementation. In addition, improvements are needed in the preparation and use of policy and
procedural documents. These need revision to include solutions to issues that arose during the
implementation. Definitional issues regarding SMEs need to be addressed to remove ambiguities. The
project also needs mitigation measures for some external bottlenecks that constrained lease-financed
firms. Evaluation of the project based on a baseline data and maintenance of database of credit can be
improved as well.
24. In response to the COVID-19 pandemic, the project has expedited disbursement to respond to
increased liquidity needs of SMEs that are otherwise viable but have been affected by the pandemic.
The project has also repurposed funds from leasing finance to working capital loan as the latter is what
the market needs in times of this crisis. In line with this, the project changed its disbursement to PFIs from
reimbursement basis to advance payment, temporarily relaxed the 5 percent NPL threshold which is one
of the eligibility criteria for PFIs (although a careful watch on NPLs remains a focus), added the number of
PFIs, and started providing online TA to PFIs.
E. RATIONALE FOR ADDITIONAL FINANCING
25. As discussed earlier, the impact of the COVID-19 crisis is being felt across firms in Ethiopia. The
effect on SMEs is especially severe, particularly because of the disproportionate vulnerability of urban
areas (where most SMEs operate) and lower resilience of smaller firms to external shocks. Around 92
percent of SMEFP borrowers are engaged in the manufacturing and agro-processing sectors which are
significantly affected by supply chain disruptions in accessing raw materials, intermediate goods, and
parts. The already acute credit constraint faced by SMEs has been further compounded by the COVID-19
pandemic. This affects not only SMEs’ growth trajectory and expansion but also their ability to maintain
employment. Not supporting this vital part of the economy will likely mean loss of jobs, a slower path to
economic recovery, loss of financial, social, and institutional capital as firm-level liquidity constraints
which could have been addressed for the otherwise viable firms turn to solvency issues. Crucially, the
COVID-19 outbreak is expected to have longer lasting impacts on economic growth with “an expected
economic recession at least as pronounced as the 2009 Global Financial Crisis. Therefore, ensuring firms
weather the crisis and regain their vitality will be key to maintaining families’ livelihoods today and
resuming economic growth afterward.” 11
26. As the COVID-19 pandemic intensified, the SMEFP has been used as a first line of response to
address the liquidity needs of SMEs and keep viable SMEs afloat, thereby preserving jobs and social and
institutional capital and enhancing the capacity to recover. In response to COVID-19’s adverse economic
impact on SMEs, the GoE has prioritized the support to SMEs and has requested for the World Bank’s
support through an AF to the well-performing parent project. The SMEFP’s existing implementation
structure provides a viable channel for responding rapidly and at scale to the emergency Ethiopia’s SMEs
are facing now. Existing project structures, particularly the SMEFP line of credit, will be leveraged for a
series of rapid and targeted interventions that can provide liquidity support as needed to enable
11Freund, Caroline, and Alfonso Garcia. 2020. “Keeping the Lights On: Supporting Firms and Preserving Jobs from Crisis through
Recovery.”.
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potentially viable firms to preserve their productive capacity and thereby protect jobs and preserve social
and institutional capital.
27. Designed as a COVID-19 response and recovery finance operation, the AF will support the: (a)
liquidity needs of viable SMEs, (b) development and adoption of new lending approaches by leveraging
existing financial market infrastructures, (c) introduction of a derisking facility (DRF) as a countercyclical
tool to lessen effects of credit rationing and exclusion due to heightened economic uncertainty, and (d)
improvement in bankability and digitalization of SMEs through a comprehensive package of business
development services.
28. The AF will build on project activities of the original project to ensure continuity, timeliness,
and effectiveness of the response to COVID-19. Such support will also help Ethiopia’s recovery from the
downturn, as SMEs that are viable are supported to tide over the downturn. The design of credit facilities
under the AF will accordingly use modalities that can channel liquidity while safeguarding risks of future
NPL build-up through eligibility criteria and focusing on SMEs with good past credit histories and similar
measures and have appropriate incentives to leverage the use of market infrastructure 12 (such as the
electronic collateral registry established under the parent project) in accessing credit, thereby
progressively reducing the need for collateral. TA to support increased capacity on credit appraisal will
also be crucial. The project also aims to incentivize the use of digital payments by and for SMEs to enhance
operational resilience.
29. This AF also aims to strengthen policies and institutions to achieve a resilient, inclusive, and
sustainable recovery by rebuilding better. The planned activities on market infrastructure, supplier
development, regulatory framework, and TA to PFIs and innovative financial products help build
institutional capacities and enhance resilience to similar shocks in the future. These activities help
preserve development gains and build a stronger foundation to adapt to the transformations in the way
SMEs work.
30. The proposed AF is in line with the WBG COVID-19 Crisis Response Approach Paper: "Saving
Lives, Scaling-up Impact and Getting Back on Track" and with the World Bank’s Africa approach to
COVID response. 13 This AF aims to alleviate the COVID-19 impact on SMEs, build confidence in the
financial sector to support viable businesses in vulnerable groups, and keep a focus on the strategic
direction needed to help the private sector adapt to the new normal post COVID-19. The activities under
the project fall under the relief and resilient recovery stages, as outlined in the Approach Paper, and will
contribute mainly to Pillar 3: Ensuring Sustainable Business Growth and Job Creation and Pillar 4:
Strengthening Policies, Institutions, and Investments for Rebuilding Better. This AF helps SMEs retain their
existing employees; create new jobs; and support growth of their business through enhancing their access
to finance, building firm capability, and facilitating access to market. The AF is largely a near-term support
but also builds on preserving social and institutional capital and laying the groundwork for building back
better. The proposed activities on market infrastructure, supplier development, market access, and TA to
PFIs help build institutional capacities and enhance resilience to similar shocks. In close coordination with
International Finance Corporation (IFC) advisory services, the project will help support the flow of credit
to the real economy by enabling better utilization and leveraging of credit market infrastructures.
12 In close collaboration with IFC.

13 World Bank Group.2020. World Bank Group COVID-19 Response Approach Paper.
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Moreover, the reforms targeting firm capability will help firms adapt to the COVID-19 reality and
strengthen their resilience to similar shocks. As SMEs only have limited financial buffers, it is likely that a
protracted crisis and continued uncertainty would result in the closing of thousands of SMEs and
jeopardize close to 50,000 jobs created by SMEFP beneficiaries. While macroeconomic conditions are
expected to rebound in the medium term, there is a clear case for providing time-sensitive support to
SMEs, both to avoid unnecessary closures of viable firms and fuel future growth as the outlook brightens.
In the immediate response, it is critical to maintain the private sector so that viable firms do not exit as a
result of the pandemic. This is reflected in the WBG COVID-19 Response Approach Paper under Pillar 3
and also by the IMF which notes that 14 “preventing excessive firm bankruptcies and creating an
environment for job-rich growth” is important and among other measures, advocates for support for firms
that are potentially viable.
31. This AF is also informed by the Ethiopia Country Private Sector Diagnostic which calls for
allowing a much greater role for the private sector in driving growth and job creation. Broadening the
base for job creation will help create more and better jobs, as well as help overcome uneven spatial
distribution of jobs across the country. Support to growth-oriented and viable SMEs will lay the foundation
for creating large private firms which will drive job creation and economic growth. This AF aims to help
protect viable SMEs from sliding back and help them grow and create more jobs to support economic
recovery through supply side (access to finance, including through liquidity support and DRF), demand
side (firm capability, e-commerce, and supplier development), and ecosystem development (enhancing
regulatory environment).
32. This AF enables the project to respond to the needs of SMEs more swiftly than preparing a new
project. Activities supported by the AF will build on the original project objective and activities. The project
description, Project Development Objective (PDO), project components and implementation
arrangements, and target beneficiaries (primarily SMEs) are materially the same. The scale of operation
of course, will be expanded through the AF and the focus will be on liquidity support to SMEs for both the
relief and recovery stage. In addition, the AF will expand on the BDS component of the parent project to
build firm capabilities that enable them to link with the market effectively. Notably, the AF will not involve
new activities with significant environmental and social risks or impacts that can adversely affect the
current safeguard risk category of the project. The safeguards risk for the SMEFP is rated ‘Moderate’.
14 Emerging Stronger from the Great Lockdown (Kristalina Georgieva and Gita Gopinath, Foreign Policy, September 9, 2020).
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F. Relevance to the Country Partnership Framework
33. The WBG Country Partnership Framework (CPF) for Ethiopia 15 for 2018–2022 strives to assist
Ethiopia in forging a more inclusive and sustainable growth path. The CPF remains valid but adjustments
have been made to meet the challenges posed by COVID-19. Its focus areas and objectives continue to
provide a platform for implementing the WBG’s global approach to addressing the pandemic’s impact.
Support is being provided across four pillars, consistent with the overall WBG approach: 16 (a) Saving lives;
(b) Protecting poor and vulnerable people; (c) Ensuring sustainable business growth and job creation; and
(d) Strengthening policies, institutions, and investments. The WBG’s support under these pillars is geared
to three expected stages of crisis response: (i) relief - emergency assistance to confront the immediate
threat to public health, as well as short-term economic, financial, and social impacts; (ii) restructuring -
strengthening health systems, restoring human capital, pursuing economic reforms, debt resolution, and
recapitalization of firms and financial institutions; and (iii) resilient recovery - exploiting new opportunities
for more inclusive, resilient, and sustainable longer-term development.
34. The WBG in Ethiopia is applying the corporate approach to helping countries address the COVID-
19 challenge—relief, restructuring, and resilient recovery. Relief is being supported by emergency
response and longer-term health systems support as well as maintaining strong social protection
programs in rural and urban areas to mitigate the social and economic impacts of the crisis. Restructuring
is to be pursued through support for business environment improvements, including for the financial
sector, enhanced infrastructure financing and debt management, and strong human capital focus. Finally,
resilient recovery, building back better, will be achieved through continued work on safety nets, national
agriculture program, and support for rapid expansion of access to power and renewable energy and
improved connectivity both in transport and telecommunication. Most importantly, reforms for growth
and competitiveness will have a central role in recovery, including for an improved financial sector and
better business climate. The portfolio has been retrofitted and adapted to the evolving COVID-19 context.
The WBG response to COVID-19 is presented in annex 7.
35. The proposed SMEFP AF is consistent with both the CPF and the COVID-19 response
adjustments, contributing directly to the economic relief, restructuring, and recovery phase of COVID-
19. The objective of the third and fourth pillar of the WBG response to COVID-19 is to help governments
respond rapidly to ensure sustainable business growth and job creation and strengthen policies,
institutions, and investments. In line with this, the AF provides essential support to viable SMEs affected
by COVID-19 to weather the crisis, maintain jobs, and ensure sustainable growth and job creation. This is
also aligned with the HGER’s goal of private sector led job creation and economic growth.
II. Description of Additional Financing
A. PDO and project beneficiaries
36. PDO. The PDO is to increase access to finance and build firm capabilities for eligible small and
medium enterprises in Ethiopia, with a focus on responding to the COVID-19 pandemic 17.
15 Ethiopia CPF 2018 - 2022, World Bank May 2017, Report No. 119576-ET.
16 Saving lives, scaling-up impact and getting back on track: The WBG COVID-19 Crisis Response Approach Paper, 2020.
17
This is a new PDO phrasing. The PDO of this AF is changed from the parent project to reflect the COVID-19 response angle.
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37. PDO-level results indicators. The progress toward achievement of the PDO will be measured by
the following indicators: (a) Volume of financial support to SMEs under the credit facility and DRF; (b)
Number of SMEs reached with financial services under the credit facility and DRF; (c) Number of SMEs
served with business development services; and (d) Portfolio quality under the credit facility. Proposed
intermediate indicators are highlighted in the results framework under section VIII. The intermediate
indicators are gender disaggregated as much as feasible. Changes have been made to the indicators of
this AF (as compared to the parent project) to reflect the increased scale and scope of operation, add
gender disaggregated indicators, and reflect revised closing date of the project.
38. Project beneficiaries. The project beneficiaries will be eligible SMEs. “SMEs” means small and
medium enterprises as more specifically defined in the project implementation manual (PIM) and as such
definition may be updated from time to time.
B. Project Description
39. This AF focuses on increasing access to finance and building firm capabilities for eligible SMEs
in Ethiopia, with a focus on responding to the COVID-19 pandemic. Activities supported by the AF will
build on the SMEFP’s current project objective and activities.
40. While the PDO, components and implementation arrangements remain materially the same,
several adaptations of activities are envisioned to respond to the impacts of COVID-19 on SMEs. New
approaches and instruments are introduced or proposed to be developed; new activities are added; and
existing activities are redesigned to respond to the COVID-19 crisis. Some of these changes include the
following:
(a) Derisking Facility. The high perceived risk of lending to SMEs in general (aggravated by
information asymmetry) makes lenders reluctant to lend to this underserved segment. The
COVID-19 crisis has compounded this challenge with balance sheets of many SMEs getting
strained. While a flight to safety is understandable, it harms those firms that are otherwise
viable (under normal business conditions) and could substantively contribute to growth and
recovery if supported. To bolster the countercyclical response, the AF will set up a DRF to
share credit risks associated with lending to existing and new productive SMEs and through
it contribute to business continuity and jobs.
(b) Leveraging private capital. The project targets to leverage more than US$60 million private
capital through counterparty contributions by PFIs and external lenders and an additional
capital up to US$40 million through the DRF. In total, the project aims to leverage US$100
million additional private capital. As part of the credit facility agreement, PFIs will commit to
match one-third of the financing from their own source, thereby contributing to the private
capital mobilization, which is a World Bank corporate mandate and also helps enhance the
sustainability of the project initiatives.
(c) Digital solutions. Digital technology offers an unprecedented opportunity to mitigate the
impact of the COVID-19 crisis on SME financing. The TA to be provided under this AF
envisages enabling simplified loan application processes and use of alternative data for
credit decision which will be leveraged to reduce turnaround times of SME loans. Moreover,
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e-commerce platforms will be leveraged to support the business expansion of SMEs. The
project will also provide digital financial literacy training to SMEs to build their knowledge
and skills, which is required to succeed in a technology-driven business world. Recent reform
measures to digitize financial services including increasing the use of bank interoperability
and upgrading of the national payment switch (Eth-Switch) will further augment SMEs’
service provisions.
(d) Leveraging credit market infrastructure. The project will leverage the market
infrastructures established by the parent project and other WBG projects, notably the
movable collateral registry, CRB, and e-payments systems and build incentives to improve
access to finance and crowd in private capital while enhancing the use of market
infrastructure. Doing so will contribute toward enhancing sustainability of project
interventions and containing credit risks, relevant for both the short term as well as for long-
term sustainability and efficiency of credit markets.
(e) Build firm capability and facilitate access to market. Above and beyond what firms can do
to stay in the SME game, governments have many instruments to foster market and
ecosystem conditions for SMEs. The GoE plans 18 to transform the business ecosystem and
build vibrant, growth-oriented micro, small, and medium enterprises (MSMEs) through: (i)
remodeling government support to incentivize enterprise growth and self-reliance, (ii)
improving the quality of BDS, (iii) improving local value chains and market links through
horizontal and vertical integration, (iv) improving the competitiveness and access to
technology for MSMEs, and (v) improving the business environment for MSMEs. To address
the market condition of Ethiopian SMEs, the project will strengthen their business
ecosystem and build firm capabilities and support the government in introduction of
enabling new policies, regulations, and strategy documents that can define and support
some of these objectives to help build stronger, more competitive, and resilient SMEs in the
future.
(f) Targeting ‘graduates’ from the Women Entrepreneurship Development Project (WEDP,
P122764). Some of the growth-oriented entrepreneurs that were targeted under the WEDP
have graduated from a relatively small-ticket working capital loan provided by MFIs to high-
ticket and diversified loan products from various financial institutions (Banks, MFIs, and
leasing companies). With a pre-COVID-19 repayment rate of above 99 percent, the women
entrepreneurs segment proved to be a viable business segment and can be a good business
case for PFIs to cater their services to this underserved business segment. Against this
background, this AF places a special focus to target women entrepreneurs for a wide range
of financial services provided under this project (leasing, working capital loan, and other
innovative loan products to be developed through this project).
18 The job creation commission’s plan of action for job creation details what the government plans to do to transform the business
ecosystem.
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C. Components
41. As the parent project, activities for the AF will be structured under four mutually reinforcing
components: (a) Component 1: Financial services to SMEs, (b) Component 2: Enabling environment for
SME finance, (c) Component 3: Business development services to SMEs, and (d) Component 4: Project
management, communication and impact evaluation. These components are fully aligned with the World
Bank’s jobs and economic transformation framework as well as its approach to the COVID-19 response. 19.
The liquidity enhancement intervention will entail a relief and restructuring response as well as supporting
resilient recovery by taking advantage of new opportunities to build a more sustainable, inclusive, and
resilient future in a world transformed by the pandemic. Strengthening the enabling environment and
BDS will support recovery through enhancing firm capability, market access, and modernizing business
processes. Digital innovation and women economic empowerment will be an underlying and cross-cutting
element across the the first three components (component 1, 2 &3). These interventions are particularly
relevant to the immediate COVID-19 response even while they are also enabled to support medium-term
economic recovery through building the productive base of the country.
Component 1. Financial services to SMEs (SDR 125.1 million, US$180 million equivalent)
42. The objective of component 1 is to provide liquidity support to SMEs through a credit line and
DRF, including potentially through receivables financing. The project will target viable/growth-oriented
SMEs. The incentive for targeting viable SMEs will be captured in the eligibility criteria to be defined in the
PIM and are also built into the design of the financial instruments—PFIs share risks and rewards as the
credit risk from the loan is borne by the respective financial institution. TA on credit appraisal including
use of alternate sources of data to assess risk, past credit history, and sector analysis will be supported
(see sub-component 1c).
43. Sub-component 1a. SME lending (US$173 million equivalent). This sub-component is expected
to channel IDA funds mainly for working capital loan and leasing finance for on-lending to eligible SMEs.
The DBE will provide lease finance to SMEs both directly through its regional branches and indirectly
through eligible lease companies operating in the country. The DBE will also provide wholesale finance to
commercial banks and MFIs for on-lending to eligible SMEs. To encourage on-lending to women-owned
SMEs which proved to be a viable business segment, the DBE will incentivize PFIs by making interest rate
discounts on the portion of funds channeled to women entrepreneurs. Additionally, coordination
arrangements to target graduates of the WEDP will be facilitated. PFIs will be required to match a certain
portion of their funding from their own source thereby leveraging additional private capital for on-lending
to SMEs. The DBE will assume the risk of on-lending to PFIs and will determine interest rates and other
terms for the wholesale finance. Overall, the wholesale pricing strategy should serve the purpose of
attracting eligible PFIs to participate in the scheme at a sufficient margin, while enabling the provision of
more affordable finance to SMEs. The PFIs will assume the full credit risk for their SME portfolio under the
project and will be free to determine the loan terms of the sub-loans. Details of implementation
arrangements for the credit line will be elaborated in the PIM.
19 World Bank Group. 2020. Saving lives, scaling-up impact and getting back on track: The WBG COVID-19 crisis response approach
paper.
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44. IDA funds are expected to be channeled as senior debt from DBE to PFIs, though the AF will
explore the feasibility of piloting a part based on market need as junior debt or other innovative loan
products to crowd in market financing. The junior component to PFIs will be structured appropriately on
a portfolio basis to enable sharing of risks with lenders, likely on a first-loss basis for on-lending to eligible
SMEs. The product innovations are aimed at better pricing for SMEs, unlocking the supply potential of
external financing 20 for Ethiopia’s financial sector and through it support innovation and knowledge
transfer benefiting the SME finance ecosystem. Should this product development materialize, the PIM will
be updated for piloting under the credit line. A description of potential financial product innovations that
will be explored under the AF is provided in annex 4.
45. Sub-component 1b. Derisking Facility (US$6 million equivalent). This sub-component will set up
a facility to share risks associated with new lending to SMEs especially given heightened economic
uncertainty driven by COVID-19. A DRF will help lower credit risk by absorbing a portion of the lender’s
losses on eligible loans made to SMEs in case of default. Such derisking will help increase lender appetite
for SME financing and reduce the requirement of collateral. The DRF will incentivize superior data
monitoring and reporting standards, safeguards, and gender practices in SMEs through establishing clear
sub-loan eligibility criteria for PFIs. The design of DRF aims to optimize leverage with sustainability of the
facility. The DRF mechanism can potentially be scaled up and adapted by the DBE for wider reach outside
the SMEFP AF project boundaries. The DBE may also build on the structure of the DRF mechanism under
this project to support other World Bank projects that are envisaging a guarantee facility (such as is being
considered under the Economic Opportunities Project - P163829). The DRF is being designed using a
learning and piloting approach for future scalability and crucially, to inform design of the GoE’s proposed
partial credit guarantee scheme for SMEs. The proposed features of the DRF are highlighted in annex 4
with details on agreed structure, terms, and implementation arrangements documented in the DRF
operations manual. The DRF design is guided by the principles for public credit guarantee schemes for
SMEs which is developed by the World Bank and Financial Sector Reform and Strengthening Initiative
(FIRST) 21.
46. Sub-component 1c. Technical Assistance (US$1 million equivalent). This sub-component will
provide TA aimed at supporting PFIs in designing, piloting, and rolling out asset-backed lending products
such as receivables financing, cash flow-based lending, factoring, reverse factoring, channel financing, and
risk sharing products, as well as supporting them toward information-based credit decision-making,
including through use of alternate sources of data) to successfully expand their outreach to the target
SMEs and reduce cost of financing. The TA program is designed to complement and reinforce project
implementation and support financial institutions—DBE and PFIs as applicable—develop and roll out a
broad set of asset-backed lending and risk sharing products and strengthen related risk management
systems and capacity. It will also build awareness and capacity of credit departments at financial
institutions to integrate credit information including credit bureau-supplied information into lending
decisions.
20 Leveraging NBE’s Directive https://nbebank.com/wp-content/uploads/pdf/directives/bankingbusiness/sbb-77.pdf. External

lenders can be from international financial institutions, including IFC.
21
The World Bank and FIRST Initiative. 2015. Principles for Public Credit Guarantee Schemes for SMEs. Washington, DC: World
Bank.
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Component 2. Enabling environment for SME finance (SDR 2.1 million, US$3 million equivalent)
47. With the financial and technical support of the parent project and IFC advisory, Ethiopia
introduced the movable property collateral registry system in early 2020. Moreover, another World
Bank project 22 from 10 years ago financed the establishment of a CRB and for the past five years, IFC has
been providing TA to strengthen the existing credit information system. However, the credit information
system is far from optimal and more needs to be done to ensure financial institutions utilize the
infrastructure to inform their credit decisions as well as to expand range of products and services. Hence,
by leveraging the financial infrastructures built by the WBG, this component aims to strengthen financial
institutions’ utilization of credit information to inform credit decisions as well as to support the
development of new financial products, and spur SME financing.
48. Sub-component 2.1. Strengthening the credit information systems and ensuring utilization by
financial institutions. 23 (US$1 million equivalent). The current credit information system in Ethiopia is
operating sub-optimally as evidenced by low coverage, limited referencing perimeter, and lack of value-
added products. The system is also fraught with serious operational, human capital, and IT challenges
which has affected the integrity of data and the system efficiency and reliance placed on the system by
credit providers. Against this background, this sub-component aims to complement the ongoing and
upcoming IFC advisory work by supporting the digitization phase of the credit reporting system by
financing the development of an integrated digital lending platform that has lending, scoring and data
submission capabilities. This AF, complemented by IFC advisory services, will: (a) provide TA to the NBE to
enhance the regulatory, legal, and supervisory framework that underpin the establishment and
supervision of a private credit bureau; (b) support the development and deployment of value-added
products and services such as scoring; monitoring, benchmarking, and bulk inquiry functionality; (c)
capacitate MFIs (with TA and digitization); and (d) support the modernization of the NBE Credit Bureau to
make it a tool that can support the institutional mandate for the Central Bank including data-driven policy
formulation and micro and macroprudential supervision.
49. Sub-component 2.2. Development of movable asset based lending (US$2 million equivalent):.
Though the legal and regulatory framework for electronic movable collateral registry system is in place,
much remains to be done to ensure financial institutions fully utilize the framework to develop range of
asset-backed lending products and services The existing movable properties security rights legal and
institutional foundations can be used to develop and roll out asset-backed financing products which are
aimed at reducing the high loan collateralization rates. In light of this, this subcomponent will identify and
fill gaps in the movable asset-based lending ecosystem including developing the industry and market. In
general, the ecosystem consists of three main areas: (a) development of new financial products, (b)
development and deployment of electronic platforms, and (c) movable property valuation expertise.
50. This AF, complemented by an IFC TA project which is being rolled out concurrently with this
program, will support the development of movable asset-based lending industry which will include the
development of financial products such as supply chain financing platforms, invoice discounting, factoring
and reverse factoring, leasing, and warehouse receipts financing, which will be informed by the outcomes
22 Financial sector capacity building project (P094704).

23 With TA from IFC, the NBE migrated the CRB application to a new platform with a disaster recovery facility improving the overall
technical infrastructure. IFC has also been working with the NBE to improve data quality and coverage of the bureau by integrating
MFIs; increasing coverage from a mere 0.2 percent of the adult population to more than 5 percent.
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of a countrywide assessment to be conducted first. A portion of the credit line from component 1 will be
allocated for new movable asset-based lending products targeting SMEs and the program will also
strengthen the supporting technical infrastructure and electronic platforms necessary to deploy these
new financial products. This window will also support development/deepening of secondary markets for
movable assets by providing the necessary technical infrastructure, for example, electronic auctions or
online liquation platforms to dispose of assets which have been repossessed in the event of borrower
default.
Component 3: Business development services (BDS) to SMEs (SDR 10.4 million, US$15 million
equivalent)
51. This component aims to build firm capabilities through selected value chains and broaden SMEs’
access to market by implementing a firm capability-building program and e-commerce platform in
Ethiopia. Three priority sectors of MoTI (textile/garments, agro-processing, and furniture) will be targeted
and value chain support for participating SMEs will be provided. Specific value chain considerations will
be detailed in the project operations manual. This component will be delivered through international or
local partnerships between international and local service providers. The beneficiary SMEs and their
backward-linked suppliers will be selected through open invitation/calls for participation in the firm
capability-building program. Beneficiaries of SMEs in component 1 and 2 will also be included in the
support under component 3. The component brings international best practices 24 considering lessons
learned from the experience to date for improving SMEs’ access to local and international markets—
including supplying to industrial parks. Details of each of the activities of the BDS component are included
in annex 5.
Sub-component 3.1. Building firm capability (US$3.5 million equivalent). Building on the BDS component
of the parent project, this sub-component aims to support SMEs and their linked suppliers in the targeted
sectors with the provision of tailored business advice and technical trainings. The business advice will help
build capacities of SMEs and their linked suppliers to develop bankable business plans; improve quality of
financial statements and records; and better manage risks, business management, entrepreneurship,
marketing strategy, and human resource management. Participating SMEs will be trained on digital tools
that improve their record keeping, financial analysis, and so on and boost their online presence. The
business advice will also include technical skills training on new product development, production
efficiency, technology adoption, and so on. This activity entails bringing a pool of international technical
experts in the targeted sectors to provide demand-driven on-the-job technical training using the
machinery and equipment of the participating SMEs and their linked suppliers. Government institutes
established to provide capacity building to SMEs include Textile Industry Development Institute, Leather
Industry Development Institute, Metal Industry Development Institute, Food, Beverage and
Pharmaceutical Industry Development Institute, Chemicals and Construction Input Industrial
Development Institute, Meat & Dairy Industry Development Institute, Regional and Federal Technical and
Vocational Education and Training (TVET) Colleges and Entrepreneurship Development Centre (EDC);
these institutes are organized to cater for such services and are equipped with the necessary qualified and
experienced personnel and equipment and are well placed locally to support in such capacity building
endeavors under the project. Hence apart from deploying qualified international consultants, FeSMMIPA
24Draft document presented at the decision meeting in October 2020; CMC SME operational guidelines: Improving WBG
interventions in support of SMEs.
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shall engage these institutes for the provision of BDS to SMEs as appropriate. The project will assess the
capacity of Entrepreneurship Development Center (EDC) 25 and works with them on areas where the EDC
has strong experience. The remaining business and technical advice/support will be given by international
service providers or a combination of international and local service providers.
52. Sub-component 3.2. Increasing access to market (US$5.5 million equivalent). This sub-
component will support participating SMEs in the value chain on business matchmaking to enable a long-
term business-to-business relationship with selected international buyers or local suppliers of inputs. A
business information center that provides access to business information to all SMEs and their
international/local buyers in Ethiopia will be established at FeSMMIPA. Finally, by building the capacities
of federal and regional investment and trade support institutions, export promotion agencies, and
business diplomacy, the program will enable the government to provide better services to SMEs in the
targeted sectors. The activities under this sub-component could be delivered by consultancy/training
firms hired in sub-component 3.1 or through new service providers.
53. Sub-component 3.3: Broaden access to market through digital solutions (US$6 million
equivalent). This sub-component will establish a web-based e-commerce platform that will broaden
access to markets for beneficiary SMEs. Other businesses in Ethiopia will also be able to utilize this e-
commerce platform for selling their products online. As part of the project’s COVID-19 response, the e-
commerce platform will support SMEs to increase their market opportunities through digital means. The
products that are transacted on the e-commerce platform can be physically distributed using the networks
of EPS which already has more than 1,000 branches in Ethiopia. These branches and existing networks will
be leveraged by the project for expanding market access for SMEs by enhancing volume and quality
through a low marginal cost. The e-commerce platform will be designed, tested, and launched by a service
providing firm or in business partnership (joint venture [JV] with an experienced partner that has
successfully implemented such a platform in other countries with similar/comparable situation as
Ethiopia. As part of its assignment, the firm will build the physical and human capacities of EPS’s in-house
IT professionals to effectively run the platform. After the e-commerce platform is launched, and if the
platform is done by a service providing firm, EPS will competitively select private IT companies and
outsource the operation and management of the platform. If the platform is implemented in a JV with a
partner, EPS and the partner will work out a sustainable business deal that benefits both the partners.
Component 4: Project management, communication and impact evaluation (SDR 1.4 million, US$2
million equivalent)
54. The objective of Component 4 is to support overall coordination of project activities and
conduct impact evaluation. The two main implementers of the project will be the DBE and FeSMMIPA.
The project management team (PMT) at the DBE and the project implementation unit (PIU) which is
housed at FeSMMIPA will be strengthened to effectively manage project activities. Like the parent project,
the DBE will be responsible for managing the credit facility under component 1 while the PIU will have the
mandate of overall project coordination and direct responsibility of components 2, 3, and 4. The NBE has
25The EDC is a quasi-governmental entity established under the framework of the Entrepreneurship Development Program. To
facilitate the realization of the entrepreneurship development goals set in the government’s GTP, the GoE, represented by the
Ministry of Urban Development and Housing, in partnership with the United Nations Development Programme, formulated and
introduced an innovative entrepreneurship and enterprise development initiative, namely the Entrepreneurship Development
Program.
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assigned a focal person that will act as the key technical referent of the PIU for market infrastructure and
regulatory reform related activities.
D. Additional financing budget
55. The total amount of AF is US$200 million. This is allocated across the four project components
as follows:
Components Sub-components Amount

1. Financial services to SMEs 1a. SME lending US$173 million
1b. Derisking facility US$6 million
1c. Technical Assistance US$1 million
Sub-total component 1 US$180 million

2. Enabling environment for 2a. Strengthening the credit information systems and US$1 million
SME finance ensuring utilization by financial institutions
2b. Development of movable asset based lending US$2 million

3. Business development 3a. Building firm capability US$3.5 million
services to SMEs 3b. Increasing access to market US$5.5 million
3c. Broaden access to market through digital solutions US$6 million

4. Project management, US$2 million
communication and impact
evaluation
Total: US$200 million
III. KEY RISKS
56. The overall risks of project implementation are moderate and manageable with mitigation and
monitoring mechanisms in place. Implementation of activities under the AF will build on the effective
project structures and implementing partners of the SMEFP to mitigate risks and achieve project targets.
The SMEFP AF activities will not involve new or modified activities expected to have significant
environmental or social risks or impacts or raise the current safeguard category of the overall project.
Despite low expected risks, mitigation measures will be further strengthened to address the potential
environmental and social risks and impacts in accordance with the requirements of the World Bank
Performance Standards (OP 4.03). The existing DBE’s Environmental and Social Management System
(ESMS) will be updated and strengthened to ensure that the project fully addresses COVID-19 specific risks
and the associated potential environmental and social risks during the AF.
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Box 1. Key Risks and Mitigation Measures

Political and governance: Substantial. The GoE has demonstrated strong political commitment to support MSME
development and job creation policies and programs. However, conflict across the country has resulted in
incidents of social unrest, which are likely to continue as the presidential election is scheduled for June 2021. The
military operation in Tigray also poses a challenge in the implementation of the project. There is also a risk that
incidents of political and social unrest could have an impact on project implementation. To mitigate this risk, the
task team will work closely with the World Bank Country Management Unit and the PIU to monitor the situation
on the ground and take appropriate risk management measures.
Other – COVID-19: Substantial. The COVID-19 pandemic threatens Ethiopia’s gains in growth and poverty
reduction, with micro-enterprises and SMEs expected to be among the ones significantly affected as a result of
the economic slowdown. The already acute credit constraint faced by SMEs has been further compounded by the
COVID-19 pandemic. COVID-19 transmission channels to the economy include both demand and supply side
elements – through supply chain disruptions; decline in demand; depressed commodity prices; decline in
remittances; and restrictions in global trade, travel, and tourism making impacts more pronounced. With the aim
of containing the impact of COVID-19 on SMEs, this AF will provide liquidity support while also building for the
future through investments in TA, market infrastructure, enabling environment- and demand-side interventions
to enhance productivity.
IV. APPRAISAL SUMMARY
57. The additional activities have been appraised for economic and technical viability.
Implementation and institutional arrangements will not change from the existing arrangements under the
parent project. No new fiduciary or procurement arrangements are needed. Finally, no changes in the
project’s safeguard category are envisioned, and no new safeguard policies are triggered. However, the
team will work to further strengthen the project’s existing ESMS including leveraging the public grievance
management system to better serve target communities.
A. Economic and financial analysis
58. The project is expected to generate significant benefits for Ethiopia’s economy in the long run
while providing liquidity support and building firm capability to help SMEs weather the COVID-19-
induced economic shock in the short run. Assuming the average size of leasing and working capital loan
will remain at US$285,000 and US$76,000, respectively, and the ratio of leasing to working capital will be
1:3, the credit line and DRF will support nearly 2,000 loans. Factoring in the revolving of funds brings the
total amount of loanable funds to US$332 million and the number of loans to 2,592 over the project
period. Loan applications and project monitoring data also reveal that on average SMEs financed by the
project create two jobs for every US$25,000 investment. Based on this estimate, the AF helps SMEs create
26,592 jobs over the next three years and helps maintain more than 50,000 jobs of existing SMEFP clients.
As the credit line is revolving, its long-term impact is compounded, resulting in a total loanable fund of
US$1.1 billion and estimated job creation of nearly 90,000 over 10 years. The project will also contribute
through the demonstration effect to building a stronger capacity base amongst financial institutions to
undertake SME financing in Ethiopia, thereby further magnifying impact. The forward and backward links
with large firms and suppliers will also create additional jobs and enhance the economic impact.
59. The AF will also reduce the fiscal burden associated with government-funded SME finance and
job creation programs by leveraging private sector financing. The proposed AF will also contribute to
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generating positive fiscal returns by increasing the tax revenue the Government receives from the
expansion of existing businesses. Moreover, the liquidity support to SMEs will help protect closure of
businesses minimizing the potential tax revenue losses for the Government and sustaining jobs.
B. Technical
60. For these AF activities, the Ethiopian Ministry of Finance (MoF) will delegate project
implementation to the DBE and FeSMMIPA. World Bank credit proceeds will be transferred directly to
the implementing agencies in line with the provisions of the Subsidiary Agreement to be signed between
the MoF and the respective institutions. To ensure continuity from the parent project, the AF will use
existing structures and institutions, which have proved to be successful in implementing the project. The
SMEFP PMT, which is housed at the DBE, will maintain direct responsibility for managing Component 1
(access to finance). The PIU, which is housed at FeSMMIPA, will maintain its mandate of overall project
coordination and will have direct responsibility for the remaining three components. Moreover, a high-
level coordination secretariat comprising senior personnel from MoTI, FeSMMIPA, Job Creation Agency,
NBE, DBE, and other relevant line ministries and agencies will be maintained to oversee all technical and
operational aspects of the project.
61. Capacity of the DBE. The DBE has a successful track record of managing credit lines. The existing
PMT, which is housed at the DBE, has developed and proven adequate capacity to manage the SMEFP and
other credit lines such as the WEDP. The PMT will be supplemented with additional capacity as needed to
manage the new project, especially to build its capacity to manage the DRF. Specifically, a safeguards
specialist and a monitoring and evaluation (M&E) specialist will be added to the team to ensure
compliance with the World Bank’s updated safeguard procedures and increased demands for timely and
updated loan data.
62. Capacity of the FeSMMIPA. The FeSMMIPA has proven its ability to act as the implementing
agency for the SMEFP and has the necessary capacity to coordinate implementation of the new program
phase. The PIU is adequately staffed with a project coordinator and experts in finance, procurement, BDS,
and other support staff. For the AF, the PIU will further employ environmental and social expert who
coordinates with the DBE safeguards staff and oversees the overall safeguards (ESMS) implementation,
monitoring, and reporting. The PIU coordinates closely with the DBE, NBE, and federal and regional
agencies for SME development and BDS providers to ensure smooth implementation of the project.
C. Financial management
63. Financial management (FM) and disbursement arrangements under the SMEFP will continue
unchanged for AF activities. The project will continue to follow the government’s channel 2 fund flow
mechanism. Both implementing agencies (DBE and FeSMMIPA) have experience operating FM
frameworks for World Bank operations. Under the SMEFP, these agencies set up an FM system to ensure
that funds were used only for the project’s intended purposes and disbursed in an efficient and
economical way. They provided accurate, reliable, and timely financial reports and ensured that project
assets were used within applicable safeguards. The FM of the parent project is rated ‘Moderately
Satisfactory’. FM arrangements, including compliance with legal covenants related to FM, are satisfactory
and there are no outstanding audit reports. Detailed FM arrangements along with the FM action plan are
described in annex 1.
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D. Procurement
64. Procurement under the proposed AF will be carried out in accordance with the World Bank’s
Procurement Regulations for IPF Borrowers: ‘Procurement in Investment Project Financing, Goods,
Works, Non-consulting and Consulting Services’, dated July 1, 2016, revised November 2017 and August
1, 2018. The project will also be subject to the World Bank’s anticorruption guidelines, dated October 15,
2006, revised in January 2011, and as of July 1, 2016. Procurement under the SMEFP AF will mainly be for
goods and equipment needed for institutional support, as well as consultancy services for capacity
building. The PIU of the SMEFP at FeSMMIPA has one procurement staff who is employed for the
implementation of procurement activities of the project. Although procurement activities under the
parent project are progressing well there are apparent capacity limitations which are reflected in terms
of lack of regular updating of procurement plans; delays in the implementation of procurement activities;
unsatisfactory procurement record keeping; and shortcomings in the quality of bid documents, evaluation
reports, and so on. The client will also be supported to prepare the Project Procurement Strategy for
Development (PPSD) document, which will form the basis for the procurement plan and selection
methods of the procurement activities to be carried out under the proposed AF.
E. Environmental and social risks management (including safeguards)
65. The project is categorized as a Financial Intermediary (FI) project and the appropriate FI
category is FI-2. This is based on anticipated environmental and social risk impacts of sub-projects as
assessed by the World Bank in accordance with OP/BP 4.03 (World Bank Performance Standards for
Private Sector Activities). According to the requirements under this World Bank policy, the project will put
in place adequate systems and processes, acceptable to the Association, to mitigate any potential risks
and impacts.
66. Relevant aspects of performance standards will be applied to activities under all components.
The DBE will be responsible for component 1 of the project, covering leasing and lending, and will address
any environmental and social risks and impacts through the existing PMT that has considerable experience
working with the World Bank (under the WEDP and the parent SMEFP), including environmental and social
risk management (World Bank safeguards). The sub-project activities under component 1 could
potentially have only limited adverse environmental and social risks and impacts that are expected to be
generally site specific and minor, largely reversible, and readily addressed through the agreed mitigation
measures, including disclosing environmental and social policy statement, and procedures for screening
and assessing risks as well as human resources policy, containing the formal rules and guidelines that the
DBE will follow in hiring, training, assessing, and rewarding its workforce (permanent and temporary staff)
and their rights and obligations as employees and with the DBE, as the employer.
67. The project will support relatively small lease finance arrangements and working capital loans
for enterprises with relatively low potential environmental and social risks and impacts. However, it is
recognized that there may be some business activities in which the environment and social risk and
impacts may potentially be more significant and may require commensurate assessment and
management. Business activities of SMEs can potentially generate impacts on the environment, present
a hazard to human health, or negatively affect local communities as a result of improper planning or
management. Environmental and social concerns for SMEs are typically associated with production
processes or other activities that generate emissions and byproducts that are potentially harmful to the
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environment, employees, and communities (for example, issues around labor standards, inappropriate
disposal of waste, or unhealthy or hazardous working conditions).
68. The DBE will incorporate key COVID-19 risk mitigation measures in an updated ESMS
operational manual and report on compliance with these measures during monthly SMEFP
implementation committee supervision meetings. The team will work closely with World Bank
environmental and social specialists to ensure that all relevant COVID-19-specific risk considerations are
addressed. The project is committed to implementing robust occupational health and safety procedures
for workers and ensuring that all project partners and clients are following COVID-19 social distancing and
other relevant precautionary guidelines.
69. Due to the nature of the SMEFP, the anticipated environmental and social risks and impacts of
AF activities are not likely to be significant. The project does not involve activities that have a high
potential for harming the environment and the local community. The potential impacts that could be
generated from the proposed project activities are expected to be temporary, reversible, low in
magnitude, and site specific. The parent project has supported capacity building in environmental and
social risk management, including institutionalizing of screening sub-projects for their environmental and
social impacts and implementing mitigating measures as appropriate. To further strengthen the
environmental and social screening of sub-projects, the PIU will consult the regional Environment, Forest
and Climate Change Commission on the project’s existing screening processes and involve them in training
and monitoring visits to ensure sustainable management of environmental and social risks and impacts in
project activities.
70. The implementing agencies for the SMEFP, DBE and FeSMMIPA, have experience in the
implementation of World Bank projects and ensure compliance with safeguard policies. The good track
record in compliance with safeguards policies will be strengthened through: (a) regular monitoring of
safeguard protocols, (b) ensuring regular follow-up of clients by hiring an additional environmental and
social safeguards specialist to be housed at the PIU, and (c) providing training to PFIs on environmental
and social risk management issues. The PIU at the FeSMMIPA will be responsible for component 3 which
covers capacity building and business development for the SMEs and these activities are expected to have
no adverse environmental or social risks and impacts. The DBE-ESMS operational manual in use for the
parent SMEFP will be updated to capture risks related to COVID-19, including risks and mitigation
measures applicable to sexual exploitation and abuse/sexual harassment or gender-based violence,
occupational health and safety, labor, social inclusion, local conflicts, and stakeholder engagement.
F. Citizen engagement
71. The project will incorporate a citizen engagement feedback loop by surveying a sample of
beneficiaries distributed across components. A citizen engagement questionnaire will be provided to a
subset of beneficiaries and designed to assess overall satisfaction of services (including ease of access,
quality, process, disclosure, responsiveness of needs, and so on). The results of the survey will be analyzed
and assessed in a report, which will also contain proposed recommendations for project adjustments
informed by citizen feedback. The survey results and the report will be shared by the PIU and financial
institutions and will inform the overall project implementation, as appropriate.
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V. WORLD BANK GRIEVANCE REDRESS
72. Communities and individuals who believe that they are adversely affected by a World Bank (WB)
supported project may submit complaints to existing project-level grievance redress mechanisms or the
WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed
in order to address project-related concerns. Project affected communities and individuals may submit
their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or
could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be
submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank
Management has been given an opportunity to respond. For information on how to submit complaints to
the World Bank’s corporate Grievance Redress Service (GRS), please visit
http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service.
For information on how to submit complaints to the World Bank Inspection Panel, please visit
www.inspectionpanel.org.
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VI. SUMMARY OF MAJOR CHANGES 26
Parent Project Additional Financing Reason

PDO The PDO is to increase access to finance for The PDO is to increase access to finance and build The PDO is revised to reflect the
eligible small and medium enterprises in Ethiopia. firm capabilities for eligible small and medium COVID-19 response angle of the
enterprises in Ethiopia, with a focus on project and capture the firm
responding to the COVID-19 pandemic. capability interventions of the
project.
Closing date August 31, 2022 August 31, 2025 The closing date for the AF is
extended by three years to absorb
the additional financing and allow
adequate time to implement the
newly added activities.
Components Component 1: Financial services to SMEs, Component 1: Financial services to SMEs, The components remain the same.
and cost Component 2: Enabling environment for SME Component 2: Enabling environment for SME The cost is revised to reflect the
finance, Component 3: Business development finance, Component 3: Business development additional financing.
services to SMEs, and Component 4: Project services to SMEs, and Component 4: Project
management, communication and impact management, communication and impact
evaluation. evaluation.
Changes to the results indicators
PDO Volume of financial support to SMEs under the Volume of financial support to SMEs under the Revised to capture results from
indicators credit facility. credit facility and DRF. the DRF
Number of SMEs reached with financial services Number of SMEs reached with financial services Revised to capture results from
under the credit facility. under the credit facility and DRF. the DRF.
Beneficiaries reached with financial services. Marked for deletion: This is

redundant; same as the indicator
above.
This AF triggers OP4.03, same as the parent project. However, the system shows a change in safeguard policy triggered as this was inadvertently reflected as
26
OP4.01 in the portal for the parent project.
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Portfolio quality under the credit facility. Portfolio quality under the credit facility. Revised: Target for the result
indicator extended through 2025
Number of SMEs served with business New: added to capture results

development service. from scaled up BDS activities.
Intermediate Number of loans/ leases disbursed to SMEs under Number of loans/ leases disbursed to SMEs under Revised: Target for the result
indicators the credit facility. the credit facility. indicator extended through 2025.
Percentage of women-owned SMEs benefiting New: added to capture gender

from the credit line and DRF. disaggregated data.
Collateral registry established Collateral registry operationalized Revised to make the indicator
stronger and target for the result
indicator extended through 2025.
Strengthened capacity of DBE for risk assessment New: Added to capture results
and management of innovative financial products. from the institutional
(Yes/No) development work.
Insolvency diagnostic completed Insolvency regime revised and approved by the Revised to make the indicator
Parliament. stronger and target for the result
indicator extended through 2025.
Report drafted on citizen engagement survey. Citizen engagement survey conducted. Revised to make the indicator
specific and measurable.
Number of SMEs that received training through a Number of SMEs that received training through a Revised: Target for the result
BDS program under the project. BDS program under the project. indicator extended through 2025.
Number of women owned SMEs that received New: Added to capture gender
BDS. disaggregated data.
Number of supported SMEs that subscribed to the New: Added to capture results
e-commerce platform. from new activities.
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Business information center launched. New: Added to capture results
from new activities
Number of federal and regional investment and New: Added to capture results
trade support institution staff trained on export from new activities.
promotion, business diplomacy, and so on.
Private participation model for management and New: Added to capture results
operation of SME market and production sites from new activities
developed.
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VII. SUMMARY TABLE OF CHANGES
Changed Not Changed

Project's Development Objectives ✔
Results Framework ✔
Components and Cost ✔
Loan Closing Date(s) ✔
Safeguard Policies Triggered ✔
Implementing Agency ✔
Cancellations Proposed ✔
Reallocation between Disbursement Categories ✔
Disbursements Arrangements ✔
EA category ✔
Legal Covenants ✔
Institutional Arrangements ✔
Financial Management ✔
Procurement ✔
Implementation Schedule ✔
Other Change(s) ✔
VIII. DETAILED CHANGE(S)
PROJECT DEVELOPMENT OBJECTIVE
Current PDO
The project development objective is to increase access to finance for Eligible Small and Medium Enterprises in the
Recipient's territory.
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Proposed New PDO

The project development objective is to increase access to finance and build firm capabilities for eligible small and
medium enterprises in Ethiopia, with a focus on responding to the COVID-19 pandemic.
COMPONENTS
Current Component Name Current Cost Action Proposed Component Proposed Cost (US$,
(US$, millions) Name millions)
Financial Services to SMEs 193.00 Revised Financial Services to 373.00
SMEs
Enabling Environment for 0.80 Revised Enabling Environment 3.80
SME Finance for SME Finance
Business Development 2.50 Revised Business Development 17.50
Services for SMEs Services to SMEs
Project Management, 3.70 Revised Project Management, 5.70
Communication and Impact Communication and
Evaluation Impact Evaluation
TOTAL 200.00 400.00
LOAN CLOSING DATE(S)

Ln/Cr/Tf Status Original Closing Current Proposed Proposed Deadline
Closing(s) Closing for Withdrawal
Applications
IDA-57930 Effective 31-Aug-2022 31-Aug-2022 31-Aug-2025 31-Dec-2025
Expected Disbursements (in US$)

DISBURSTBL
Fiscal Year Annual Cumulative
2016 0.00 0.00
2017 8,539,000.00 8,539,000.00
2018 17,262,400.00 25,801,400.00
2019 25,603,800.00 51,405,200.00
2020 29,794,800.00 81,200,000.00
2021 31,965,200.00 113,165,200.00

2022 76,656,600.00 189,821,800.00
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2023 85,342,000.00 275,163,800.00
2024 70,677,800.00 345,841,600.00
2025 54,158,400.00 400,000,000.00
SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Latest ISR Rating Current Rating
Political and Governance  Substantial  Substantial

Macroeconomic  Moderate  Moderate
Sector Strategies and Policies  Moderate  Moderate
Technical Design of Project or Program  Moderate  Moderate
Institutional Capacity for Implementation and  Moderate  Moderate
Sustainability
Fiduciary  Moderate  Moderate
Environment and Social  Moderate  Moderate
Stakeholders  Moderate  Moderate
Other  Substantial  Substantial
Overall  Moderate  Moderate
Safguard_Table
COMPLIANCE
Change in Safeguard Policies Triggered
Yes
Safeguard Policies Triggered Current Proposed
Environmental Assessment OP/BP Yes No

4.01
Performance Standards for Private No Yes

Sector Activities OP/BP 4.03
Natural Habitats OP/BP 4.04 No No
Forests OP/BP 4.36 No No
Pest Management OP 4.09 No No
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Physical Cultural Resources OP/BP No No

4.11
Indigenous Peoples OP/BP 4.10 No No
Involuntary Resettlement OP/BP 4.12 No No
Safety of Dams OP/BP 4.37 No No
Projects on International Waterways No No

OP/BP 7.50
Projects in Disputed Areas OP/BP 7.60 No No
LEGAL COVENANTS2
LEGAL COVENANTS – Ethiopia Small and Medium Enterprises Finance Project - Additional Finance (P175045)
Sections and Description
Section I.A.2: The Recipient shall, through DBE maintain, at all times during the implementation of Part 1 of the
Project, the Project Management Team (“PMT”), with a mandate, staffing in adequate numbers, with qualifications
and experience and under terms of reference acceptable to the Association and other resources satisfactory to the
Association. The PMT shall be responsible for, inter alia, preparing annual work plan and budgets for Part 1 of the
Project and forwarding them to the PIU for submission to the Association. Without limitation to the foregoing,
within ninety (90) days from the Effective Date, the Recipient shall cause DBE to have in place at the PMT an
additional monitoring and evaluation specialist under terms of reference acceptable to the Association.
Section I.A.3: The Recipient shall, through MoTI, maintain, at all times during the implementation of the MoTI’s
Respective Parts of the Project, the Project Implementation Unit (“PIU”) established within FeSMMIPA, with a
mandate, staffing in adequate numbers, with qualifications and experience and under terms of reference
acceptable to the Association and other resources satisfactory to the Association. The PIU shall be responsible for,
inter alia, preparing annual work plan and budgets for MoTI’s Respective Parts of the Project. Without limitation to
the foregoing, within 90 (ninety) from the Effective Date, the Recipient shall have in place at the PIU, an additional
environmental and social expert, responsible for coordinating with DBE PMT safeguards staff and overseeing the
overall Project safeguards implementation, monitoring and reporting.
Section I.A.5: Within ninety (90) days from the Effective Date, the Recipient shall cause DBE to update and
thereafter, implement the updated Institutional Development Plan according to the timetable set forth in said plan
and in a manner and substance acceptable to the Association.
Section I.B.2(a): The Recipient, through DBE, shall: within 90 days from the effective date, update, in accordance
with terms of reference satisfactory to the Association, the SME Facility Operations Manual for the implementation
of Part 1(a) of the project; furnish the updated SME Facility Operations Manual to the Association for approval, and
adopt such updated manual as shall have been approved by the Association (“SME Facility Operations Manual”).
Section I.F.1: The Recipient shall cause DBE to, within 30 (thirty) days from the effective date, update the ESMS, in
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accordance with terms of reference satisfactory to the Association, furnish the updated ESMS to the Association for
approval, and thereafter, implement the Project in accordance with the provisions of such updated ESMS approved
by the Association and ensure that PFIs and Eligible SMEs carry out their respective on-lending activities and Sub-
projects in compliance with the requirements of the ESMS.
Conditions
Type Description
Effectiveness Article V. 5.01(a): The Subsidiary Financing Agreement has been duly executed
on behalf of the Recipient and DBE, and the Association has received a legal
opinion, satisfactory to the Association, confirming that the Subsidiary Financing
Agreement is legally binding upon the Recipient and DBE in accordance with its
terms.
Type Description
Effectiveness Article V. 5.01(b): The Recipient, through both DBE and MOTI, has adopted the
Project Implementation Manual updated in accordance with Section I.B.1 of
Schedule 2 to this Agreement.
Type Description
Disbursement Section III. B.1(b): Notwithstanding the provisions of Part A of this Section, no
withdrawal shall be made: under Category (1) and Category (3B), until the
allocations in Categories (1) and (2) respectively of the table in Section IV.A.2 of
the original Financing Agreement are fully disbursed..
Type Description
Disbursement Section III.B.1(c): Under Category (2), until the DRF manual has been drafted by
DBE, approved by the Association, and adopted by DBE, all in accordance with
Section I.B.3 of this Schedule 2.
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VIII. RESULTS FRAMEWORK AND MONITORING
Results Framework
COUNTRY: Ethiopia
Ethiopia Small and Medium Enterprises Finance Project - Additional Finance
Project Development Objective(s)
The project development objective is to increase access to finance and build firm capabilities for eligible small and medium enterprises in Ethiopia, with a focus on
responding to the COVID-19 pandemic.
Project Development Objective Indicators by Objectives/ Outcomes

RESULT_FRAME_TBL_ PD O
Indicator Name PBC Baseline Intermediate Targets End Target

1 2 3
To increase access to finance for eligible SME in Ethiopia.
Volume of financial support to

SMEs under the credit facility and 218,000,000.00 300,000,000.00 390,000,000.00 480,000,000.00 548,000,000.00
DRF (Amount(USD))
Action: This indicator has been
Revised
Number of SMEs reached with
financial services under the credit 1,452.00 2,000.00 2,800.00 3,700.00 4,200.00
facility and DRF. (Number)
Revised
Portfolio quality under the credit
6.00 8.00 7.00 6.00 5.00
facility (Percentage)
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RESULT_FRAME_TBL_ PD O

1 2 3
Revised
Beneficiaries reached with financial
0.00 2,152.00
services (CRI, Number)
Marked for Deletion
Number of SMEs served with
business development service 218.00 618.00 1,000.00 1,300.00 1,500.00
(Number)
Action: This indicator is New
PDO Table SPACE
Intermediate Results Indicators by Components

RESULT_FRAME_TBL_ IO
1 2 3
Financial Services to SMEs
Number of loans/ leases disbursed

to SMEs under the credit facility 1,853.00 2,400.00 3,000.00 3,500.00 4,000.00
(Number)
Revised
Collateral registry operationalized.
No Yes Yes Yes Yes
(Yes/No)
Revised
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1 2 3
Strengthened capacity of DBE for
risk assessment and management
No Yes Yes Yes Yes
of innovative financial products.
(Yes/No) (Yes/No)
Percentage of women-owned SMEs

benefiting from the credit line and 14.00 17.00 22.00 26.00 28.00
DRF (Percentage)
Enabling Environment for SME Finance
Insolvency regime revised and

approved by the Parliament No Yes Yes Yes Yes
(Yes/No)
Revised
Citizen engagement survey
conducted (Yes/No) No No Yes Yes Yes

Revised
Business Development Services for SMEs
Number of SMEs that received

training through a BDS Program 218.00 618.00 1,000.00 1,300.00 1,500.00
under the project (Number)
Revised
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1 2 3
Number of women owned SMEs
that received business 70.00 180.00 300.00 400.00 500.00
development service (Number)
Number of supported SMEs that

subscribed to the e-commerce 0.00 0.00 40.00 70.00 100.00
platform (Number)
Business Information Center

No No No Yes Yes
launched (Yes/No)
Number of federal and regional

investment and trade support
institution staff trained on export 0.00 0.00 25.00 50.00 50.00
promotion, business diplomacy and
related topics (Number)
Private participation model for

management and operation of SME
No No Yes Yes Yes
market and production sites
developed (Yes/No)
IO Table SPACE
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Monitoring & Evaluation Plan: PDO Indicators Mapped
Methodology for Data Responsibility for Data

Indicator Name Definition/Description Frequency Datasource
Collection Collection
This indicator captures the
Quarterly
financing under the credit
Volume of financial support to SMEs Quarterly monitoring reports from DBE
facility and DRF facilitated DBE, PFIs
under the credit facility and DRF PFIs and DBE.
from PFIs to target
beneficiaries.
This indicator is designed
Quarterly
to include all enterprises
Number of SMEs reached with financial Quarterly monitoring reports from DBE
that are direct recipients of DBE, PFIs
services under the credit facility and DRF. PFIs and DBE.
loans and guarantee
facility.
This indicator captures the
quality of portfolio under
the credit facility. The
NPL calculated based on
indicator will be calculated
Annual DBE, PFIs financial statements of DBE, PFIs
Portfolio quality under the credit facility as non-performing loans
DBE and PFIs.
and/or portfolio at risk
according to the
methodology of the
National Bank of Ethiopia.
Beneficiaries reached with financial
services
Report collected from
Number of SMEs served PIU, BDS BDS providers for the
Number of SMEs served with business Quarterly PIU
with business development providers project and verified by
development service
service. the PIU.
ME PDO Table SPACE
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Monitoring & Evaluation Plan: Intermediate Results Indicators Mapped
Methodology for Data Responsibility for Data

Indicator Name Definition/Description Frequency Datasource
Collection Collection
This indicator will include
the number of all loans and
Quarterly monitoring
leases that were disbursed
Number of loans/ leases disbursed to Quarterly DBE, PFIs report from DBE and DBE
as part of the leasing and
SMEs under the credit facility PFIs.
lending window for the
DBE and PFIs under the
credit facility.
This indicator will receive a
‘Yes’ once the registry is Annual Verification from NBE. NBE
Collateral registry operationalized. NBE
established and
operational.
Strengthened capacity of To be verified by field
Strengthened capacity of DBE for risk DBE for risk assessment visits during
Bi-annual DBE DBE
assessment and management of and management of implementation support
innovative financial products. (Yes/No) innovative financial missions.
products.
This indicator captures
percentage of women- Quarterly monitoring
Percentage of women-owned SMEs Quarterly DBE, PFIs DBE, PFIs
owned SMEs benefiting reports.
benefiting from the credit line and DRF
from the credit line and
DRF.
Official document on the
This indicator will receive a
insolvency regime
Insolvency regime revised and approved ‘Yes’ once the insolvency Annual NBE, PIU
NBE approved by the
by the Parliament regime is approved by the
Parliament .
Parliament.
This indicator captures Once FeSMMIPA Survey PIU, FeSMMIPA
Citizen engagement survey conducted
citizen engagement and
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feedback in overall project

implementation. A “Yes”
implies that the survey was
administered and a report
was drafted that contained
sound and in-depth
analysis of citizen
feedback.
This indicator captures the Report collected from
number of eligible SMEs BDS providers for the
Number of SMEs that received training Quarterly PIU PIU
that receive training as part project and verified by
through a BDS Program under the project
of the BDS program under the PIU.
the project.
This indicator captures the Gender disaggregated
number of women owned PIU, BDS data collected from BDS
Number of women owned SMEs that Quarterly PIU, BDS providers
SMEs that received providers providers for the project
received business development service
business development and verified by the PIU.
service.
This indicator captures Reports from the PIU
PIU, Ethiopian
Number of supported SMEs that number of SMEs supported Annual and Ethiopian Postal PIU
Postal Service
subscribed to the e-commerce platform by the project to subscribe Service.
the e-commerce platform.
This indicator will be
marked 'Yes' when a PIU, Confirmation through
Once PIU, FeSMMIPA
Business Information Center launched business information FeSMMIPA field visit.
center supported by this
project is launched.
This indicator captures
Number of federal and regional
number of federal and PIU,
investment and trade support institution Annual Report from PIU. PIU
regional investment and FeSMMIPA
staff trained on export promotion,
trade support institution
business diplomacy and related topics
staff trained on export
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promotion, business
diplomacy and related
topics.
This indicator will be
marked 'Yes' when a
Private participation model for private sector participation PIU, Final document
Annual PIU, FeSMMIPA
management and operation of SME model for management FeSMMIPA submitted by PIU.
market and production sites developed and operation of SME
market and production site
is developed
ME IO Table SPACE
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Annex 1: DBE Due Diligence
1. The DBE has a successful track record of managing credit lines. The existing PMT, which is housed
in the DBE, has developed and proven adequate capacity to manage the SMEFP and other credit lines such
as the WEDP. The PMT will be supplemented with additional capacity, as needed, to manage the new
project. Specifically, DRF specialists, a safeguards specialist, and an M&E specialist will be added to the
team to ensure smooth implementation of the project and build capacity of the client.
2. Moreover, the proposed Financial Sector Strengthening and Access Project (FSSP, P171627) will
support the transformation and institutional strengthening of the DBE in line with the vision of a catalytic
and well-governed development finance institution (DFI). The DBE’s institutional reforms are critical for
financial and fiscal sustainability and therefore to sustain both response and recovery efforts. A
comprehensive strategic assessment proposed by the DBE will inform specific activities and results. The
proposed DBE reform will be driven through TA and results-based modalities.
Ownership, regulation, and oversight
3. The DBE is a fully licensed and regulated non-deposit-taking bank, wholly owned by the GoE,
through the shareholding of the MoF. As a shareholder representative, the Public Financial Enterprises
Agency oversees the DBE’s performance through regular reporting requirements.
4. The DBE is regulated by the NBE under the Banking Business Proclamation Act No. 592/2008 and
is subject to the NBE’s prudential norms and regulations for commercial banks. According to local
standards, the DBE reports and registers its operations and transactions according to general accepted
accounting principles for fiscal years before 2017/2018. From FY2017/2018, the DBE reports according to
international financial reporting standards, in compliance with the Financial Reporting Proclamation
847/2014, leading particularly to a relevant revaluation of risk assets values and corresponding
adjustments to net-income. The last audited statement for the DBE is for FY2019 which ended in June
2019.
5. The DBE is subject to annual independent external audits of its financial statements. For
FY2017/2018 and a number of prior years, the institution has been audited by the Federal Democratic
Republic of Ethiopia Audit Services Corporation, an independent public sector entity established by law,
with delegated function to provide external audit services to state-owned commercial entities. During the
assessment, the annual external audit reports for the FY2014/2015 to FY2017/2018 were reviewed. In all
cases the auditors provided an unqualified opinion.
Risk management and control
6. Complementary governance structures and arrangements such as the appropriate BOM

Committees and independent internal audit and risk management functions are established and perform
reasonably. The Internal Audit Process conducts financial, operational, and special investigative audits
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based on its annual audit plan approved by the BOM 27 or upon request of the BOM or Executive
Management. In line with best practice, the internal audit process reports to the internal audit committee
of the BOM.
Credit risks and liquidity challenges
7. The risk management processes need to be further strengthened, foremost in view of the
significant levels of credit risks, liquidity, and interest rates risks the DBE faces, some of which reflect the
bank’s structural constraints as a non-deposit-taking state-owned institution. Credit risks and the
attending potential pressure on the bank’s solvency are of concern. Particularly, several large-scale project
finance operations and corporate lending exposures have shown very poor performance. As of end-June
2019, reported NPL for the bank stood at almost 34 percent, slightly diminished from the earlier quarter.
NPLs are largely driven by poorly performing exposures in the manufacturing sector, followed by
agriculture, particularly businesses in the textile, telecom, and agro-processing segments.
8. The DBE prepared a strategic reform plan in September 2019 detailing reform measures to
improve operations over the next five years until 2024. By improving credit operations, the bank plans to
reduce the 40 percent NPL to 10 percent. More specifically, the bank plans to use the 6 eyes principle in
credit operations and complete an asset quality review (AQR) in 2021. In addition, to improve loan
recollection and accountability, it plans to address asset liability mismatch, rehabilitating about half of the
NPLs to perform and enhance collection from disposals. Strategically, the plan proposes a revision of the
bank’s business model to improve targeting of credit operations. Currently, priority areas are deemed to
be too broad. In addition, the DBE’s role in addressing information gaps in new sectors of investment until
sufficient engagement of the private sector leads to access to commercial loans.
9. DBE is undergoing a reform. The ongoing reform measures attempt to develop a non-distortionary
means of raising funding for the priority sector where the private sectors face challenges to invest in. By
improving efficiency and lowering cost of borrowing, the DBE plans to competitively raise funds and lend
it at a lower interest rate compared to commercial rates. With the removal of the NBE bill and repayment
of a portion of the outstanding balance to commercial banks upon their request, the DBE is proposing
ways of mobilizing resources including issuing of bonds with interest rates above the deposit rate targeting
excess liquidity of banks, insurance companies, and pension funds. These show marked improvement
from the low interest rate NBE bills.
Table 1. 1. DBE Financial Performance Overview
ETB,
FY2013/14 FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19
thousands
Total assets 35,723,711 41,704,009 49,475,947 53,166,865 73,201,034 83,339,581
Loan portfolio 19,984,280 23,773,019 26,889,176 28,283,850 29,414,327 40248990
Equity 3,576,074 4,257,705 7,876,584 7,902,436 2,557,078 5,725,782
Net profit 532,992 681,437 373,520 325,852 (1,886,444) (1,666,525)
Net operating 1,168,287 1,576,200 1,813,642 1,607,229 3,463,337 3,993,369
Income
27 The BOM constitutes what in other institutions is generally termed the ‘Board of Supervisors’ or ‘Board of Directors’. It is solely
an oversight and not an executive management organ.
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Summary evaluation
10. The DBE qualifies as an implementing agency and financial intermediary for the project as per the
stipulations of the World Bank’s policy for Financial Intermediary Lending (OP 10.00). The DBE is in good
regulatory standing and has consistently received unqualified external audit opinions over five years.
While specific elements of the corporate governance arrangements reflect the nature of the bank as a
wholly state-owned enterprise, on balance, the arrangements in place are acceptable in terms of oversight
and independent control and risk management functions. The DBE’s financial performance is weak, owing
partially to legacy government interference in its business operations, specifically the financing of SOE
and priority lending projects, which exhibit high credit risks. However, state support has allowed
establishing and maintaining adequate capitalization levels, and the government’s commitment to the
institution ensures appropriate levels of solvency and liquidity and continued operations as a concern
going forward.
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Annex 2: Financial Management
Executive Summary
1. An FM assessment has been carried out for the AF based on IPF policies and procedures. The
project implementation arrangements will remain materially the same and will continue to support SMEs
through the DBE, PFIs, commercial banks, leasing companies, and the FeSMMIPA. The AF will introduce
additional activities including a DRF at the DBE, which will require different arrangements from the
existing ones. In light of this, the project assessment is updated with the existing performance for the AF.
2. The current FM arrangements are functioning well although some improvements are still
required. The last FM review indicated a Moderately Satisfactory rating due to low budget utilization,
qualified audit opinion at the DBE, and infrequent internal audit reviews at both implementing entities.
Mitigating measures are already being implemented in the existing operation. These, along with other
risks identified for the AF, will be addressed through a revised action plan which is presented under the
‘FM Action Plan’ section.
3. The FM arrangements for the program will continue to follow the government’s channel 2 fund
flow mechanism, where funds from the World Bank flow directly to the implementing agencies, DBE and
FeSMMIPA, using the existing separate accounts opened for the original project. These accounts will
continue to be used for the AF. Additional designated account (DA) and local currency account will be
opened at the DBE for the implementation of the DRF. The DBE and FeSMMIPA will continue to use the
existing disbursement mechanisms which are through report-based disbursement and transaction-based
disbursement, respectively. Both entities will continue to submit interim financial reports (IFRs) quarterly
within 45 days of the quarter end. The project will continue to have independent auditor’s report every
year, to be submitted to the World Bank by the entities within six months of the year end.
4. It is the conclusion of the assessment that the existing FM arrangements are adequate to provide
reasonable assurance to the use of project resources as per the World Bank’s IPF policy and directives.
The current FM risk rating is ‘Moderate’, which is a residual risk once the proposed mitigating measures
are implemented.
FM arrangement
5. Budgeting. Both DBE and FeSMMIPA will continue to follow the government’s budgeting process
and cycle to prepare and approve the budget. The DBE will continue to prepare the annual work plan and
budget for component 1. The FeSMMIPA will continue to prepare a consolidated annual work plan and
budget for components 2, 3, and 4. Both entities will continue to obtain the necessary approval from the
World Bank. The DBE’s budget will be approved by the BOM and that of FeSSMIPA will be approved by
the MoF. Both approved budgets will form part of the entities’ annual budget for implementation. The
implementing entities’ system enables tracking of expenditure against budget. Budgets are regularly
monitored by the entities and reported quarterly through the IFRs. The budget utilization by both
implementing entities has not been satisfactory for FY19/20 due to the COVID-19 pandemic, delayed
procurements, slowed-down lease financing, and overall delayed implementation at the FeSMMIPA. The
World Bank has addressed some implementation bottlenecks through changing the disbursement
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mechanism of SME financing from transaction-based to report-based disbursement. It also allowed PFIs
to receive advances for on-lending working capital finances. However, these need to be assisted with
strengthened follow-up and supervision if expected results are to be achieved. Furthermore, the
management’s attention at the FeSMMIPA is of paramount importance, now that additional activities
have been proposed under the AF. Regular review of project implementation and bottlenecks should be
done for smooth implementation of the project.
6. Accounting systems, policies, and procedures. The implementing entities for this project will use
the government’s accounting policies and procedures which are modified to meet the project’s need in
the current SMEFP FM manual. This will be amended to capture and reflect the minimum requirements
for implementation of the activities introduced under component 1. Peachtree accounting software will
be used at FeSMMIPA and the DBE’s internal bank system will continue to be used for project accounting
and reporting. These institutions would continue to maintain accounting books and records and prepare
financial reports in line with the provisions of the FM manual. The DBE has a good filing and record-
keeping mechanism and data entry is done in real time and accounts are fairly up-to-date. It is also noted
that timely backups are taken by IT units and the antivirus software is timely updated.
7. At the DBE, at a minimum, the existing number of accountants at the institutions should be
maintained. At the DBE, as current staff have gained experience, it is advisable that as much as possible,
these staff are not rotated to other posts or if they are, staff with adequate qualification and experience
should be assigned. Furthermore, at the DBE PMT, the M&E team which significantly supports the
supervision of PFIs and final beneficiaries is currently understaffed, with two officers. These positions
should be filled without further delay. At the FeSMMIPA, the AF is considering expanding the activities to
be implemented. It is recommended to have an AF officer at the FeSMMIPA.
8. The AF will expand its reach with additional PFIs, leasing companies, and commercial banks. An
FM assessment will be conducted on the new entrants before resources are released. The World Bank
should be informed when a new entrant applies, when the assessment is conducted, and when the
agreement is signed. Each of these implementing additional entities will at least assign one focal person
for accounting, reporting, and auditing. The assessment conducted should be shared with the World Bank.
9. Accounts receivable (loan to PFIs, commercial banks, and leasing companies). Any advance
disbursed to the financial intermediaries is captured as receivables in the DBE system and will be settled
upon repayment of the loan in the DBE accounts. However, the project is expected to report to the World
Bank the disbursements to PFIs, commercial banks, and leasing companies as receivables and subsequent
disbursement by these financial intermediaries to eligible beneficiaries as expenditure/use of funds
regardless of repayment of loan proceeds to the DBE by these intermediaries. For existing projects, the
DBE is maintaining a memorandum record. Furthermore, in the T-24 system of the DBE, the financing
provided by this project will be updated to be traced through the source of finance. This system will show
the details of aging, status of loan, approval amount, due and undue principal and interest amounts,
advance, sector, sub sector, and customer name, among others. The DBE PMT has access to review
approved loans which will strengthen the reconciliation of accounts with branches and be made available
to external auditors.
10. Accounting at PFIs, commercial banks, and leasing companies. As per the design of the project,
only those FIs that meet the stipulated eligibility requirements will be able to obtain the status of PFIs and
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their eligibility will be verified annually. It is expected that the normal operating procedures of the
PFI/commercial bank/leasing companies will be used for the project. However, for this project, the
operations manual highlights the eligibility criteria for on-lending to this project’s beneficiaries. This
manual will be updated to incorporate the new element introduced in the project, DRF, under component
1. Furthermore, although the accounting system of the FI will be used, there is a need to hold
memorandum recording which will allow for identifying the resources used for the project and to put in
place a proper trail for audit exercise.
11. Accounting at the SME level. Sub-loans will be extended to eligible SMEs for working capital loans
up to ETB10 million and lease financing ranging up to ETB30 million. For these SMEs, special FM
arrangements will not be requested. However, each of the SMEs is expected to maintain proper books of
accounts as indicated in the establishment bylaw of the SMEs. The one-stop shops and the city/regional
SME development agencies have a responsibility along with technical and vocational education and
training institutions to train the SMEs with good FM systems and also conduct reviews and monitoring as
to whether the enterprises are operating as required. An annual external audit for SMEs is usually carried
out by registered audit firms. These audit reports are required for obtaining loans from PFIs as well as for
determining the grading of the SME. Therefore, for this project, specific reporting requirements will not
be requested from the SMEs, but the operations manual will indicate that the financing agreement to be
signed between the PFIs and the SMEs will include a section on the expected FM arrangements of SMEs.
The DBE, the external auditors, the World Bank, and other participating development partners will have
access to review the SMEs on a sample basis during implementation support and supervision missions or
as required.
12. Internal control and internal audit. The government’s internal control procedures will continue
to apply. All the implementing entities have adequate internal control systems in place to be used for this
project. However, some internal control weaknesses such as weak advance follow-up and liquidation were
consistently noted in the IFR reported by the FeSMMIPA and will need to improve. At the DBE, internal
control weaknesses such as lease financing agreements not authenticated and audit reports not obtained
from lessees, among others, were noted in external audit reports. The internal control procedures of the
government and the DBE should be strictly followed. Internal Audit departments have been including this
project in their annual work plan and have been providing the necessary review and support to the
project. With more activities included for implementation, it is important that the internal audit units of
the FeSSMIPA and DBE conduct at least semiannual internal audit reviews of the project. For the DBE, the
audit could cover management of lease financing, working capital loan, and the following of procedures
of the DRF mostly within the DBE headquarters and its branches. The detailed report should be shared
with the World Bank at least semiannually. Furthermore, although it is not part of the Internal Audit
Department of the DBE, the DBE has an M&E team within the PMT which follows up with commercial
banks, PFIs, and SMEs on the proper implementation of the project. This unit’s function has been useful
both for the SMEFP and WEDP operations. The unit should be strengthened so that it can continue to
conduct the supervisions and produce quarterly report with observations from the implementing entities
and SMEs reviewed.
13. Financial reporting. Both the DBE and FeSMMIPA will continue to prepare quarterly unaudited
IFRs which will be submitted to the World Bank within 45 days of the end of the quarter. The reporting
template has been revised to properly reflect the new components introduced in the AF. So far, all reports
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have been submitted on time and in acceptable quality. One financial report will be used for both the
original IPF and the AF.
14. External audit. The project annual audit will continue to be carried out and submitted to the
World Bank within six months of the end of the fiscal year in accordance with the International Standards
of Auditing issued by the International Federation of Accountants. The proposed mechanisms for
following audit findings in the original project will continue to apply. The audit terms of reference for the
project have been amended to incorporate the audit of the new activities. In accordance with the World
Bank’s policies, the borrower must disclose the audited financial statements in a manner acceptable to
the World Bank; following the World Bank’s formal receipt of these statements from the borrower, the
World Bank makes them available to the public in accordance with the its policy on access to information.
The audit reports of the project, by both the FeSMMIPA and DBE, for FY2019 were submitted to the World
Bank within the deadline. The auditors have issued unqualified (clean) audit report for FeSMMIPA and
qualified audit opinion on the financial statements of the DBE which is due to lack of detailed record of
SME loans and Procurement Plan at the DBE. The DBE has disclosed the audit report in the DBE’s website.
FeSMMIPA has not yet publicly disclosed the audit report which needs to be addressed.
15. Funds flow. The current funds flow arrangement of the project will continue to apply except for
the introduction of the DRF at the DBE. The specific funds flow arrangement for the DRF is laid out below
separately. For the other activities, the project will continue to use the already opened DAs at the NBE.
Funds from the designated US dollar accounts will be further transferred into ETB accounts already
opened by the implementing entities, to be used for payment for goods and services. Disbursement to
the DBE will be made quarterly to cover cash requirements for the next six months based on the forecasts
in the IFRs. The FeSMMIPA will continue to draw down IDA allocation by replenishing its fund with
transaction-based disbursements. The project will have the option of using advance, direct payment,
special commitment, and replenishment methods of disbursement. The detail of the documents required,
and the procedures will be indicated in the disbursement and financial information letter for the project.
• Fund flow arrangements for SME lending. The DBE will sign a subsidiary agreement with the
MoF for the AF before receiving resources from IDA or other development partners which
might be involved in financing the project. Once transfers are made to the opened account,
as is the case, the DBE will transfer resources to its branches and lease companies for lease
financing. For the lease financing, advance from IDA (as a ceiling to the DA) based on
estimates, will be provided to the DBE. Once the business proposal/feasibility study has been
approved as per the working procedures to be developed for the project, and the leasing
process is finalized, on presentation of the invoices, the DBE will transfer the money to the
leasing companies and branches will record the use of funds for the project. This list of use
of funds needs to be reconciled with the lease agreements provided to SMEs and should
form part of the quarterly IFRs to be submitted to IDA. Due to foreign currency changes and
local currency contribution by the SMEs, the total amount of the use of funds reported to
IDA and the amount reflected in the lease agreements will not reconcile. However, with
those discrepancies, the use of funds reported reconciled with lease agreements signed
should be submitted to IDA as part of the IFR. Eligible expenditures in this case will be the
provision of the items; hence, once the leasing companies and branches finalize the process,
they must submit the documents evidencing the procurement/leasing to the DBE. This will
be the basis for IDA to document expenditures and replenish the DA. For loans to working
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capitals, to ensure liquidity in the project, the DA ceiling will incorporate the best estimate
amount for this line of credit. The DBE can release resources to the financial institutions
when each presents evidence to the DBE that it has on-lent to SMEs or has loans already
approved as per the operations manual of the project, at which time it will get replenishment
from the DBE. Currently, advances have been provided to PFIs, which has enabled to move
the credit line. However, the settlement is not as desired and hence the advance method
needs to be considered on a case-by-case basis. Expenditures will be recognized when
evidence is provided that the money has been on-lent to the final beneficiaries.
Furthermore, the project will explore the possibility of having a subordinated debt facility
which is for working capital financing in foreign currency for certain percentage of the loan
to mobilize external financing in foreign currency to SMEs through PFIs. This modality is
explained under annex 4. However, the option is being explored and is yet to be developed
fully. Depending on the market situation, if the project intends to explore/pilot this kind of
facility, then the operations manual will be updated with detailed arrangements including
FM and disbursement arrangements.
• Funds flow arrangement for DRF. The DRF component will be included in the subsidiary
agreement to be signed between the MoF and the DBE. The DBE will create a line for this
activity in its chart of account. With that, the DBE will open a segregated DA for this
component at the NBE. Advance to the DA will be made in installments. The initial advance
will be provided once the DBE has identified the loans to be supported through this facility.
It will also open a separate DRF local currency account. Based on the procedures to be
outlined in the revised operations manual with regard to eligibility criteria, assessments
required, and percentage of collateral to be guaranteed, among others, resources will be
transferred from the DRF DA to the local currency DRF account for approved DRF loans only.
At that time, expenditure will be recognized for the World Bank financing part. The amount
will be blocked until the guaranteed loans have been fully paid up. If there are defaults,
based on the procedure and mechanisms to be noted in the operations manual, the
defaulted amount will be transferred to the PFI, commercial bank, or lease company which
has provided the loan to the defaulting SME. More details on DRF are provided in annex 3.
A DRF operations manual will be developed, which describes the terms, conditions,
governance structures, approval mechanisms, and others. This will be a condition for
disbursement for the DRF, which has a separate category in the financing agreement.
• Funds flow arrangement for components 2, 3, and 4. The FeSMMIPA will continue to use
the DA it opened for the project to receive resources from this AF. Based on the advance
ceiling to be established in the disbursement and financial information letter, the agency will
receive resources from IDA. The already opened local currency account will be used for local
transactions. No funds will be transferred to regions or other implementing entities.
16. Table 2.1 summarizes the various financings under component 1 and identifies the point of
expenditure recognition as well as follow-up mechanisms.
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Table 2.1. Financing under component 1

Type of financing Point of expenditure Follow up system
Lease financing When commercial invoice is Quarterly IFR reports the use of fund on commercial invoices
presented presented; the amount on-lent to SMEs for working capital and
Working capital When loan is provided to the amount transferred to the local currency account of de-risking
financing SMEs facility;
De-Risking facility When amount is transferred T-24 amended to include the source of fund as World Bank so
from the designated account that detail SME report for lease financing could be extracted
to the local currency de- from the system;
risking facility account Quarterly progress report to be submitted to the World Bank
including portfolio status; repayment status of SMEs; the
reconciliation of invoices paid and lease agreements signed with
SMEs with branch reference; observations on M&E reviews for
all finances;
Internal audit to review semiannually and produce report (to be
confirmed during negotiation)
External audit reviews reports at DEB, transactions at PFIs, DBE
branches and visits selected SMEs.
17. The fund flow and reporting arrangement is depicted below.
Figure 2.1. Fund Flow and Reporting Arrangement
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18. Foreign currency and risks. The foreign currency risk of the project will be borne by the MoF.
Through the subsidiary agreement that the MoF will sign with the DBE, it is up to the government to
decide and agree as to specifically who (the MoF or DBE) should be bearing the foreign currency risk of
the project. Regarding the credit risk, the DBE extends subsidiary loans to lease companies, commercial
banks, and PFIs assuming the credit risk. Furthermore, the credit risk on subsidiary loans to be provided
by the FIs to the SMEs will be borne by the FIs.
Table 2.2: FM action plan
# Action Date due by Responsible

body
1 Budget GoE /DBE budget calendar.
Finalize budget preparation early before beginning of budget Budget control is during FeSMMIPA
year. project implementation. and DBE
Track budget availability as each transaction occurs. Provide
variance analysis with explanation regularly along with
reporting.
2 Accounting ongoing
Maintain current level of accountants until project closure at July 2021 FeSMMIPA
DBE and add additional accountant at FeSMMIPA. July 2021 and DBE
Assign two M&E officers in the current M&E team at DBE.
Assign project accountants at new participating July 2021
PFIs/commercial banks.
3 Internal Control:
Ensure the involvement of internal audit units to increase During implementation. FeSMMIPA
their engagement in providing the required service. and DBE.
Semiannual internal audit reports to be submitted to the
World Bank.
Conduct regular FM implementation and support to the lower
level implementations .
M&E unit of DBE to conduct quarterly reviews and provide
reports to the World Bank as part of the IFR.
4 Reporting
Submit quality IFRs to the WB within 45 days from end of the Quarterly FeSMMIPA
relevant quarter in agreed format. and DBE
6 External audit
Submit annual audited financial statements, audit report and Within 6 months after end FeSMMIPA
management letter. of year; and DBE
Submit government’s response to the findings in the annual Within one month of
audit report to WB and an action plan for any follow-up submission of audit report
actions including the status thereon. to the World Bank.
Prepare status report of action taken on audit findings; Two months after
Disclose audit reports to the public in accordance with The submission of audit report
World Bank policy on access to information. to the World Bank;
annually.
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Annex 3: Procurement
1. Procurement under the proposed SMEFP AF will be carried out in accordance with the World
Bank’s Procurement Regulations for IPF Borrowers: ‘Procurement in Investment Project Financing,
Goods, Works, Non-Consulting, and Consulting Services’, dated July 1, 2016, revised November 2017 and
August 2018, and the provisions stipulated in the financing agreement and shall be subject to the World
Bank’s Anticorruption Guidelines, dated October 15, 2006, revised in January 2011, and as of July 1, 2016.
The project will use the Systematic Tracking of Exchanges in Procurement (STEP) to plan, process, record,
and track procurement transactions
2. The SMEFP PIU, implementing agency of the AF, will use standard procurement documents
issued by the World Bank to be used by borrowers for IPF-financed projects as well as standard bid
evaluation forms for procurement of goods, works, and non-consulting contracts which are to be procured
through open international competitive bid. Implementing agencies shall also use the World Bank’s
standard request for proposals, sample format for request for specific procurement notices, request for
expression of interest, and the sample form of evaluation report for selection of consultants.
3. When approaching the national market, as shall be agreed in the procurement plan, the country’s
own procurement procedures as well as standard procurement documents for procurement of goods and
works may be used, subject to the requirements provided in section 5, paragraph 5.4 of the procurement
regulations. Other national procurement arrangements (other than national open competitive
procurement) that may be applied by the borrower (such as limited/restricted competitive bidding,
request for quotations/local bidding, and direct contracting) shall be consistent with the World Bank’s
core procurement principles and ensure that the World Bank’s Anticorruption Guidelines and Sanctions
Framework and contractual remedies set out in its Legal Agreement apply.
4. Procurement under the proposed SMEFP AF shall be carried out by the SMEFP PIU in the
FeSMMIPA. All procurement activities of the project which are limited to low-value procurement of goods
and services and include procurement of office furniture and equipment, communication materials, and
the selection of consultants, including project staff, project financial audit, and consultancy services of the
BDS provider for technical training, shall be carried out centrally by the SMEFP PIU in the FeSMMIPA. The
project and FeSMMIPA will set up a procurement approval committee that is specific to the project. In
addition, the project coordinator will set up bid evaluation committees specific to each procurement
activity composed of relevant technical staff on case by case basis. The DBE is also the implementing
agency of the project for the on-lending of resources to MFIs or SMEs who are beneficiaries of the AF.
However, in accordance with paragraph 2.2 of the Procurement Regulations, World Bank procurement
procedures do not apply to the procurement of goods, works, non-consulting services, and consulting
services financed by the World Bank through loans made by eligible financial intermediaries to private
borrowers.
5. To understand the procurement environment under which the SMEFP AF is to operate, a project
procurement risk assessment of the implementing agency, FeSMMIPA/SMEFP PIU, was carried out. The
assessment reviewed the organizational structure for implementing the proposed SMEFP AF, and the staff
responsible for procurement in the implementing agency. The assessment also looked into the legal
aspects and procurement practices, procurement cycle management, organization and functions, record
keeping, planning, and the procurement environment. The procurement system of the SMEFP
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implementing agency is assessed as to the extent to which the planning, bidding, evaluation, contract
award, and contract administration arrangements and practices provide a reasonable assurance that the
project will achieve intended results through its procurement processes and procedures. In addition, the
procurement system’s assessment also considers how the FeSMMIPA/PIU handles the risks of fraud and
corruption, including by providing a complaint handling mechanism, and how such risks are managed
and/or mitigated.
6. The procurement risk assessment has indicated that the SMEFP PIU at the FeSMMIPA has
maintained one experienced procurement staff, who can handle the procurement of goods and consulting
and non-consulting services required under the project with a reasonable level of efficiency and
effectiveness, since the beginning of implementation of the project. The procurement activities at the PIU
are carried out in accordance with agreed procedures of the World Bank. Government proclamations and
directives provide the basis for the procurement policy framework, regulations, and procedures for all
procurement activities to be carried out at the FeSMMIPA. Most procurement and related staff are
considered familiar with the procurement manual of the SMEFP. However, these staff are not familiar
with World Bank procurement procedures and this poses a serious challenge when they are assigned as
evaluation committee members and in other procurement processing activities.
7. Procurement plans are prepared and approved in STEP by the SMEFP PIU. However, processed
procurement activities are not regularly and timely uploaded in STEP upon completion of each step in the
process. Complete procurement documents are not available for some procurement activities under the
project. As a result, carrying out post-procurement review or procurement audit is a challenge in the
SMEFP. Although external independent bodies oversee the procurement activities at FeSMMIPA, the
internal auditor’s capacity to carry out procurement audits with particular reference to World Bank-
financed procurement procedures need to be enhanced through capacity building. Contract management
is another area of weakness. The procurement staff with no training in contract management is
responsible for such activities. Hence, there is a need to strengthen contract management in the
FeSMMIPA and the PIU.
8. In general, there is a reasonable capacity to carry out the procurement activities in the PIU for the
proposed SMEFP AF, provided that the below risk mitigation measures are implemented. Since the
procurement activities under the project are limited and these are low-value procurement activities, the
procurement risk is not considered to be high. However, there are gaps in undertaking procurement
planning and procurement processing including preparation of procurement documents, bids/proposals
evaluation, contract awards, and record keeping, which need to be improved. Delays in procurement
processing, particularly delays in procurement decision-making, also need to be addressed. Overall, the
procurement risk rating for the proposed AF is Substantial.
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9. The identified procurement risks and proposed mitigation measures are provided in table 3.1.
Table 3.1. Summary of Findings and Actions (Risk Mitigation Matrix)

Responsible
No. Issue/Risk Risk Level Mitigation Measures Time Frame
Body
1. Procurement staff Substantial 1. Procurement staff and related PIU/FeSMMIPA During project
and staff related staff such as procurement /World Bank implementation.
to procurement endorsing committee members,
not familiar with evaluation committee members,
the World Bank’s and internal auditors to be
new procurement provided basic training in the
framework and World Bank’s procurement
the procurement regulations.
regulations. 2. The procurement staff and
related staff shall be provided
with basic training in
management of procurement of
goods and equipment, and
selection and employment of
consultants.
2. Delays in Substantial 1. Establish performance PIU/FeSMMIPA During project
processing of standards to be maintained by implementation.
procurement the entity and PIU in the
activities, in the processing of procurement
evaluation of activities and in procurement
bids/proposals, decision-making and ensure that
and delays in such standards are maintained
decision-making. and reported.
3. Procurement Substantial Capacity building be carried out FeSMMIPA/PIU During project
plans not updated on the requirements for /World Bank implementation.
regularly, Procurement Plans/STEP.
processed
procurement
documents not
uploaded in STEP
and not used for
monitoring
purposes.
4. Skill gaps in Substantial Contract management at the FeSMMIPA/PIU During project
contract PIU and FeSMMIPA needs to be /World Bank implementation.
management at strengthened through capacity
the PIU. building.
5. Internal control Substantial Train internal audit staff in FeSMMIPA/PIU During project
needs to be procurement audit and /World Bank implementation.
strengthened. strengthen procurement
oversight on the entities and
carry out independent audits
annually.
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10. The PIU of the FeSMMIPA is preparing the PPSD which forms the basis for a procurement plan
for the first 18 months of the proposed AF and also provides the basis for the procurement methods.
This plan shall be agreed between the PIU of the SMEFP and the project team and will be available at the
PIU of the FeSMMIPA. It will also be available in the project’s database and on the World Bank’s external
website. The procurement plan will be updated by the project team annually or as required to reflect the
actual project implementation needs and improvements in institutional capacity.
11. Procurement oversight and monitoring arrangements. Mandatory thresholds for prior review for
the proposed AF based on procurement risk levels of the project are provided in table 3.2. Based on the
risk level of the SMEFP AF, procurement above the applicable thresholds specified in the table shall be
subject to prior review and shall be included in the procurement plan. Such procurement activities shall
use the World Bank’s standard procurement documents. For post-review contracts undertaken by the PIU
of the SMEFP AF, the World Bank staff or World Bank-appointed consultant shall carry out post-
procurement reviews at the end of each fiscal year.
12. Based on the initial risk rating, the SMEFP PIU shall seek the World Bank’s prior review for
equivalent value of contracts, as detailed in table 3.2.
Table 3.2. Thresholds for procurement approaches and methods (US$, millions)
Short List of National

Prior Review Consultants
Request
Category (US$, Open Open Engineering
for
millions) International National Consulting and
Quotations
Services Construction
Supervision
Works ≥10.0 ≥7.0 <7.0 ≤0.2 n.a. n.a.
Goods, IT, and ≥2 ≥1.0 <1.0 ≤0.1 n.a. n.a.
non-consulting
services
Consultants ≥1.0 n.a. n.a. n.a. 0.2 0.3
(firms)
Individual ≥0.2 n.a. n.a. n.a. n.a. n.a.
consultants
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Annex 4: Derisking Facility and Proposed Innovations under the Credit Line
A. Derisking facility
1. Ethiopia’s SMEs face huge constraints in access to finance despite their substantive role in
economic activity and job creation. In addition to SMEs’ providing vital products and services, networks
of small businesses comprise the backbone of supply and distribution chains of key industries including
trade, construction, healthcare, mobile telecoms, and consumer services. Several of these sectors are key
to spurring growth and jobs in Ethiopia. Improving operational efficiencies and overall firm capabilities to
deepen integration of SMEs within the value chains can therefore be core drivers of development and
shared prosperity. SMEs also strengthen economic inclusion, delivering goods and services to underserved
markets, and providing jobs for large numbers of women entrepreneurs.
2. Financial institutions are however reluctant to extend uncollateralized credit to SMEs, even at
high interest rates, in part because of the high costs of obtaining adequate information on the true credit
quality of firms. SMEs are more affected by credit rationing than larger companies since information
asymmetry is more pronounced for smaller firms and the cost of monitoring is higher. Also, many of these
firms do not have the necessary assets for collateral and therefore get excluded from the formal system
of financial intermediation. Such tendencies get accentuated during business downturns especially so
during a crisis such as now. Derisking instruments are therefore among a set of needed countercyclical
tools to alleviate binding constraints to finance for otherwise viable and productive SMEs and help bolster
them to build back better. The SMEFP AF, a COVID response operation, considers it vital to introduce a
DRF in its design as a complement to the credit line (aimed at boosting liquidity) and TA (on business
development and market access).
Derisking Framework
3. The objective of the DRF is to broaden the range of financial instruments to support viable SMEs.
The DRF will be structured under the component 1 (Financial Services to SMEs) of the SMEFP AF to create
a market mechanism for mitigating credit risks associated with lending to existing, productive SMEs and
through it contribute to business continuity and jobs during this pandemic. The financing facility will be
targeted toward viable/growth-oriented SMEs. Insolvent (zombie) firms which failed to repay loans even
before COVID-19 pandemic will be excluded from accessing the DRF. As a market-based facility, the DRF
would apply to SMEs across sectors based on market need while actively avoiding industry segments
where solvency itself is a concern. Relevant qualifying criteria would be applied to identify eligible
beneficiaries under the DRF.
4. The economic fallout of COVID-19 pandemic has accelerated the need for a risk sharing facility.
Even where there is willingness to support, business uncertainties caused by the large COVID shock has
tended to constrain lender risk appetite necessitating risk sharing arrangements to complement liquidity
lines. Currently, lenders in Ethiopia use collateral rather generously 28 to offset high levels of information
asymmetry including due to the lack of reliable financial information on SMEs. Yet while collateral gives
lenders security in case the borrower is unable to repay the loan from business cash flows, it locks up a
substantial amount of value that could be leveraged for additional funding. One way this becomes feasible
28 323 percent as per Enterprise Survey, 2015. Collateral is typically in the nature of immovable assets.
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is if lenders are able to offset part of the risk while in parallel seeking to address information asymmetry
more broadly including through requiring better quality information, disclosures and transparency from
SMEs. For credit worthy borrowers, the DRF instrument is proposed to be designed to share credit risks
with PFIs on a substantial portion of a loan (at least 50 percent) in pari passu terms, to step up lending if
future cash flows justify it 29.
5. The DRF will be a funded, partial risk sharing facility. A partial risk sharing facility with a strong set
of criteria will provide the right set of incentives for lenders, borrowers and the DRF. It will incentivize: (a)
lenders to originate quality sub-loans through assessing and pricing credit risks appropriately, (b) SME
borrowers to manage businesses in a productive manner, maintain credit discipline and honor debt
obligations timely, and (c) DRF to push the frontiers on SME outreach and access while maintaining
financial viability. As the primary implementing agency for the SMEFP AF, DBE will manage the DRF as an
apex financial institution and ensure that loan guarantees are distributed to the qualifying financial
institutions in a fair and controlled process on market conform terms. The DRF would accompany a robust
set of standards on risk governance and data monitoring / reporting by PFIs and on sustainable business
practices of SMEs to provide a strong economic rationale for the DRF intervention.
6. Monitoring of NPLs will be strengthened. Despite a set of emergency measures and additional
liquidity channeled in response to the COVID shock, negative impacts on asset quality of banks and MFIs
are expected in light of dampening global trade, weaker order book of SMEs, and a likely sluggish recovery
till confidence returns. Closer monitoring of NPLs including through strengthened reporting requirements
under the DRF and parallel TA to augment risk management processes will therefore be key features of
design. To expand outreach to target SMEs while maintaining a well performing portfolio, the SMEFP AF
intervention through TA would support the following: (a) enhance the system of information based credit
decision making and monitoring (including via leveraging credit / market infrastructure and use of
alternate sources of data where feasible), (b) facilitate product design to reflect diversity of SME sub-
sectors, (c) support strengthening of PFI processes to identify incipient signs of sub-loan vulnerability, and
(d) support SMEs in enhancing firm capabilities, market access and financial discipline. In addition, support
on strengthening DBEs institutional capacity to manage the DRF instrument will be woven in as a core
feature of the project and will complement other World Bank 30 and donor financed institution level
capacity building interventions underway.
7. The DRF will leverage and deepen adoption of the evolving financial market infrastructure
ecosystem in Ethiopia. The gradual adoption of digital payments and digital financial services as part of
the National Financial Inclusion Strategy rollout over the next few years would help realize efficiency and
increase interoperability and cost-effectiveness in financial transactions. The recent inclusion of
borrowers from the MFI and Capital Goods Finance companies in the NBE CRB would facilitate greater
access to un-served and underserved entrepreneurs who could now leverage their credit histories across
financial institutions. An electronic movable collateral registry launched under the SMEFP parent project
in March 2020 will help diversify the collateral options for SMEs broadening bankable options for secured
financing. The DRF will be designed to incentivize adoption of each of these pillars of Ethiopia’s financial
market infrastructure thereby yielding broader development benefits.
29
Based on the implementation experience, the design will be adjusted if needed.
30 For example, FSSP and Access to Electricity and Lighting in Ethiopia (ADELE) Project under preparation.
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8. A piloting and learning approach will be adopted for the DRF. The technical design would be based
on good practices and lessons learned from similar WBG operations and platforms facilitated by other
global financial institutions. The DRF will help foster the development of necessary institutional and
market processes for risk sharing mechanisms to be scaled in future. Lessons will be used to strengthen
the design for greater market impact going forward and crucially aim to inform the institutional design of
a Partial Credit Guarantee Scheme for SMEs proposed by the GoE. The design of the facility is building on
the experience of an existing collateral sharing facility for renewable energy administered by DBE.
Capacity constraints and institutional development needs would be addressed through accompanying TA
under the project.
Structure of the DRF
9. The DRF is responding both to post COVID financing challenges and structural inefficiencies in the
credit market for SMEs in Ethiopia. The purpose of the DRF is to provide partial credit risk guarantees to
increase the availability of financing for investments or working capital of target SMEs. Such financing
could be in the form of working capital, leasing or investment finance aimed at ‘keeping the light on’,
bolstering firm capabilities, and enhancing competitiveness.
10. The DRF will be administered by DBE and is proposed to be set-up as a funded facility to ensure
availability of liquidity and signal market confidence. The scheme proposes to offer partial credit risk cover
(between 50 and 75 percent of principal) to loans by Eligible PFIs, typically commercial banks and MFIs 31.
Accreditation will require DBE to identify FIs that meet established eligibility criteria to apply for individual
loan guarantees. Details of criteria will be included in the DRF operations manual criteria and will include,
among others, (a) a good track record of SME lending (as demonstrated by a portfolio of SME loans that
is at least 30 percent of the bank or MFI’s total portfolio; and at least 3 years of SME lending experience),
(b) asset quality of the SME lending portfolio (for example, NPL ratio of less than 5 percent), (c) adequate
risk control and management practices with a demonstrated commitment to responsible lending
practices, (d) adequate profitability 32 and liquidity profile (to be validated through capital to risk-weighted
asset ratio (CRAR) 33 and audited financial statements), (e) a committed action plan to support SMEs in the
target segment; and (f) willingness to institutionalize enhanced data monitoring and sustainability
practices in SMEs as a result of TA provided under the SMEFP.
11. The DRF will be offered on an individual loan basis covering only outstanding principal (between
50 and 75 percent). Accreditation to the facility will require DBE to accredit FIs that meet established
eligibility criteria to apply for individual loan guarantees 34, have a strong portfolio performance record
and robust institutional systems. Loans sanctioned in principle by PFIs based on their credit evaluation
can be presented to the DRF for guarantee cover. DBE will determine a loan’s eligibility for access to DRF
and while it will not undertake primary due diligence it will review guarantee applications from PFIs.
Among other metrics, DBE will assess credit applications on adequacy of debt service coverage ratio
(DSCR), credibility of projections relative to industry trends, compliance with prudential and risk
31 Subject to overall facility exposure limits – viz. (a) a single commercial Bank may be limited to a total exposure 40 percent of
the total DRF, (b) a single MFI may be limited to a total exposure of ~ 20 percent of the total DRF, and (c) total funded
guarantees may be limited to within 85 – 90 percent of the facility.
32 PFIs should be profitable at a post-tax level and dividend paying for at least the last 3 years.
33 Meets at least the minimum regulatory capital and liquidity ratio required by NBE.
34 To be elaborated in the DRF operations manual.
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management criteria viz. maximum loan size, tenor, exposure limits and other risk-return dimensions that
would be provided in the DRF Operations Manual 35.
12. The guarantee fund amount will be available to PFIs in case of default by a borrower (for at least
90 calendar days) i.e. when the lending commercial bank or MFI decides to classify a loan as an NPL and
after appropriate recovery procedures have commenced. As the DRF will apply to SMEs across sub-sectors
(other than those industry segments where solvency itself is a concern), the facility is being designed as
an individual loan-by-loan scheme. This is assessed as appropriate at this early stage of financial market
development in Ethiopia with its limited familiarity and supporting data infrastructure to adopt portfolio
approaches to risk sharing facilities. This design would allow risks of moral hazard to be better managed;
appropriate governance structures, processes and capacity to be established for scaling risk sharing
facilities; and enable greater prudential control in particular through avoiding excessive concentration in
the DRF portfolio. Finally, given imperfections in Ethiopia’s SME credit markets, the individual approach is
expected to help reduce information asymmetry and improve lenders’ perceptions of risk and confidence
to lend to the SME segment.
13. To ensure sustainability of the facility and prudent use of public funds, the DRF will charge PFIs a
guarantee fee (~2 percent annually of outstanding guaranteed exposure) for its services. In addition, the
facility’s investment policy will explore the possibility of risk-free investments (T-bills, G-Secs) as prudent
and as permitted by regulations, to help cover costs of payouts on defaults, operating and due diligence
expenses, and preserve its capital reserves. The investments will be structured so as to have a prudent
mix of tenor and liquidity enabling the DRF to optimize returns while ensuring sufficient liquidity.
14. The DRF’s outreach will be assessed using simple measurable and attributable quantitative
indicators such as the number of guarantees issued, the value of the guaranteed credit portfolio, extent
of collateral offset, and so on. The DRF’s M&E system to be put in place will also aim to capture economic
additionality from greater access to finance by firms supported through the DRF viz. changes in
employment, investment, firm-level business and profitability and other relevant indicators as
measurable.
15. It is expected that by the end of the AF period, sufficient capacity will be developed within several
PFIs as well as facility managers/administrators. The DRF platform would be able to successfully determine
which PFIs are adept at identifying borrowers that need a guarantee through robust credit analyses.
Migrating to a mix of individual loan based and portfolio structure where selected lenders with robust
systems are granted the ability to put a guarantee on a loan portfolio without submitting individual
applications to the facility could then become feasible. This would help scale impact and facilitate
standardization of processes for credit appraisal and loan processing with increased automation.
Risk Management
16. The DRF aims to implement a robust risk management and lender oversight scheme. While the
DRF would not conduct primary credit evaluation for each guarantee application, it would develop a
comprehensive credit risk management checklist with clearly defined responsibilities and accountabilities
35 The SMEFP supported 1,126 firms; average loan size US$98k and US$46k via banks and MFIs respectively. Based on initial
assumptions, the DRF size of US$6mn would be a good start. The project will build in flexibility to allocate between component 1
activities depending on overall DRF performance.
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on part of the Eligible PFIs. Guarantee applications sent to DRF should include those loans that have in
principle been sanctioned through the normal credit appraisal process based on robust credit evaluation
methodologies of PFIs. The measurement and management of credit risk should rely on appropriate
quantitative and qualitative techniques. An effective credit risk management platform for the DRF should
establish and enforce a set of relevant exposure limits (for example, by subsector, geographical area, and
so forth) as well as apply stringent monitoring to mitigate concentration risk. The DRF would reserve the
right to limit approval of new loans if there is a concern about credit quality at a specific lender or its roll-
out in specific sectors or regions if an unacceptable concentration develops. A combination of onsite and
off-site inspection of files of the guaranteed loans on a sample basis would be employed to ensure due
diligence processes are being applied by PFIs. The onsite reviews would provide the opportunity to
understand the internal processes used by lenders and would provide useful insights on strengthening
lender systems that may be necessary for a migration to portfolio approaches at a later stage.
17. To ensure timeliness of support and optimum utilization of DRF to address market needs, DBE will
initiate the process of identifying eligible PFIs early and encourage PFIs to start developing a pipeline of
loans for potential DRF utilization.
18. Lenders will be required to submit monthly reports providing the performance of all of the
guaranteed loans in the portfolio for asset quality and loss monitoring purposes. As the scheme develops
performance data, standards for maximum allowable losses will be developed. Controlling losses is an
integral part of maintaining a sustainable scheme.
19. The DRF would develop an effective liquidity and market risk management framework to ensure
that it meets claims while maintaining sustainability. It would also follow a transparent investment policy
that establishes an investment framework consistent with the mandate and strategic objectives of the
facility, approved risk profiles, and monitoring procedures. To assess and control operational risks, the
DRF would establish a framework that identifies lines of responsibility, segregation of duties, and reliable
control mechanisms. The DRF risk management platform would build an automated reporting system that
will track portfolio performance of the PFIs. The DRF will also explore the possibility of counter-guarantees
on its exposure in the form of risk sharing with other IFIs beyond a pre agreed ‘stop loss’ amount.
Governance and monitoring
20. A governance mechanism would be developed to oversee the DRF and ensure adherence to the
financial, legal and operational guidelines. The governance structure of the DRF will likely comprise: (a)
Project Advisory or Steering Board 36 (PSB), (b) Guarantee Fund Management Committee (GFMC) and (c)
Guarantee Administrator (i.e. DBE). The PSB will provide policy guidance, represent key stakeholders at
appropriate levels of seniority, and will delegate authority to GFMC to oversee operations. The GFMC will
provide advisory support to DBE and will have approval authority for guarantees above a certain
threshold. Periodic reporting from DBE to GFMC and GFMC to PSB will be agreed. If governance tiers can
be reduced without compromising oversight and effectiveness, those will be explored. The agreed
structure and governance protocol will be detailed in the DRF operations manual.
36 The PSB modality would likely be utilized in case of co-financing by other donors.
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21. As part of the overall risk management framework of DRF, the GFMC would also report to the DBE
Board / Risk sub-committee of the Board. The responsibilities of the GFMC would also include operational
authority to ensure adherence to proper code of conduct and risk management practices as laid out in
the DRF Operations Manual including periodic internal audits and reviews of the DRF’s guarantee
liabilities. In the future, the composition of GFMC could also include participation from donor agencies
with the adoption of a diversified funding model.
22. A brief review of DRF operations will take place at the end of the first year of operations. The
purpose of the first review will be to determine if any criteria, policies or procedures need adjustment or
if unexpected developments have occurred that need consideration / addressing. This will include an
assessment of COVID impacts, notably the directional trajectory of business, liquidity and market risks for
the real and financial sectors.
Exit Strategy
23. A full operational review of the DRF will be conducted by the PSB at the end of the SMEFP AF. It
is expected that institutionalization of the DRF beyond the project period would serve to deepen the
domestic credit market in Ethiopia. The specificities of the institutional structure of the DRF beyond the
SMEFP AF period would be ascertained depending on its performance and economic additionalities. The
amount that has already been drawn down by the facility, and against which guarantees have been issued
and are outstanding would remain in the guarantee reserve account until such time as the outstanding
guarantees expire. For any amount remaining in the guarantee reserve account after the guarantees
expire, funds would revert to DBE to support SME lending in a manner that is deemed fit by its
management at the time. This could be through further upscaling the DRF if the authorities decide in its
favor. It may be noted that continuation of the DRF would be an acceptable route only if the DRF has
performed well during the initial years of implementation and demand for its guarantees are still needed.
This would be jointly determined by the GoE, DBE, WBG and other donors involved.
B. Junior Debt and other Potential Risk Sharing Product Innovations
24. To leverage private sector financing, component 1 under the AF will explore the development of
innovative financial products using risk sharing mechanisms on a pilot basis. The potential innovations will
include structuring of junior debt to provide partial risk cover to eligible PFIs that leverage external co-
financing for on-lending to SMEs 37 in foreign currency. The regulatory enabler for external financing is
provided by the recent NBE directive 38 that allows foreign currency intermediation by domestic banks
through external borrowings from registered non-resident entities. The recent directive seeks to address
the demand supply gap in foreign currency for Ethiopian businesses. While structural constraints on the
supply side have been exacerbated by the ongoing pandemic, business needs are anticipated to increase
as Ethiopia aims to grow substantively to meet its middle-income ambitions.
25. The objective of these product innovations would be to partially cover the credit risk of lending
to SMEs by PFIs and help align the risk-return metrics for external lenders which can spur future
intermediation via leveraging capital. As per the NBE directive, the ‘all in cost’ of any foreign currency loan
37 With FX revenues
38 https://nbebank.com/wp-content/uploads/pdf/directives/bankingbusiness/sbb-77.pdf
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through the facility shall not exceed six-month currency specific LIBOR+5 percent. Given this and to
nurture a nascent market, DBE may need to perform the role of a market maker by piloting transactions
that would specifically involve risk-mitigation through junior loan tranches in order to improve the risk
return profile of the senior tranche held by external lenders. Should this innovation materialize, it would
enable needed foreign currency funding to be channeled to eligible and credit worthy SMEs. Market
sounding will determine the quantum of the credit line that can be deployed as junior tranches.
26. Discerning credit criteria and strong oversight systems of potential external lenders will mitigate
risks for the junior debt facility. In addition to robust oversight systems of external lenders, strong
prudential requirements for domestic banks to be eligible have been set by the NBE under the recent
directive on forex intermediation. In addition, thorough due diligence, qualifying conditions and risk audits
would ensure that PFIs with better established systems and more robust SME portfolio performance will
become eligible candidates to avail this innovative facility should it materialize. PFIs would be required to
showcase adherence to due process and satisfactory levels of risk controls to safeguard the junior debt
facility against any undue risks including those from moral hazard or adverse selection. Besides, the
project will facilitate the establishment of robust risk management and governance arrangements at DBE
to minimize implementation bottlenecks and ensure sustainability. IFC has expressed interest in exploring
development of risk sharing structures under this AF.
27. In addition to junior debt, potential options for a counter-guarantee agreement with IFIs would
be explored for the DRF on a pre-determined fee sharing basis and could cover credit risks above a
threshold level of risk (stop loss). While the product development may be initiated any time after AF
effectiveness, evidence of the impact of these initiatives would likely be feasible after performance data
of guaranteed loans is available which in the absence of any precedent, may be available after at least
two years of the DRF operation since the guaranteed portfolio may perform somewhat differently than a
PFI’s traditional SME portfolio. With better data availability and price discovery for these products, more
IFIs are expected to enter the market with customized solutions to increase the capacity and sustainability
of the DRF.
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Annex 5: Detailed description of Component 3
1. Sub-component 3.1: Building firm capability. Building on the BDS component of the parent
project, this sub-component aims to support SMEs and their linked suppliers in the targeted sectors with
the provision of tailored business advice and technical trainings.
• The business advice will help build capacities of SMEs and their linked suppliers to develop
bankable business plans, improve quality of financial statements and records, better manage
risks, business management, entrepreneurship, marketing strategy and human resource
management. It will also include tailored coaching and mentoring support depending on the
needs and capacities of SMEs and their linked suppliers.
• The technical trainings will support SMEs and their linked suppliers to meet compliance with
international standards and increase their adoption of quality, safety and environmental
certifications. This activity will also support SMEs and their linked suppliers with technical
skills training and technology adoption that enhances their productivity and
competitiveness.
• Participating SMEs and their linked suppliers will also be trained on digital tools that boost
their online presence. This includes training on accounting tools, digital marketing, e-
commerce, inventory systems, and so on.
2. To implement the firm capability building mentioned above, this sub-component will work with
existing programs in Ethiopia such as EDC. In addition, for training/TA areas that are not covered with
EDC, the project will recruit international and local business advice providers to deliver the activities. This
entails bringing a pool of international technical experts in the targeted sectors to provide demand driven
on the job technical training using the machinery and equipment of the participating SMEs and their linked
suppliers.
3. Sub-component 3.2: Increasing access to market. Activities that will be supported under this sub-
component include:
• SME focused matchmaking and support to participating SMEs in enabling a long-term

business-to-business relationship with selected international buyers or local suppliers of
inputs. One-to-one meetings or on-site factory tours and holding B2B events will help the
formation of business relationships or Joint Ventures (JV’s) between local and FDI
companies. In addition, this activity will support participating SMEs to attend study
tours/exposure visits on cost sharing basis (50 percent by the SME and the remaining 50
percent by the project).
• Establish a business information center at FeSMMIPA: This activity establishes a center at

FeSMMIPA that provides equal access to business information to all SMEs and their
international/local buyers in Ethiopia. The center will improve the business decision-making
capacity of SMEs. The Center will provide information including quality standards, access to
working premises, information on business regulations, suppliers, business incentives,
export market opportunities, local market opportunities, lease financing, bank/MFI loans,
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bank procedures, competitors, and so on. The project will support the design and conversion
of an existing building within the compound of FeSMMIPA to become an SME Business
Information Center. The project will support the Center with equipment and IT systems
(hardware and software) that will make it fully functional. A feasibly study will be conducted
to inform the operation and management modality of the Business Information Center. The
feasibility study is expected to provide recommendations operation and management of the
center, promotion of the center, financial sustainability, linking it with international SME
databases, and so on.
• By building the capacities of federal and regional investment and trade support
institutions, export promotion agencies and business diplomacy, enable them to provide
better services to their customers in the targeted sectors. MoTI’s export promotion agencies
will be supported with audio-visual promotion tools, database and software/e-platforms
that helps them promote Ethiopian exports. The training activity will be carried out by the
TA provider that will be hired for the SME focused matchmaking activity above.
• Access to production and marketplaces is a major binding constraint for SME growth 39. The
Ethiopian government plays prominent role in construction and management of SME
production sites and marketplaces. The background study for this AF 40 identified that
government inefficiencies in allocation and management of these infrastructure plays the
biggest role in severe shortage of supply of the resources. In order to overcome this
challenge, it is imperative that a more sustainable and long-term solution is provided for the
ownership, operation and management of the resources. To support the government with
alternative options, the project will support the development of a private participation
model for the ownership, operation and management of SME production sites (sheds) &
market centers in Ethiopia.
39 WBG, August 2020; Addressing challenges of Ethiopia’s SMEs’ access to market and production facilities.
40 Ibid.
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Annex 6: E-commerce through Ethiopian Postal Services (EPS)
1. Ethiopia has immense potential for broadening access to market for SMEs through e-commerce.
Digital economy diagnostics indicate that digital financial services and e-commerce have high potentials
to create direct and indirect jobs in Ethiopia. With urban unemployment rate at around 20 percent, the
digital economy can be the next frontier in job creation. The MoTI of Ethiopia data shows that the number
of ICT firms being registered in the country between 2013 – 2018 has been consistently growing, with the
highest number recorded in 2019. A study commissioned by the World Bank in February 2020 shows that
there are 68.3 million mobile phone users and 17.8 million active internet users in Ethiopia. To support
Ethiopia’s digital economy which is at an early stage of development with few private sector players
offering digital services and some government initiatives driving digitization agenda, the GoE launched an
economic reform program that aims at better utilizing online platforms for businesses.
2. The EPS has been providing postal services in Ethiopia since its establishment in 1894. Given the
fierce competition in the postal and logistics sector, especially with the advent of e-commerce, designated
postal operators like EPS in various countries have had to reinvent themselves to optimize their operations
and venture into new areas of business to remain competitive. Tasked with the responsibility of providing
universal postal service, EPS has announced its intention to reform its institutional set-up, operations and
financial systems while continuing to serve the community. The institution currently transfers pension
payments to beneficiaries, playing its inclusion role, through its over 1,200 branches across the country.
These branches and existing networks can be leveraged for expanding its services by enhancing volume
and quality through a low marginal cost. The postal sector has an immense potential for growth in Ethiopia
and EPS could be at the forefront of transforming the sector. An assessment conducted by the GoE with
the support of Universal Postal Union identified EPS as a priority SOE for piloting e-commerce in the digital
economy agenda.
3. EPS’s branch network is equivalent to nearly 20 percent of the total banking branch (about 6,200)
in the country. Leveraging EPS’s existing branches and assets for logistics and financial service will
significantly increase financial access points in the country thereby driving access. According to Findex
2017, long distance to financial access point was one of the major factors for financial exclusion, especially
for the rural poor. As EPS’s branches are widely distributed across the country, including in small ‘woreda’
towns, these branches will potentially drive financial inclusion by getting closer to the unserved and
underserved segments of the rural community. Moreover, the recently issued payment system operators
directive allows for super agents to operate in the market and EPS is well positioned to become one.
4. The electronic transaction law enacted in March 2020 has created an enabling regulatory
environment for businesses to operate online. This law forms part of a broader Digital Transformation
Strategy of Ethiopia that lays out the road map for creating a "Digital Ethiopia" by 2025. The strategy
underlines the importance of strengthening the capacity of EPS to serve domestic and cross-border e-
commerce. An efficient and improved EPS can play a big role in serving the untapped local market; it will
enable SMEs and Large Enterprises to sell their products and services online and move them across
borders.
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Annex 7: World Bank Group Response to COVID-19 in Ethiopia
I. Impact of the COVID-19 pandemic on the country and government response

1. The outbreak of the COVID-19 pandemic has had a serious health impact. As of early January 2021,
over 128,000 COVID-19 cases with over 2,000 fatalities were registered, with a sharp acceleration in
recent months. These figures are the second largest in absolute terms among Sub-Saharan African
countries, after South Africa, though the caseload and mortality as a percentage of the population are
near the median for the overall region. The pandemic has overstretched the health system and affected
the delivery of essential health services. Other socio-economic impacts being felt across Ethiopia are
already wide-ranging and serious, with the potential to become severe, depending on the combination of
the pandemic’s trajectory and the effects of countermeasures.
2. COVID-19 is seriously threatening Ethiopia’s gains in growth and poverty reduction. Ethiopia grew
at 6.1 percent in fiscal year (FY) 20, compared to 9 percent in FY19, as the impact of the COVID-19
pandemic took place largely in the final quarter of the fiscal year. However, the collapse in external
demand experienced since the onset of the COVID-19 crisis, coupled with the effects of restrictions in
domestic demand, is expected to result in a further growth slowdown in FY21. Merchandise exports,
excluding gold, declined by 11.9 percent during July-September 2020 (year-on-year). Both exports and
imports of services, dominated by air transport, recorded negative growth in FY20. Meanwhile, foreign
direct investment has been severely hit, with inflows declining by 20 percent in FY20, contributing to
weakening reserve levels. The consequent reduction in government revenue is putting pressure on its
provision of social services. Government spending and investment has been an important engine of
poverty reduction in the past and reduced spending resulting from decreased government revenue and
foreign exchange may have detrimental long-term effects on the poor. 41
3. Economic impacts of COVID-19 are already being felt by households, and although impacts are
more severe in urban areas, rural households are also affected. High-frequency monitoring surveys 42 of
households conducted by the World Bank in Ethiopia since April 2020 shows that the COVID-19 pandemic
is affecting economic activity, households’ incomes, and food security. The survey results indicate that by
April 2020 about half of households had experienced either a reduction or a total loss of income since the
viral outbreak. Though fewer households have subsequently reported further income erosion, apparently
income losses have not yet bottomed out: a quarter of them reported reductions between August and
September. Food security is a major concern in Ethiopia, particularly for rural residents, and is at the heart
of the country’s social protection system. According to the COVID monitoring survey about four in ten
rural households in Ethiopian were still experiencing moderate or severe food insecurity in September
compared to 30 percent in urban areas. An estimated 1.4 million jobs, accounting for 19 percent of current
employment, were estimated to be threatened due to the crisis during the second half of 2020.
4. The pandemic and associated containment measures have adversely impacted the private sector,
particularly in the horticulture, hotel, tourism and travel sectors as well as manufacturing firms in the
industrial parks. In FY19, export revenues generated from the horticulture sector which includes flowers,
fruits, vegetables, herbs and spices, stood at US$ 318 million. Following the outbreak in early March 2020,
41
World Bank. 2020. “COVID-19: Potential Poverty and Social Impacts in Ethiopia and Policy Responses.” Poverty
and Equity Global Practice: Ethiopia COVID Response Notes.
42
https://www.worldbank.org/en/country/ethiopia/brief/phone-survey-data-monitoring-covid-19-impact-on-
firms-and-households-in-ethiopia.
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most European and Middle Eastern countries closed their borders. As a result, the horticulture sector has
suffered a significant loss. In a similar vein, the private sector in the apparel and garment industry
experienced an unprecedented global demand shock. Disruptions to the global value chains continue to
weigh on the supply of intermediate inputs and imported raw materials, which are vital for the
manufacturing sector. Against this backdrop, several SMEs have shifted their production lines to fulfill the
growing need for both personal protective equipment and items for consumer use such as masks and
hand sanitizers. As most workers in industrial parks are women, the pandemic weighs more adversely on
women’s participation in the labor force.
5. The government’s health services response to COVID-19 has been robust. The GoE declared a
state of emergency under Article 93 of the constitution on April 8, 2020. It moved quickly to institute
measures to limit the spread of COVID-19, including outreach activities for awareness raising and
behavioral changes, expanding COVID-19 testing capacity and institutions to provide clinical care and
quarantine for COVID-19 suspects and patients; and establishment of a multisectoral COVID-19 response
taskforce and coordination platforms at each level of government.
6. The government has also adopted several measures to address the social and economic impacts
of the pandemic. Measures aimed at mitigating the impacts on people include additional expenditure on
healthcare, indexation of safety net benefits, provision of temporary incomes support and/or emergency
food aid to the vulnerable, introduction of guidelines to ensure the distribution of agricultural inputs. To
support firms, authorities have adopted temporary tax exemptions and preferential access to currency
for those firms importing raw materials and equipment to be used in the prevention and containment of
COVID-19, and have allowed businesses to carry forward the loss incurred this fiscal year, as well as to
take advantage from some tax deferrals and waivers. In the financial sector, the NBE has availed ETB15
billion liquidity in support of private commercial banks, to allow them to provide debt relief and
refinancing to customers in need, and forbearance limits have been extended. In addition, mobile banking
limits at the CBE has been increased, and a new eTransactions Proclamation has been adopted by the
Parliament. The government adjusted quickly its rural and urban Productive Safety Net Programs (PSNPs)
by waiving the work requirements, increasing coverage to more beneficiaries and increasing temporarily
the benefit amounts paid to particularly vulnerable households. The government also decided to expand
the urban PSNP to more cities more quickly to provide support for particularly affected urban poor
households (including refugees and host communities), and also promote youth employment and
enhance job search services to support the economic and social recovery. To address the negative impacts
of the pandemic on education, the government is promoting adjustments in the sector such as advancing
the establishment of digital learning platforms and providing additional school grants to support the re-
opening of schools.
7. The government is proactively managing its unanticipated financing needs. Revenue mobilization
at the federal level is estimated to have declined by the equivalent of 0.5 percent of GDP in FY20, with
domestic direct and indirect tax collection impacted by COVID-19. Preliminary data suggests despite the
surge in healthcare spending in response to the pandemic, expenditure execution fell short from budgeted
amounts. Overall, the federal government fiscal deficit is estimated to have widened from 2.5 percent of
GDP in FY19 to 2.8 percent of GDP in FY20. The deficit is expected to further increase in FY21, to 3 percent
of GDP, as the economic impacts of the crisis continue to be felt. Meanwhile, the external financing gap
has increased by an estimate of US$1.8 billion with respect to pre-COVID-19 projections, to a total of
about US$5.2 billion in FY21. Expected financing sources include official transfers and prospective budget
support (US$2.3 billion, including IDA grants), IMF disbursements (US$0.9 billion), privatization proceeds
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(US$1.1 billion), debt service reprofiling (US$0.6 billion) and gains from the Debt Service Suspension
Initiative (US$0.2 billion). As part of its response to the financing challenges, the government has
performance and policy actions to adopt an SOE debt resolution framework to facilitate debt repayments
and minimize risks to macroeconomic instability and implementation of a new excise tax proclamation in
FY21 aims to mitigating the fall in revenue.
II. World Bank Group support for responding to the crisis
8. The WBG’s approach in Ethiopia has been adjusted to meet the challenges posed by COVID-19
while maintaining a longer-term strategy to sustain transformational structural reforms embedded in the
CPF for Ethiopia for FY18-22. These adjustments have been made within the CPF’s focus areas and
objectives, particularly the second Focus Area of Building Resilience and Inclusiveness which includes
objectives to improve safety nets, healthcare systems, basic education, water supply & sanitation, and
management of natural resources which impacts livelihoods. Focus Area 1 also provided strategic
underpinning for addressing COVID-19 impacts, particularly in improving access to finance and agricultural
productivity As a result, support is being provided across four pillars consistent with the overall WBG
approach: (a) Saving lives, (b) Protecting poor and vulnerable people, (c) Ensuring sustainable business
growth and job creation, and (d) Strengthening policies, institutions and investments. The WBG support
has been primarily focused on the first two of the three expected stages of crisis response: relief—
emergency assistance to confront the immediate threat to public health, as well as short-term economic,
financial and social impacts; restructuring—strengthening health systems, restoring human capital, and
pursuing economic reforms, debt resolution, and recapitalization of firms and financial institutions; and
resilient recovery—exploiting new opportunities for more inclusive, resilient, and sustainable longer-term
development.
9. The World Bank lending has been rapidly adjusted to support Ethiopia across several dimensions
of its response to the pandemic. Ethiopia was among the first countries to receive financing from the
World Bank’s COVID-19 rapid response facility, with a US$82.6 million COVID-19 operation approved on
April 2, 2020, just weeks after the crisis became evident in the country. This operation is already two-
thirds disbursed and has been critical in providing medical supplies, capacity building, information
outreach, and supporting quarantine, isolation, and treatment centers. This was followed by the rapid
preparation of a supplemental US$250 million Development Policy Financing (COVID-19 Supplemental
Financing to the Second Ethiopia Growth and Competitiveness Programmatic Development Policy
Financing, P169080) approved in June 2020 to augment an earlier US$500 million approved in March
2020 to support the country’s growth and competitiveness agenda. New social protection operations
were fast-tracked and levels of financing were increased, with the US$400 million Urban Productive Safety
Net and Jobs Project (P151712) approved in September and the US$512.5 million Strengthening Ethiopia’s
Adaptive Safety Net Project (P172479) approved in November 2020. These operations build on preceding
support for productive safety nets and support cash transfers, food aid, public works, self-employment
through start-up grants, and labor market integration of youth. Employment and development in the
agriculture and rural areas was pursued through US$80 million in Additional Financing of the Second
Agriculture Growth Project (P148591) approved in September 2020 and a US$165 million Additional
Financing for the Ethiopia Resilient Landscapes and Livelihoods Project (P163383)in December 2020,
financed by the Green Climate Fund. These latter two operations had been previously planned but were
accelerated and design was adjusted to meet COVID challenges. A US$14.9 million COVID-19 Education
Response project, financed by the Global Partnership for Education, was approved in August 2020 to
complement the ongoing General Education Quality Improvement Project. Finally, a new US$100 million
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Additional Financing for the Women Entrepreneurship Development Project was rapidly prepared and
approved in December 2020.
10. The World Bank’s lending pipeline in the latter half of FY21 similarly reflects changes to address
COVID-19 impacts. A second phase under the COVID-19 Emergency Response MPA is under preparation
to support Ethiopia’s anticipated rollout of vaccines in 2021. Support for small businesses and jobs
creation is being fast-tracked through a previously unplanned US$200 million SMEFP AF, both of which
are to be delivered in Q3 FY21. In addition, preparation of the US$200 million Digital Foundations Project
(P171034) has been accelerated, recognizing the central role of connectivity to help overcome the human
development and commercial impacts of COVID-19 restrictions. Similarly, preparation of the US$500
million Access to Distributed Electricity and Lighting (P171742), central to improving connectivity, has
been fast-tracked. Finally, a new US$250 million additional financing for the Enhancing Shared Prosperity
through Equitable Services Program for Results (P151432) operation is planned to help sustain service
delivery improvements at the local level. Development policy lending as well as an integrated agriculture
and rural development program as well as support for the financial sector and human capital development
are being planned for FY22.
Ethiopia World Bank Program Lending Adjustments Triggered by COVID-19 Impacts
COVID-19 Impacts Addressed

Adjustment Strengthen
triggered Commitment Protecting Business policies
by COVID- amount, Saving poor and growth and
Operations 19 Impacts millions USD Approval lives vulnerable and jobs institutions
Approved Since April 2020
New (not
COVID-19 Emergency planned
82.60 Apr-20 X X
Response (Health Services) prior to
pandemic)
Supplemental DPF New 250.00 Jun-20 X X
COVID-19 Education
New 14.85 Aug-20 X
Response Project
Urban Productive Safety Fast-
400.00 Sep-20 X X X
Net and Jobs Project Tracked
Strengthen Ethiopia’s Fast-
512.50 Nov-20 X X
Adaptive Safety Net Tracked
AF Women’s
Dec-20
Entrepreneurship New 100.00 X
Development Project
Planned in Remainder of FY21
AF Small and Medium
New 200.00 Q3 FY21 X
Enterprises Finance Project
Access to Distributed Fast-
500.00 Q3 FY21 X X
Electricity and Lighting Tracked
Ethiopia Digital Foundations Fast-
200.00 Q3 FY21 X X
Project Tracked
2nd phase, COVID-19
Emergency Response (prep New 200.00 Q3 FY21 X X
for vaccination)
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COVID-19 Impacts Addressed

Adjustment Strengthen
triggered Commitment Protecting Business policies
by COVID- amount, Saving poor and growth and
Operations 19 Impacts millions USD Approval lives vulnerable and jobs institutions
Additional Financing to
GEQIP-E for Refugees
Design
Integration (Partially funded 122.50 Q3 FY21 X
adjusted
by Global Partnership for
Education)
AF for the Enhancing Shared
Prosperity through New 250 X X
Equitable Services
11. Implementation of several ongoing operations has been adjusted to address COVID-19 impacts.
With respect to saving lives, the Ethiopia Health Millennium Development Goal Program-for-Results
(PforR) operation is financing critical inputs to the national response, such as personal protective
equipment for frontline health workers. Ongoing operations supporting the water sector (One WASH),
the Second Urban Water Supply and Sanitation Project (restructured) and urban development have had
implementation adjusted to focus more on addressing emergency water rehabilitation, providing access
to WASH services in priority health institutions and quarantine centers and hygiene interventions to curb
the potential spread of the virus. The rural and urban PSNPs temporarily waived the work requirements
to allow for social distancing. Payments to beneficiaries were made in advance for three months instead
of monthly payments, and protective gear was adjusted the needs of the pandemic. Hygiene measures,
protective gear and intensive information accompanied the implementation of the safety net programs.
Implementation support by the World Bank has been similarly constrained owing to distancing
requirements. In addition to supporting connectivity for World Bank staff in Ethiopia as well as key
operational counterparts within the framework of projects, the Ethiopia program is accelerating the use
of the Geo-Enabled Monitoring System and analogues in its operations, particularly in the transportation
and agriculture sectors.
12. IFC’s FY20-24 strategy for Ethiopia is incorporating responses to COVID-19 to protect livelihoods
an minimize destruction of markets. Prior to the onset of the COVID-19 pandemic, the strategy envisaged
investment adjustments in FIG, MAS and infrastructure sectors for FY20-FY24. At present the economic
and humanitarian impacts of the pandemic have pushed IFC’s work in sectors to scale back investment
services targets and increase advisory services in order to protect, and then support the subsequent
recovery and creation of, new markets. In particular, based on the findings of IFC deep dive on two
Ethiopian banks prior to the COVID-19 pandemic, risks associated with the Ethiopian financial sector were
considered very high. With COVID-19, these risks have become even higher (for example, higher NPLs,
increased liquidity crunch, higher impact on capital adequacy). Regarding MAS sectors, IFC is looking to
provide working capital lines to firms with headroom to take on debt. In particular, the MAS team is
supporting clients operating in the agribusiness sector to enter new regional export markets with the aim
to increase diversification and minimize longer supply chain risk. The infrastructure sector, given the
specific case of Ethiopia, private sector involvement is already limited so there is not much to
protect/restructure as a result of the COVID-19 pandemic As of June 2020, IFC’s potential program size in
Ethiopia stands at US$285 million in Investments Services (IS) (base case) and US$25.5 million in Advisory
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Services (AS) for the five-year period. In line with IFC’s COVID-19 response framework, going forward the
strategy will aim to reduce market destruction and subsequently restructure and create new
opportunities in the tourism, agribusiness and health sectors.
13. Going forward, the unprecedented global nature of the COVID-19 crisis, coupled with Ethiopia’s
structural bottlenecks, hamper prospects for private sector engagement in key sectors.
14. Financial Sector. The COVID-19 fallout will likely exacerbate shortage of foreign exchange, in part
due to reduced exports, remittances, and tourism receipts. In addition, giving the financial sector’s
mounting vulnerabilities, the pandemic will likely result in a local currency liquidity crisis, putting
additional strain on the private sector’s limited access to finance. Lastly, financial institutions will likely
require additional working capital to provide liquidity support to their SME clients.
15. Agribusiness. A prolonged COVID-19 outbreak in Ethiopia, including protracted containment
measures and transport restrictions will impede farmers’ access to markets and disrupt fresh food supply
chains, thereby exacerbating food shortages created by the ongoing locust invasion. On the demand side,
the closure of restaurants and street food outlets removes a key market for many producers and
processors that may result in a temporary glut or trigger upstream production cuts as shown in some
countries in the meat and beverage (malt) sectors.
16. Manufacturing. The COVID-19 crisis has adversely impacted the sector, as evidenced by a decline
in investment inflows, disruption in supply chains, and a loss of revenue and jobs as a result of a
contraction in global economic growth and demand.
17. The WBG’s knowledge agenda has similarly been adjusted to support Ethiopia on evidence and
analysis for dealing with the pandemic’s impacts. The World Bank has supported several rounds of rapid
phone surveys administered to firms (eight rounds) and households (seven rounds) between April and
November 2020. The results of these surveys have been communicated with the Jobs Commission. Online
briefs highlighting the main findings in each round and special topic reports focusing on firm’s behavior
during the pandemic, and gender effects and have been published on the website of the WBG. The
findings have also been used to inform the response to COVID-19 in WBG operations. A policy note
synthesizing the survey findings to inform policies for enhancing household welfare recovery from the
COVID crisis is planned for FY21 Q3. The World Bank’s regular biannual Ethiopia Economic Update (the
8th in the series) issued in the summer of 2020 assesses the macroeconomic and microeconomic impacts
and policy responses to COVID-19. In addition, a Country Economic Memorandum is under preparation
for completion in early FY22 and will try help identify additional reforms to support inclusive and
sustainable growth going forward. Analytical work in HD sectors, particularly health, has been recalibrated
to address the changed circumstances for service delivery.
18. The WBG’s efforts are closely coordinated with other development partners. The World Bank
coordinated closely with the IMF as well as major bilateral partners of Ethiopia on financing support to
cushion against the impacts of COVID-19 in the context of the government’s robust policy response. This
included the US$250 million supplemental Development Policy Financing (following the approval in March
2020 of the previously prepared US$500 million Second Growth and Competitiveness DPF) alongside the
IMF’s approval in May 2020 of a Rapid Credit Facility of US$410 million which supplemented its own three-
year US$2.9 billion program for Ethiopia. With respect to financing for health services to save lives, the
World Bank’s provision of US$82.6 million complemented by support from the Global Fund, GAVI, the Jack
Ma foundation and other bilateral and multilateral donors. The World Bank also place a central
coordination role for managing financing for the productive safety nets programs. In particular, the rural
Page 76 of 77
The World Bank
safety nets program will be complemented by US$190 million in financing in FY21 from eight other
development partners (and US$967 million over five years). The World Bank also plays a similar
coordinating role for development partner funding for water and sanitation via the One WASH program
and basic education through the General Education Quality Improvement Project. For One WASH the
World Bank mobilized additional grant funding from the Dutch government and is in talks to mobilize
additional resources from the Danish government for WASH interventions.
Page 77 of 77

Ethiopia Small and Medium Enterprises Finance Project Additional Financing

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Ethiopia Small and Medium Enterprises Finance Project Additional Financing

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Public Disclosure Authorized

FOR OFFICIAL USE ONLY

INTERNATIONAL DEVELOPMENT ASSOCIATION

IN THE AMOUNT OF SDR 139.0 MILLION

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

ETHIOPIA SMALL AND MEDIUM ENTERPRISES FINANCE PROJECT

March 15, 2021

Finance, Competitiveness and Innovation Global Practice

(Exchange Rate Effective {February 28, 2021})

Currency Unit = Ethiopian Birr (ETB)

ETB 40.35 = US$1

SDR 0.69 = US$1

ABBREVIATIONS AND ACRONYMS

Regional Vice President: Hafez M. H. Ghanem

I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING ........................................ 7

BASIC INFORMATION – PARENT (Ethiopia: SME Finance Project - P148447)

Country Product Line Team Leader(s)

Project ID Financing Instrument Resp CC Req CC Practice Area (Lead)

Financing & Implementation Modalities Parent

[ ] Multiphase Programmatic Approach [MPA] [ ] Contingent Emergency Response Component (CERC)

[ ] Performance-Based Conditions (PBCs) [ ] Small State(s)

[✓] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country

[ ] Deferred Drawdown [ ] Responding to Natural or Man-made disaster

[ ] Alternate Procurement Arrangements (APA) [ ] Hands-on, Enhanced Implementation Support (HEIS)

Ratings (from Parent ISR)

Implementation Latest ISR

13-Jun-2018 12-Dec-2018 08-Jun-2019 17-Dec-2019 18-Jun-2020 14-Jan-2021

Financing & Implementation Modalities Child

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[ ] Performance-Based Conditions (PBCs) [ ] Small State(s)

[✓] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country

[ ] Deferred Drawdown [✓] Responding to Natural or Man-made disaster

Disbursement Summary (from Parent ISR)

PROJECT FINANCING DATA (US$, Millions)

SUMMARY (Total Financing)

Proposed Additional Total Proposed

Financing Gap 0.00 0.00 0.00

DETAILS - Additional Financing

Private Sector Investors/Shareholders

Equity Amount Debt Amount

IDA (Credit/Grant) 200.00

IDA Resources (in US$, Millions)

Credit Amount Grant Amount Guarantee Amount Total Amount

Does the project require any other Policy waiver(s)?

Practice Area (Lead)

Contributing Practice Areas

Climate Change and Disaster Screening

I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING

Source: National Bank of Ethiopia (NBE). Source: IMF.

5 Pre COVID-19 target.

of their loan disbursement. The mandate has been discontinued.

D. SME FINANCE PROJECT

E. RATIONALE FOR ADDITIONAL FINANCING

12 In close collaboration with IFC.

F. Relevance to the Country Partnership Framework

II. Description of Additional Financing

A. PDO and project beneficiaries

20 Leveraging NBE’s Directive https://nbebank.com/wp-content/uploads/pdf/directives/bankingbusiness/sbb-77.pdf. External

22 Financial sector capacity building project (P094704).

D. Additional financing budget

Components Sub-components Amount

Sub-total component 1 US$180 million

Sub-total component 2 US$3 million