European Union and IFAD to support Ethiopian rural financial institutions

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By Murimi Gitari, 25 May 2021

The International Fund for Agricultural Development (IFAD) and the European Union (EU) will provide EUR26.5 million worth of liquidity and debt relief to rural financial institutions to protect jobs and safeguard livelihoods during the COVID-19 pandemic.

In Ethiopia, the agriculture sector and rural people are the most impacted by the COVID-19 pandemic that has reduced agricultural labor, limited access to inputs and production capital, reduced production and productivity, and obstructed access to markets and financial services. This has led to loss of employment, reduced access to food, and increased domestic responsibilities for women.

Micro small and medium enterprises (MSMEs) and cooperatives who play an important role in creating jobs and sustaining livelihoods in rural areas are also facing the challenges due to the pandemic.

Dominique Davoux, Green Deal Team Leader, EU Delegation in Ethiopia said, “Today’s new project of €26.5 million to support agriculture financing in time of COVID shows our support to Ethiopia’s economic development and job creation. This EU and IFAD funding will provide new line of credits to agricultural SMEs and their farmers in the production areas of the main agro-industrial parks of the country.” 

The current economic slowdown requires additional support for the rural financial institutions who are most at risk, to maintain their liquidity. 

The Government of Ethiopia has already put in place mitigation measures to deal with the impacts of the pandemic including support to the entire value chain, the MSMEs and farmers’ cooperatives.

Through the IFAD-supported Rural Financial Intermediation Programme III (RUFIP III), the government’s request to provide liquidity to MSMEs experiencing shortages will be met with assistance to enhance the resilience and sustainability of the rural financial sector. More than 1.5 million clients of these rural financial institutions will benefit.

“The COVID 19 pandemic is affecting the most vulnerable members of the community through loss of jobs and economic opportunities. As the life blood of the rural economy, MSMEs will be able to sustain their business with minimum shocks and retain employees, thanks to this assistance,” said Mawira Chitima, IFAD Representative and Country Director for Ethiopia.  

He added that IFAD is happy to co-finance this effort with the EU and the government of Ethiopia, as protecting jobs is vital for resilience and supporting the financial sector is a key strategy.

The Development Bank of Ethiopia (DBE) will receive a EUR13.8 million IFAD grant and an additional EUR12.7 million EU grant to improve its liquidity and support rural financial institutions (RFIs). 

The financing will enable RFIs to help their MSME clients retain workers in employment, reduce the interest cost of credit, provide support to farmers facing challenges meeting their contract farming arrangements, absorb the penalty on defaulted loan repayments, and offer liquidity to partly meet the deferment of loan instalments due to DBE from the RFIs.

“This support could be key in maintaining agricultural productivity in time of uncertain national and international food markets because of COVID,” Davoux said. 

“The EU contribution provides for an interest rate subsidy that will reduce the costs of finance for RUFIP beneficiary enterprises affected by the COVID-19 crisis, thereby increasing their resilience to withstand the crisis and maintain employment.” He added.

Key partners in the project will include the Federal Cooperative Agency, the Regional Cooperative Promotion Bureaus, Association of Ethiopian Microfinance Institutions and the National Bank of Ethiopia.

Since 1980, IFAD has invested US$795.5 million in 20 rural development programmes and projects in Ethiopia worth a total of US$2.1 billion. These have directly benefited around 12 million rural

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