Ethiopia’s merchant economy is in rapid expansion but remains largely excluded from formal credit systems, with more than 99 percent of digital payments still flowing through personal accounts rather than business accounts, reveals a new report.
The report from FSD Ethiopia, a non-government agency funded by the UK government and the Bill and Melinda Gates Foundation, points to what the report describes as an “invisible” merchant economy, where vast amounts of transaction data exist but remain unusable for formal financial intermediation.
It indicates that digital adoption among merchants has surged, particularly through mobile banking platforms, with one system alone serving 83.2 percent of digital merchants.
However, this growth has not translated into improved access to finance. Instead, the data generated through these transactions remains “invisible to credit underwriters,” effectively locking out small businesses from formal lending systems.
“CBE Mobile Banking, the primary provider for 83.2 percent of digital merchants, holds years of transaction data for the majority of Ethiopia’s merchant economy. However, this data cannot effectively support credit underwriting until merchants transition to business-designated accounts,” reads the report.
This disconnect highlights a significant supply-side failure in the financial sector. While merchants are actively using digital tools, the absence of tailored product design and onboarding mechanisms has prevented them from transitioning into formal business accounts. As a result, the report indicates that the financial system continues to overlook a critical segment of the economy despite clear evidence of activity and cash flow.
The document notes, “with 67 percent of micro-enterprises already holding a formal business license, a rate higher than in many comparable markets, the primary constraint is not documentation, but rather product design, onboarding models and commercial incentive structures.”
According to the report, this represents a supply side market failure with direct implications for credit access, data visibility, and regulatory oversight. Further compounding the issue is the uneven distribution of digital infrastructure across the country.
The report identifies a stark divide between urban and rural areas, with digital payment adoption standing at 69.2 percent in cities compared to just 26.4 percent in rural regions. This disparity is attributed not to temporary delays but to structural challenges, particularly connectivity constraints.
Connectivity remains the single largest barrier, cited by 22.7 percent of merchants, surpassing even cost-related concerns. The document frames this as a foundational issue, raising questions about the feasibility of long term digitalization strategies in areas where basic infrastructure remains underdeveloped. Without addressing these constraints, the expansion of digital financial services risks remaining concentrated in urban centers.
At the same time, headline figures suggest rapid growth in digital finance. Mobile money accounts, for instance, increased dramatically from 12.2 million in 2020 to 139.5 million by 2025. However, the report cautions that this growth may not reflect genuine usage. Internal data shows that only 15 percent of these accounts are active.
“National Bank of Ethiopia’s own NDPS 2.0 draft acknowledges that only 15 percent of mobile money accounts are active and merchant payments accounted for less than 0.2 percent of total digital transactions in 2023/24,” it reads.
Much of the increase, according to the report, has been driven by “compulsory use cases,” including mandated digital payments for specific services such as fuel suggesting that while account ownership has expanded, actual engagement with digital financial tools remains limited.
The report also warns that emerging regulatory requirements could unintentionally deepen exclusion within the merchant economy.
Policies mandating the use of national digital identification systems, such as Fayda, or requiring formal business registration for digital transactions may “entrench exclusion” rather than reduce it.
Current figures indicate that only 39 percent of merchants possess a Fayda ID, while formal registration among rural enterprises stands at just 44.3 percent.
“Policies or mandates that require Fayda or business registration as prerequisites for digital payment acceptance risk entrenching exclusion rather than expanding coverage,” the report cautions.
Meanwhile, access to credit remains a persistent challenge. The report identifies strong demand among micro-enterprises, with 44.5 percent, equivalent to approximately 222,000 businesses, indicating that they would benefit from access to financing. Despite this demand, formal digital lending platforms account for less than five percent of borrowing.
As a result, most merchants continue to rely on informal sources, including family and friends, to meet their financing needs. This reliance underscores what the report describes as an “informal credit trap,” where businesses are unable to scale due to limited access to structured financial products.
The issue is particularly pronounced in the segment about businesses seeking loans in the range of 100,000 to 500,000 Birr.
