Assessment of Financial and Operating Pe

MEKELLE UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
A THESIS ON
ASSESSMENT OF FINANCIAL & OPERATING PERFORMANCE OF MICROFINANCE
INSTITUTION:
(A CASE STUDY OF DEDEBIT CREDIT & SAVING SHARE INSTITUTION)
SUBMITTED BY: HAILAY ALEM

ID NO: CBE/PE140/03
A THESIS SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENTS OF THE

AWARD OF MASTERS DEGREE IN BUSINESS AND ADMINISTRATION (MBA)
PRINCIPAL ADVISOR: ASSEFA WORED (ASS. PROFESSOR)

CO-ADVISOR: KIBIRET DESSALEGN
I
JUNE 2013
MEKELLE, ETHIOPIA
II
DECLARATION
I, Hailay Alem, hereby declare that the research paper work entitled “Assessment of
Financial and Operating Performance of Microfinance: A Case Study of DECSI” submitted by
me for the award of the Degree of Masters of Business and Administration specialize in Finance
of Mekelle University at Mekelle, is my original work and it has not been presented for the
award of any other Degree, Diploma, Fellowship or other similar titles of any other University or
institution.
Place: Mekelle Signature:
Date: June 01, 2013 Name: Hailay Alem
Assessment of Financial and Operating Performance of MFI: A Case Study of DECSI. By: Hailay Alem 1
CERTIFICATION
This is to certify that the research work entitled “Assessment of Financial and Operating
Performance of Microfinance Institution: A Case Study of DECSI” is a bona-fide work by
Hailay Alem who carried out the research under my guidance. Certified further, that to the best
of my knowledge the work reported herein doesn’t form part of any other research paper report
or dissertation on the bases of which a degree or award was conferred on an earlier occasion on
this or any other candidate.
Date: June, 2013 Assefa Worede (Asst. Professor)

Principal Advisor
Department of Accounting & Finance
College of Business & Economics
Mekelle University
CERTIFICATION
Date: June, 2013 Kibiret Desalegn

Co-Advisor
Department of Management
Mekelle University
CERTIFICATION
Date: June, 2013 Aregawi G/Michael (Ass. Professor)

Internal Examiner
Department of Management
Mekelle University
ACKNOWLEDGEMENTS
First of all I would like to thank the almighty God for helping me in the successful
accomplishment of this paper.
I am greatly indebted to my advisor Assefa Worede and co-advisor Kibiret Desalegn for their
unreserved involvement in the thesis right from its inception to its completion. Also I extend my
sincere gratitude to them for the critical and detailed comments and suggestions he gave me
throughout the research process. I greatly appreciate Assefa Worede & Kibiret Desalegn who has
also been very helpful in my personal career.
My deepest admiration and thanks also goes to my wife, Netsanet Haftu, and my brother,
Mulugeta Alem who supported me financially to buy Laptop to process this thesis in my home.
Without their kind assistance this research paper wouldn’t have been processed on time. It had
not been for their valuable support and encouragement this research paper would have been
difficult to complete.
Finally yet importantly, I would like to thank all my classmates for their support during my stay
at the university.
Hailay Alem
ABSTRACT
The major elements of the Ethiopian social economy for wealth making are access to finance,
knowledge, access to markets and regulation and government support. The presence of
microfinance institutions allow the poor people & low income clients to access the financial
services such as credit, savings etc offered and it is a helpful tools to fill the gap of mainstream
banks’ limits in reaching the rural & urban poor people & the uncovered non-poor with financial
banking services.. These financial services create the poor and low income clients opportunity to
finance & support their economic activities, their household as well as their businesses financial
management and utilization needs. The formation of financial sustainable microfinance
institutions has been the main tool of the poverty alleviation and the recent development strategy
of Ethiopia. So, healthy financial and operating performance of MFI is more vital for their good
performance and to serve their customers appropriately. Consequently, this study presents
empirical analysis of financial and operating performance of DECSI.
The purpose of this study is to assess the achievement of DECSI to reaching the large number of
clients, to identify financial sustainability, profitability, portfolio quality, and operating
efficiency and assess the trend in performance of the institution.
Data for the study was from primary source through unstructured personal interview with
different employees of the institution and main secondary sources of this study were analyzed via
different techniques and performance indicators. In order to see the trend in performance five
years data from 2004 to 2008 were used.
The major findings of the study indicate that DECSI is increasing in terms of breadth & depth of
outreach. DECSI can carry on in the future since its profitability is more significant. From
financial sustainability angles of DECSI, it can say that the institution was going down the ladder
of sustainability measures from the year to year in the observed years from year 2004-2008.
DECSI also shows a better improvement in managing its loan portfolio because the ratio of
portfolio at risk (PAR) greater than 30 days and write-off ratio was lower. The trend tells us that
DECSI is decreased in PAR. Finally, DECSI spends least in operating and administrative
expenses for serving and providing loan to a single client. The trend showed that DECSI is cost
efficient in providing and serving a single client. The study also found efficiency of the
institution in case of staff productivity ratios, it diminishes over time.
TABLE OF CONTENTS
Declaration I
Certification II
Certification III
Certification IV
Acknowledgement V
Abstract VI
Table of contents VII
Index of tables VIII
Index of figures XI
Acronyms X
Page
CHAPTER I INTRODUCTION 1
1.1 Background of the Study 1
1.2 Statement of the problem 2
1.3 Research questions 3
1.4 Objectives of the study 3
1.4.1 General objective of the study 3
1.4.2 Specific objectives of the study 3
1.5 Significance of the Study 3
1.6 Scope and limitation of the Study 4
1.7 Structure of the study 4
CHAPTER II LITRATURE REVIEW 5
2.1 Theoretical framework 5
2.2 Conceptual framework 6
2.1.1 Microfinance & Microfinance Institutions 6
2.3 Microfinance Performance Evaluation 9
2.4 Performance and Performance Indicators for 10
Microfinance Institution
2.4.1 Outreach 13
2.4.1.1 Outreach: Breadth (number of clients served) 13
2.4.1.2 Outreach: Depth (client poverty level) 14
17
2.4.2 Portfolio quality (Loan repayment)
2.4.3 Financial Sustainability and Profitability 21
2.4.4 Efficiency 24
2.5 The Overview of the Microfinance Sector in Ethiopia 27
2.6 Empirical literature review 28
2.7 Empirical Evidence Ethiopian Scenario 30
2.8 Challenges of Microfinance Institutions in Ethiopia 32
CHAPTER THREE METHODOLOGY OF THE STUDY 33
3.1 Introduction 33
3.2 Research Design 33
3.3 Types of Data sources 33
3.4 Method of Data Collection 34
3.5 Methods of Data Analysis and Interpretations 34
CHAPTER FOUR DATA ANALYSIS AND DISCUSSION 36
4.1 Introduction 36
4.2 Financial and Operating Performance of DECSI in the 36
year 2008
4.2.1 Outreach performance of DECSI in the year 2008 37
4.2.1.1 Number of active borrowers 38
4.2.1.2 Percentage of Female borrowers 39
4.2.1.3 Outstanding gross loan portfolio 41
4.2.1.4 Average outstanding loan balance per borrower (the 43
average loan size)-depth of outreach
4.2.1.5 Number of depositors 43
4.2.1.6 Outstanding savings (total value of all deposit accounts 43
4.2.1.7 Average outstanding saving balance 44
4.2.3 Financial Sustainability and Profitability indicators of 45
DECSI in the year 2008
4.2.3.1 Profitability indicators of DECSI in the year Ended 46
2008
4.2.3.1.1 Return on assets (ROA) 46
4.2.3.1.2 Return on equity (ROE) 46
4.2.3.2 Financial Sustainability ratios of DECSI in the year 47
2008
4.2.3.2 .1 Operational self – sufficiency (OSS) 48
4.2.3.2.2 Financial Self-Sufficiency (FSS) 48
4.2.4 Portfolio Quality (Loan Repayment) of DESCI in the 50
year 2008
4.2.4.1 Portfolio at risk (PAR) > 30 days (Non-performing 50
loan) of DECSI in year 2008
4.2.4.2 Write-off ratio of DECSI 51
4.2.5 Efficiency and productivity of DECSI in the year 2008 52
4.2.5.1 Operating expense ratio 52
4.2.5.2 Cost per borrower ratio 52
4.2.5.3 The average disbursed loan size 53
4.2.5.4 Personnel productivity ratio (PPR) 53
4.2.5.5 Loan officer Productivity 53
4.3 Trend analysis on operating and financial 54
performance of DECSI from the year 2004-2008
4.3.1 Trend of outreach by DECSI from year 2004- 55
2008
4.3.2 Trend in Sustainability & Profitability of 63
DECSI from year 2004-2008
4.3.3 Trend of Portfolio Quality of DECSI from 65
year 2004-2008
4.3.4 Trends in Efficiency and Productivity of 66
DECSI from year 2004-2008
CHAPTER FIVE CONCLUSIONS AND RECOMMENDATIONS 71
5.1 Conclusions 71
5.2 Recommendations 74
Reference 76
Annex 80
Index of Tables
Table No. Description Page
Table 4.1 Breadth & depth outreach performance of DECSI in the year 2008 41
Table 4.2 Operational & Financial self-sufficiency performance of DECSI in 49
2008
Table 4.3 Portfolio Quality performance of DECSI in 2008 50
Table 4.4 Trend of outreach indicators by DECSI from year 2004-2008 55
Table 4.5 Trend of Average disbursed loan size per borrower per GNI per capital 58
of DECSI from the year 2004-2008
Table 4.6 Average deposit balance per depositor per GNI per capital from the 58
year 2004-2008
Table 4.7 Trend in profitability of DECSI from the year 2004-2008 63
Table 4.8 Trend in Financial Sustainability of DECSI from the year 2004-2008 64
Table 4.9 Trend in portfolio quality (Loan repayment) from the year 2004-2008 65
Table 4.10 Trend in efficiency and productivity of DECSI from the year 2004- 66
2008
Index of Figures
Figure No. Description Page
Figure 1 Critical Microfinance Triangle 5
Figure 2 Percent of female & male borrowers in the year 2008 40
Figure 3 Trend of outreach in breadth by DECSI from the year 2004-2008 56
Figure 4 percentage/compositions of Female and Male borrowers from the 56
year 2004-2008
Figure 5 Trend of outreach in depth by DECSI 57
Figure 6 Trend of Average loan and deposit balance per borrower of 59
DECSI from the year 2004-2008
Figure 7 Trend of Average loan and deposit balance per borrower per GNI per 59
capita of DECSI from the year 2004-2008
Figure 8 Trend of outstanding savings by DECSI from the year 2004-2008 60
Figure 9 Trend the performances in terms of average annual savings 60
increments by DECSI from the year 2004-2008
Figure 10 Number of depositors of DECSI from the year 2004-2008 61
Figure 11 Trends in Number of Active Borrowers Vs Number of 61
Depositors from the year 2004-2008
Figure 12 Trend in profitability indicators of ROA & ROE by DECSI from 63
the year 2004-2008
Figure 13 Trend in financial self-sufficient and operating self-sufficient of 64
DECSI from the year 2004-2008
Figure 14 Trends in portfolio at risk (>30 days) & write-off ratio of DECSI 66
from the year 2004-2008
Figure 15 Trend in operating expense ratio of DECSI from year 2004-2008 67
Figure 16 Trend in cost of borrowers of DECSI from the year 2004-2008 68
Figure 17 Trend in Average loan disbursed per borrower of DECSI from 68
the year 2004-2008
Figure 18 Trend in personnel productivity ratio by DECSI from 2004-2008 69
Figure 19 Trend in loan officer productivity of DECSI from 2004-2008 69
ACRONYMS
ACSI Amhara Credit and Saving Institution
AEMFI Association of Ethiopian Microfinance Institutions
AFRACA African Rural and Agricultural Credit Association
ALR Annual Loan Loss Rate
AROA Adjusted Return on Assets
AROE Adjusted Return on Equity
CBE Commercial Bank of Ethiopia
CGAP Cumulative Group to Assist the Poorest
CRR Current Recovery Rate
DEA Data Envelopment Analysis
DECSI Dedebit Credit and Saving Institution
FSS Financial Self- Sufficiency
GLP Gross Loan Portfolio
GNI Gross National Income
HQ Head Quarter
IBD Inter-American Development Bank
IFPD International Fund for Population Development
LAR Loan at Risk
MBB Micro Banking Bulletin
MENA Middle East and North Africa
MFIs Microfinance Institutions
MGD Millennium Development Goals
MIX Microfinance Information Exchange
MSE Micro & Small Enterprises
NBE National Bank of Ethiopia
NGO Nongovernmental Organizations
NPLs Non-perform loans
OCSSO Oromia Credit and Saving Share Company
OER Operating Expense Ratios
OSS Operational Self- Sufficiency

PAR Portfolio at Risk
PL Poverty Lines
PPR Personnel Productive Ratio
RCST REST Credit Scheme of Tigray
REST Relief Society of Tigray
ROA Return on Assets
ROE Return on Equity
SDI Subsidy Dependence Index
USAID United States Agency for International Development
USD United States Dollar
CHAPTER I
INTRODUCTION
1.2 Background of the Study
A large number of the population of the globe has a problem to access of finance. This is because
formal commercial banks take into consideration the poor people as un-bankable as a result of
their information irregularities or asymmetries and lack of collateral.
Microfinance involves the provision of financial services to the poor and low income people with
micro business (Otero, 1999 cited in Marzys, 2006). They are helpful tools to fill the gap of
mainstream banks’ limits in reaching the rural and urban poor people and the uncovered (weak)
non-poor with financial banking services. They are intended to reduce poverty and mitigate risk
by letting the low income and poo+r people have access to credit, savings and insurance. MFIs
have grown subsequent to Muhammad Yunus’s establishment of the Grameen Bank Project in
1976 (Cabraal, et al. 2006). However, there are substantial differences in the stage of
development and performance among different nations (MIX, 2010).
In Ethiopia, microfinance services initially started operation with donor fund and as of
September, 2012 there were 32 microfinance institutions serving around 2.9 million rural and
urban poor & low income people of Ethiopia. The institutions have been offering broad range of
financial services in the entire country. During this period, the MFIs had deposits of Birr 5.3
billion in the type of compulsory and voluntary savings. In addition, total assets, total
outstanding loan, and total capital stood at Birr 13.7 billion, Birr 9.8 billion, and Birr 3.9 billion
respectively (Biritu No. 113, 2012)
Empirical studies on MFIs have been conducted on the basis of the schools of thought with
regard to the source of finance for the sustainability of MFIs (Basu & woller, 2004). The
Welfarists believe that microfinance institution should be sustainable with using donor funds
while the institutionists believe they have to stand on their own by operating profitably.
Besides, a number of studies have been made in the area of microfinance institutions that largely
focus on three main important areas. That is on impact assessment (Jonathan & Barbara, 2001;
Meyer, 2002; Asmelash, 2003; Hishigsuren, 2004; Samual, 2006), outreach (Adam, 1988;
Befekadu B. Kereta, 2007; Navajas et al., 2000; Hishigsuren, 2004), and sustainability of MFIs
(Khandker et, al., 1995; Meyer, 2002; Basu &Woller, 2004; Kereta, 2006 and Kidane, 2007).
The formation of sustainable Microfinance Institutions (MFI) that can reach a large number of
poor people who are not served by the commercial banks has been the main tool of poverty
alleviation and the recent development strategy of Ethiopia. Therefore, this research study is
geared to assess the financial sustainability and outreach of microfinance institutions in
Tigrai Region.
1.2 Statement of the Problem
Microfinance institutions have the objectives of serving as many poor and able people and
maintaining their sustainability. In other words, outreach in terms of breadth and depth and
financial sustainability are not a choice to MFIS. To attain both objectives, the microfinance
institutions have to work in the direction of institutional sustainability.
In this regard, studies have been undertaken in the area of sustainability of MFIs (Khandker et,
al., 1995; Meyer, 2002; Basu &Woller, 2004; Kereta, 2006 and Kidane, 2007) and outreach
(Adam, 1988; Befekadu B. Kereta, 2007; Navajas et al., 2000; Hishigsuren, 2004). However, to
the best of my knowledge, no study is conducted on the financial sustainability and outreach of
DECSI. Then to what extent is the degree of outreach and financial sustainability of DECSI in
its operation in Tigray?
1.3 Research Questions
In view of addressing the issues of outreach and sustainability of the MFI in Tirai Region, the
following questions are raised.
 Does Dedebit Microfinance have good financial and operational performance?
 How much does the institution address the demand of the poor in the region?
 Does the institution operate in the region cost efficiently?
 What are the major internal & external challenges of Dedebit microfinance institution?
1.4 Objective of the Study
1.4.1 General objective of the Study
The principal objective of this research is to assess the financial & operational performance and
challenges of a Dedebit Microfinance.:
1.4.2 The Specific objectives of the study

 To assess the financial sustainability and profitability of Dedebit microfinance
 To calculate appropriate and relevant performance indicators
 To assess the outreach of Dedebit microfinance institution for low income people in
Tigray region.
 To identify the major challenges faced by Dedebit microfinance, and
 To formulate recommendations based on the findings.
1.5 Significance of the Study

This research study believed to be important in improving the operation of DECSI by clearly
representing the financial & operating performances of the institution. The research is generally
expected to:
 Provide important information to decision makers such as donors, customers, the
government and the public at large how well the institution is performing.
 Highlight the strengths and weaknesses of the existing operation of the inistitution,
 Identify the challenges of the MF industry.
 Suggest potential recommendations to improve the current financial and operational
performances of the institutions, and
 Serve as a source for further research that allows the sustained operation.
1.6 Scope and limitation of the Study
The research is based on the interviews conducted with 12 officials of DECSI main office. The
secondary data is obtained from Dedebit Microfinance Institution Head Quarter audited financial
statements reported to the MIX market Inc. (www.themixmarket.com) and the scope of the
study covers 5 years period of 2004- 2008 . The period 2009-2011 is not covered in the study
due to lack of data in the website and from Dedebit Microfinance-HQ.
There are thirty two microfinance institutions currently operating in the country. In view of the
available time and resource, the study is limited to Tigrai Region. Therefore, the scope of the
study is limited to the Dedebit microfinance institution (DECSI) which is the only microfinance
institution operating in Tigray region. This study is further limited to the assessment of the
financial and operating performance such as breadth and depth of outreach, sustainability&
profitability, portfolio quality, efficiency & productivity; and included its components namely
ratio analysis and trend analysis of Dedebit Credit & Saving S.co.
1.7 Structure of the study

The first chapter covers the background of the study; statement of the problem; research
questions; objective of the study, significance of the study, and scope and limitation of the study.
The second chapter provides the related summary of literature review on the performance
measurement of microfinance institutions. The third chapter covers the methodology of the
study. Chapter four is devoted to data analysis and discussion based on data collected such as
audited financial statements from themixmarket.org. Finally, chapter five concludes the study
and provides relevant recommendations.
CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical framework
The main problem of most developing economies is poverty. In these economies, it is argued that
among others have not access to credit is assumed to be the cause for the failure of the poor to
arise poverty. Fulfilling the gap between demand and supply of credit in the formal financial
institutions limit has been challenging (Von Pischke 1991). In fact, the gap is not occurred
merely because of shortage of loan-able fund to the poor rather it occurs because it is expensive
for the formal financial institutions to lend to the poor. Lending to the poor includes great
transaction cost and risks related with information irregularities and moral hazards (Stiglitz and
weiss 1981). However in several developing economies governments have interfered, through
foreword of microfinance institutions to minimize the gap after that allow the poor access
credits.
There are different arguments relating to how to assess the performance of microfinance
institutions. Meyer (2002), mention from Zeller & Meyer (2002), showed that there is what is
called ‘’ Critical Microfinance Triangle’’ that we demand to examine to assess Microfinance
institutions based on their objective. The triangle can be indicated as (Meyer 2002; 3):
Figure1. Critical Microfinance Triangle

Source: Zeller and Meyer, 2002
The angles of the triangle figure stand for outreach to the poor, financial sustainability and
welfare impact. Meyer specified that performance standards are obligatory for each objective
and all three must be measured carefully to assess performance of microfinance (Meyer, 2002).
In addition he stated that the in-crowd in the figure stand for microfinance institution innovations
in technology, organization, policies and management that influence how satisfactory each
purpose is met. The outside circle of the figure stand for the environment within which
microfinance operates that also influences performance. Largely this environment contains social
and human capital owned by the poor, the quality of the financial public services or systems and
the economic policies of the country that helps financial dealings. Progresses in the environment
create it simpler for microfinance institutions to achieve the three objectives (Meyer, 2002; 2).
Twin mission system

Currently, according to new microfinance approach most microfinance institutions operate
mainly under a twofold mission system. Those are:
1, Commercial Mission: refers to financial viability & sustainability/profitability of the
MFIs. These institutions provide services to cover its costs and even making revenue.
1. Social (development) mission: involves serving the poor (reaching the poor) and
working for the reduction of poverty and income inequality.
The microfinance institutions are expected to harmonize these two objectives.
2. 2Conceptual Framework
2.2.1 Microfinance & Microfinance Institutions
Microfinance is defined by some scholars and organizations are seemingly different from one
another. The essence of the definitions is usually the same, but the variations are mostly a matter
of emphasis. The first term ‘micro-credit’ was invented in the 1970s to show that the provision
of loans to the poor to establish income-generating projects, while the term ‘microfinance’ has
come to be used since the late 1990s to indicate the so-called second revolution in credit theory
and policy that are customer-centered instead of product-centered (Elahi and Rahman
2006:477). The terms ‘microcredit’ and ‘microfinance’ are often used interchangeably to show
the range of financial services provided specifically to poor, low-income households and micro-
enterprises (CGAP website 2010; Brau and Woller 2004:3), but they do not have exactly the
same meaning. Mostly both terms are confused so it is necessary to highlight the difference
between them. Microfinance principally encompasses micro-credit and also involves additional
non-microcredit financial services such as micro-savings, micro-insurance, pensions and
payment services for the poor (Okiocredit, 2005). Microcredit, which is part of microfinance, is
the practice of delivering small, collateral-free loans to usually poor & unsalaried borrowers or
membership of cooperatives who or else cannot get access to credit (CGAP website 2010;
Hossain 2002:79).
According to Legerwood (1999 p. 1) defines Microfinance as the provision of financial services

particularly credit & saving to poor and low income people. Robinson (2001 p. 9) stated it as
small scale financial services mainly credit and saving provided to people who farm or fish or
herd who operate microenterprises where goods are produced, recycled, repaired or sold; who
offer services; who work for salary and commission; who earn income from leasing small
amount of land, draft animals, vehicles, or machinery tools; and other groups and individuals at
the local level of developing countries both rural and urban area. Therefore, microfinance can be
defines as the provision of a broad range of financial services such as loans, deposits , insurance,
pension, credit card, money transfers and payment services to the low income households and
poor people and their farm or non-farm microenterprises and small businesses, to those who are
neglected by the formal banking sector, through variety microfinance institutions.
Microfinance Institutions (MFIs) are organizations which were primarily established with the
aim of support finance those small scale microenterprises and local economic activities which
were mainly excluded from traditional finance and mainstream banking practice. However, in
Sub-Saharan Africa, until now microfinance is not widespread and extremely low income
earners, including a lot of the poor, cannot access financial services (CGAP, 2009; Spencer &
Wood, 2005) while poverty is formally extensive and sever (World Bank, 2009).
According to Ledgerwood (1999) stated that financial intermediation is the provision of

financial products and services such as credits, savings, insurance, pension and payment services
by the microfinance institutions to the poor people. Besides this, in practice various microfinance
institutions offering social intermediation, enterprise development services and social services.
Social intermediation is the process of developing human capital (such as education, health,
Confidence, Skills & empowerment) and social capital (such as social networks & social
mobility) needed by sustainability of financial intermediation for the poor. This includes group
formation, leadership training, and cooperative training. Enterprise development services is a non
financial services that assist micro entrepreneurs such as marketing & technology services, skills
& self confidence development, business training, operational training and subsector analysis.
Social services is a nonfinancial services that improving the well being of micro entrepreneurs
such as health, nutrition, education, and literacy training for low income people. Financial &
nonfinancial services offering by MFIs targeted to benefit poor people. These other than
financial intermediation denote that the skills and confidence of poor and low income women &
men have to be developed besides providing them access to credit offering. So, the microfinance
approach is not a minimalist approach providing only financial intermediation but an integrated
approach providing financial intermediation as well as social, enterprise development, or other
services. Generally, the definition of microfinance often includes both financial intermediation
and social intermediation. Microfinance is not simply banking, it is a development instrument.
Microfinance institutions are taking into account as a major instrument for poverty eradication as
a result of enhancing access to finance and financial services. According to Basu et al. (2004)
noted that MFIs complement efficiently the conventional banking industry in providing financial
services to the low income people. The realistic of developing finance originates from the ground
that empowerment of the poor through making revenue creating capacity allows the poor to gate
all development necessities to avoid complicated dimensions of poverty and trim down their
vulnerability to unanticipated proceedings (Davis et al., 2004).
Whereas, studies of Ahlin and Jiang (2008) propose that these advantages of microfinance can
only be recognized on condition that the poor continue to be clients of the institutions of
microfinance. Hence, it is proposed that microfinance institutions should take into consideration
additional allow the average borrower to graduate from the constant reliance on them to improve
long run development. This will create MFIs as the weapon to alleviate poverty.
Microfinance is not a solution for poverty alleviation, but one among many good instruments &
strategies to eradicate poverty and reach the United Nation’s Millennium Development Goals
through improving access to finance and financial services. According to Stewart R, van Rooyen
C, Dickson K,Majoro M, de Wet T(2010) stated that microcredit and micro savings enable the
poor to invest their money in the future, rise their incomes then ‘lift themselves out of poverty’.
2.3 Microfinance Performance Evaluation

Microfinance has impressed numerous attentions across the world and many countries and
donors have been using it as an instrument of poverty eradication and growth strategy.
Microfinance has played major role in acceptance huge world population who was overlook and
excluded by the traditional financial institutions. It has been helping as a litmus paper to banks to
indicate that it is feasible to transact business with the poor people. Moreover, it has put the poor
at a better moral ground by seeing that the poor are faithful and have visions, ideas, ability and
capacity to attain them, if they are offered the chance. These days, a lot of players in the
microfinance industry witness finance as an effectual tool which can be used to support humanity
and society improve. Substantial numbers of people throughout the globe have able to make
income and accumulate money as their capacity permits them to perform as a result of the
accessibility of financial services.
“Microfinance is much more than simply an income generation means. Through directly
empowering poor people, especially women, it has become one of the important driving
mechanisms in the directions of meeting the Millennium Development Goals/MGD/, specifically
the overarching target of halving extreme poverty and hunger by 2015."
Within their exertion to succeed what is expected of them from many interested parties,
microfinance institutions are demanded to achieve two main performances that are social
performance and financial performance. Social performance consists of outreach to the poor and
the excluded, modification and creating of new services and products to the target clients,
development of clients’ social capital and social responsibility of MFIs.
Financial performance in contrast, deals on economic conditions that are portfolio quality,
efficiency and productivity, financial management and profitability.
Nevertheless, unlike commercial banking with its Basle standards, the microfinance industry
does not have widely agreed performance standards. “Recent years have seen a growing push for
transparency in microfinance industry. An important feature of this trend has been the growing
use of financial and institutional indicators to measure the performance and risk of the
microfinance institutions. However, it is difficult to achieve transparency if there is no common
understanding on how indicators measuring performance, financial condition, and risk should be
named and calculated.” Hence, Micro rate, Inter-American Development Bank (IBD),
Roundtable group, the United States Agency for International Development (USAID), MCRIL
and planet Rating agree on the names and definitions of a set of commonly used indicators.
Accordingly, the Consultative group to assist the poorest (CGAP) (2009) agreed on five core
performance measures such as breadth of outreach, depth of outreach, Portfolio quality, financial
sustainability ( profitability), and efficiency. SEEP network has also developed MFIs
performance measure and reporting guidelines.
2.4 Performance and Performance Indicators for Microfinance

Institution
Performance is achieving a goal. The performance of MFIs influences as a minimum six units of
stakeholders: society, investors, poor customers, donors, the poor people, and the employees.
Each unit has its own objectives, and so each unit inquires its own questions concerning
performance. In concentrate, every unit inquires whether it obtains higher benefits than costs
from MFIs. Each unit follows its own objectives, and this limits how the rest of the units can
achieve their objectives. Better analysis of the performance of MFIs from the standpoints of the
poor will also examine performance from the standpoints of the other units of stakeholders.
Every unit depends on other units to achieve its objectives. The network of agency relations and
their agency costs restrict the assist MFIs can provide to the poor (Schreiner 1997).
Performance of the microfinance institution will be measured from the purposes of organization
point of view. Microfinance’s objective is to alleviate poverty. In the primary eras when MFI
began they were funded by donor finances that have a poverty alleviation objective. Therefore
the performance and achievements of the MFI was gauge on how far MFI reach to the qualified
poor people (outreach) and impact (how much the live of those people who access financial
services are changing as contrast to those who don’t access these services). But as the MF
industry develops in size, the demand for raised financing coupled with instability of donor funds
activate the issue of creating a sustainable MFIs that begin generating their own incomes and
covering their own cost of operating. The various viewpoints on which the microfinance
institution performance is to be assessed and measured has formed two opposing approaches but
having common goals school of thought regarding the microfinance institutions. The primary
approach is called Welfarists and the secondary approach also known as Institutionist.
Welfarists discussed that MFIs can succeed sustainability without attaining financial
sustainability. They argue that donations serve as a kind of capital and as such donors can be
considered as social investors. Unlike private investors who buy capital in openly traded firm,
social investors don’t require to make financial revenues. As a substitute these donor investors
achieve a social (intrinsic) return.
Welfarists tend to underline poverty eradication, put comparatively more weight on depth of
outreach compared with breadth of outreach and measure institutional achievement in
accordance with social metrics. This is not to express that neither breadth of outreach nor
financial metrics concern. Welfarists believe these points are significant, but they are lower
willing than Institutionist to lose depth of outreach to succeed them.
Welfarists are focused on a social bond types of institutions and emphasize the performance
evaluation approach of the MFIs are from the standpoint of customers (clients) particularly social
outreach and impact assessment. Targeted clients of this approach are very poor people ($1 per
day). Methodological approach of Welfarists is depending on subsidies.
The welfarists’ approach faces many criticisms as regards problems of sustainability issue, high
operation costs, various impact measurement methodologies, and generated refunding rates
below 50% and finally due to these problems leading to the failure and the missing of some
MFIs (De Briey, 2005).
Encouraged by international organizations namely the United Nations and the World Bank,
according to Woller et al. (1999) the institutionalists’ approach take into account that the one
finest means to reach the greatest number of the poor people without gain access to financial
services is to integrate microfinance institutions in the official financial system.
Institutionalists argue that microfinance have to perform on a commercial (profitable) base as
subsidized lending is not sustainable, financing limitations restricts potential and a lack of market
control means raised costs. Commercialization, they maintain, provides a win-win position in
raising outreach and sustainability while providing social benefits. Welfarists disagree with
commercialization because they believe it causes in institutions shifting away from their primary
mission of poverty eradication.
Institutionalists are focused on commercial contracts types of institutions and emphasize the
performance evaluation from the standpoint of institution particularly the broadness and
sustainability of the MFI. Targeted clients of this approach are micro-entrepreneurs close to the
poverty line ($2 per day). Methodological approach of Institutionalists is emphasis on financial
self-reliance or self-sufficiency of the MFIs. The institutionalists’ approach faces also some
criticisms that have customers’ selection bias (MFIs do not reach the very poor), high interest
rates and long term self-reliance strategy. But the Welfarists and Institutionalists approaches
have common goals on poverty alleviation.
As per congo (2002) stated that the performance measurements used differ significantly from
one author to another or from one institution to a different one, so they based on the
methodological approach, which, in order, depends on the strength of character (determination)
to give priority to the supply direction or to the demand direction of the financial intermediation.
The discussion between the two schools of thought is ceaseless and nowadays various
participants in the MF industry use both the welfarists and instututionist viewpoint to assess the
performance of microfinance institutions.
Microfinance institutions’ accomplishment can be appraised using social performance and
financial performance of the industry. According to CGAP (most widely used) a World Bank
based organization to consult MFIs (2009) discussed that at minimum the five common (core)
indicators to measure the performance of Microfinance institutions are: breadth of outreach and
depth of outreach, portfolio quality, financial sustainability and profitability, and efficiency and
productivity.
The financial performance indicators are normally ratios bring out from the financial reports of
the institutions (Balance Sheet, Income Statement and Portfolio Report).
For analyses this study considers into account these five core indicators to assess the financial
and operational performance of Dedbit microfinance institution. The performance of
Microfinance industry is also highly assessed in light of the institution’s context, level of
development and governance quality (that simply cannot be quantified). Remark where as the
MFI’s major strategic action may have unfavorable short term financial results but favorable
long term outcomes.
2.4.1 Outreach
According to Congo (2002) outreach is defined as the ability or the effort of a MFI to deliver
good quality financial services to reach to a huge number and type of clients. Tasks to increase
microfinance services to cover the people who are un-served and underserved by financial
institutions are categorized as outreach. The indicators of outreach performance are variations in
the number of clients, ratio of women clients, the amount of savings and deposits, the worth of
the outstanding loan portfolio, the average amount of savings and deposits, the average worth of
loans, etc. Outreach performance needs microfinance institutions to reach a large people
particularly the poor, and to have a significant and rising volume of activities (savings, credit,
insurance, etc.). This section is planned to collect information for MFIs to indicate how they are
serving their clients and assess their social performance. To measure outreach based on
Schreiner (2002) identifying six dimensions of outreach, namely; worth, cost, depth, breadth,
length, and scope, but among these in this analysis, I focus on two indicators that are the breadth
and depth of outreach. Outreach can be best measure in terms of breadth — number of clients
served and volume of services and/or depth — the clients poverty or socioeconomic level that
MFIs reach. Many scholars such as Christen, 1997; Hulme and Mosley, 1996; Rahy, 1998;
Matin, Hulme and Rutherford, 2000; discussed that more outreach indicates a decrease in the
cost of service and growths in income, eventually leading to sustainability of the MFIs.
2.4.1.1 Outreach: Breadth (number of clients served)

According to CGAP (2009), breadth of outreach is the number of customers (clients) or accounts
that are active at a specified period of time. Hishigsurem (2004) stated that the breadth of
outreach means the number of poor people served by a microfinance institution with in a given
period of time.
The total number of active clients includes loan clients (borrowers), voluntary saving clients
(depositors), and percentage of women clients and percentage of rural area clients and other
clients who are currently gain access to any financial services. This performance indicator is
more important than the total number of loans clients served within a period of time. With other
misrepresentations, cumulative numbers generate the MFI that provides short term loans
consider better than one that offers longer term loans, however the latter may be great important
for borrowers. To show actual service provision, membership based institutions should account
on active clients, not now the number of members: fellows may be not active for long years,
particularly in financial cooperative organizations.
A single client may contain multiple reports. All MFI information systems should be able to
follow and trace numbers of active accounts, whereas some are not able to remove twice-
counting in order to reach at the number of individual clients. In those cases, numbers of reports
is a tolerable indicator.
Several researches have used the number of borrowers like a measure of microfinance breadth of
outreach (Ganka, 2010; Mersland and Strom, 2009; Harmes et al., 2008). It is mostly implied
that the higher the number of borrowers the greater the outreach.
Logotri (2006) denoted that greater number of borrowers found to be the biggest sustainability
factor of the MFIs, in contrast, as per Ganka (2010) on microfinance institutions of Tanzanian
indicates negative and significant relations between financial sustainability and breadth of
outreach. Ganka infers on the end result that larger in number of borrower itself does not
increase financial sustainability of microfinance institutions. The cause could be improving
inefficiency because of improved number of borrowers. Though, according to Hartarska (2005)
stated that number of borrowers had no meaningful impact on financial sustainability of
microfinance institutions.
2.4.1.2 Outreach: Depth (client poverty level)

According to Hulme and Musley (1996), without the poor people the assumed MFI is no longer
different from a conventional bank. Their dispute is that outreach should not be measured by
presently total number of clients whereas it should quite be based on the number of poor clients
of the microfinance institutions. Moreover, as said by Ledgerwood (1999) the number of
borrowers or clients as a measure of outreach takes into account only the total number of clients
served from different services of MFIs without their relative level of poverty. Therefore, average
loan size has been used as a substitute measure of depth of outreach using relative poverty level
of clients.
Depth of outreach meaning the levels of poverty reached. It focuses on analysis of the type of
clients served and their poverty level that MFIs reach. Lafourcade et al. (2005), the depth of
outreach is defined as efforts to increased microfinance services to peoples not served by
financial institutions.
As per CGAP (2009) discussed that the majority of, but not all, microfinance sectors have
poverty alleviation as a clear or an explicit objective, and are like this needed to reach poor
clients of rural and urban areas. For such sectors, there are different tools for measuring poverty
levels of clients that MFIs reach, some of them costly and others cheap, but up to now there is no
common understanding or agreements on any one of them. If the sector does not use a more
advanced indicator, it should at a minimum account the following very beatify substitute for the
poverty level of loan or savings clients at a moment in time:
Average Outstanding Balance = Gross amount of outstanding loans or savings
Number of active customers or accounts
This indicator is usually indicates as a ratio of per capita Gross National Income (GNI):
Average outstanding loans or savings balance per customer

Gross National Income per Capital
The average outstanding balance comprises only loan amounts that clients have not until now
repaid to the MFIs or savings that clients have not withdrawn from the institutions. This point of
period number should not be mix up with total amounts loaned or deposited at the reporting time,
or with the average opening or initial amount of the loans in the portfolio.
Stating average balance as a ratio of GNI per capita takes into account a comparison of how
deeply MFIs from various countries reach down in their own national income allocations. Some
consider an average outstanding loan balance less than 20 percent of per capita GNI as an
approximate indication that clients are very poor. The MIX categorizes lenders or financers as
being MFIs if their average outstanding loan balance is not greater than 250 percent of per capita
GNI.
The stand- in for depth of outreach used in a variety of investigations (Cull et al., 2007; Gonzalez
and Rosenberg, 2006; Olivares-Polanco, 2005) is ratio of women borrowers and the average loan
size per borrower / GNI per capital. Lensink et al.,(2011), like this a higher ratio of women
borrowers also shows better depth of outreach, as lending to female mostly is associated lending
to the poor.
As regard to the average loan size per borrower / GNI per capita, though it is pertinent and can
compensate for variances in monetary units, it is whereas arguable. In fact, Schreiner (2001)
denoted that per capital GNP surpass in various nations the poverty line income. Consequently, it
no longer stands for the right proxy (substitute). To resolution this problem, we used the index
established by Adair and Berguiga (2010) which includes of comparing the average loan size per
borrower based on Gross National Income (GNI) per capita (AL) and the two poverty lines(PL)
income (1 and 2 $per day). As a result, this social outreach index, knowing more accurately the
target users of the MFI, is a qualitative variable with three modalities, which takes along
correspondingly one if AL less than PL1 imply that the MFI targets the very poor people, second
if PL1 <AL<PL2 AL shows the MFI targets the poor people and 3 if AL greater than PL2
indicates that the MFI targets the non poor people. As a result, the lowest average loan size per
borrower based on Gross National Income (GNI), the greatest a MFI is reach the very poor
people.
As per CGAP (2009), Average outstanding balance is approximately related to client poverty,
because well off (fairly wealthy) clients be likely to uninterested in lesser loans or deposit
accounts. However the correlation between account balances and poverty is distant from
accurate. Low loan or saving sizes do not necessarily mean poor customers. Similarly, increase
in average loan size does not necessarily denote that an MFI is affliction from basic mission.
Several MFIs have a progressive stepladder of loan sizes for clients. During an MFI matures and
progress slows, a smaller ratio of its customers are the first-time borrowers, and the average loan
sizes will increase even so there has been no alter in the market it is serving. Similarly, MFIs
occasionally find out that their limits on the size of first loans are unreasonable careful; relaxing
those limits makes loan size increase that has nothing to perform with leaving poorer clients.
Among the different social performance indicators currently being established are numerous
more accurate measures of client poverty level. These performance indicators are more costly to
apply, but when they are accessible or on hand they are much more significant than average
account size.
Donors who need to reach very poor clients should generally look for MFIs that now serve low
end clients, instead of demanding to encourage higher end MFIs to shift their market. Greatest
numbers of MFIs that concentrate on the very poor apply recognized tools to screen potential
clients by income level.
2.4.2 Portfolio quality (Loan repayment)
Anne-Lucie Lafourcade, (2005) discussed that the loan portfolio is a very significant asset of
microfinance institutions. Portfolio quality shows that the risk of loan delinquency and
determines future revenues and the ability of the microfinance institutions to raise outreach and
serve current clients.
Portfolio quality or Loan repayment is a measurement of actual paid back loans within expected
timetable over amount outstanding yet to be paid. Portfolio quality indicators refer to the loan
portfolio which is crucial to financial institutions. A said by Natilon, et al. (2001), microfinance
institutions does not collect its income at the time of sale (loan payment) but later, so the
institution must be worry concerning the quality lengthy afterward the sale.
CGAP (2009) technical guide discussed that portfolio quality is the best informative of the five
core performance areas. A retail moneylender’s ability to collect loans is essential for its
achievement: if delinquency is not maintained to very low levels, it can immediately turn out of
control. Additional, loan collection has confirmed to be a powerful proxy for overall
management competence. Overlong knowledge with assessing microfinance industries has
indicated that only some successful industries have poor repayment, and very few ineffective
industries have good repayment. More than any other indicator, this one deserves special care to
ensure meaningful and reliable reporting.
Portfolio quality is a measurement of financial health and loan recovery of the microfinance
institutions performance. Maintain good portfolio quality is very important for the following
reasons:
 The principal source of revenue for the MFI is its loan portfolio
 Reaching great number of clients cannot be succeeding without there is good portfolio
quality.
 It is MFIs responsibility to teach and communicate credit discipline among its clients.
 The MFIs provide viable & sustainable microfinance services. Poor quality of loan
portfolio will lead to losses to MFIs, making it hard to sustain microfinance operations.
 A decreasing PAR signals a healthy loan portfolio of the institution.
Unluckily, the reporting of loan collection is difficult and complex. Microfinance institutions
have used a range of percentages that measure very separate things. The terminology and
calculation approaches are not at all times coherent. Percentages (ratios) can confuse instead of
make clear performance if they are not calculated consistent with global standards. For that
reason, every time any measure and calculate of loan repayment, delinquency, default, or loss is
reported, the numerator and denominator of the ratio should be clarify very accurately.
Microfinance institutions’ self reported concerning loan collection performance frequently
minimizes the level of problems, mostly due to information system weaknesses instead of intent
to mislead. Loan collection reporting should be considered trustworthy only if it is confirmed by
a competent independent party.
The standard global measure of portfolio quality indicator in lending is portfolio at risk (PAR)
after a stated number of days:
PAR (x days) = Outstanding principal balance of all loans past due more than x days
Outstanding principal balance of total loans
The number of days (x) utilized for portfolio at risk measurement different. Within microfinance
institutions, 30 days is a popular limit. If the repayment timetable is apart from monthly, in that
case one repayment time - for instance week, fortnight, or quarter—may be used as replacement.
After any entire or half payment is overdue, the total outstanding balance of the loan is at greater
than common risk of non payback. Portfolio at risk (PAR) should not be confused with arrears or
overdue payments, which measure the worth of the past due amount instead of the whole residue
outstanding loan amount. PAR reflects the ratio of microfinance loan portfolio with one day or
more missed payment to total microfinance loan outstanding at a given time. It shows the degree
of riskiness of the total microfinance portfolio and quickest and dependable indication of
increased risk. Often the standard of portfolio quality is 5 %. Before disbursements of loan the
balance of power is with the MFIs but after disbursements of loan with the clients.
The PAR percentage should also consist of the outstanding value of the whole renegotiated
loans, including rescheduled and repaid loans, because they have larger than common risk,
particularly if any payment is ignore afterward the renegotiation.
Some immature or not well experienced MFIs and a lot of revolving funds, until now do not
have loan tracking systems that can create a portfolio at risk figure. Most of these, however,
should be able to compute loans at risk (LAR), an easier indicator that sum the number of loans
rather than their amounts. On condition that repayment is approximately similar for higher loans
and lower loans, loan at risk (LAR) will not vary a lot from portfolio at risk (PAR).
LAR (x days) = number of loans greater than x days late

Total number of outstanding loans
Both PAR and LAR can be operated not only by not including renegotiated loans, but also by
forceful use of write-offs, which eliminate past due or unpaid loans from the records or books.
When an MFI writes off a delinquent loan, that loan clear from the MFI’s books and hence from
PAR or LAR, which automatically creates the percentage view finer. So, it is important when
reporting these measures to contain an explanation of the MFI’s write-off policy. (For example,
“the microfinance institution does not write-off loans” or “the microfinance institution writes-off
loan amounts that remain unpaid more than six months after the final loan payment was
originally due.”) When reporting PAR, it can be important to consist of a write-off percentage
additionally, although the write-off percentage is not used instead PAR.
Cash collected in the period from borrowers

CRR = Cash falling due for the first time in the period under
the terms of the original loan contract
As a substitute to PAR, the current recovery rate (CRR) can be calculated by most microfinance
institutions and provides a good representation of repayment performance -but given that it is
explain very conscientiously.
Current recovery rate (CRR) can be compute using principal payments only or principal with
interest. Difference in delayed payments and prepayments cause CRR to jump almost more than
short periods, frequently recording greater than 100%. Therefore, it must be used to a period long
enough to ease random or seasonal variations—usually a year.
Current recovery rate (CRR) and variants of it are mostly got the wrong idea. It is attractive, but
poorly wrong, to consider of current recovery rate as a complement of an annual loan loss
percentage. For example, if the microfinance finance institutions reports a 95 % collection rate,
one may be interested to suppose that its annual loan losses are 5 % of its loan portfolio.
Actually, if a MFI creation 3 month loans along with weekly payments has a 95 % collection
rate, it will miss well over a third of its portfolio annually. Therefore, the indicator of CRR
should never be applying without changing it into an annual loan loss rate (ALR). The
following is a straightforward formula:
ALR = 1 – Current Recovery Rate x 2

T
Whereas T is average loan term stated in years
This computation provides a nice approximation of the ratio of a microfinance institution’s loan
portfolio that it is losing to default every year. ALR is very good reliable because it is based on
actual cash flow however PAR, LAR, and write-offs can be misleading by lenders’ accounting
system practices.
Portfolio quality or loans repayment is a vital signal of MFI’s performances. Weak and bad
collection of microloans is nearly at all times noticeable to management and systems
weaknesses.
The strongest repayment stimulus for uncollateralized microloans is most likely not peer
pressure however reasonably the clients’ want to keep or to maintain their upcoming gain access
to a loan service that they and their families obtain very beneficial: therefore, healthy or higher
repayment rates are a strong indication that the loans are of genuine and actual value to the
clients.
To conclude, more delinquency creates financial sustainability unachievable. As a poor law of
thumb when dealing with uncollateralized loans, PAR or LAR (30 days or one payment period)
higher than 10 %, or ALR higher than 5 %, must be reduced quickly or they will spin out of
control.
2.4.3 Financial Sustainability and Profitability
Financial sustainability of microfinance institutions is almost certainly the main measurement of
microfinance sustainability. Thapa et al. (1992), define that the ability of MFIs to cover all their
costs from their own making revenues from performances without subject to external support or
subsidy. Dunford (2003) also express financial sustainability as the ability to maintain on going
towards microfinance objective without depending on continued donor support. These
definitions focus on one fact, that is, the ability to have confidence in self-operation. The
definitions also indicate the probability of producing income from the microfinance
performances.
According to Meyer (2002), the poor people demanded to have access to financial service on
long run basis instead of just a short period financial support. Short-time loan would deteriorate
the welfare of the low income & poor people. Meyer (2002) also indicated that the financial un-
sustainability in the MFI happens because of low repayment rate or un-materialization of funds
pledged by donors or governments.
As stated by Meyer (2002a), there are two levels of financial sustainability that we could give
attention or observe in measuring microfinance institutions performance. The first one is lower
level of achievement in which the microfinance institutions succeeds operational self-
sustainability (OSS). This implies that the operating revenue is adequate enough to cover
operational expenses such as salaries, loan losses, supplies, and other general & administrative
expenses. The second one is also called financial self-sustainability which is a high standard
measure; because it indicates that the MFIs can cover the costs of funds and other types of
subsidies or supports received when they are valued at market prices.
Barres et al. (2005) denoted that the dissimilarity between operational self-sustainability and
financial self-sustainability measures are the ability of the MFIs to cover their operating
expenses and their ability to preserve the worth of their equity in relation to inflation, and to
performing and expand without subject to external support or subsidies. As stated by Barres
(2005), general speaking, operational self-sustainability measures the ability of microfinance
institutions to survive, while financial self-sustainability is a better sustainability indicator of the
MFIs ability to grow. For that reason, microfinance institution’s financial self-sustainability is
very important for the microfinance institutions; it is a sign of that the microfinance institutions
would yet breakeven if the whole subsidies would be eliminate.
According to AEMFI (2007), operational self-sustainability (OSS) takes into account the extent
that financial revenue covers financial expenses, impairment losses on loans and operating
expenses without performing adjustments for non lending activities or other revenue like
donation/grant and government support.
Operational self-sustainability (OSS) = Financial revenue__________________

(Financial expense +impairment losses on loans +operating expenses
According to Meyer (2002:4), measuring financial self-sustainability of MFIs demands that

maintain better financial accounts and follow accepted accounting practices that give full clarity
for revenue, expenses, loan recovery, and potential losses.
Financial Self-sufficiency (FSS) is a subsidy-adjusted indicator frequently employed by donor-

funded microfinance NGOs. It measures the ability of the MFI to cover its adjusted costs from
adjusted revenues (largely interest received) without grants (donation). MFIs with FSS exceeding
100% rates is indicating of a long-run sustainability (financially self-sufficient) and also if the
FSS is below 100%, at that point the MFI has not still attained financial breakeven.
Financial Self-sufficiency (FSS) = Adjusted financial revenue (excluding grants)_______

Adjusted (financial expense +impairment losses on loans +operating expense)
In any commercial institutions, the widespread measures of profitability are return on asset
(ROA), which reflects the institution’s net operating income as a ratio of average total assets.
This means ROA measures how MFI utilize and manage its assets to produce optimum its
profits. A mature MFI should produce a positive ROA. And another indicator is return on equity
(ROE), which reflects the institution’s net operating income as a ratio of average total equity (or
net assets). This also measures to determine what the microfinance institution’s returns produced
will be on owners’ equity investment. These two are good indicators for unsubsidized
institutions. However donor interferences more usually manage institutions that receive large
subsidies, mostly in the kind of donations/grants or loans at lower-market interest rates. In such
situations, the key question is whether the microfinance institution will be able to maintain itself
and develop when ongoing subsidies are no longer available. To find out this, usual financial
information should be “adjusted” to indicate the impact of the current subsidies.
Three main types of subsidy-adjusted indicators are in widespread use: financial Self-sufficiency
(FSS), Adjusted Return on Assets (AROA), and the Subsidy Dependence Index (SDI).
ROE = (Net Income After tax)

Average total Equity
AROE = (Adjusted Net Income After tax)

Adjusted average total Equity
ROA = (Net Income After tax)

Average total Assets
AROA = (Adjusted Net Income After tax)

Adjusted average total assets
The negative values AROA and AROE show the performance of microfinance institutions are
not profitable after adjustment for subsidy. Positive rates of AROA and AROE reflect that the
microfinance institutions have been able to perform as a profitable and sustainable microfinance.
A study conducted by Peter (2007) indicates that a negative relationship between the financial
sustainability of an institution and the level of subsidies received every quarter. When the level
of subsidy income increases, the respective institution’s financial sustainability decreases. Many
have discussed that subsidies support microfinance institutions reach the demanded operational
size. However, as mentioned in many previous researches, these institutions may really be doing
less benefit as they receive additional assistance from donors and governments. Moreover,
institutions with great subsidy income have higher level of loans outstanding that is larger scale.
This result may reflect the crowding out effect described above - a rising amount of donations
(grants) and other subsidies are being directed to microfinance institutions that have already
achieved a level of operations demanded for their own sustained success. Likewise, Kereta
(2007) found that there is a negative relationship between financial sustainability and
dependency ratio, and he additional clarifies as reduction in dependency ratio (as dependency
ratio measured by the percentage of donated equity to total capital) decrease over the years in the
MFI industry is an indication that microfinance institutions can be self sustainable, profitable,
and meet their social missions and letting the industry to be financial self-sufficient.
2.4.4 Efficiency and productivity

A small number of microfinance institutions can keep and improve the financial services they
provide in the long run if not they can cover all of their expenses and produce net profit.
Efficiency is a one with several gauges used as internal determining factor of MFIs performance.
As study by Woller (2000) shows that the efficiency reflects to the ability to make the highest
productivity at a given quantity of input, and it is the main effective methods of providing low
amount loans to the poorest in microfinance institutions context. This contains reduction of cost
and maximization of revenue at a given level of performance, and it has a long term impact on
financial sustainability of microfinance institutions. Therefore, efficiency can be calculated using
its cost administrative (for example, cost per number of borrower) and productivity (for example,
the number of borrowers per personnel) ways.
According to Woller (2000) discussed on financial viability of village microfinance to review the
former operation and upcoming prediction of village microfinance shows that the number of
borrowers and cost per borrower were discovered to be among the factors highly favourable
related with financial sustainability of MFIs. After two year Woller and Schreiner (2002)
assessed the determinants of financial sustainability of the MFIs and it was discovered that
productivity was significant determining factor of profitability of the MFIs. As study conducted
by Ejigu (2009) found that microfinance institutions age relates optimistically or positively with
efficiency, productivity, the use of debt investing (commercialization) and operation self-
sustainability of the MFIs. Besides, a later research made by Ganka (2010) on Tanzanian rural
microfinance discovered a pessimistic or negative and strongly numerically significant
correlation between Productivity (number of borrowers per worker) and financial sustainability
of the MFIs. He explained the reasons that the staffs of rural microfinance institutions are
inefficient because they deteriorate to retain borrowers when their number increases creating un-
sustainability of the microfinance institutions. Even though, Christen et al. (1995) found no
relationship between productivity and financial sustainability of the MFIs. Moreover, Ganka
(2010) denoted that numerically insignificant correlation between cost per borrower and
financial self sustainability of the institutions.
Efficiency and cost aspects should be take into account to minimize the cost per unit of financial
services offer at retail finale, to allow institutions to charge a reasonable but yet sustainable cost.
Two indicators are the most widely used to evaluate whether a retail microfinance supplier is
cost effective. The two percentages reflects to nonfinancial operating expenses of the institutions.
They do not consist of interest paid on the MFI’s liabilities or loan loss provision expenses. All
type of institution can compute both ratios.
Two indicators such as operating expenses ratio (OER) and cost per client (loan) are
recommended to determine and measure whether a retail microfinance service provider is cost
effective. Both i.e. operating expenses ratio (OER) and cost per client (or loan) ratios focus on
nonfinancial operating expenses of the institution. They excluded interest paid on the
microfinance institution’s liabilities or loan loss provision expenses. All type of institution can
compute both.
Very often used indicator of efficiency reflects to nonfinancial expenses as a ratio of the gross
loan portfolio.
Operating expense ratio (OER) = Personnel and Administrative expense
Period-average gross loan portfolio
Operating expense ratio (OER) is the greatest number of microfinance institutions used to
calculate of efficiency. It permits a fast contrast between an MFI’s portfolio return in relation to
its personnel and administrative expenses—how much it generates income on loans versus how
much it spends to produce them and control them. Its main problem is that it will produce a MFI
operating less amount of loans look worse than an MFI operating great amount of loans, even if
the two are efficiently managed. So, a suitable alternative is a percentage that is based on clients
served, not amounts loaned.
Cost per client (or loan) = Personnel and administrative expense__________
Period-average number of active clients (or loans) [x GNI per capita]
Cost per client (or loan) reflects to how much it costs the retail financial service offer to serve
individual client or loan. Because it does not punish MFIs creating smaller loans, cost per client
is an improve efficiency percentage for contrasting the microfinance institutions. If one desires to
standard the MFI’s cost per client opposed to identical MFIs in other nations, the percentage
should be denoted as a ratio of per capita GNI, which is used as approximate substituted for local
personnel costs.
Evaluate in relations of costs as a ratio of amounts on loan, small loans are more costly to
produce than huge loans. Merely a few very efficient MFIs have an operating expense ratio
(OER) less than 10 %; commercial banks creating larger loans mostly have operating expense
ratios (OERs) good less than 5 %. The average operating expense ratios (OER) of MFIs
reporting to MIX Market for 2006 was approximatly19 %.
When a microfinance market begins to mature and MFIs have to compare for clients, price
rivalry on interest rates will mostly press the MFIs to make more efficient. But several MFIs do
not until now encounter much original rivalry. External intensive care of efficiency is
particularly crucial in those situations. New or quick-development MFIs will look low efficient
by both of these measures, because those MFIs are disbursing for personnel, infrastructure, and
overhead that are not yet making at maximum capacity.
Productivity usually measured in terms of borrowers per staff member, productivity is a
combination of outreach and efficiency. Productive MFIs increase services with reduce
resources, including staff and funds. The main essential productivity indicators are such as: loan
officer productivity ratio and personnel productivity.
2.5 The Overview of the Microfinance Sector in Ethiopia

According to Ethiopian proclamation No.40/1996, Micro financing business is defined as “an
activity of extending credit, in cash or in kind, to farmers or urban small or micro entrepreneurs,
the loan size of which shall be fixed by the bank’’ and Micro Finance Institutions means ‘’ a
company licensed under this proclamation to engage in micro financing business in urban &
rural areas.’’
According to Ethiopian Microfinance Business Proclamation No. 626/2009 defined that micro-
financing institution mean a company licensed under this Proclamation to engage and participate
in micro financing business in the areas of rural and urban region in some or all of the following
activities:
 Accepting both voluntary and compulsory savings in addition to demand and time
deposits;
 Extending credit to rural and urban people engaged in other related activities along with
micro and small-scale rural and urban entrepreneurs;
 drawing and accepting drafts payable inside Ethiopia;
 micro-insurance business as given by directive to be released by the National Bank of
Ethiopia;
 buying income-generating financial instruments like treasury bills and other short term
instruments as the National Bank of Ethiopia may ascertain as applicable;
 purchasing, maintaining and transferring any movable and immovable assets including
building for execution its business;
 supporting profit generating projects of urban and rural micro and small scale workers;
 provide marketing, technical, managerial, and administrative advice to clients and
assisting them to get services in those fields;
 management of funds for micro and small scale businesses;
 rendering local money transfer services;
 rendering financial leasing services to peasant farmers, micro and small-scale urban and
rural entrepreneurs in line with the Capital Goods Leasing Business Proclamation No.
103/1998; and
 Participating in other business activities as stated by directives of the National Bank of
Ethiopia from period to period.
The main objective of a micro-financing institution shall be to collect deposits and extend credit
to urban and rural farmers and people participated in other the same activities in addition to
micro and small scale rural and urban entrepreneurs, the maximum amount of which may be
determined by the National Bank of Ethiopia.
Ethiopia is one of a country that has been indicating imposing performance in microfinance in
Africa. Up to 1996, the offering of microfinance services in Ethiopia has been done mainly by
donor financed programs through NGOs and government organizations. This practice has
harmed loan collection performance leading to enormous default and so deteriorated the
improvement of self sustaining microfinance institutions. Consequently, the primary licensing &
supervision of microfinance business was issued in 1996. This proclamation was again amended
and substituted by Microfinance Business Proclamation no. 626/2009. Nowadays, there are 31
MFIs in the country and serving about 2.8 million clients. MFIs renders broad range of financial
services including lending, savings, money transfer, collecting taxes on behalf of tax authorities,
paying pension payments etc. The assets of largest MFIs are comparable to those of the smallest
private banks
As of September 30, 2012, thirty two microfinance institutions were serving about 2.9 million
rural and urban low income people. The institutions have been rendering different financial
services in all of the regions. The institutions mobilized savings to the tune of Birr 5.3 billion in
the form of compulsory and voluntary savings. Moreover, total assets, total outstanding loan, and
total capital stood at Birr 13.7 billion, Birr 9.8 billion, and Birr 3.9 billion respectively, indicative
of the significant growth compared to the corresponding period of the previous year.
2.6 Empirical literature review

The contribution of MFIs as a financial intermediary to service the financial demands of un-
served or underserved of people in rural and urban areas of the society in all over the world is
improving from period to period.
One of the studies in the global microfinance industry is the research conducted by Cull et al.
(2007) on the financial performance and outreach of foremost microfinance based on data on 124
MFIs from 49 developing countries gain facts as follow: in relations of financial viability
indicators, average financial self-sufficiency of 1.035 which means MFIs are becoming
financially self-sufficient considering that the minimum requirement for MFIs to breakeven point
is 1 or 100%, the mean operational self-sufficiency of MFIs was 1.165 which denotes the MFIs
are covering their expense using generate income. The average adjusted ROA of -0.027 implies
MFIs are not produce favorable return on their investing. They additional detected Average loan
size to GNP per capita which is outreach depth indicator of 0.676, ratio of women borrowers of
64.9%. Lastly their results shown the average GLP to asset percentage of 68.9%, mean real gross
portfolio yield (average interest rate) 34.8% and employees expense to total asset percentage of
18.55% for MFIs comprised in the research.
Research made by Manos and Yaron (2009) on the major issues in evaluating the performance of
Microfinance institutions; their finding that there is a trade-off between outreach and
sustainability in the short term. The researchers’ analysis was based on Production Possibility
Frontier (PPF). As stated by the investigators’ results, in the short term whenever the MFIs are
on the production frontier there is desirably a trade-off between improving financial
sustainability and expanding outreach. In contrast, in the long term it is likely to increase both
outreach and financial sustainability by using scale of economies, advancing operational
methods, and starting innovations.
The research made by Hassan and Sanchez (2002) on efficiency analysis of MFIs in developing
countries of the world using data 45 MFIs from regions of Latin America, South Asia and
MENA. Their assessment was using data envelopment analysis (DEA) based on 5 year data in
conditions of both production and intermediation method. Their studies indicate that South Asian
MFIs have greater efficiencies than their equivalents in Latin America and MENA regions. The
cause of inefficiency in MENA and Latin America are clear technical which shows that MFIs in
the regions are either degenerative (wasting) resources or are not making sufficient outputs.
Hence, the researchers also recommend MFIs to improve their pure technical efficiencies so as to
make the most of social wealth.
As per Nawaz (2009) conducted a research on Efficiency and Productivity of Microfinance:

Including the role of subsidies on 204 Microfinance Institutions in 54 countries using Data
Envelopment Analysis and Malmquist index as analysis technique. His result have disclosed an
average 1% rise in entire factor productivity with subsidy and an average 0.8% reduce in total
factor productivity without subsidies.
The research paper conducted by Lafourcade et al. (2005) about the outreach and financial
performance of MFIs in Africa that, distinct MFIs from the other of the world areas, African
MFIs have a greater number of savers than the rest regions of the globe. On the other hand to this
outreach breadth in terms of borrowers in Africa is distant behind their counterparts in South
Asia, East Asia and the Pacific. Alike, outreach in Africa differs by region. East Africa region
highest the outreach scores with 52 percent of all African savers and 45percent of all African
borrowers. This highest score is the result of the existing of two large borrowing institutions in
Ethiopia namely Amhara Credit and Saving Institution (ACSI) and Dedebit Credit and Saving
Institution (DCSI) and the largest saving institution in Kenya (Kenya Post Office Saving Bank
KPOSB). The depth of outreach evaluated by a measurement of women borrowers sub Saharan
Africa has 61 percent women borrowers which is the lowermost compared to 86 percent in south
Asia, 80 percent in MENA, 76 percent in East Asia and pacific. Regarding financial
performance, compare with the rest world regions MFIs in sub- Saharan Africa indicate the
lowest Average ROA of 2 percent whereas MENA region showed 2-5 percent, Latin America
and the pacific region indicated 5-8 percent and Asia registered 8-10 percent.
Within African areas MFIs in East Africa are the best profitable region (ROA of 3.4 percent),
and those in West Africa region also make favorable revenues (ROA of 1.7 percent). Whereas
MFIs in the region of Central Africa (ROA of -0.6 percent), South Africa (ROA of -9.7 percent)
and Indian Ocean (ROA of -3.3 percent), produce unfavorable revenues.
2.7 Empirical Evidence Ethiopian Scenario

However the availability of writings on performance and sustainability of Ethiopian
microfinance industry is limited, studies conducted by Befekadu B. Kereta in (2007), Kidane A.
in (2007) and Letenah Ejigu in (2009) are appreciably encouraging. According to Befekadu B.
Kereta (2007) conducted a research on Outreach and Financial Performance Analysis of
Microfinance Institutions in Ethiopia and his results indicates that from the institution's outreach
angle increases on average by 22.9 % in the year from 2003 to 2007. But MFIs reach to the very
poor and a disadvantages person particularly to women is limited to 38.4 %. With regard to
financial sustainability angle of the industry finds that MFIs are operational sustainable as
evaluated by return on asset and return on equity and the institution's profit performance is
increasing over time. Likewise, using dependency percentage and Non-performing Loan (NPLs)
to loan outstanding ratio confirms the research that MFIs are financial sustainable with favorable
average NPLs ratio of 3.2 % in the period. Lastly, the study finds no evidence of trade-off
between outreach and financial sustainability for Ethiopian MFIs case.
The study conducted by Kidane (2007) on outreach and sustainability of Amhara Credit and
Saving Institution (ACSI) Ethiopia indicates that ACSI has served greater than half a million
clients. More than 1.6 million loans have been paid value Birr 1.5 billion. By year 2005, the
institution was operationally and financially self sufficient at 119.9% and 115.3% respectively.
ACSI is among a few MFIs that are able to attain the maximum efficiency at the minimum cost
per borrower. The operating expense was as low as 5 cents in the year 2005. ACSI also has a
large portfolio quality, as delinquency percentages are about 1.9%.
The research paper conducted by Ejigu (2009) on performance analysis of a sample MFIs of
Ethiopia and he indicate on the following issues. First, the MFIs are not levered appropriately as
compared to their counter parts. Second, Ethiopian MFIs in serving women borrowers are poor
performers when compared to else MFIs. Third, all MFIs are also poor actors at Average loan
size per GNI standard. Forth, With regard to breadth of outreach gauged by number of borrowers
all MFIs work for higher number of borrowers than their industry average. Fifth, the size of the
institutions affects profitability and sustainability optimistically. Finally, Ethiopian MFIs are
efficient as gauged by operating expenses to gross loan portfolio (GLP) and cost per borrower
ratio and also productive gauged by borrower per worker of the institutions.
A research studied by Pfister M. W., Gesesse D., Mommartz R., Amha W., Duflos W., Steel E.
(2008) conducted on access to finance in Ethiopia shows that Ethiopian microfinance has made
meaningful improvements over the past years, reaching around 2 million clients in a country of
74 million people. However, financial services for the low-income people, poor farmers and
MSMEs are still typified by limited outreach, great transaction expenses for clients, a commonly
weak institutional ground, weak governance and insignificant ownership structure in addition to
dependence on government and mother NGOs.
The above facts sufficiently summary the contributions and problems of micro finance
institutions. The researcher will make an attempt here to assessment the whole literature attached
to have a detail drawing of the findings, conclusions and recommendations forwarded by these
studies with all degree that it is going to help to identify the gaps in the research.
2.8 Challenges of Microfinance Institutions in Ethiopia

The Microfinance Institution in Ethiopia is growing with an incredible speed changing the lives
of the poor. Besides the good things, according to Wolday (2008), Befkadu (2007), Fikirte
(2011) and Woldemicheal (2010) stated below are some challenges faced by MFIs.
 Internal challenges such as shortage of loan able funds for further expansion, high turnover
of employees, poor customer handling, poor documentation, not use computerized system,
no training given by the institutions, the institutions couldn’t consider the customer
complaints and don’t take corrective action. ; and external challenges such as high credit risk
due to poor loan repayment, high competition with conventional banks and improper
interference of third party in the decision of loan approval (Fikirte K. Reta, 2011)
 Illegal government and NGO operations, which spoiled the market. (Woldemicheal, 2010)
 Limited outreach particularly for femal (Befekadu, 2007)
 Limited in product development and innovations due to the regulatory framework influencing the
type and development products; the owner (mother NGO, government or shareholders) not clear
defining the products; absence of competition; high risk and high cost developing new products; and
limited capacity of the institutions to develop financial products ( Wolday Amaha, 2008).
 Rural agriculture related challenges due to seasonality nature of the agricultural loans are
creating pressures on the markets; absence of well developed small, medium or large scale
irrigation practices; the presence of recurrent natural disasters such as drought; unmatched
demand for loans with the entrepreneurial skills of individuals; absence of well qualified
technical trainings to MSE and package borrowers; untimely and too much expectations
from DECSI by the stakeholders; higher costs of borrowing from banks might lead for
major changes in the cost structure (Ataklti Kiros, 2007).
CHAPTER TREE
METHODOLOGY OF THE STUDY
3.1 Introduction
The aim of this research is to measure the financial and operating performance of DESCI. This
study is a historical research based on case study method. In selection of the sample unit, the
convenience sampling technique is employed.
3.2 Description of the study area-DECSI

As stated by National Bank of Ethiopia as at June30, 2011, there are 31 MFIs operating through
498 branches and 635 sub-branches in Ethiopia which serving about 2.8 million clients as
compare with less than 0.8 million bank clients and 0.3 million insurance clients. MFIs offer
extensive of financial services comprising lending, savings, insurance, money transfer, collecting
taxes on behalf of tax authorities, paying pension payments etc to low income people and clients.
MFIs developed within less than 20 years in Ethiopia and are the well known financial services
providers for the poor people in the urban & rural areas. The government support MFIs by means
of tax exemption and other empowerment processes. Three Ethiopian MFIs such as Dedebit
Credit and Saving Institution (DECSI), Amhara Credit and Saving Institutions (ACSI) and
Oromia Credit and Saving Share Company (OCSSO) are on the top 10 list in Africa and the
largest MFIs in Ethiopia. The National Bank of Ethiopia regulates and controls MFIs, Banks and
insurers.
As per the study operated on the socio-economic condition in specific sample woredas of Tigray
Regional State in 1993, the lack of financial institutions which can offer financial services to the
poor was one of the problems that delayed the task of reintegration and progress activities. The
study custom-made by the Relief Society of Tigray /REST/ disclosed the important of launching
this institution with the intention of full contractual financial services can be supplied to the poor
households. Therefore, Rural Credit Scheme of Tigray, by way of one development part of
REST, was established in 1994. This was afterward named as Dedebit Credit and Saving
Institution /DECSI/. After 3 years of its task, Dedebit Credit and Saving Institution /DECSI/ was
reregistered in the kind of a Share Company in 1997 subsequent the proclamation of the National
Bank of Ethiopia. With such duty, DECSI is the only institution which has been operating
extensively in rural and urban Tigray for the past 18 years. DECSI was established in 1997 with
a total capital of $0.5million, has a total asset of $200 million.
At this time, DECSI has some 700,000 savings clients and 420,000 credit clients. A loan
collection rate of DECSI is 98%. It has 148 branches in Tigray & elsewhere. Dedbit
microfinance institution participates in innovative initiatives such as the prison project, TOT for
female, and 50% of its clients are female directed businesses and households. Lends significantly
for investments and productive businesses and does not expect collateral from low income
households and micro, small and medium enterprises.
The major objectives of DECSI are:

 To develop food securities at family level both in the rural and urban areas.
 To make job opportunities to the jobless portions of the population through supporting micro,
small and medium enterprises in the Tigray region.
 To motivate the regional economy through providing sufficient and cost-effective financial
services and creates financially secure and sustainable institution.
Dedebit Microfinance /the so called DECSI/ is a share company established compliant with the
obligations of the National Bank of Ethiopia. The owners (share holders) of the institution are the
government of Tigray Regional State, the Relief Society of Tigray (REST), Women’s
Association of Tigray, Farmers’ Association of Tigray and Youth Association of Tigray.
Currently, it is delivering its financial services through functionally decentralized 122 sub
branches, 9 main branch offices and 17 micro finance collateral based branches of the institution.
The existing number of staff has also reached more than 2000. Besides, it opened branches in
Addis Ababa and Gonder and it is on providing remittance services from abroad. DECSI offer
various financial services in the rural and urban areas of Tigray region. At present, DECSI is
rendering four main types of financial services namely credit, saving, money transfer and
pension Payment. All loans are processed, approved, disbursed, and followed-up at this level
along with the mobilization of savings and deposit withdrawal services (AEMFI.2000).
http://www.ethiopianreview.com/pdf/001/brochure.pdf
According to Ebisa Deribie (2013) denoted that in the year ended of 2011 the total number of
active borrowing clients of the microfinance institutions in Ethiopia reached over 2.4 million
customers and the total credit extended by all microfinance institutions amounted to Birr 6.9
billion. Out of these, the numbers of borrowing clients are 396,648 and the amount of loan
provided is Birr 1,849,942,011 for DECSI. The market shares based on the number of borrowing
clients are 16.1% and also the market share in terms of the total loan provision are 26.9% for
Dedebit Credit and Savings Inst (DECSI).
Organizational Chart of DECSI
GENERAL ASSEMBLY
BOARD DIRECTORS
GENERAL MANAGER MANAGEMENT COMMITTEE
MANAGEMENT AUDIT SERVICE

INFORMATION SYSTEM (MIS)
PLANNING & DUTY GENERAL FINANCE HUMAN

BUSINESS MANAGER DEPARTMENT RESOURCES
OPERATIONS DEPARTMEN
TREASURY
PLANNING & & BUDGET PERSONNEL
BRANCHES (26) ADMINISTRA
PROGRAMING DIVETION
TION
TRAINING
SUN-BRANCHES GENERAL
BUSINESS DEV’T
(122) ACCOUNTS
DEVELOPMENT DIVEVISION
GENERAL
SERVICE
3.2 Research Design
The objective of the research is to measure the financial and operating performance of DESCI.
This study is a historical research based on case study approach. In any types of research study,
the methodology /research design/ to be pursued is decided by the nature of the problem
statement or more specifically by the research objectives. Here in this case study, the
methodology will be follow largely of descriptive approach. Descriptive approaches is a technique
used to organize and summarize a set of data in concise way; helps to identify the general features
and trends in a set of data and extracting useful information; and also it is very important in
conveying the final results of a study. Example: tables, graphs, numerical summary measures.
The descriptive approach will be used relating to elements of the main operations (both financial
and nonfinancial), the financial ratios and trends of ratios. This is to denote that the study will be
employed both qualitative and quantitative designs.
3.3 Types of Data sources

Both primary and secondary source of data were used. Secondary data sources have been from
publicly available third- party agencies such as MIX (Microfinance Information eXchange)
Market Inc. website (www.themixmarket.com), journals, data from book, publications, internets
and reports of various governmental and nongovernmental organizations such as National Bank
of Ethiopia and AEMFI (Association of Ethiopian Micro Finance Institutions). To support and
improve the quality of the secondary data, primary data has been used.
3.4 Method of Data Collection

The data for this study is mainly based on secondary data sources. Secondary data has been
gathered from DECSI audited annual financial statement reported to the MIX market Inc.
website (www.themixmarket.com), journals, annual and quarterly bulletins, news papers, data
from book, publications, magazines, reports of different governmental and nongovernmental
organizations like AEMFI (Association of Ethiopian Micro Finance Institutions), and National
Bank of Ethiopia. To support and improve the quality of the secondary data, primary data has
been collected through unstructured interview with the head quarter workers (officials) of
Dedebit microfinance institution to obtain the important information for the research.
As it is mentioned in the above sections, the study has been conducted to evaluate the financial
and operating performance of DECSI’s; therefore, most of the data important for analysis were
secondary in nature, which has been collected using personal review of the preceding stated
sources of audited financial statements of the institution.
3.5 Methods of Data Analysis and Interpretations

The purpose of the analysis is for formation of vital conclusions that indicate the researcher’s
interest of inquiry expressed right at the starting of the study. Based on the general concepts, the
statement of the objective of the institution existence, and their real practices; strengths and gaps
have been identified and analyzed using qualitative and quantitative analysis. That is, ratio
analysis and trend analysis of broad & deep outreach, sustainability & profitability, portfolio
quality and efficiency & productivity performance of DECSI over time (comparative analysis)
have been included as part of quantitative analysis. Under qualitative analysis assessment of
DECSI operation has been analyzed based on the workers’ (officials’) response and the
secondary data collected from the audited financial statements reported and documents given to
website www.themixmarket.org.
The data that have been collected using the above methods i.e., from primary and secondary
sources will be analyzed through different techniques. At the beginning, the collected data has
been coded in a means that is simple for analysis. Secondly, the arranged data have been
analyzed using different statistical tools of data processing such as tables, charts, graphs and
percentages. Besides, techniques of financial analysis, such as ratio analysis and trend analysis
have been used to address the scientific evidence in financial and operating performances of
Dedebit microfinance. The ratios were interpreted to determine the outcome of the analysis. To
state performance of MFI very well, five years data from 2004 to 2008 were used to saw the
trend in performance of DECSI.
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSION
4.1 Introduction
Data collected were analyzed using different financial and operating performance indicators and
ratio analyses were applied to evaluate the trend in performance of DECSI considered in this
particular study. The findings presented below are produced and analyzed from the sum audited
financial statements of DECSI reported to the Mixmarket.org from the period of 2004-2008. In
this section, the research paper states findings of the study on performance of outreach, portfolio
quality, financial sustainability and profitability; and efficiency and productive of DECSI.
4.2 Financial and Operating Performance of DECSI in the year 2008
In the following sub portions the study tries to see the performance of DECSI from different
viewpoints in the year 2008. This allows the reader to observe how the institution performing
well or not in order to achieve the general objective of the institution and this portion also
assesses the DECSI’s performance by contrasting a year with other year.
But at these times the performance of microfinance institutions is being measured by different
measurements. For instance Richard Rosenberg (CGAP) has denoted that core performance
indicators of microfinance institutions written for staffs who design or monitor projects that fund
microfinance institutions (MFIs). He offers basic tools to measure performance of microfinance
institutions in a few core areas: Breadth of Outreach: number of clients being served; Depths of
Outreach: poverty level of the clients; Collection performance: performance of the microfinance
institution in collecting its loans; Financial sustainability: profitability to maintain and expand
services without continued injections of subsidized donor funds, Efficiency; performance in
controlling the administrative costs. These are general are in which the performance should be
considered and these can be further elaborated in detail based on Ledgerwood (1999) ways of
measuring the performance of MFI. These are:
Performance of DECSI is assessed based on three points of view of the triangle; these are
outreach to the poor, financial sustainability and profitability, portfolio quality (loan repayment)
and finally efficiency and productivity. In the next part it first presents outreach of DECSI.
4.2.1 Outreach performance of DECSI in the year 2008
Outreach as used in this research paper is the effort by microfinance institutions to extend loans
and financial services to an ever-wider clients (breadth of outreach) and particularly toward the
poorest of the poor people (depth of outreach). Breadth of outreach is the provision of significant
benefits to large numbers of a particular target individual or group and also depth of outreach is
the provision of significant benefits to particularly disadvantaged peoples or members of a
broader target individual or group. According to CCAP (2009) stated that the greatest
measurement of outreach breadth is the number of active borrowers and the measurement of
outreach depth (poverty level of client) is outstanding gross loan portfolio. Outstanding gross
loan portfolio is concerned to client poverty because rich clients tend to be indifferent in small
loans or deposit accounts. In additions, the Micro Banking Bulletin (MBB) uses ratio of women
clients, average outstanding balance or Average loan balance per borrower and the total amount
of savings or deposits as substitute to measure the outreach performance of the microfinance
institutions.
For this study to assess outreach performance of DECSI and access to the poor people in the year
2008 is seen by taking into consideration seven main factors of outreach these are number of
active borrowers served, percentage of female borrowers involved in it, gross loan portfolio,
Average loan balance per borrower per GNI per capital, number of depositors, outstanding
savings and average deposit account balance per GNI per capital.
DECSI is among the few largest in the country, covered by 2008 the whole Tigray region, which
has a population of approximately 4.6 million (CSA, 2008). Taking the population, estimated
number of families and those expected to be potential candidates for microfinance; it can be
safely and securely concluded that the demand in the region is closely satisfied by the single
supply of DECSI with current number of customers. DECSI is the only institutional operator in
Tigray region with powerful government and regional ruling party support, as it was founded and
largely funded by a party ‘’endowment’’ fund.
Number of active borrowers, percentage of female clients and number of depositors (savings)
clients are indicators to measure breadth of outreach performance of DECSI. Percent of female
borrowers or clients and average loan balance per borrower per GNI per capital are the indicators
to measure depth of outreach performance of DECSI.
Table 4.1 Breadth & depth outreach performance of DECSI in Tigray as of Dec. 31, 2008
Indicators
Number of Percenta Gross loan Average Number Outstanding Average
active ge of portfolio loan of savings (Total deposit
borrowers Female (in USD) balance depositors value of all account
borrowe per deposit balance per
rs borrower accounts) GNI per
per GNI capital
per capital
Years
2008 464,622 24.47% 145,826,452 112.09% 261,437 39,975,665 55%
2007 423,830 38% 118,766,535 127.37% 423,830 32901910.34 35%
4.2.1.1 Number of active borrowers is a measure of breadth of outreach, which means the
number of poor people served by a microfinance institution (Woller and Schreiner, 2002). It is
mostly supposed that the greater the number of borrowers the better the outreach and as a result,
it leads the microfinance institutions to become better sustainable.
As per SEEP network guideline 2005, number of active borrowers indicates that the number of
individuals who currently have an outstanding loan balance with the microfinance institution or
are primarily responsible for repaying any portion of the gross loan portfolio.
According to Crombrugghe et al (2007) stated that increasing the number of borrowers per
microfinance institution would reduced the average operating cost and would increase total
operating costs lower than proportionately with the number of borrowers. This is a strong sign
for an increasing the number of borrowers per field officer would raise the sustainability
indicators in financial self-sufficiency and operating self-sufficiency. The research conducted by
Woller and Schreiner (2002) and Melkamu (2012) also indicated that an increase in the number of
borrowers would lead to an increase in the financial self-sufficiency of an MFI. Therefore, if all
other things are held constant, higher number of borrowers would precede the microfinance to
become more sustainable. Generally, the greater the number of borrowers the better the
sustainability is.
Number of active borrowers who get access to loan service or who borrow money from DECSI
in the year 2008 are 464,622. The number of active borrowers increased in this year as compared
to the previous year from 2007. This means, if all other things are held constant, there was a
better breadth outreach.
4.2.1.2 Percentage of Female borrowers –It is the most important indicator of outreach because
females are more vulnerable (weak) than male in getting the chance of being served by formal
financial institutions. In this outlook from the number of active borrowers 24.47% of borrowers
are female and the rest 75.53% are male in the year 2008. As a result, it can be concluded that
the DECSI reaches to the disadvantages especially female is limited to 24.47 percent and also
male borrowers of the institution are greater than female borrowers considering the number of
active borrowers served in the year 2008. When we compared to 38% percent of female
borrowers in year 2007, there was lower percent of female borrowers. This also indicated that
lower depth outreach performance in this year. Since female are hardly served by traditional
financial institutions because most of them in the developing world particularly in Ethiopia are
less educated plus low income earners of the society. They couldn’t get collateral to be served by
conventional financial institutions and are unable to paying their debt as contrasted to male.
Moreover, they contain half part of the population in Ethiopia. So, percentages of female
borrowers are equal to number of active borrowers who is female by number of active borrowers.
(MIX, Market).
For brief understanding the following figure summarizes the percentage share of females and
males active borrowers in the year 2008.
100%
90%
80%
70%
60% 75.53% Percentage of Active male
borrowers
50% Percentage of Active female
borrowers
40%
30%
20%
10% 24.47%
0%
2008
Figure 2 Percent of female & male borrowers in the year 2008
Female usually face more problems than male in accessing financial services particularly loan so
number of female served is mostly measured as another criterion. Even though difficult to
measure, depth of poverty is a concern because the poorest of the poor face the highest access
problem. In this study also DECSI faces the challenges of limited outreach (particularly to
women) because its reach to the disadvantages particularly to female is limited to 24.47 in the
year 2008.
Dedebit microfinance institution‘s overall outreach performance indicated a significant increase
through the study period of 2004-2008. However, according to AEMFI, 2009 statistical sources
show that only 20% of Ethiopia‘s eligible microfinance institution clients have access to
financial intermediation.
4.2.1.3 Outstanding gross loan portfolio is that all outstanding principal for all outstanding
client loans including current, delinquent and restructure loans but not loans that have been
written off. It excludes interest receivable and employee loans. This indicator is an indicator of
depth of outreach of MFI.
Outstanding gross loan portfolio performance by DECSI in the year 2008 is USD 145,826,452
and it is increased in this year as compared to outstanding gross loan portfolio of USD
118,766,535 in the year of 2007. When the outstanding gross loan portfolio of an institution is
increased, mostly the outreach performance of this institution also improved. So, the outreach
performance of DECSI in the year 2008 is increased.
4.2.1.4 Average outstanding loan balance per borrower (the average loan size)-depth of
outreach
The average outstanding loan balance consist only loan amounts that clients have not yet repaid.
This point of time number should not be confused with gross (total) amounts loaned at the time
of the reporting period, or with the average initial amount of the loans in the portfolio. The
average loan size (defined as the average gross loan portfolio divided by the number of active
borrowers) is a proxy measurement for depth of outreach and it measures the efficiency of
microfinance institutions in selling loans. Smaller loans are largely taken to denote greater depth
of outreach.
The study conducted by Rombrugghe et al (2007) indicates that the size of loans or average loan
per borrower influences financial self-sufficiency (FSS) of microfinance institutions. The
outcome by Woller and Schreiner is that depth of outreach is inversely related with financial
self-sufficiency. Maybe the most important finding was that depth of outreach, as peroxide by
the average loan to GNP per capita, is inversely related with financial self-sufficiency. This
result demonstrates that among poverty lenders, deep outreach and financial self-sufficiency can
be complementary (opposite), supposing the adoption of suitable policies.
As per CGAP (2009) also expressing average loan balance as a percentage of GNI per capita or
national poverty line allows for a comparison of how deeply MFIs from different nations reach
down in their own national income distributions. A number of regard an average outstanding
loan balance lower 20 % of per capita GNI as a rough indication that clients are poorer. The
Microfinance Information Exchange (MIX) classifies lenders as being MFIs if their average
outstanding loan balance is not higher than 250 % of per capital GNI.
Average outstanding loan balance is approximately related to client poverty, because rich clients
tend to be indifferent in smaller loans. Similarly, growth in average loan size does not
necessarily mean that an MFI is suffering from “mission drift.” Most MFIs have in sequence
ladder of loan sizes for clients.
Most funders who want to reach extremely poor clients should mostly look for MFIs that already
serve low-end clients, instead of trying to motivate higher end MFIs to change their market.
Large number of microfinance institutions that focus on the poorer use formal tools to screen
potential borrowers by income level of the people.
Average outstanding loan balance per borrower= Gross amount of loans Outstanding as of
Dec. 31, 2008/Number of active borrowers
Average Outstanding loan balance per borrower=$145,826,452/464,622=314
Average Outstanding loan balance per borrower=314
Depth of Outreach= Average Outstanding loan balance per borrower/GNI per Capital
=314/$280
=112.09%
Based on the above mentioned two benchmarks, average loan balance of 112.09 percent per
capital GNI in the year 2008 indicates that clients of DECSI are not the poorer but the lenders of
DECSI were classifies as microfinance institution lenders. The average loan size of DECSI in
2008 had lower in depth of outreach as compared to year 2007.
4.2.1.5 Number of depositors is the quantity or number of saver or client to deposit their money
in the institution. The number of depositors increase means the better the outreach performance
and so, it leads to become more sustainable of the microfinance institutions. Number of
depositors of DECSI in end of year 2008 is 261,437 and this is decreased as compared to 423,830
depositors in 2007.
4.2.1.6 Outstanding savings (total value of all deposit accounts) is the total of compulsory,
voluntary saving, time deposit and demand deposit by clients in the microfinance institution. In
current period, MFIs have to concentrate on financial systems approach that accepts the
significance of savings instead of the poverty lending and obligatory savings products to the
poor. National Bank of Ethiopia Directive No.MFI/16/2002 and the Microfinance business
Proclamation No. 626/2009 Article 3(2) make stronger the researcher‘s idea by encouraging
MFIs to bit by bit move out from dependence on subsidize and donated funds to commercial
source of funds. The microfinance institutions can achieve this aim by mobilizing savings, as
alternate source of finance, from the public and borrow money for their regular business
operations and expansions of the institution.
In accordance with these issues, saving mobilization ability of MFIs has an important role in
meeting the objective of increasing outreach performance of the MFIs either in depth or breadth.
This is due to the following three grounds:
1. Savings are appealing source of funds at the time their financial costs are usually smaller than
another sources of funds like borrowing from interbank market;
2. Savings are a more constant or steady funding source than subsidize and donor funds; and
3. The related less liquidity risk- MFIs are low open to attack to liquidity risk than it would be if
more withdrawals were made from greater savings accounts.
When to come to DECSI concerning saving is that the number of applications has grown slowly
and rose up unexpectedly to the level DECSI couldn’t suppose and avail adequate financial
resources. Out of the basketful of alternatives, the simplest and cheapest method to obtain
financial resources for the institution was savings. Due to the mobilization of savings provides to
have a strong capital base to a healthy & sustainable of the institution. Generally, the institution
will have other advantages that are protection of its portfolio from financial risks (inflation and
default cost) and build a sense of responsibility, competence & accountability on the institution.
The level of deposits mobilized by DECSI in Tigray region has shown a substantial increase
from USD 17,901,842 in 2004 to USD 39,975,665 in 2008 indicating the potentials for savings
but it decrease when compared to deposits USD 32,901,910 in the previous year 2007.
3.2.1.7 Average outstanding saving balance
If the institutions do not use a very sophisticated indicator, it is a more rough proxy for the
poverty level of savings clients at a point in time. The average outstanding savings balance
consist only savings that clients have not withdrawn. This point of time number should not be
confused with gross (total) amounts deposited during the reporting period.
Average outstanding savings balance is approximately related to client poverty, because rich
clients tend to be not interest in smaller deposit accounts. But the relationship between account
balances and poverty is far from exact. Low account sizes do not guarantee poor clients.
Similarly, growth in average loan size does not essentially denote that the microfinance
institution is suffering from “mission drift.” A lot of MFIs have in sequence ladder of loan sizes
for clients.
Average deposit balance per depositors= Gross value of all deposit accounts as of Dec. 31,
2008/Number of depositors
Average deposit balance per depositors =39,975,665 /261,437=152.91
Average deposit balance per depositors =152.91
Average deposit balance per depositors/GNI per Capital
=152.91/$278
=55%
The result of year 2008 shows that it is below the mean average deposit balance per depositors
per GNI per capital of the 5 years under consideration of the study from 2004-2008 but better
than year 2007.
In general, in this research outreach breadth and outreach depth and saving potential of DECSI were
important evaluated to assess the outreach performance of the institution. Number of active borrowers and
outstanding gross loan portfolio are the vital measurement of MFIs ability to cover a great number of
unbanked and under banked people by conventional banks and their ability to achieve the objective of
poverty reduction. Regarding the breadth of outreach substantially work has been done as observed from
the operational data of DECSI. DECSI have expanded their operations over wide-raging geographical
area covering nearly the whole districts within its regional state and also it considers the leading
microfinance institution in number of clients in Sub-Sahara Africa.
4.2.3 Financial Sustainability and Profitability indicators of DECSI in the

year 2008
Sustainability of Microfinance Institutions (MFIs) is a continuous financial service provision to
clients profitably as a going concern without depending on subsidies. Sustainability and
Profitability ratios indicate the ability of microfinance institutions to continue operating and
develop in the future periods of time. Most of good repute microfinance institutions are making
every effort for sustainability, regardless of their for-profit or nonprofit condition; donors and
investors similar to fund sustainable microfinance institutions. Numerous factors can influence
profitability and sustainability of the institutions. However, begin or fast growing institutions
may have less profitability, they are building the foundation for a sustainable future. The ratios
used in this section are the most broadly accepted in the microfinance institutions.
Sustainability and profitability of microfinance institutions were measured and analyzed using
operational and financial self sufficiency; adjusted return on assets; and adjusted return on equity
ratios as follows:
1. Return on Assets (ROA)
2. Return on Equity (ROE)
3. Operational Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS)
4.2.3.1 Profitability indicators of DECSI in the year Ended 2008
4.2.3.1.1 Return on assets (ROA) reflects how well DECSI is managing its assets to improve
and maximize its profitability. ROA ratio contains not only the return on the portfolio, but also
any other income generated from investments and other operating activities of the institution.
ROA=Net Operating Income after tax / Average Total Asset
ROA= $3,683,950/(($171,228,824.80+ $185,844,934.70)/2)
ROA== $3,683,950/$178,536,879.75=0.2063
ROA= 0.02063*100=2.06%
ROA=2.06%
The profitability status of DECSI in year 2008 is profit because the result of the return on asset
(ROA) ratio in this year is indicated positive. However, this result tells us that DECSI
accomplished lesser as compared to the previous year 2007.
Adjusted return on assets (AROA) reflects the ability of microfinance institutions to expand
profitability without subsidized funding from donors or other supporters. Due to absence of
information concerning subsidies under DECSI headquarter level, the researcher does not
construct any adjustment on the usual financial information for computing return on asset and
return on equity.
4.2.3.1.2 Return on equity (ROE) is also the greatest important profitability indicator especially
in for profit MFI; it measures a microfinance institution’s ability to reward its investors
investment, make its equity base by means of retained earnings, and increase additional
investment. For nonprofit MFI, return on equity reflects its ability to produce equity by retained
earnings; and raised equity allows the MFI to leverage (influence) additional financing to raise
its portfolio.
ROE= Net Operating Income after tax / Average Total Equity
ROE= $3,683,950/ ((34395355.06 + 35728454.87)/2)
ROE=$3,683,950/$35061904=0.1055
ROE=0.1051*100=10.51%
ROE=10.51%
In year 2008, DECSI’s total assets were equivalent to USD 185.8 million. DECSI’s overall
financial performance in year 2008 was measured by a return on assets (ROA) of 2.06% as
compared to ROA of 3.85% in year 2007. Similarly, DECSI’s return on equity (ROE) indicated
this reduce in year 2008 of 10.51% from 18.82% in year 2007.
4.2.3.2 Financial Sustainability of DECSI in the year 2008
Financial sustainability is the degree to which an institution collects sufficient revenues from sale
of its services to cover the full costs of its activities, evaluated on an opportunity-cost basis. Full
financial sustainability is allowing continuing operating at a stable or growing scale without ongoing
support from external supporters such as governments, donor agencies, or charitable organizations.
In this section, the study tries to see two main ratios that are widely used to measure the
continuity of a financial institution. As indicated above sustainability is one and the fore most
objective of any institution. In microfinance industry now a day the main intention of any
concerned body is to address this critical issue, because the first goal of most MFIs is to change
the lives of the poor in a continuing manner, so, to achieve this goal institutions should have to
be sustainable.
These institutions, to continue serving the poor societies, their profitability and sustainability
should be measured, because they need to be operationally and financially sustainable. Among
the available measures, operational self-sufficiency and financial self-sufficiency are the
predominant profitability and sustainability measurement variables. This has been needed
because mostly they rely on the funds which are obtained from donors. The problem is not about
relaying on them, but it is about what if the donation is terminated at some point in time.
Sustainability in this study is measured by operational self-sufficiency and financial self-
sufficiency of the microfinance institution.
4.2.3.2 .1 Operational self – sufficiency (OSS) is the most basic measurement of sustainability,
indicating whether revenues from operations are sufficient to cover all operating expenses. It
reflects the DECSI’s ability to continue its operations if it receives no further subsidies. As with
the preceding measures of returns, OSS focuses on revenues and expenses from the branch’s
core business, excluding non operating revenues and donations. The breakeven point of OSS is
100 percent. The value of 1 (or 100%) and above for OSS variables shows that the microfinance
institutions are operationally self-sufficient but the value below 1 (or 100%) shows they have not
yet achieved financial breakeven and also not sustainable.
OSS = Financial revenue_____________________

(Financial expense +impairment losses on loans +operating Expense)
OSS= Birr153,630,709.00________________
(Birr 57,134,581.00+ Birr 24,535,635.00+ Birr 36,520,894.00)
OSS= 1.2998
4.2.3.2.1 Financial Self-Sufficiency (FSS) is a subsidy-adjusted indicator mostly used by donor-

funded microfinance nongovernment organization. It is a ratio which measures the sustainability
of the microfinance institution in terms of the financial capacity or it measures the extent to
which the microfinance institution’s business revenue excluding grants and extraordinary items
—mostly interest received—covers the microfinance institution’s adjusted expenses. Financial
self-sufficiency (FSS) is a ratio of the adjusted financial revenue to the financial and operational
expense as well as the loan loss provision and expense adjustments. The value of 1 (or 100%)
and above for FSS variables shows that the microfinance institutions are financially self-
sufficient, but the value below 1 (or 100%) shows the microfinance institutions have not yet
achieved financial breakeven and they are not sustainable. One of the most challenges facing
non-profit organizations in developing countries is that of obtaining important funds to perform
the required activities to achieve their mission. These challenges exist at the domestic or
national, and the global level.
FSS= ______________________Adjusted Financial revenue______________
Adjusted (Financial expense +impairment losses on loans +operating Expense)
FSS in the year ended 2008=0.44 or 44%
Financial self-sufficiency (FSS) performance of DECSI in the year 2008 is 0.44 (44%). This
ratio indicates that DECSI was unable to attain financial self-sufficiency because in FSS ratio
they achieved below the threshold level of 1(or 100%). Thus, DECSI is not financially
sustainable in the year 2008 and this also shows the institution was subsidized by the donors or
other external supporters in this year because the FSS ratio of the institution was not achieved the
financial breakeven point that is below 1 (Or 100%).
The purpose here is to measure what the institutions have achieved in freeing itself from
depending on subsidy or donation in the years observed. To be financially sustainable, the
institution must earn a return that covers their costs, net of inflation.
Table 4.2 Operational & Financial self-sufficiency performance of DECSI in 2008

Indicators 2007 2008
Breakeven 1.00 1.00

OSS = Financial revenue/ 1.73 1.30
(Financial expense +impairment losses on loans +operating
Expense)
FSS= Adjusted Financial revenue/Adjusted(Financial 1.00 0.44
expense +impairment losses on loans +operating Expense)
Source: Compiled by author from DECSI operational reports and audited financial statements
given to www.mixmarket.org
From the above table, it can be observed that DECSI scored about 130 % (or 1.30) in operational
self-sufficiency and 44% (0.44 in financial self-sufficiency in the year 2008.
In general, it can be concluded that DECSI did well in terms of operational self-sufficiency
because it achieved more than the threshold level of 1(or 100%). The financial self-sufficiency of
DECSI in the considering year was 0.44 (or 44%) that was below the breakeven point of 1
(100%). DECSI was unable to attain financial self-sufficiency in the year 2008 because this
could be the high inflation in that year which stands an annual average of 44%. FSS is reduced
to below breakeven in year 2008 than in 2007.
4.2.4 Portfolio Quality (Loan Repayment) of DESCI in the year 2008

The loan portfolio is the highest vital asset of microfinance institution. Loan portfolio quality is
reviews how the microfinance institution measures, monitors, and manages its loan portfolio,
together with delinquency and write-offs. Portfolio quality indicates the risk of loan delinquency
and influences future earnings and the microfinance institution’s ability to extend outreach and
serve current clients.
This is the most making known of the five performance areas. A moneylender’s ability to collect
loans is essential for its success: if delinquency is not maintained to very low levels, it can
rapidly spin out of control. Moreover, loan collection has verified to be a powerful proxy for
general management competence.
Table 4.3 Portfolio Quality performance of DECSI in 2008
years
2007 2008
Indicators
PAR>30 days (Non-performing loans) 1.66% 1.78%
Write-off ratio 0.41% 0.16%
4.2.4.1 Portfolio at risk (PAR) > 30 days (Non-performing loan) of DECSI in year 2008
Portfolio quality is measured as portfolio at risk over 30 days. PAR ratio measures existing
degree of risk in the total microfinance portfolio at a point in time. It provides a picture of the
loan portfolio which is at risk of not being paid. It measures how much you could lose if all
borrowers with late payments default. Changes to PAR ratio may show changes in risk, but
should be examine in combination with the write-off ratio, as the level of reported non-perform
loans can be reduced through write-offs. A decreasing PAR signals a healthy loan portfolio.
To calculate PAR, age the loan portfolio. The age (degree of lateness) of the missed payment is
stated in days. The principal balance of loans with missed payment is calculated as to number of
days late.
Portfolio at risk (PAR) > 30 days= (Outstanding loan balance, portfolio overdue > 30 Days
+ renegotiated portfolio) / Gross Loan Portfolio
PAR.>30 days= (2,595,711/$145,826,452)*100=1.78%
PAR PAR.>30 days =1.78%
The higher PAR shows low loan repayment rates, as sign of inefficient microfinance institution. The
greater the PAR, the higher inefficient the microfinance will be and, so, the less financially
sustainable of the microfinance institution. CGAP, 2009 stated that as a rough rule of thumb when
dealing with uncollateralized loans, PAR or LAR (30 days or one payment period) more than
10%, or ALR more than 5% must be minimized quickly or they will spin out of control.
A decreasing PAR indicates a healthy loan portfolio. The above result of PAR> 30 Days is
1.78% and this reflects that DECSI had increased PAR > 30 Days in year 2008 as compared to
1.66% in year 2007. This was indicative of the lesser follow-up activities made to the clients in
the year 2008 than in the year 2007.
4.2.4.2 Write-off ratio of DECSI is measures the percentage of the microfinance institution’s
loans that has been eliminated from the balance of the gross loan portfolio because they are
improbable to be pay back. Changes write-off ratio should be interpret in combination with the
PAR> 30 Days ratio, as MFIs may keep risk on their balance sheets.
Write-off ratio=Value of loans written-off
Average Gross Loan Portfolio
Write-off ratio= $216,117.05______________ =0.0016 *100

($148,826,451.80-$118,766,534.70)/2
Write-off ratio in year 2008=0.16%
A decreasing write-off ratio shows a healthy loan portfolio. Write-off ratio of DECSI was 0.16%
in year 2008 and this was reduced and indicated better write-off ratio than the write-off ratio of
0.41% in the year 2007.
4.2.5 Efficiency and productivity ratio of DECSI in the year 2008

Efficient and productivity ratios provide information about the rate at which the MFI generate
income to cover their cost. These indicators show how well DECSI utilizes its resource,
especially its assets and personnel. Efficiency refers to cost per unit of output and also
productivity refers to the volume of business that is generated for a give input or resource. This
mainly study used operating expense ratio; average disbursed loan size; cost per borrower, staff
productivity ratios and loan officer productivity ratio as efficiency and productivity indicators.
3.2.5.1 Operating expense ratio, according to CGAP (2009), is the most generally used
measure of microfinance efficiency. It indicates administrative and personnel expense of the
institution yield on the gross loan portfolio. Operating expense ratio is the percentage of
operating expense to average gross loan portfolio. It measures how the microfinance
institution’s management has been efficient in minimizing operating expenses at a given level of
operation. The lower the operating expense ratio will show efficiency in microfinance
institutions’ cost minimization strategy. The lesser the ratio, all things being equal, the greater
efficient the institution is. In this point of view, DECSI attains lower ratio (i.e., 0.0287) in the
year 2008. From this one can conclude that DECSI incurred almost 3 cents for administration
and personnel (operating) expense in turn to provide a $1 average gross loan portfolio to its
customers in the year 2008.
Operating expense ratio=Operating Expense / Average Gross Loan Portfolio
Operating expense ratio=$3,796,351/(($118766534.70+$145826451.8)/2)=0.0287
Operating expense ratio=0.0287
4.2.5.2 Cost per borrower ratio shows how much the institution currently disburse in personnel
and administrative expenses to serve a one borrower and it also tells the institution how much it
must earn from every one borrower to be profitable. In this concern, the DECSI incurred $8.55
per borrower for providing its services for its clients in the year 2008.
Cost per borrower ratio=Operating Expense / Average Number of Active Borrowers
Cost per borrower ratio=$3,796,350.73/ ((423830+464622)/2) =8.546
Cost per borrower ratio=$8.546
4.2.5.3 The average disbursed loan size indicator measures the average loan size that the
institution pays out to its clients. From the below calculation it can be deduced that the institution
on average disburses $314 loan to its clients in the year 2008.
Average loan balance per borrower=Gross Loan portfolio/ Number of Active Borrowers
Average loan balance per borrower=$145,826,451.80/464,622=314
The average disbursed loan size=$314
4.2.5.4 Personnel Productivity Ratio (PPR) measures the amount of quality services provided
by microfinance employees to their clients and it quantifies the staffs’ efforts to deliver a MFIs
output services. Personnel productivity ratio is computed by dividing the number of active
borrowers of an institution by the total number of personnel. Total staff is expressed as the total
number of people that work full time in an MFI. It contains contract staff namely consultants, as
well as they perform full time. This ratio limits the productivity of the institution’s staff–the
lower the ratio the higher productive the institution. The lower this value means the higher the
productivity of personnel. In this point of view, in year 2008, DECSI serves 246 borrowers per
staff.
Personnel productivity ratio=Borrowers per staff member
Personnel productivity ratio=Number of Active borrowers/Number of personnel
Personnel productivity ratio=464,622/1,887
Personnel productivity ratio=246 borrowers per one staff
4.2.5.5 Loan officer Productivity

Loan officers are indicates as personnel whose major activity is direct management of a part of
the loan portfolio. It consists of field personnel or line officers that inter relate with the client, but
excluded administrative staff or analysts who process loans without direct client contact. Loan
officers also consist of contract staffs that may not be included in the permanent employees, but
are contracted on a usual basis in the capacity of loan officer.
Loan officer productivity measures how well the MFI has adapted and improved its processes
and procedures to its business purpose of lending money. This ratio attains the productivity of
the institution’s loan officers – the greater the ratio the higher productive the institution.
Therefore, DECSI serves 1,012active borrowers per loan officer in the year 2008.
Loan Officer Productivity=Number of Active Borrowers / Number of Loan Officers
Loan Officer Productivity=464,622/459
Loan Officer Productivity=1,012 active borrowers per one loan officers
From this it can be concluded that the institution is financially sustainable because it handles
large numbers of customers with a lower of administrative effort and without given portfolio
quality to deteriorate or get worse.
Generally, each loan officers under DECSI serves 1,012active borrowers which needs an
administrative and personnel expense of approximately 3 cents to provide a $1 loan. But it costs
$8.55to serve a single borrower in the year of 2008.
4.3 Trend analysis on operating and financial performance of
DECSI from the year 2004-2008.
Trend analysis is the assessment of a company’s financial statements and indicators over time to
determine how action affects results of the microfinance institutions performance. Since financial
statements for a single period do not show much about the institutions, trend analysis covering
five years period from 2004 to 2008 were used to show their performance.
4.3.1 Trend of outreach by DECSI from the year 2004-2008

The following table shows the trend of outreach breadth & depth performance by DECSI from
the year 2004-2008.
Table 4.4 Trend of outreach indicators by DECSI from the year 2004-2008
Indicators Years of operation Average
2004 2005 2006 2007 2008
Number of active 407,386
336,733 419,052 392,693 423,830 464,622
borrowers
% of Female borrowers 19.92% 22.83% 18.60% 38.00% 24.47% 24.76%
Gross loan portfolio (in 80,828,701
46,365,572 77,918,547 85,266,397 118,766,535 145,826,452
USD)
Average loan balance per 1.1366
0.9835 1.1621 1.1428 1.2737 1.1209
borrower /GNI per capita
Number of depositors 238,086
165,844 183,652 160,667 423,830 261,437
Outstanding savings ( in 22,969,824
17,901,842 21,782,529 22,871,741 32,901,910 39,975,665
USD)
Average deposit account 0.632
0.77 0.74 0.75 0.35 0.55
balance /GNI per capita
Source: Calculated & Compiled by author from DECSI operational reports and audited
financial statements given to www.mixmarket.org
From the table above table, one can understand that the DECSI’s outreach level reflects
irregularity in the years under consideration but in the last year it shows increase in the total
number of active borrowers served, gross loan portfolio, average loan & deposit balance per GNI
per capita, number of depositors and outstanding savings..
The numbers of female borrowers were shows abnormality from the year 2004-2008. In the year
2007 the number & percent of female borrowers were highest as compared with other years
under consideration but decrease in 2008. The study found that credit access to female is still
limited. At DECSI, female credit access share is only 24.47 percent as at Dec. 31, 2008.
500,000 464,622
450,000 419,052 423,830
392,693
400,000
350,000 336,733 Number of Active
300,000 Borrowers with loans
outstanding
250,000
200,000 161,055 Number of female
150,000 borrowers
113,693
95,670
100,000 67,077 73,041
50,000
0
2004 2005 2006 2007 2008
Figure 3 Trend of outreach in breadth by DECSI from the year 2004-2008
100%
90%
80%
70% 62.00%
75.53% Percentage of Active
60% 80.08% 77.17% 81.00% male borrowers
50%
Percentage of Active
40% female borrowers
30%
20% 38.00%
10% 19.92% 22.83% 19.00% 24.47%
0%
2004 2005 2006 2007 2008
Figure 4 percentage/compositions of Female and Male borrowers from the year 2004-2008
To this end, the research's finding to DECSI is hopeful. Number of active borrowers or clients of
the DECSI was rising as can be observed from table 3.3 and figure 3 above. Dedebit
microfinance's outreach has shown increment over the period of the study with different rates of
growth, leading the institution's outreach to increase in the period from 2004 to 2008 on average
by 8.75%. At the DECSI level female credit access composition is only 24.4 percent as at
December 2008, and also share of female participation to credit access is different but below
50% from the year 2004 up to 2008.
Gross Loan Portfolio in USD

160,000,000
145,826,452
140,000,000
120,000,000 118,766,535
100,000,000
77,918,547 85,266,397
80,000,000 Gross
Loan
60,000,000 Portfolio
46,365,572 in USD
40,000,000
20,000,000
0
2004 2005 2006 2007 2008
Figure 5 Trend of outreach in depth by DECSI from the year 2004-2008
Average outstanding loan balance per borrower (Average Disbursed Loan Size)
The average outstanding loan balance consist only loan amounts that clients have not yet repaid.
This point of time number should not be confused with gross (total) amounts loaned at the time
of the reporting period, or with the average initial amount of the loans in the portfolio.
As per CGAP (2009) expressing average loan balance as a percentage of GNI per capita allows
for a comparison of how deeply MFIs from different countries reach down in their own national
income distributions. Some regard an average outstanding loan balance below 20 percent of per
capita GNI as a rough indication that clients are very poor. The Microfinance Information
Exchange (MIX) categorizes lenders as being MFIs if their average outstanding loan balance is
not higher than 250 percent of per capital GNI.
Average outstanding loan balance is approximately related to client poverty, because rich clients
tend to be indifferent in smaller loans. Similarly, growth in average loan size does not
necessarily mean that an MFI is suffering from “mission drift.” Most MFIs have a sequential
ladder of loan sizes for clients.
Table 4.5 Trend of Average disbursed loan size per borrower per GNI per capital of DECSI
Years of operation
Indicators 2004 2005 2006 2007 2008 Average
Average Loan Balance per

Borrower (USD) 138 186 217 280 314 188
Average loan balance per
borrower / GNI per capita 98.35% 116.21% 114.28% 127.37% 112.09% 113.66%
Average deposit balance per depositor

The average outstanding savings balance consist only savings that clients have not withdrawn.
This point of time number should not be confused with gross (total) amounts deposited during
the reporting period.
Average savings or deposit balance is approximately related to client poverty, because rich
clients tend to be not interest in smaller deposit. But the relationship between account balances
and poverty is far from exact. Low account sizes do not guarantee poor clients. Similarly,
growth in average loan size does not essentially denote that the microfinance institution is
suffering from “mission drift.” A lot of MFIs have in sequence ladder of loan sizes for clients.
Table 4.6 Average deposit balance per depositor per GNI per capital from the year 2004-2008
Indicators Years of operation Average
2004 2005 2006 2007 2008
Average deposit balance per depositor 108 119 142 78 153 120
Average deposit balance per depositor / 77% 74% 75% 35% 55% 63.2%
GNI per capital
350
314
300 280
250
217
200 186
Average Loan Balance per Borrower
153 Average deposit balance per
150 138 142
119 depositor
108
100 78
50
0
2004 2005 2006 2007 2008
Figure 6 Trend of Average loan and deposit balance per borrower of DECSI from the year
2004-2008
140.00%
127.37%
116.21% 114.28%
120.00% 112.09%
98.35%
100.00%
77% 74% 75%

80.00% Average loan balance per
borrower / GNI per capita
55% Average deposit balance per
60.00% depositor / GNI per capital
35%
40.00%
20.00%
0.00%
2004 2005 2006 2007 2008
Figure 7 Trend of Average loan and deposit balance per borrower per GNI per capita of DECSI from
the year 2004-2008
Outstanding Savings in USD
45,000,000
39,975,665
40,000,000
35,000,000 32,901,910
30,000,000
Outstanding Savings in USD
25,000,000 Polynomial (Outstanding Savings
21,782,52922,871,741 in USD)
20,000,000 17,901,842
15,000,000
10,000,000
5,000,000
0
2004 2005 2006 2007 2008
Figure 8 Trend of outstanding savings by DECSI from the year 2004-2008
The Performances in terms of

Average Annual Saving Increments
900,000
835,847
800,000
700,000
600,000 589,480
500,000
400,000 Ave.
323,391 Desposit
300,000 Amount
250,829 in USD
200,000
100,000 90,768
0
2004 2005 2006 2007 2008
Figure 9 Trend the performances in terms of average annual savings increments by DECSI
Number of depositors
450,000 423,830
400,000
350,000
300,000
250,000 261,437 Number of depositors
200,000 183,652
165,844 160,667
150,000
100,000
50,000
0
2004 2005 2006 2007 2008
Figure 10 Number of depositors of DECSI from the year 204-2008
2008 464,622 261437
2007 423830 423830

Number of Active
2006 392693 160667 Borrowers
Number of Depositors
2005 419052 183652
2004 336733 165844
0 200000 400000 600000 800000 1000000
Figure 11 Trends in Number of Active Borrowers Vs Number of Depositors from the year
2004-2008
Breadth of outreach in terms of the number of active clients increased from year to year except
the decline from year 2005 to year 2006. Breadth of outreach in terms of number of depositors
increased from 2004 -2005, decreased in 2006 and which was followed by a sharper increased
from 2006 to 2007 but decreased in 2008. Breadth of outreach concerning portfolio growth
(Table3.3 & Figure) and saving mobilization (Table 3.3 & figure) shows growth, despite the
variations between years of operation and fluctuating trends. The total portfolio grew from
46,365,572 in year 2004 to 145,826,452 at the end year of 2008. Breadth of outreach on the
saving front, this DECSI increased outstanding savings (Total value of all deposit accounts) from
USD 17,901,842 in year 2004 from 165,844 clients, which gives an average saving balance of
USD 108 per individual saver, and the performance in terms of average annual saving
increments of USD 250,829 into USD 32,901,910 in the year 2008 from 261,437 clients, which
gives an average saving balance of USD 153 per individual saver and the performance in terms
of average annual saving increments of USD 589,480. Based on this information, the breadth of
outreach performance of DECSI, substantial work has been done as observed from potential data
of DECSI.
Depth (client poverty level) of outreach in this study is measured by direct indicator that is the
extent of gender composition or percent of female clients (more female equal’s deeper outreach).
In this regard the percentage of female borrowers of DECSI was varies from year to year but
increased from 19.92% in the year 2004 to 24.47% in the year ended 2008. Highest composition
of female borrowers was 38% in the year 2007. Another way indicating depth of outreach for
this research is to look at proxies, such as the average balances of outstanding savings and loans
and average outstanding loans or savings balance per client percentage of GNI per capita are
proxy indicators used to indicate a client’s socio-economic level. The smaller the depth or
smaller the ratio of the loan sizes to GNI, the poorer the client. The smallest the depth or the
smallest ratio of average outstanding loans balance per client percentage of per capita GNI was
98.35% in the year 2004 and in this year the clients were the poorer. The highest the depth or the
highest ratio of the loan size to GNI per capital is 127.37% in the year 2007, not the poorer the
clients as compared to the other considering years.
4.3.2 Trend in Sustainability & Profitability of DECSI from year 2004-2008
Table 4.7 Trend in profitability of DECSI

Indicators Years of operation
Average
2004 2005 2006 2007 2008
ROA 0.055 0.0496 0.0430 0.0385 0.0206 0.04134
ROE 0.1464 0.1834 0.1946 0.1882 0.1051 0.1635
Source: Calculated & Compiled by author from DECSI audited financial statements given to
www.mixmarket.org
0.25
0.2 0.19 0.19

0.18
0.15
0.15
ROA
0.11
ROE
0.1
0.06 0.05
0.05 0.04 0.04
0.02
0
2004 2005 2006 2007 2008
Figure 12 Trend in profitability indicators of ROA & ROE by DECSI from the year 2004-
2008.
The trend in performance indicated that DECSI was successful from profitability point of view;
regardless of the rate vary year after year. DECSI was secured a positive return both on equity
and assets because the two ratio of the institution showed a positive ratio from year 2004 up to
2008 but reduce the return of the institution staring from year 2007 up to 2008.
Table 4.8 Trend in Financial Sustainability of DECSI from the year 2004-2008
Years of operation
2004 2005 2006 2007 2008
Indicators Average
Operational self- 2.16 1.71 1.94 1.73 1.30 1.77
sufficiency (OSS)
Financial self- 1.253 1.51 1.27 1.00 0.44 1.0946
sufficiency (FSS)
Source: Calculated & Compiled by author from DECSI audited financial statements given to
www.mixmarket.org & FSS ratio from research of Melkamu Tamene, 2012
2.50
2.16
2.00 1.94
1.71 1.73
1.51
1.50
1.25 1.27 1.30
1.00
1.00
0.50 0.44
0.00
2004 2005 2006 2007 2008
Breakeven Operating Self Sufficient Financial Self Sufficient
Figure 13 Trend in financial self-sufficient and operating self-sufficient of DECSI from the
year 2004-2008
From the above table 4.7 & figure 13 that DECSI did well in terms of operational self-
sufficiency because it achieved more than the threshold level of 1(or 100%). The average
financial self-sufficiency of DECSI in the considering years was 1.0946 (or 109.46%) that was
above the breakeven point of 1 (100%), however DECSI was unable to attain financial self-
sufficiency in the year 2008 because this could be the high inflation in that year which stands an
annual average of 44% (versus an annual average of 17.2% in Dec. 2007) and then the result of
FSS is below breakeven. This means DECSI was subsidize and donated by external parties in
the year 2008, but the previous years were not subsidized.
Generally, based on the above result from financial sustainability and profitability angle, it is
found that DECSI was going down the ladder of sustainability and profitability measures during
the periods of the study from year 2004-2008. To reach at financial self-sufficiency level, DECSI
should: a. Increase the number of borrowers (It has to reach the possible maximum number of
borrowers). b. Should decrease the cost per borrower (possible by increasing the number of
borrowers). c. It should be able to utilize its short term assets to the maximum possible level to
produce better cash and financial revenues. d. DECSI should increase the gross loan portfolio so
as to increase the loan size that it lends to a borrower and to minimize cost per borrower in
proportion to the amount it lends. e. DECSI should increase the value of their total assets greater
than what it is having.
4.3.3 Trend of Portfolio Quality of DECSI from year 2004-2008
Table 4.9 Trend in portfolio quality (Loan repayment) from the year 2004-2008
Years of operation Average
2004 2005 2006 2007 2008
Indicators
PAR>30 days (Non-performing 7.32% 0.00% 2.93% 1.66% 1.78% 2.74%
loans)
Write-off ratio 0.00% 0.00% 0.37% 0.41% 0.16% 0.19%
Source: Calculated & Compiled by author from DECSI operational reports and audited
financial statements given to www.mixmarket.org
8.00%
7.32%
7.00%
6.00%
5.00%
4.00% PAR >30 days

2.93% Write-off ratio
3.00%
2.00% 1.66% 1.78%
1.00%
0% 0%
0% 0.00% 0% 0%
0.00%
2004 2005 2006 2007 2008
Figure 14 Trends in portfolio at risk (>30 days) & write-off ratio of DECSI from 2004-2008.
In general, we can conclude that the portfolio quality (loan repayment) performance of DECSI
was improved because portfolio at risk (PAR) greater than 30 days was decreased from 7.32% in
2004 to 1.78% in 2008. DECSI continue to demonstrate low PAR > 30 days, with an institution
average of 2.74 percent. This was an indicative of the higher follow-up activities made to the
clients by DECSI in the year 2008 than in 2004.But write-off ratio was increased slight
percentage from 0% in year ended 2004 to 0.16% in 2008.
4.3.4 Trends in Efficiency and Productivity of DECSI from year 2004-2008
Table 4.10 Trend in efficiency and productivity of DECSI from the year 2004-2008
Indicators Years of operation
Average
Indicators 2004 2005 2006 2007 2008
Operating Expenses Ratio 0.0366 0.0273 0.0251 0.0287 0.0287 0.02928
Cost per Borrower 4.5223 4.4853 5.0502 7.177 8.546 5.9563
Av loan disbursed per borrower 138 186 217 280 314 227
Personnel Productivity ratio 388 344 284 253 246 303
Loan officer Productivity 1,840 957 616 711 1,012 855
Source: Calculated & Compiled by author from DECSI audited financial statements and
operational data given to www.mixmarket.org. N.B the currency is in USD
Operating Expense Ratio
Operating Expenses Ratio

4.00% 3.66%
3.50%
3.00% 2.73% 2.87% 2.87%
2.51%
2.50%
2.00% Operating Expenses Ratio
1.50%
1.00%
0.50%
0.00%
2004 2005 2006 2007 2008
Figure 15 Trend in operating expense ratio of DECSI from the year 2004-2008
As per the above table and figure there was almost a declined trend in operating expense ratio
parameter in the DECSI (0.0366 to 0.0251 & lastly 0.0287) as a result one can infer that the
institution was improved efficiency in providing loan to its clients.
Cost per Borrower
$9.00 Cost per Borrower $8.55

$8.00
$7.00 $7.18
$6.00
$5.00 $5.05
$4.52 $4.49 Cost per Borrower
$4.00
$3.00
$2.00
$1.00
$0.00
2004 2005 2006 2007 2008
Figure 16 Trend in cost of borrowers of DECSI from the year 2004-2008
The indicator of cost per borrower in the second row of the above table 3.9 determines the
average cost of maintaining an active borrower or client. In this view, the DECSI incurs an
average cost of $5.9563 to serve a single borrower. Besides, during the years observed the
DECSI’s cost per borrower indicates increment that is from $4.5223 in 2004 to $8.546 in 2008
and also DECSI registered the lowest cost $4.4853 to serve a single borrower in 2005 & the
highest cost $8.546 in 2008. From this it can be concluded that DECSI on average spends least
(efficient) $5.9563 in operating and administrative expenses for serving a single client. DECSI
performs well in serving a single client in earlier than in later years of the study periods. (See
Table 3.9 above)
Average loan disbursed per borrower (depth of outreach)
Average loan disbursed per borrowers

$350 $314
$300 $280
Average loan disbursed per
$250 $217 borrower
$200 $186
Linear (Average loan disbursed per
$150 $138 borrower)
$100
$50
$0
2004 2005 2006 2007 2008
Figure 17 Trend in Average loan disbursed per borrower of DECSI from the year 2004-2008
The average loan disbursed per borrower index in the above table 4.9 & figure 4.14 showed that
there was increase in the average amount of loan disbursed to borrowers or clients from the year
2004 to 2008. DECSI on average disburses $227 loan per single borrower in those years of
operations. From this it can be concluded that the DECSI disbursed satisfactory average loan per
a single borrower.
Personnel Productivity
Personnel Productivity Ratio

387
400 344
350 284
300 253 246
250
200
150
100
50
0
2004 2005 2006 2007 2008
Figure 18 Trend in personnel productivity ratio by DECSI from the year 2004-2008
Loan officer Productivity
Loan officer Productivity

2000 1840
1800
1600
1400 Loan officer Productivity
1200 1012 Polynomial (Loan officer
957 Productivity)
1000
800 711
616
600
400
200
0
2004 2005 2006 2007 2008
Figure 19 Trend in loan officer productivity of DECSI from the year 2004-2008
The last two indicators in the above table 4.9 and figures 18 & 19 are known as staff productivity
ratios -are important ratios for all financial institutions because staffs are mostly the highest
operating expense.
The two indicators calculated above measure the size of the caseload (the number of active
clients) each loan officer takes, in addition to how much borrowers are served by a single staff.
The larger the ratios the better efficient the institution is. Appropriately, each loan officer under
the DECSI on average served 855 borrowers and also a single staff member on average served
303 borrowers. From the above analysis and discussion one can infer that DECSI is more
efficient in prior years since the trend of personnel productivity ratio indicates reduction over
time and also the trend of loan officer productivity shows reduction from year 2004-2006 and
then increased from 2007-2008.
The result of each indicators of efficient & productive performance of DECSI in the above table
& figures showed as follows:
The personnel productivity index was subsequent decrease overtime in number of clients by a
single staff member from 387 in 2004 to 246 in 2008. But average loan size per borrower has a
subsequent increased actively from $138 in the year 2004 to $314 in year 2008.Operating
expense ratio showed a decrease from 3.66% in 2004 to 2.87% in 2008.and the cost to serve a
single borrower remained between $4.52 and $8.456.Loan officer productivity indicated that a
single loan officer serve for 1,840 clients in the year 2004 and for 616 clients in 2006 and 1,012
clients in year 2008.
In general, based on indicators from the angle of productivity performance of DECSI results on
the above table & figures shows that there was decrease in personnel productivity and decreased
in loan officer productivity in previous years from 2004-2006 but later years increased; from the
angle of efficiency performance of DECSI results also a steady progress in the average loan
disburses size per borrower, decreased in operating expense ratio, but increased costs to serve a
single borrower. Therefore, by considering all indicators, the efficient and productivity
performance of DECSI was improved within the study years from 2004 up to 2008 as a result of
expansion or increase in outreach.
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusions
Based on the data analysis and discussion presented in chapter three the following conclusions
are made on financial and operating performance of DECSI.
The role of microfinance institutions as a tool to alleviation of poverty by providing financial
services to the poor people and microenterprises has become an accepted principle. However,
this key role can be performed only if the microfinance institutions are sustainable .i.e., can
operate in the long run without subsidy and donated by external supporter.
Performance of microfinance institutions is analyses from two viewpoint; first, an assessment of
historical performance based on analysis of financial statements and second, an evaluation of
their potential and ability to survive in the long-run. Performance is the development toward the
mission of growth finance. This mission is to create the lives of the poor people getting better.
MFIs do this by making more outreach, loans & deposits used by the poor people. Sustainability
is the ability to repeat and to continue performance of microfinance institutions in the future.
This research paper examines the performance of DECSI in relation to outreach in breadth &
depth, financial sustainability and profitability, portfolio quality, and efficiency and productivity.
It reviews literatures on these five core performance indicators of microfinance institutions and
those literatures help as a point of view to the study findings presented below.
The literatures mentioned in chapter two indicated that outreach can be seen through different
angles and based on this the research paper assesses the institution’s outreach using the
parameters like the number of active borrowers or clients involved, the percentage of female
borrowers or clients, gross loan portfolio, average loan balance as a % of GNI per capita, number
of depositors, outstanding savings, and average deposit balance as a % of GNI per capita.
Breadth (number of client) of outreach indicators including for this study are number of active
borrowers, number of female borrowers, and number of depositors; and also depth of outreach
indicators including as direct indicator like percent of female borrowers and as another way of
very rough proxy like, gross loan portfolio, average loan balance as a percent of GNI per capita,
gross outstanding savings, and average deposit balance as a percent of GNI per capita. The
breadth of outreach of DECSI in terms of number of active borrowers, number of female
borrower and number of depositors the trend demonstrates increase over the periods of the study
with different rates of increment.
In depth (client poverty level) of outreach in terms of percentage of female borrowers identified
that while DECSI reaches the very poor, it reaches to the disadvantages particularly to female is
limited (24.47 %). Depth of outreach in terms of average outstanding loan balance per borrower
was increased in an increment rate, and also average outstanding deposit balance per depositor
was increased except in 2007 at different rate of increment. Depth of outreach in terms of
average outstanding loan balance as a percent of GNI per capita was increased but average
outstanding loan balance as a percent of GNI per capita was decreased. Generally, the outreach
performance of DECSI considered in the study is increasing over the study period.
Profitability of DECSI is discussed in the research paper using two common indicators these are
return on assets (ROA) and return on equity (ROE). Return on assets shows how well the MFIs
are managing their assets to optimize its profitability. ROA of the DECSI is decreased in the year
2008 as compared to its average value. The trend also convinced that ROA is positive in all of
the years observed. In addition ROE of DECSI decreased in the year 2008 as compared to its
average value. The trend of ROE reveals privileged performance more than ROA. The trend of
ROE is positive in all of the years observed. In general the DECSI is more profitable and its
performance is good taking into account profitability ratios.
The other main issue discussed in the research paper is sustainability since DECSI, regardless of
its social mission, is financial intermediary. So, it should be financially sustainable and sound to
attain its mission. From this sustainability point of view, DECSI was achieved and doing well in
terms of operational self-sufficiency that was greater than the breakeven within the considered
year 2004-2008. However, FSS necessary adjustments were considered, which clearly showed
that the institution was not financially self-sufficient in the year 2008. If the institution were not
subsidized it was not able to cover its operational expenses from its operation. In actual terms,
the institution was not operationally self-sufficient. Hence, ratios determined based on traditional
accounting system are so inflated that lead the management, investors and the public to wrong
conclusion. The financial self-sufficient ratio of DECSI was financially self sufficient in all years
except 2008, but substantially the FSS ratios were decreased from 1.63 in the year ended Dec.
31, 2004 to 0.44 in year ended Dec. 31, 2008. Within the considered years from 2004 up to 2008,
DECSI was registered averagely 1.77 (or 177%) and 1.17 (or 117%) of OSS and FSS
respectively. Weak management performance, bad weather condition, inflation and shortage of
funds are the main problems that affect the performance and sustainability of this organization.
Generally, it can say that DECSI was going down the ladder of sustainability measures from the
year to year in the observed years from 2004 up to 2008.
The basis of financial threats in microfinance institutions is the ability to measures, monitors and
manages its loan portfolio (the source of earning), together with delinquency and write-offs. In
light of this, DECSI is evaluated based on its portfolio quality. DECSI shows a better
improvement in managing its loan portfolio because the ratio of portfolio at risk (PAR) greater
than 30 days and write-off ratio was lower. DECSI showed a better improvement in managing its
loan portfolio because the average ratio of portfolio at risk (PAR) greater than 30 days within the
considered years 2004 up to 2008 was 2.74% and this result had less than 5% portfolio at risk,
which was encouraging. The write-off ratio was also lower. The trend tells us that DECSI was
decreased in PAR> 30 days ratio because the average PAR > 30 days ratio within the considered
years for this study from 2004 up to 2008 was 2.74% and this result had less than 5% portfolio at
risk, which was encouraging. And also write-off ratio increase but at a lower rate, which was
averagely 0.19%. Therefore, DECSI was improved its portfolio quality from 2004 upto2008.
Finally, the study presents the indicators that reflect how efficiently and productively DECSI is
using its resources, specially its assets and its personnel. From this point of view, DECSI spends
least in operating and administrative expenses for serving and providing loan to a single client.
The trend showed that DECSI is cost efficient in providing and serving a single client. The study
also found efficiency of the institution in case of staff productivity ratios, it diminishes over time.
5.2 Recommendations
Based on the findings of the study the following recommendations are made by the researcher:
1. As discussed in chapter two the primary purpose of any MFI is to provide access to those who
have not access in conventional financial institutions. From this part of the population female
take the highest share and it is also the leading key strategy of DECSI to make sure that female
get priority for financial services. DECSI should provide due focus to involve and empower
female so as to achieve its goal.
2. Even though DECSI is doing satisfactory in terms of outreach performance to the poor. It
should use its maximum & full effort to increase its outreach to the target people. In general, the
greater the numbers of borrowers, the better sustainable microfinance institutions are. Thus,
DECSI in Tigray should reach larger number of poor so that, for first thing its objective of
reaching the poor will be achieved and for second thing, the number of borrowers will be
increased & the cost pay out to serve the borrowers will be minimized due to the economies of
scale.
3. Since return on assets and return on equity of DECSI greater than zero, it should perform on it
to move towards highest return and to get performance consistency or stability. In assess of the
fact that these parameters are the means to survive and grow to provide sustained service to the
poor without any subsidize and support of fund from external parties.
4. Even though DECSI was doing well in terms of profitability and sustainability, it should exert
maximum effort to pass the minimum threshold level in connection with operational and
financial self sufficiency to cover their expenses, grow and sustain by their own. Operational and
financial self-sufficiency is very important in the commercialization of microfinance. To reach at
financial self-sufficiency level, DECSI should: a. Raise the number of borrowers (It has to reach
the possible maximum number of borrowers). b. Should decrease the cost per borrower (possible
by increasing the number of borrowers). c. It should be able to utilize its short term assets to the
maximum possible level to produce better cash and financial revenues. d. DECSI should raise the
gross loan portfolio so as to increase the loan size that it lends to a borrower and to minimize
cost per borrower in proportion to the amount it lends. e. DECSI should raise the value of their
total assets greater than what it is having.
5. DECSI should think up & create a means to acquire finances from diversified sources so as to
reduce the risks related with obtaining funds from limited sources. Particularly, DECSI should
work in obtaining more additional funds in order to increase its operations to the target people.
DECSI should able to collect savings from the public, which helps keep afloat its loan portfolios.
For those whose savings portfolio greater than ETB 1,000,000 the maximum loan size is
unrestricted, but loans more than ETB 5,000 should not surpass 20% of total loans.
6. DECSI should improve its cost efficiency since the trend of efficiency in the analysis and
discussion part show that the institution does have surplus potential to increase its income by
reducing cost without increasing the resources available to it. DECSI continue to seek ways to
increase efficiency through keeping both cost per borrower and cost per saver better
communication, improved lending products, new technology, or some combination of these
improvements in order to minimize cost of operation and run sustainably with no subsidy.
7. Even though DECSI’s staff productivity decreases over time. It indicates some improvement
recently so to keep high productivity DECSI should raise the number of clients served per staff.
This is not a definitive study of DECSI in terms of financial & operating performance. A lot of
factors could influence the selected five basic performance measures including data quality and
non-optional variables in terms of MFIs characteristics and variation in the operating
environment. However, the findings from this study work provide basic indicators on the
performance of DECSI considered into account the five core measures. Therefore the concerned
institution can use the output of the study too see their operating & financial performance level in
terms of the indicators included in the study.
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Annex 1
Dedebit Credit & Saving Institution
Financial & Operating performance Reports
For the years Ended Dec. 2004-2008
Fiscal Year 2004 2005 2006 2007 2008
Period ANNUAL ANNUAL ANNUAL ANNUAL ANNUAL
Currency USD USD USD USD USD
Dec. Dec. Dec.
As of date 31,2013 Dec. 31,2013 Dec. 31,2013 31,2013 31,2013
Assets 57222626.78 103363657 118249357.9 171228824.8 185844934.7
Offices 119 119 21 21 139
Personnel 868 1217 1385 1673 1887
Financing Structure
Capital/asset ratio 0.3387 0.2325 0.2105 0.2009 0.1922
Debt to equity ratio 1.95 3.3 3.75 3.98 4.2
Deposits to loans 0.3861 0.2796 0.2682 0.277 0.2741
Deposits to total assets 0.3128 0.2107 0.1934 0.1922 0.2151
Gross loan portfolio to
total assets 0.8103 0.7538 0.7211 0.6936 0.7847
Outreach Indicators
Number of active
borrowers 336733 419052 392693 423830 464622
Percent of female
borrowers 0.1992 0.2283 0.186 0.38 0.2447
Number of loans
outstanding 336733 419052 392693 423830 464622
Gross Loan Portfolio 46365571.59 77918546.9 85266397.16 118766534.7 145826451.8
borrower 137.69 185.94 217.13 280.22 313.86
borrower / GNI per capita 0.9835 1.1621 1.1428 1.2737 1.1209
Average outstanding
balance 137.69 185.94 217.13 280.22 313.86
Average outstanding
balance / GNI per capita 0.9835 1.1621 1.1428 1.2737 1.1209
Number of depositors 165844 183652 160667 423830 261437
Deposits 17901842.14 21782528.8 22871741.41 32901910.34 39975664.82
Average deposit balance
per depositor 107.94 118.61 142.35 77.63 152.91
Average deposit balance
per depositor / GNI per
capita 0.77 0.74 0.75 0.35 0.55
Average deposit account
balance 118.61 142.35 77.63 152.91
Average deposit account
balance / GNI per capita 0.74 0.75 0.35 0.55
Financial Sustainability & profitability indicators
Return on assets (ROA) 0.055 0.0496 0.043 0.0385 0.0206
Return on equity (ROE) 0.1464 0.1834 0.1946 0.1882 0.1051
Operational self
-sufficiency (OSS) 2.1553 1.9732 1.9377 1.7337 1.2998
Financial self 1.253 1.51 1.27 1.00 0.44
sufficiency(FSS)
Efficiency & Productivity Indicators
Operating expense/
Average Gross loan
portfolio 0.0366 0.0273 0.0251 0.0287 0.0287
Personnel expense/
Average Gross loan
portfolio 0.0223 0.0162 0.0175 0.0192 0.0185
Cost per borrower 4.5223 4.4853 5.0502 7.177 8.546
Borrowers per staff
member 387.9412 344.332 283.5329 253.3353 246.2226
Borrowers per loan officer 1840.071 956.7397 615.5063 711.1242 1012.2484
Depositors per staff
member 191.0645 150.9055 116.0051 253.3353 138.5464
Portfolio Quality (Loan Repayment) Indicators
Portfolio at risk greater
than 30 days 0.0732 0 0.0293 0.0166 0.0178
Write-off ratio (Loan loss
rate) 0 0 0.0037 0.0041 0.0016
Balance Sheet Statement
Assets 57222626.78 103363657 118249357.9 171228824.8 185844934.7
Cash and cash equivalents 7912682.31 18008741.6 20544049.49 36766121.76 20576796.98
Trade & other receivables 4882944.59 8809773.51 12846333.79 15950413.38 19215335.98
Net loan portfolio 43493978.7 74675234.3 81826701.02 114316115.2 139459020.2
Gross Loan Portfolio 46365571.59 77918546.9 85266397.16 118766534.7 145826451.8
Impairment loss allowance 2871592.9 3243312.61 3439696.13 4450419.48 6367431.56
Inventories 429353.17
Net fixed assets 933021.19 1869907.68 3032273.61 4196174.43 6164428.34
Liabilities and equity 57222626.78 103363657 118249357.9 171228824.8 185844934.7
Liabilities 37839710.36 79329609.1 93357336.63 136833469.8 150116479.8
Deposits 17901842.14 21782528.8 22871741.41 32901910.34 39975664.82
Borrowings 15097555.3 50169495.4 70471443.91 95374319.91 99480129.35
Trade and other payables 4840312.92 7377584.86 14151.31 8557239.5 10637776.78
Provisions for employee
benefits 1583.02
Current tax liabilities 21325.83
Equity 19382916.41 24034048.1 24892021.27 34395355.06 35728454.87
Paid in capital 468568.1 547591.74 543230.94 519586.51 479899.5
Retained earnings 8718902.68 12897539.6 17809287.83 22882535.8 24911344.22
Donated equity 10195445.63 10588916.7 6539502.5 0 10337211.16
Other equity interest 0 0 0 10993232.75
Income Statement
Financial revenue 4679652.31 8070534.98 9835518.46 13180974.11 15969928.17
Interest and fee income 4628479.75 8022073.53 9731406.08 13029568.11 15712867.57
Revenue from interest 4412820.37 7749307.36 9499240.94 12747052.67 15342953.74
Interest income on loan
portfolio 4239299.65 7522840.85 8894454.47 11345799.44 14342527.86
Interest income from
investments 173520.72 226466.51 604786.47 1401253.22
Other interest income 1000425.88
Fee and commission
income on loan portfolio 215659.38 272766.17 232165.14 282515.44 192242.93
Income from penalty fees
on loan portfolio 96081.08
Other fee and commission
income 81589.81
Other operating income 51172.57 48461.45 104112.39 151406 110555.41
Gains (losses) on
available-for-sale financial
assets 146505.2
Financial expense 476705.32 1741539.36 2498403.67 3071714.78 5939145.63
Interest and fee expense 476705.32 1741539.36 2498403.67 3071714.77 5939145.63
Interest expense 5939145.63
Interest expense on
borrowings 4285266.84
Interest expense on
deposits 1653878.79
Net impairment loss, gross
loan portfolio 422097.34 653482.51 527703.9 1600877.78 2550481.81
Impairment loss (reversal
of impairment loss), gross
loan portfolio 422097.34 653482.51 527703.9 1600877.78 2550481.81
Operating expense 1272402.89 1694968.12 2049732.68 2930093.67 3796350.73
Personnel expense 775756.13 1003853.05 1430659.17 1957553.22 2451518.3
Depreciation and
amortization expense 91852.08 236996.66 235240.6 255682.89 345188.77
Administrative expense 404794.68 454118.41 383832.91 716857.56 999643.66
Net operating income 2508446.76 3980544.99 4759678.21 5578287.89 3683950
Non operating income 0 49659.49 0 0
Net Income before taxes
and donations 2508446.76 4030204.49 4759678.21 5578287.89 3683950
Tax expense 0 0 0 0
Net Income after taxes and
before donations 2508446.76 4030204.49 4759678.21 5578287.89 3683950
Donations 1378176.74 547350.52 0 0
Net income after taxes
and donations 3886623.5 4577555.01 4759678.21 5578287.89 3683950
Write offs 0 0 303708.14 415941.56 216117.05
Loan officers 183 438 638 596 459
Source: Compiled by the Author from Audited financial statement reported to Mix market website
http://www.mixmarket.org/mfi/decsi/report

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MEKELLE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

SUBMITTED BY: HAILAY ALEM

A THESIS SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENTS OF THE

PRINCIPAL ADVISOR: ASSEFA WORED (ASS. PROFESSOR)

Place: Mekelle Signature:

Date: June 01, 2013 Name: Hailay Alem

Place: Mekelle Signature:

Date: June, 2013 Assefa Worede (Asst. Professor)

Place: Mekelle Signature:

Date: June, 2013 Kibiret Desalegn

Place: Mekelle Signature:

Date: June, 2013 Aregawi G/Michael (Ass. Professor)

ACSI Amhara Credit and Saving Institution

OSS Operational Self- Sufficiency

1.2 Statement of the Problem

1.3 Research Questions

1.4 Objective of the Study

1.4.1 General objective of the Study

1.4.2 The Specific objectives of the study

1.5 Significance of the Study

1.6 Scope and limitation of the Study

1.7 Structure of the study

Figure1. Critical Microfinance Triangle

Twin mission system

According to Legerwood (1999 p. 1) defines Microfinance as the provision of financial services

According to Ledgerwood (1999) stated that financial intermediation is the provision of

2.3 Microfinance Performance Evaluation

2.4 Performance and Performance Indicators for Microfinance

2.4.1.1 Outreach: Breadth (number of clients served)

2.4.1.2 Outreach: Depth (client poverty level)

Average outstanding loans or savings balance per customer

LAR (x days) = number of loans greater than x days late

Cash collected in the period from borrowers

ALR = 1 – Current Recovery Rate x 2

Operational self-sustainability (OSS) = Financial revenue__________________

According to Meyer (2002:4), measuring financial self-sustainability of MFIs demands that

Financial Self-sufficiency (FSS) is a subsidy-adjusted indicator frequently employed by donor-

Financial Self-sufficiency (FSS) = Adjusted financial revenue (excluding grants)_______

ROE = (Net Income After tax)

AROE = (Adjusted Net Income After tax)

ROA = (Net Income After tax)

AROA = (Adjusted Net Income After tax)

2.4.4 Efficiency and productivity

2.5 The Overview of the Microfinance Sector in Ethiopia

2.6 Empirical literature review

As per Nawaz (2009) conducted a research on Efficiency and Productivity of Microfinance:

2.7 Empirical Evidence Ethiopian Scenario

2.8 Challenges of Microfinance Institutions in Ethiopia

3.2 Description of the study area-DECSI

The major objectives of DECSI are:

Organizational Chart of DECSI

GENERAL MANAGER MANAGEMENT COMMITTEE

MANAGEMENT AUDIT SERVICE

PLANNING & DUTY GENERAL FINANCE HUMAN

3.2 Research Design

3.3 Types of Data sources

3.4 Method of Data Collection

3.5 Methods of Data Analysis and Interpretations

4.2 Financial and Operating Performance of DECSI in the year 2008

4.2.1 Outreach performance of DECSI in the year 2008

Figure 2 Percent of female & male borrowers in the year 2008

3.2.1.7 Average outstanding saving balance

4.2.3 Financial Sustainability and Profitability indicators of DECSI in the