THE ECONOMIC CONTRIBUTION AND CHALLENGES OF SAVING

AND CREDIT INSTITUTIONS ( IN FITCHE TOWN)

SALALE
UNIVERSITY

COLLEGE OF BUSSINESS AND

ECONOMICS

DEPARTMENT OF ECONOMICS

SENIOR ESSAY SUBMITTED TO DEPARTEMENT

OF ECONOMICS IN PARTIAL FULFILMENT OF BACHLOR ART (BA) DEGREE
IN ECONOMICS

BY: TEKLU GETACHEW

ID NO:- WU0142/11

ADVISOR: MARSEMOE BEKELE

13, DECEMBER,2021

FITCHE, ETHIOPIA
 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The government follows different strategies and plans to eradicate poverty. To do this the
government has motivated both the government and non-governmental organization to
contribute their effort in alleviating poverty to improve the consumption level and capital
formation. Among these means to improving productivity and living standard the provision
of credit system motivating the industrial sector to engage in international market with an
incentive such as exporting products can be implemented.

The development of micro finance institution in Ethiopia is a recent phenomenon. The policy,
which provides for the establishment of micro finance institution have legally been registered
and started delivering micro finances services. In particular, the licensing and supervision of
micro finance institution policy of the government encourages the spread of micro finance
institution in both rural and urban areas as it authorizes them among other things, to legally
accept deposits from the general public, to draw and accept draftsman to manage funds for
the micro financing businesses.

Reducing unemployment and poverty is the primary goal of Ethiopian policy makers. For this
case the issue of micro finance activities have received a great attentions as more important
area that are stimulating economic growth in Ethiopia.

In most developing countries, government and international donors believe that poor societies
need credit as a way of promoting agricultural production of small land holders. In addition,
to provide subsidy for agriculture,donors setup credit unions.

Poor households and other individuals denied access to institutional credit due to high
collateral and un liquidated lending practice of formal banks. For this reason, alternative and
innovative approaches to provide credit to poor and others has designed and successfully
tried in many developing countries. The main target of the program was specially for low
income societies who live in urban and rural areas.

Proclamations number 40/1996, which defines the mandate of micro finance institution in
Ethiopia, creates favorable conditions for the establishment of micro finance institution in the
country. Following the endorsement of this proclamations,fitche credit and saving institution
has got legal personality to offer micro finance service and commenced its operation.

Today the focus is on providing financial service only, where as much of 1970s and 1980s,
characterized by integral package of credit and training and the institution have began to
transform in to providing saving services to their clients and to access market funding source
than relay on donors funds. To provide all their service, credit and saving institution
established in fitche town , since the resident are poor, how income and unemployment
segments. Those poor and unemployed people were not able to have access to financial
services provided by private and public banks particularly the loan services because of
perceived risks and lack of collaterals. On the other hands, the surrounding rural people do
not have even proximity to the service offered by conventional banks as they live far from
urban.

1.2 Statement of the problem

The majority of the world's poor live in the less developed countries irresistebly.
Various approaches have been developed in alleviating poverty and increase creation of
employment with provision of credit that targets the poor.It is believed that allowing the
poor to have command over resources through credit can contribute towards poverty
alleviation. The best way to do something about poverty is to let the people do their own
thing.Everybody will have more motivation to change his life situation than suffer himself.

It is generally accepted that credit,applied to productive use, results in good returns. But
credit provision is such a risky business that, in addition to other reasons of varied nature, it
may involve dishonesty behavior. The lender in the formal financial system is at a
disadvantage of information on the burrower’s behavior. Fortunately, group based micro
financing system that involves peer pressure and joint liability has evolved to counter
the problems of a conventional bank that provides a collateral backed credit alienating
the poor.

For such MFIs to be successful, they should be sustainable both financially as well as
institutionally. On top of sustainability one has to include developmental effects like increase
in income on the target group as core measure of success. For agencies that are involved in
the development or in assisting the development of a micro-credit institution, it is
recommended that sustainability should be the final goal, and therefore the only
indicators of success.

Although the performance of the MFIs in Ethiopia has been impressive since their
establishment, they are experiencing basic problems as can be observed in their declining
repayment rates.

Hunte(1996) argues that default problems destroy lending capacity as the flow of
repayment declines, transforming lenders into welfare agencies, instead of a viable financial
institution. It incorrectly penalizes creditworthy borrowers whenever the screening
mechanism is not efficient. Loan default may also deny new applicants access to credit as the
bank's cash-flow management problems augment in direct proportion to the increasing
default problem. It is obvious that many rural credit schemes have sustained heavy losses
because of poor loan collection. And yet a lot more have been dependent on government
subsidy to financially cover the losses they faced through loan default. But such dependence
will not prove helpful for sustainability. MFIs should rather depend on loan recovery to
have a sustainable financial position in this regard, so that they can meet their objective of
alleviating poverty and reduce unemployment. "Whether default is random and influenced
by erratic behavior or whether it is influenced by certain factors in a specific situation,
therefore, needs an empirical investigation so that the findings can be used by micro
financing institutions to manipulate their credit programs for the better.

In many developing counties, credit and saving institution are accepted as the most important
ways in creatoin of employment.By considering this, various credits and saving institution
established in Ethiopia and their number and coverage increased through time. One of them is
(credit and saving institution) also established in Fitche town for creation of employment and
improving the house hold income. Providing financial service to the poor plays the crucial
role in poverty and unemployment reducing strategy of the country. Therefore, credit and
saving institution have to be encouraged to diversify their services to all clients of poor
society.

Depending on the strategy of the country, Fitche credit and saving institution started delivery
of financial services to the poor population of rural and urban resident of the Zone. This
financial delivery to the poor aimed to creation of employment and reduction of poverty
through giving financial assistance as a beginning capital. However there are still many
people in the labor force that do not get sufficient credit access in the area, which can resulted
in lack of job opportunity in the zone. Thus, this research bridges this gap by raising the
following research questions and at the end it will answer the following questions.

1.3. Research question

 What is the role of credit and saving institutions in fitche town?

 How credit and saving institutions play to creating employment as oromia regional state in the
fitche town?

 What are the challenges faced by credit and saving institutions in fitche town?

1.4 Objective of the study

1.3.1 General objective
The general objective of this study will be to examine the contribution and challenges of
credit and saving institution in fitche Town.

1.3.2 Specific objectives

To examine the role of credit saving institutions in creation of employment.
To examine the role of credit saving institutions in income generation
To assess the challenges faced by the credit and saving institutions in fitche town

1.4 Significance of the study

This study may provide some important information about the role of credit and saving
institution in the creation of employment. It also provides valuable information on Fitche
town branch of credit and saving institution. Thus, it can serve as a proceed board to carry out
further research on saving and credit institutions in the creation of employment

1.5 Scope of the study

This paper focuses on identifying the major factor that affect individual willingness to pay
for improving the level of credit and saving institutions in Fitche town.

The particular purpose of the study will mainly delimited on the prevailing role of credit and
saving institutions in providing job for the society in the Fitche town. The respondent will be
the individual living in Fitche town.
1.7 Organization of the study

This study will be organized into five chapters; the first chapter will include the introduction,
statement of the problem, objective of the study, significance of the study, scope of the study
and organization of the study. The second chapter contained review literature; the third
chapter will incorporate methodology of the study. Fourth chapter analysis and the final
chapter will deal with recommendation and conclusion.