BAHIR DAR UNIVERSITY

POST GRADUATE PROGRAM (REGULAR)

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE TITLE : FINANCIAL MARKET AND INSTITUTION

GROUP ASSIGNMENT

STRICTURE, ACTIVITIES AND OTHER KEY FACTS OF MICRO FINANCE

INDUSTRY IN ETHIOPIA

CONDUCTED BY;

NAME ID

MELESE WULETAW BDU1301609

EDLAMU ALEMIE BDU1208378

ABYOT MULAT BDU1301596

SUBMITTED TO – TILAHUN A.(PhD)

JUNE 1, 2021

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Executive summery
Microfinance is a term for financial services that are offered to individuals of lower
socioeconomic backgrounds or those who lack access to traditional financial services and also
the term refers to the provision of financial services to low-income clients, including the self-
employed. Even if the development of microfinance institutions in Ethiopia is a recent
phenomenon today there are more than 31 microfinance institutions in the country. Ethiopian
microfinance institutions have great role for economic development, reduction of poverty and
improving the living standard of the society and the institution provides several activities like,
saving and providing loansto their members and others. Inaccessibility for foreign capitals, lack
of clarity in ownership structures, lack of skilled personnel and problem of using modern core
finance technologies are the major challenges for Ethiopian microfinance institution .

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Table of content

Contents
Executive summery .................................................................................................................................... i
Table of content ........................................................................................................................................ ii
INTRODACTION ............................................................................................................................................. 1
1.1 OVER VIEW OF MICRO FINANCE INSTITUTIONS ................................................................................. 1
1.2 MICROFINANCE IN ETHIOPIA ............................................................................................................ 2
1.2.1 Background of Microfinance Institutions in Ethiopia ..................................................................... 2
1.2.2 STRUCTURES OF MICRO FINANCE INSTITUTIONS IN ETHIOPIA ....................................................... 3
1.2.3 Activities of micro finance institutions in Ethiopia .......................................................................... 3
1.2.4 THE ROLE OF MICRO FINANCE INSTITUTIONS ................................................................................. 4
1.2.4.1. Microfinance and its role in economic development .................................................................. 4
1.2.4.2 THE ROLE OF MICROFINANCE ON POVERTY REDUCTION ............................................................ 5
1.2.4.3 ROLE OF MICROFINANCE ON LIVELIHOODS ................................................................................. 5
1.2.5 STRENGTHS AND CHALLENGES OF ETHIOPIAN MICRO FINANCE INSTITUTIONS............................. 5
1.3 Conclusion: .............................................................................................................................................. 7
1.4 RECOMMENDATION ............................................................................................................................... 7
Reference .................................................................................................................................................. 9

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INTRODUCTION
1.1 OVER VIEW OF MICRO FINANCE INSTITUTIONS
Microfinance is a term for financial services that are offered to individuals of lower
socioeconomic backgrounds or those who lack access to traditional financial services.
Microfinance includes a number of services, such as savings accounts, checking accounts, fund
transfers, micro insurance, and microcredit.
Microfinance has evolved as an economic development approach intended to benefit low-
income women and men. The term refers to the provision of financial services to low-income
clients, including the self-employed Financial services generally include savings and credit;
however, some microfinance organizations also provide insurance and payment services. In
addition to financial intermediation, many MFIs provide social intermediation services such as
group formation, development of self-confidence, and training in financial literacy and
management capabilities among members of a group. Thus the definition of microfinance often
includes both financial intermediation and social intermediation. Microfinance is not simply
banking, it is a development tool.
Microfinance originally started with microcredit, which is the practice of providing extremely
small loans to those who do not have a steady source of income, collateral, or any credit history.
It also aims to support and kick start entrepreneurs who do not have the financial backing to
begin a small business or capitalize on an idea.
Key Features of Microfinance
Micro finance institution has the following key feature:
 The borrowers are generally from low income backgrounds.
 Loans availed under microfinance are usually of small amount, i.e., micro loans.
 The loan tenure is short.
 Microfinance loans do not require any collateral.
 These loans are usually repaid at higher frequencies.

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1.2 MICROFINANCE IN ETHIOPIA

1.2.1 Background of Microfinance Institutions in Ethiopia

The development of microfinance institutions in Ethiopia is a recent phenomenon. The
proclamation, which provides for the establishment of microfinance institutions, was issued in
July 1996. Since then, various microfinance institutions have legally been registered and started
delivering microfinance services. The number of micro finance institutions as well as the number
of clients is increasing from time to time. The existing political and economic condition of the
country contributes alot for the development of the microfinance industry. the Licensing and
Supervision of Microfinance InstitutionProclamation of the government encouraged the spread
of Microfinance Institutions (MFIs) in both rural and urban areas as it authorized them, among
other things, to legally accept deposits from the general public (hence diversify sources of
funds), to draw and accept drafts, and to manage funds for the micro financing business. In this
case some MFIs have strong capacity to serve a large number of clients by using their financial
and geographical advantage.. In Ethiopia there are more than 30 micro finance institutions, those
are listed as follows:
Amhara Microfinance PEACE Microfinance 1Letta Microfinance
Dedebit Microfinance Meket Microfinance Harbu Microfinance
Oromia Microfinance Addis Microfinance Ghion Microfinance
Omo Microfinance Wassasa Microfinance Degaf Microfinance
Specialized Financial Benishangul-Gumuz Harar Microfinance
Promotional Microfinance Microfinance
Gasha Microfinance Shashemene Microfinance Lefayeda Microfinance
Wisdom Microfinance Metemamen Microfinance Tesfa Microfinance
Sidama Microfinance Mekdela Microfinance Gambella Microfinance
AVFS Microfinance .Dire Microfinance Dynamic Microfinance
BuusaGonofa Microfinance Aggar Microfinance

Among the above listed institutions, amhara, debebit and oromia micro finance institutions take
more than 50% of the market share. This means they are reaching and serving many poor in their
areas.

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1.2.2 STRUCTURES OF MICRO FINANCE INSTITUTIONS IN ETHIOPIA
MFIs have evolved with different regulations, capital structures, and institutional objectives that
have resulted in a variety of organizational forms. Ownership could range from shareholders as in
commercial banks to membership owners as in credit unions, resulting indifferences in
regulatory oversight. Some MFIs registered as commercial banks or rural banks, usually owned
and governed by shareholders operate under the regulation of formal banking institutionswith
regulatory oversight through central banks. In contrast, NGOs operate under the direction of
donors, founders, or other stakeholders and face minimal regulation from the government. Non-
bankfinancial institution (NBFI) ownership and operations are governed through mixture of
public and private ownership, are regulated through central banks and/or government units and
may have a more extended range of products that may include insurance and leasing. Finally,
cooperatives or credit unions are owned by members and may or may not be regulated.
Ethiopian microfinance institutions have decentralized operations to the sub-branches, the only
client facing part of the operation. In turn, the sub-branches report to branch offices, which then
forward consolidated information to head office. This manual process takes around a month to
produce consolidated information at head office. While this system is effective, it is time
consuming and costly in terms of the number of staff required to capture data.

1.2.3 Activities of micro finance institutions in Ethiopia

According to the Proclamation No. 626 /2009, the main purpose of a micro-financing institution
shall be to collect deposits and extend credit to rural and urban farmers and people engaged in
other similar activities as well as micro and small scale rural and urban entrepreneurs, the
maximum amount of which may be determined by the National Bank. In line with the above
mentioned proclamation, a micro financing institution may engage in some or all of the
following:

 Accepting both voluntary and compulsory savings as well as demand and time deposit.
 Extending credit to rural and urban farmers and people engaged in other similar activities
as well as micro and small-scale rural and urban entrepreneurs.
 Drawing and accepting drafts payable within Ethiopia.
 Micro-insurance business as prescribed by directive to be issued by the National Bank.

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  Purchasing income-generating financial instruments such as treasury bills and other short
term instruments as the National Bank may determine as appropriate.
 Acquiring, maintaining and transferring any movable and immovable property including
premises for carrying out itsbusiness.
 Supporting income generating projects of urban and rural micro and small scale
operators.
 Rendering managerial, marketing, technical and administrative advice to customers and
assisting them to obtain services in those fields.
 Managing funds for micro and small scale businesses.
 Providing local money transfer services.
 Providing financial leasing services to peasant farmers, micro and small-scale urban and
rural entrepreneurs in accordance with the Capital Goods Leasing Business Proclamation
No. 103/1998; and
 Engaging in other activities as specified by directives of the National Bank from time to
time.
 Small loans, typically for working capital
 Informal appraisal of borrowers and investments
 Collateral substitutes, such as group guarantees or compulsory savings
 Access to repeat and larger loans, based on repayment performance
 Streamlined loan disbursement and monitoring
 Secure savings products.

1.2.4 THE ROLE OF MICRO FINANCE INSTITUTIONS

1.2.4.1. Microfinance and its role in economic development

For many, microfinance is a way to promote economic development, employment and growth
through the support of micro-entrepreneurs and small businesses; for others it is a way for the
poor to manage their finances more effectively and take advantage of economic opportunities
while managing the risks. https://en.wikipedia.org/wiki/Microfinance

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1.2.4.2 The role of microfinance on poverty reduction
Poverty is a pervasive problem for the developing countries like Ethiopia. It exists through the
world as a curse. Poverty, works as a hindrance of economic development of a country. Poverty
may exist in different levels in our society. The rural people especially the poor deprived of basic
needs such as food, cloth, shelter, and so on at their daily lives. To get those services they need
financial sources. Consequently, Microfinance has received extensive recognition as a strategy
for poverty reduction and for economic empowerment particularly in rural areas having poor
population. Providing poor people the small amounts of credit at reasonable interest rates give
them an opportunity to set up their own business at small scale.

1.2.4.3 Role of microfinance on livelihoods

Having access to MF services have led to an enhancement in the quality of life of clients, had
increased their self-confidence, and had helped them diversify their livelihood security strategies
and thereby increase their income. A sustainable livelihood is that which can cope with and
recover from stresses and shocks and maintain or enhance its capabilities and assets both now
and in the future, while not undermining the natural resource base. Access to capital is one of the
determinants of a household’s ability to achieve wellbeing, defined broadly to include natural,
physical, financial, human and social capital.

1.2.5 STRENGTHS AND CHALLENGES OF ETHIOPIAN MICRO FINANCE

INSTITUTIONS

Strengths:

 The biggest strength is bringing financial services to poor people and making it financial
sustainable by the economies of scale effect.
 the service provision is centered on urban and rural poor particularly in alleviating the
chronic problem of poverty;
 The number of clients served is growing from time to time making it accessible for the
needy partners;
 Regional distribution of the services is appreciable as microfinance institutions are
operating in all regional states of the country.

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 Also helps in the development of an economy by giving everyday people the chance to
establish a sustainable means of income. Eventual increases in disposable income will
lead to economic development and growth.

Challenges:

Even if Ethiopian micro finance institutions have several strengths as listed above, the also
faces the following challenges:

 The first challenge is the inaccessibility for foreign capitals which may foster their loan
portfolio. As a result, many MFIs are limited to certain category of services.
 Lack of clarity in ownership structures persist specially in some MFIs where private
investors are not the real owners of the MFIs though they are shareholders. Therefore,
this situation could be seen as a challenge due to inefficiencies in the management.
 Lack of skilled personnel is the common problem in Ethiopian Microfinance institutions.
This situation is more exacerbated by high turnover of experienced personnel either for
the need of better jobs or hate to work in rural areas with minimal facilities provided as
compared to urban areas which offer better living conditions.
 There is also a problem of using modern core finance technologies for many of MFIs
specially those microfinance institutions operating in remote rural areas having poor
infrastructure development. As a result, there are problems of non-standardized reporting
and performance monitoring system. On the other hand, MFIs face challenges of
obtaining loans in the existing finance market particularly from banks which hampers
strive for addressing various needs of clients.
 There is an illegal way of doing the micro financingbusiness from the side of the
government, NGOs and other agencies which continue to provide uncollectible loans by
violating the proclamations ratified by the House of People’s Representatives. Apart from
this, there are deep concerns within the microfinance sector about the growing issue of
inflation on the profitability of MFIs, and the ability to maintain low interest rates.
Other challenges most commonly cited are lack of knowledge about microfinance
services, weak governance and management capacities for further developments, less

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attention and emphasis on the financial sustainability of MFIs, low interest rates in the
microfinance industry affecting the financial health and viability of MFIs and limited
outreach particularly for women.

1.3 CONCLUSION:
We conclude that, Ethiopian microfinance institutions had played a significant role in
alleviating poverty, improve sustainable livelihood and assure economic growth.
However, Ethiopian microfinance institutions faced different challenges like
inaccessibility for foreign capitals which may foster their loan portfolio, Lack of skilled
personnel, and Lack of clarity in ownership structures. We learned that Microfinance has
emerged as a growing industry to provide financial services to poor people. Until
recently, it focused primarily on providing microcredit for microenterprises. Now,
however, there is recognition that poor people need a variety of financial services in
addition to credit. Current microfinance, therefore, provides a range of financial services,
including credit, savings and insurance, to poor enterprises and households.

1.4 RECOMMENDATION
 Now a day our world is fulfilled in competition and is become in one village due to
globalization. This is difficult task for business organization especially for developing
country like Ethiopia.
 To pass the obstacles and become competent in this competing world Ethiopian micro
finance institution should use skilled and educated human force and updated
technology to conduct their activities.
 Most microfinance institution in Ethiopia faced a loan refunding problems, especially
in rural area. To solve such types of challenges the institution should practice the
following activities:
 Before providing a loan for borrower they should study the credit worthiness of the
borrower and measure the degree of credit worthiness. Then provide a loan according
to the measurement.
 The institutions pledged property or fixed asset of the borrower as a collateral.

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 Before providing any credit they should create awareness to their customers about
the all over characteristics of the loan, such as maturity date, interest rate and other
related events.

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Reference

Kintamo, B. H. Impact of Microfinance on Poverty Reduction in Ethiopia: Case of Omo Microfinance in

Hosana Town.

Martha, W. (2014). The Contribution of Micro-Finance Institution to the Livelihood of Micro Credit
Beneficiaries: The Case of Lideta Micro-Finance, Adigrat Town, Tigray, Northern Ethiopia (Doctoral
dissertation, Mekelle University).

Ledgerwood, J. (1998). Microfinance handbook: An institutional and financial perspective. The World
Bank.

Sida, A. (2014). The role of microfinance institutions in improving livelihood: In case of Oromia Credit
and Saving Share Company in Agaro Town, Jimma Zone. GRIN Verlag.

Chirkos, A. Y. (2014). The role of microfinance institutions in the development of small and medium size
businesses in Ethiopia, a case study in Amhara credit and saving institutions. Research Journal of
Finance and Accounting, 5(13), 102-117.