Chapter One

1. Introduction

1.1 Back Ground of the

The need of Microfinance Services are regarded as poverty alleviation among the most
stricken led to the creativity of making small informal microfinance. When microfinance
was started in the 1990s, the aim was to alleviate people against the effect of low income.
Since then, they have either achieved their aim or are still working on it facing related
challenges. The Microfinance institutions Services help the poor to start their own initia-
tives and to build assets for their economic security. Conventional financial institutions
such as banks fail to lend money to the poor for many reasons. Hence, the poor rarely
have a chance to get financial support from them. As a means of getting rid of poverty,
Muhammad Yunus from Bangladesh created the formal microfinance concept in 1990s.
The low income people’s problems have been aggravated by the recurrent and complex
natural calamities such as drought, flood, disease and so forth. Due to both artificial and
natural calamities, the poor people have emerged as the poorest of the poor. Micro fi-
nance Institutions (MFIs) could play a significant role in improving food security and al-
leviating poverty. With regard to this several studies (Obaidullah 2008; Halder and
Mosley 2004;) noted that providing microfinance services to poor households is one as-
pect of promoting food security. It is obvious that micro finance institutions can contrib-
ute their role in enterprise development whenever they are implemented properly. How-
ever, some says it is not a panacea which by itself can help enterprise development. Thus,
even though these studies and other reports remarked on the non-existence of MFIs in the
region they do not go through to explore firstly could introduction of microfinance insti-
tution help enterprise development given that the existing environment. Additionally,
they don‘t try to see reasons behind dalliance of such institutions to be establishment
while its use is crucial in poverty reduction and income diversification in spite of some
negligible criticisms.
Since 2008 the regional state is trying to establish feasible MFI in the region.
Unfortunately, the effort of the region to establish the feasible institution does not come
in to practices until this research is undertaken because of unidentified reasons.

1
Therefore, this study will try to explore the challenges and prospects found in the City to
introduce feasible MFI for the residents of the city majority people for enterprise
development and ultimately poverty reduction purpose.
The remaining parts of the introduction are organized as follow. Under this introductory
part statement of the problem is presented first. Next to that, research objective and
questions are follows respectively. Significant of the study, scope of the study and
organization of the paper are also presented under this introductory part respectively.

1.2 Statement of the problems

Samara was established as the capital city of afar regional state in 1997 E.C which has
made the city in a very pivotal point for the growth and development of governmental
and private financial organizations. Due to high immigration and high birth rate the
population of the city is growing at alarming rate. Due the prevailing climatic factor of
the Afar region most of the pastoralist (surrounding) people move places to place
fallowing their cattle as the result of the drought. The immigration of people caused
poverty due to lack of any kind of effective financial institutional which needs to support
the people in establishing sustainable livelihood in the city.

Though, at present time the city has bureau which work on behalf of this objective but
this institution was not functioning well as it is intended the reason for this is not well
studied. Due to the existing situation of the area which need to base on the specific need
of the people that need to be studied well. As it’s known most of the residents of the city
are Muslims and according to Islamic teaching the use of interest is not allowed. And this
situation has its own influence in shaping the peoples attitude to take loan with interest
from micro finance institutions and this situation has not studied well. In the other hand
the responsible body is not giving the necessary awareness for the people on micro
finance and how to use the money given which aggravate the problem. On the other hand
there is, no enough loans is also given for those organizations for the established small
and mini scale enterprises. Therefore, this study is intended to study the major challenges
and prospects of microfinance institution services, identifying the needs of the people
from the and finally forward the necessary solution for the challenge faced by the
microfinance institution of S amra city.

2
1.3. Objectives of the study

 To identify the need of the residents for microfinance service.

 Identify the major challenges of introducing microfinance service in Samara city
 To forward possible solutions for the challenges

1.4. Research question

This study responds the following Research equation:

 To what extent is the need of the resident for microfinance service

 What are the major challenges of introducing microfinance service in Samara
city?
 What possible strategies are thought to be valuable to mitigate the problem?

1.5. Significance of the study

This study will provides relevant information about the challenges and prospective of
introducing microfinance service in Samara city for institutions that are interested in
micro finance and related issues. Its output will be used for policy makers and
responsible bodies for understanding the challenges and prospective of introducing
microfinance service in city. In addition to this the study will provide essential
information for researcher by showing the gaps of provision of the service and by
indicating the additional areas need to be studied.

1.6. The Scope of the Study

The scope of this research was focused on assessing the needs of the people for MF
services and possible challenges and prospects of introducing micro finance services, and
identifying the major challenges of introducing microfinance service and the possible
strategies (solutions ) needed to mitigate the problem. So the researcher takes 126
household respondents from kebele three of samara city. In addition to this 8 Small and
microenterprise workers in four kebele and expert (professionals ) and decision makers
working in Samara city micro finance institute.

3
1.7. Description of the study Area

Samera is a new city on the Adiss Abeba-Djibuty highway in north-east Ethiopia

planned to replace Asaita as the capital of the Afar region. Located in the Administrative
zone 1, It had modern apartment blocks and soulless administrative buildings it looks like
a microscopic version of Brazilia emerging incongruously in the middle of the desert
except that it's a completely botched attempt at creating a new city

The city had a population of 5,625 in 2007 (CSA) .

Land form/Relief of the City

The City is an area of Low Land, with an irregular drainage system and depression,
which, is 114 m below sea level as well as some of the exposed rocks. Samera has
latitude and longitude of 11°47′32″N 41°0′31″E coordinates 11°47′32″N 41°0′31″E.
Almost 35.47 % of the city has an elevation less than 400 m above sea level whereas
51.44% has an elevation between 400 to 900 and 13.09 % has an elevation above 900 m
above sea level. (Afar atlas, 2009).

MAP of ETHIOPIA, AFAR REGION and SAMARA CITY

Kilometers
0 2.5 5 10 15 20

1.7.1. Temperature of the city

The city temperature is usually high and ranges from 12 0c to 480c, May, June and July
being the hottest months, and January and February the coldest months (Afar atlas, 2009).

4
1.7.2. Rainfall of the city
The city is highly characterized by low rainfall zone. Relatively high rainfall amount
receives < 300 mm. (Afar atlas, 2009)

1.8. Organization of the Study

The study paper is organized in to five Chapters. Those chapters deal with many points of
views raised, identified facts and basic information regarding MFIs. The first chapter
deals with the introduction, provides information on the main themes of the study and
justification for the statement of problem, research question, objective of the study, the
scope of the study. The second chapter mainly focuses on theoretical framework of
literature review on the topic of the study. The third chapter deals with research
methodology includes sampling designs (sample size, sample techniques etc.) and
method of data collection. The fourth chapter contains analysis and interpretation. The
last chapter contains conclusion and recommendation.

5
 Chapter Two

Review of Related Literature

2.1. Introduction of Micro Finance

In the case of formal Microfinance, the idea of helping poor people by giving loans is
new; however, the idea has always been there but in an informal way. Informal money
lenders grant loans with interest, family loans are traditional ways of lending money
which have long existed in many developing countries like Ethiopia and still used.
The poor people in most developing countries have practically no access to formal finan-
cial services. They are those with not ability to access loans from commercial banks nor-
mally because of lack in guarantee and collateral. But there are many other reasons also
involved for which commercial banks are not willing to finance poor. These reasons are
included that poor have less education, no proper experience and training, high transac-
tion expenses of small loans and lower rate of profit. Therefore limited option to access
loan leads to push poor people in more poverty. This situation resulted in emerging the
idea of micro lending and microfinance.

2.2 History of MFIs

Traditionally, the idea of poverty has long existed with the old culture of microfinance
where people were encouraged to start businesses when it was their turn to take the con-
tribution. But the modernization and rapid urge for people to get rid of poverty led to the
legalization of microfinance worldwide in a unique form. This modern microfinance was
first created in Bangladesh by a Greman bank (David, 2008).
Another term for microfinance is microcredit although they do not have exactly the same
meaning but are interchangeable. It is called microcredit because it gives out small loans
to poor people (Grammen Bank, 2011).
The 21st century microfinance system emerged from a group of poor people in
Bangladesh in a form of a small microcredit. It started in 1970s with Dr Muhammad Yu-
nas being the brain behind it. He gave money to start a small scale business with 27 US
dollars. They started with the making of Bamboo chairs. With the small amount he gave
out to women, he understood the women could survive taking care of their families and

6
themselves. In 1980s he started the Grameen Bank. This bank gave out loans of about
300 US dollars. The money was aimed to helping the poor to be able to sustain them-
selves but the interest rate was as high as about 98%. Today the bank recounts a success
story of what they did in the 1980s. The Grameen banking system of alleviating people
against poverty has been a model to many other countries such as Nepal, India, USA and
Norway.

2.3 The Theoretical Issues of Micro finances

The legalist school of thought about the informal economy as accentuated and popular-
ized by celebrated the ingenuity and entrepreneurial proficiency of people operating in
the informal economy. The a argument that small entrepreneurs retort to operate infor-
mally as a result of huge cost of operating or starting a business, time and efforts of for-
mal registration.
The deferent studies advocated strongly for the need to make capital available to the
working poor. That identified the poor flooded the urban areas from the rural settlement
to aggressively promote their economic and social well-being. Their surge from the rural
areas to the cities brought about increased slum development with deplorable habitable
conditions. But in that situation the people were able to seek ways and means to survive
by operating varying informal activities.
The deferent argument as measures to stem likely revolt by the working poor, recom-
mended the need for reform to create access to financial credit for these kinds of en-
trepreneurs.
The arguments has struck a strong cord with development institutions like the World
Bank (2005) who through its studies on the cost of doing business (reviewed edition; also
Kuchta-Helbling, 2000) recommended strongly the need for deregulation reforms to
make for greater market freedom. These reforms they argue will reduce bureaucracies in
business registration and imbibe stronger business governance culture that would stem
corruption as ways to promote economic growth. To Bredow (2000), the concepts of mi-
crocredit first appeared at the time of exiting of the state as the engine room of the eco-
nomic and the ascendancy of the market. Therefore, private enterprises became the bright
and new hope.

7
However, continuing from the arguments on the need for access to credit for micro en-
trepreneurs and the formalization of property rights. The point is that the poor can then
convert their formal held assets into real assets (de Soto, 1989; 2000). This formalization
of property rights can be done through official approach. This would require Government
conferring legal titles/deeds of land to these informal economy operators. The land titles
can then serve as collateral for loans or converted to credit for business enterprise set-up,
promotion and expansion. Therefore, he canvassed passionately like Muhammad
Yunus that capitalism can also work for the poor. To put it better, the poor micro en-
trepreneurs can also become successful capitalists through access to credit – an otherwise
appropriated preserves of the rich who can afford collaterals.
Furthermore, this argument has gained currencies in development discourses.
This can be seen from the attendant unacceptable level of global poverty, which with
the rise and ascendancy of globalization, greater wealth has been produced. But its distri-
bution has exacerbated inequality. Also, the proclaimed success story of the Grameen
Bank saw the United Nations (UN) as show of its concern for the need to attend to
poverty also recommended for the place of microcredit as one powerful intervention.
This culminated in its declaration of 2005 as the international year of microcredit
(UNCDF, 2005). This was done with the aim to steam and step up efforts to half by 2015
the number of people within the global poverty rung. Precisely, it seeks to attain its target
for its Millennium Development Goals (MDGs) agenda.
The desire is that with the availability and easy access to credit, micro entrepreneurs can
grow their businesses, improve productivity, and create opportunities for employment
and improve their income generation. The succinct point to note is that microcredit is
built on the premise of self-employment. It is therefore a means to promote the expres-
sion of social and economic self-reliance.

2.4. Challenges of microcredit as strategy to poverty Alleviations

The first challenge to credit arises from the notion of the theory as espoused by de Soto
(1989, 2000). The idea that the poor are entrepreneurs is rather too simplistic.
Also, to think that they will succeed without taking other internal and external environ-
mental factors like market, technical and managerial competences and infrastructure, etc,
into recognized is too theoretical.

8
According to Dichter (2006:5), the very nature of the loans themselves, which are small,
fewer in frequency and smaller savings will not engender much result. The micro level
activities the loans are been utilized for and the shorter repayment periods amongst others
limit their effectiveness. The practice is such that borrowers are more likely to invest the
loans in quick yielding investment. The thinking is that they need to repay the loans as at
when due and so cannot afford the luxury of time-long investment. Since they hardly
make substantial profits to be ploughed back into the enterprises, they remain perpetually
small operators.
It is pertinent, however, to understand that microcredit is one of the many instruments of
social change and not a panacea. Srinivas (1997:1) while rooting for microcredit enthused
that it is not the solution to poverty, but a ‘menu and enablement that have to be put to-
gether in an a la carte manner, based on local conditions and needs’. Bello (2006) was
more assertive in rejecting microcredit as sufficient for poverty alleviation. For him, mi-
crocredit is not the key to development, which involves not only massive capital-inten-
sive, state-directed investments to build industries but also an assault on the structures of
inequality such as concentrated land ownership that systematically deprive the poor of re-
sources to escape poverty. Microcredit schemes end up coexisting with these entrenched
structures, serving as a safety net for excluded and marginalized by them, but not trans-
forming them. Besides having credit, the question of how to turn the loan into profit is
very important and necessary for consideration. Meade (2000) pointed that one of the
fundamental problem of microcredit programme is the difficulty involved in actually
turning loans into profit.

The ability to cope with backlash from the community is also another challenge for the
operation and success of microcredit. Mostly these can be seen from the reaction of the
husbands, the local capitalists and even leaders who see credit as mean of control. This
comes from old, high-caste men who used to decide everything, landowners needing
cheap day labour, local lenders, middlemen who get cut out, weaving company owners
losing child labor, husbands being jealous and losing power and politicians trying to ma-
nipulate voting” (Financial Times, May 2007: 14). No doubt, these are strong backlashes
that need dealing with for microcredit to be successful.

9
The inability of microcredit to reach the very poor is also a major dilemma of its efficacy.
Meade (2000: 10) noted that this is a major problem for microcredit programme and that
it may even be increasing the chasm between the poor and the rest of society. Quoting
“Assessing the Poverty and Vulnerability Impact of Micro Credit in Bangladesh”, he
quipped that “the poorest have a number of constraints (fewer income sources, worse
health and education, etc) which prevent them from investing the loans in high-returns
activity” he stated further that the same report also noted that “there appears to be a grow-
ing consensus that moderate-poor micro credit borrowers benefit more than extreme-poor
borrowers. The reason for this he explained centered on the peculiar nature of credit need
of the poor. The poorest need tiny loans which are not cost effective even for micro credit
programs. They also place the greatest demands on microcredit training programmed,
which make the cost of lending even higher. And that as microcredit are pressured to be-
come more self-sufficient, the incentives to lend to such desperately poor borrowers
evaporates. At another level is the increased desire for transformation of NGO microcre-
dit outfits to formal financial institutions types on the guise of sustainability. This is seen
as a realization that the microcredit market is a lucrative market. Initial microcredit insti-
tutions have been greatly successful; especially in attracting savings (deposit taking) and
larger clientele base (Bredow, 2002).
Transformation and commercialization reflect a shift in the industry’s focus from micro-
finance as a social movement to the integration of microfinance into the formal financial
sector. And this shift is driven by the fact that the industry has been developed, inno-
cently by NGO social movements who started off on donor funds to become a ‘cash
cows’. In some ways, micro-finance is coming of age, completing a transition from a
business funded by NGOs and development banks and subsidies to one that is fully com-
mercial.
However, this change reflects the increasing commercial acceptance of the MFI business
model, which centers on very low default rates, the relatively high cost of administering
loans and high interest rates and large coverage and access for the very poor.
Bredow (2002) noted that opined that the all comers’ affair practice made the poor poorer
as a result of huge debt. He explained that as against old practice that is, before transfor-
mation, credit officers were attached to borrowers to monitor and supervise their busi-
nesses. But the new trend focused on just giving loans and hoping to make profit from in-

10
terest charges. And when the loans were due, the new MFIs used unorthodox means to
demand repayment. Fearing these means, borrowers committed themselves to seeking
more loans from other MFIs to pay previous ones. This clearly made them perpetually
poor as interest rates on loans accumulate and left them indebted to many MFIs. The
transformation effects also exposed the limitation of a purely market driven initiative to
seek solution to the problem of poverty, especially when the problem is viewed as just the
absence of credit. When the argument about transformation is on sustainability, advocates
place less emphasis on the consequences of it as per how it affects borrowers. One of
such effect is that it increases interest rates for poor borrowers. And this makes repay-
ment more difficult and in most cases the business suffers from lack of growth and this
has led to complaints from interested quarters.
The other challenge to be noted is the notion of competition. In the first place, informality
grows as a result of formal firms wanting to stay competitive. Firms do this by restructur-
ing their production and employment relations. Rather than have one production site (fac-
tory), they have supplier (chains) through contracting, subcontracting and off-shoring.
The result is the transfer of employment relations responsibilities to the suppliers who
rarely respect workers rights. And when workers are classified by employment status and
by industry or trade, the process by which poverty sets in with respect to informal work-
ers begins to become clearer. Micro entrepreneurs are tempted to want to follow such
similar production pattern and this means their few employed staff will be paid wages not
sufficient to escape poverty. Clearly, bigger firms, who in most cases have superior pro-
duction techniques, are likely to increase the chances of failures of
The issue about micro credit creating a niche market for itself through dependency has
also featured as a weakness of such strategy. This accusation has also been made about
the Grameen Bank whose borrowers has little or no other sources of borrowing to turn to
and so cannot afford to default. Meade (2000) stated that this problem is sufficient to
counter the claims of micro credit programmers being better lenders than the informal
lending sources.
The investment in the human capital of the poor should be an appropriate and efficient
method of poverty reduction. Nevertheless, these challenges and preferences have been
noticed and voiced by the poor. And they have through different forms and means
worked to provide for these needs. Some households have even reached decisions to bor-

11
row to give their children education as they feel this gives them better chances of escap-
ing poverty. And that the children can repay the loans upon graduate that is, in the cases
where the family is too poor to make repayment. Informal borrowing from mostly local
money lenders represents such sources. And it comes often with very high interest rates.
Most households in most cases never stop paying or servicing such loans given the high
unemployment rate, especially among graduate. The recognition of the limitation of
credit without social protection also has other dimensions. It is based on the fact that the
working poor are so concerned with meeting their daily survival needs that they are not
concerned about future eventuality (Churchill and Brown, 1999). Therefore, they are vul-
nerable to unexpected events and single such event in their entire life span would nullify
the growth-enhancing effects of savings and credits. And this would reinforce indebted-
ness and poverty. The point is that risk and vulnerabilities will most likely make credit
ineffective in alleviating poverty. Therefore, a more socially embedded tool of social pro-
tection initiated by the state should be adopted. The tool must recognized these risks and
have local conditions-friendly solutions.

2.5 Savings: A highly important service for the poorest

MFIs regarded savings as being a less important service than credit. Therefore in recent
studies the savings possibility is called the ‘forgotten half of micro-finance’s (Graeub and
Kraehenbuehl 2004, p. 15). As per the authors, collateral systems or compulsory savings
were implemented, to extract saving from the clients in order to provide a security for the
MFI. These kinds of programme designs are based on the prevalent and powerful
assumption that the poor cannot save. The experience has shown however that there is a
high demand for saving facilities, often even higher than for credit. Therefore only credit
services can become a heavy burden for vulnerable households, if they cannot rely on a
regular income. Saving deposits on the other hand have quite different characteristics
than loan money and they are highly valued especially by the poor households.
ROBINSON (2001: 230) as cited in Graeub and Kraehenbuehl 2004 mentions 4 main
reasons why the poor save:
Savings as insurance:
Against emergency situations like illness, old age, loss of income and others and
unexpected investment opportunities.

12
Savings as stock to equalize irregular income:
For example for entrepreneurs whose income fluctuates with the seasonal cycles: These
people save when their income is high for consumption in periods when income is low.
Many informal saving methods are used for this purpose.
Savings for social and religious obligations:
Commonly save for life crisis and ceremonies such as birth, puberty, weddings and
funerals; as well as for social obligations such as contributions to family or friends or
village functions.
Savings for future long-term investments:
Such as land purchase, children‘s education and house construction.
Old age and disability:
Include saving for investment in children‘s education and marriages, with the expectation
that the parents will be cared for in old age or case of illness.
Although most of the poor people do not have access to formal savings deposits, there are
a lot of possible ways to save for them. Poor people can deposit cash money in their
home, buy animals or become a member of informal savings groups. Some even pay
collectors to hold their savings safely.

2.6 Empirical Evidence of Microfinance Services

In this section it would be presented findings of different researchers on the issues
impact of MFIs on enterprise development and on poverty reduction. Challenges
observed empirically are also to be reviewed. The empirical evidence is organized as
follow. First empirical impacts of MFIs on enterprise development or poverty reductions
issues of the world experience are discussed. Secondly empirically observed challenges
of microfinance are presented.

2.6.1 Empirically observed Role of Microfinance Services

Based on empirical studies undertaken on microfinance in Bangladesh and Pakistan,
despite some criticisms, microfinance is making significant contribution in uplifting the
livelihoods of disadvantaged rural communities (Meyer 2002; Hossain and Knight 2008;
International Finance Corporation 2008). The criticism regarding the role of microfinance
is emanated from the methods used in the impact studies. Nevertheless, several studies
showed that microfinance can help as an instrument to poverty alleviation helped with

13
other interventions. According to Fernando (2004, p. 4), in his review of several studies
in Bangladesh, an innovative approach targeting destitute rural Bangladeshi women who
have little or no income opportunities, received training and support in poultry and
livestock raising, vegetable gardening, agriculture, fishery production, or grocery
business. Based on the review, two thirds of these women have ‘graduated ‘from absolute
poverty. Story (1994) notes that policy-makers should consider the dangers associated
with the very high failure rates for microenterprises, particularly new start-ups. As per the
Bateman (2011), a major claim long made of microfinance is that it can reduce the credit
constraints that often face potential entrepreneurs in poor communities, and that preclude
enterprise development. A contrasting viewpoint is that credit constraints affecting tiny
individual enterprises are not the core problem. It is the overall lack of access to credit for
small and medium enterprises that prevents microenterprises growing into anything more
substantive.

2.6.2 Empirically observed challenges of microfinance

In the past, many difference finance programs failed due to a combination of lack of
attention to institution building, faulty design and implementation, and bad macro
policies driven by political interests (Nagarajan and Meyer 2006). Assumption of
microfinance providers to different approaches has its impact on establishment and
performance of microfinance. Research taken place in Bangladesh showed that the initial
phase of rapidly expanding outreach to the extremely poor impeded sustainability of
microfinance industry. As to the study, the industry must be transformed into one capable
of retaining existing clients and reaching those who have been left behind. This will
contribute to reducing costs and improving the sustainability of MFIs in Bangladesh,
most of which are highly subsidy dependent. The study also found several impediments
retarded the development of more flexible products. Such as saving culture, internal and
management control systems, loan quality, and client dropouts (Meyer 2002, p. 14)
Low coverage of the extreme poor households by microfinance programmes was also
mentioned in other studies. Reasons for non-involvement of the poor in microfinance
providing NGOs, as identified by (Halder and Mosley 2004, p. 7) were: perception of
MFIs that clients lack capacity to save and repay regularly; NGOs‘ fear about
misappropriation of funds by clients; on the supply side. Whereas on the demand side,
limitations in the availability of liquid cash for the savings, lack of awareness, illiteracy

14
and poor culture of credit were found to be the main reasons inhibiting the extremely
poor.
The primary challenges facing all MFIs in Pakistan are lack of adequate human
resources, securing sources of funding, and reaching profitability. In general, in Pakistan,
microfinance is still viewed as a social intervention to alleviate poverty. This viewpoint
has been the primary reason for lack of growth in the sector and is the source of its
current challenges (International Finance Corporation 2008, p. 17-18).
As per Graeub and Kraehenbuehl (2004 p. 144) study indicates, the experience of poor
MFI clients seem to exist substantial entry or mobility barriers to high return niches
within the rural non-farm economy. The picture is one of a complex balancing act
between agriculture and a growing enterprise sector. The balance in the single household
will depend on a range of factors: the factors observed are presented as follow:
Priority of food security:
The primacy of food security in the minds of rural Eritreans means that even where
income-generating options are available the first choice will be to get land and to grow
crops for home consumption.
Cultural attitudes to business:
Traditional gender divisions of labor are challenged when women become involved in
cash transactions. In addition agricultural activities are socially more revered than others.
Education and skills:
The study remarked a strong link between business success and education in Eritrea. This
correlation does not mean that better educated people always have a better income, but
usually clients who have diversified with success are better educated.
Access to market:
This includes not only the usual physical infrastructure facilities such as road building
and maintenance, improved communication and electrification, but also institutional
innovations to reduce entry costs through the introduction of grades and standards and
public price reporting systems and the relaxation of burdensome licensing and regulatory
requirement of micro enterprises.

Lack of capital:
In the absence of complete credit or savings markets, individuals are typically unable to
smooth consumption in spite of a strong desire to do so.

15
Dackauskaite (2009, p. 12-15 ) revealed in his study about client exit in Ethiopia that
factors affected client exit ultimately microfinance performance could be divided in three
groups namely the demand factors, the supply factors and the environmental factors. The
demand side factors encompassed personal shocks and graduation while supply side
factors would include competitive environment, characteristics of product and quality of
services. While, the environmental factors include economic situation in the country such
as unfavorable macroeconomic situation, civil unrest, or adverse weather conditions that
has a negative effect on the population and increases its vulnerability.
In conformity with the above idea, Matin et al (2002, p.16) in his archival study stated
that the depth of outreach problem of microfinance institutions can be seen in terms of
demand and supply forces.
As per the author, most studies focus on the demand side forces leading to the conclusion
that not all categories of the poor can make good use of the services. However, it must
also be noted that such demand side constraints are underpinned by certain supply side
factors like the nature of the service provision and the terms of the contract. It could be
argued that changes in these supply side features through better product design and
delivery methods—would alter demand in ways that deepen outreach.
Halder and Mosley (2004, p. 8) in their finding from Bangladesh identified several
supply and demand side factors influencing in non-NGO participation of the extremely
poor which are summarized as follow: these factors can negatively affect establishment
of microfinance for the extremely poor as well as the poor.
Demand side factors:

such as: economic vulnerability of the ultra poor; less use of NGO services; lack of
knowledge on NGO services; lack of time; inappropriate loan size; personal conflict; and
fear of misappropriation of loan money. Whereas the

Supply side factors:

Include restriction in membership; vulnerable status (lack of permanent address);
opposition from existing NGO members; and negative attitude of NGO staff.
Woller (2002, p. 5), noted from its archival study that the greatest challenges facing
microfinance pioneers in the past were how to deliver small loans in a cost-effective and
sustainable manner to a poor and often hard-to reach clients, absent physical collateral,

16
given information asymmetries, and with relatively high per-units costs. The solutions
were a high degree of product standardization, full cost plus pricing, joint liability, a
heavy emphasis on repayment discipline, and an overarching emphasis on financial self-
sufficiency.
Likewise, Sebstad and Cohen (2001) cited (Cohen 2002, p. 5) using information collected
in four countries, argue that if microfinance services are to be more effective in helping
the poor it is better to manage financial risks, then it needs to think in terms of matching
products, loan size, repayment amounts, and financial flows and repayment cycles to
clients‘ needs.
Ahmed (2002, p. 3) pointed out from its findings some barriers that can arise between the
financial institutions and the clients in a developing economy perspective. Physical
barriers of poor infrastructure like lack of markets, roads, power, communications, can
worsen both the adverse selection and moral hazard problems. Physical constraints inhibit
the financial institutions to gather information on their prospective clients. According to
the finding once credit is advanced, it is difficult to monitor the use of the funds.
Socioeconomic factors of clients like low numerical skills due to illiteracy,
caste/ethnicity/gender aspects preventing interaction also add to the adverse selection
problem as per the study.
Lyman et al (2005) in their report regarding the financial sectors especially microfinance
activities of the country stated that microfinance of Yemen has at least two challenges.
First, Yemen‘s Muslim religious tradition expects ‘Sharia-compliant‟ financing
approaches. Second, Yemen has a long historical and still widespread tradition
(predominantly among men) of ‘qat‘consumption (a mild but addictive stimulant
consumed in East and Northeast Africa and the southern Arabian Peninsula). The
interaction of traditional Yemeni work habits and the consumption of ‘qat‘mean that the
work day for many Yemenis ends in the early afternoon.
A study conducted in neighboring country Kenya noted that one of the challenges in
introducing MFIs was lack of any commercial credit or financing organizations willing to
operate in pastoralist areas. Because the risks involved in credit and commerce in these
areas were assumed to be high (The center for minority rights development 2005, p. 8).
According to McKague and et al (2009, p. 2), despite CARE‘s longstanding presence and
work with residents in the Kenya pastoral region, high rates of vulnerability and poverty

17
among livestock pastoralists have persisted. Pastoralists remained continually threatened
by drought with minimal access to markets and limited access to risk-mitigation
opportunities like credit, savings and insurance. Loans are given only to livestock traders
and ranchers, who buy the livestock form CARE‘s organized pastoralists.

2.7 Summary of the Review of Related Literature

To sum up, both the theoretical as well as the empirical evidences asserted that
microfinance has a vital role in poverty alleviation. Whereas some believe MF is not a
panacea so it needs other helping mechanism to use its role in enterprise development.
The literature showed that the impact of microfinance is determined by approaches of
microfinance providers towards deep outreach and financial sustainability of the
institution.
Besides from the literature one can inferred that challenges impede introduction (equally
performance) of microfinance all over the world as well as in Ethiopia are not out of four
factors. Which are demand factor (with regard to clients or potential clients problems),
supply factor (problems of microfinance providers), government factor (policy,
regulation…), and environmental factors (remoteness, weather…)
Overall, the studies reviewed above said all about the impact, challenges ad approaches
of microfinance. However, except for Wolday (2008) mentioning the non-existence of
microfinance institution in Afar and Somali, there is no study that explores what
challenges and prospects in introducing microfinance services in Afar regional state;
specifically the pastoral community with regard to introducing feasible MFIs. Thus,
statements of the problem and research questions were developed after a cautious review
of this literature. The gap that is going to be filled therefore is, exploring the challenges,
and opportunities, how different it would be and what alternatives of microfinance in
Afar regional state could be introduced.
Inferring from the literature, this research tried identified variables which can help in
investigating challenges and prospects found in the region which could impact
establishment and success of feasible microfinance services in the region. The variables
identified from the literature are listed as the need of the pastoralist people for
microfinance services and saving and credit habit of the people

18
 CHAPTER THREE

RESEARCH Methodology

3.1. Research Design

In order to answer the intended objective different studies require different research
design. This study was focus on the assessment of challenge and prospects of introducing
microfinance service in Samara city. In order to assess this challenge descriptive research
method would be used for this study. This method is selected because the research
intended to observe phenomenon of the challenge in Samara city. In order to achieve the
mentioned objective survey research strategy were employed. Cross-sectional study
design were also be the appropriate design for this study this is because the intended
objective involves observation of a sample of a population or phenomenon at one point in
time. Both qualitative and quantitative research approach would be adopted in this study
due to the data type to be collected which necessities both approach to answer the main
objective of this study.

3.2. Sources of Data

The methods or tools that were used in collecting data were both primary and
secondary Sources to generate the necessary data for the study.

3.2.1. Primary Data Sources

Primary data sources collected through key informant interviews; by using semi-
structured and structured questionnaires and by having field observation were collect.
The questionnaires were distributed to households, workers of micro and small
enterprise, expert and professionals, responsible bodies (heads) of MFI and which held
with clients of NGO and cooperative desk led financial services (SACCOs or
cooperatives) providers in the City.

3.2.2. Secondary Data Sources

Secondary data were obtained through reviewing of literatures from different Published
and unpublished documents. These include books, reports, journals, and seminar
Proceedings, various theses.

19
3.3. Sampling Techniques:
In order to answer the research question and attain the intended objective of this study
both probabilistic and non-probabilistic sampling technique were employed. To select
household respondent’s systematic random sampling technique was applied. The non-
probabilistic sampling especially purposive sampling technique were employed to
acquire data from workers of micro and small enterprise, expert and professionals of
responsible bodies (heads) of MFI.

3.3.1. Population or Universe

Out of total 3 Kebeles of Samara city one Kebeles (kebele 03) were selected
purposively. From 500 households living in the Kebele using 93 % confidence
level the target Population of this study were 126 household units within 03
kebeles of Samara city. In addition to the above, and workers of micro and small
enterprise, expert and professionals of responsible bodies (heads) of MFI were the
population under study in this research.

3.3.2. Sampling Frame

The sampling frame of this study would be list of 500 households which are
residents of Kebeles 03, workers of micro and small enterprise, expert and
professionals of responsible bodies (heads) of MFI were the sampling frame of
this study.

3.3.3. Sampling Unit

The sampling unit of this study was households, workers of micro and small
enterprise, expert and professionals of responsible bodies (heads) of MFI, were
the sampling unit of this study.

3.3.4. Sample Size

From total population in kebele 500 sample sizes were used by using the following
formula.
Using 93% confidence interval:
2 2
Z ( pq) (1 . 81) (0 . 5)(0 . 5) 3 .2761(0 . 25)
n= 2 = = =167
d (0 . 07)2 0 .0049

20
 Where n = desired sample size when target population is greater than 10,000

z = standard normal deviate

p= target population estimated to have characteristics being measured (50% or 0.5)

q= 1-p

d= the level of statically significance 0.07

Then if the population is less than 10,000 the new formula becomes as follows

n 167 167
nf = = = =126
n−1 167−1 1. 33
1+ 1+
N 500

Where n’=new sample size N= the new population.

There for the Sample under study were 126 households of 03 kebele

Table1. Sample Size and sampling method to be applied.

No Type of respondent Sample Area of selection Sampling technique

population
1 Household 126 Kebele 03 Systematic random sampling
2 Small and microenterprise 8 Small and micro Purposive
workers enterprise working
sites
3 Experts 4 MFI Purposive
4 Process owner in the institute 2 MFI Purposive
5 Head of MFI 1 MFI Purposive
Total numbers respondents = 141

3.4. Methods of Data Collection

To achieve the stated or intended objectives and address the research questions
by using survey method, data collection techniques of the structured and semi-

21
structured questionnaires, interviews and filed observations were used for this
study.
I. Questionnaires: the researcher were prepare and design
questionnaires to gather reliable data and information from the
selected respondent’s (households), workers of small and micro
enterprises, experts and responsible bodies of MFI. The
questionnaire was including both open-ended and close-ended
questions.
II. Interviews: For the purpose of collecting detailed information in the
study, in-depth interviews were conducted with all official participants of
the microfinance institution and selected representatives of government.
There was also the questionnaires were distributed to households, workers
of micro and small enterprise, expert and the interview was held by
interviewing professionals, responsible bodies (heads) of MFI. Semi
structured interview questionnaires was also held with clients of NGO
and cooperative desk led financial services (SACCOs or cooperatives) in
order to get mixed study results regarding success or failure of such
services in the region..

3.5. Data Analysis and Interpretation

The qualitative data was analyzed by summarizing the words of the study participants. As
to quantitative data, tabulation, analysis and interpretation were carried out using
frequencies and percentage. And it was tried to compare the data with each other. Finally,
based on the analyzed data, interpretation was made side by side with the analysis part to
come up with certain conclusions and recommendations at the end.

3.6. Method of Ensuring Data Quality

To strength the accuracy of the study, as it was described in data collection procedure the
study tried to triangulate the study results by compare and contrasting the data from one
target groups with the other target groups and supporting the pastoralists with the other
responses. The data extracted from documents was compared and contrasted with that of
data from officials and the data generated from the pastoral people with that of the clan

22
leaders; the data from religious leaders with that of clan leaders and generally, all of the
data were compared and contrasted with each other. The procedure was supposed to
increase the reliability and validity of the study.

3.7. Ethical Considerations

The researcher was receiving a letter of introduction from the Ethiopia civil service
university. Particularly of the study were be informed about the objectives of the study
emphasizing that the data were be used only for the intended academic purpose. Careful
attentions were given regarding to respecting the rights, needs and values of the study
subjects, and maintain confidentiality of the data and acknowledging sources of
information. With respect to ethical issues, the study planned not to mention individuals’
name and not to commit any behavior which can affect the culture and norms of the
society

23
 CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRETATION

4.1. Introduction
This chapter consists of series of section which are relevant to present results of data
analysis, interpretation and discussion of the study. Response rate is presented under
section 4.2 followed by socio-economic and demographic characteristics of respondents
under the next sections.
4.2. Response Rate
Samara City is currently divided in to 4 kebles which are the foundation of the city.
Among this the study included only one kebeles namely 03. The researcher had
distributed questionnaire which has been the major data collection instruments to conduct
this research for about 126 households and the entire questioner was filled by the
respondents successfully.
(See in table 4.1 below).
Table 4.1: Response Rate
Questionnaires
Ser. no Kebele Administered Collected Not Response
collected rate
1 03 126 126 0 100%
Total 206 206 0 100%

Source: Filed survey, 2014

4.3. Demographic Data of the Respondents

The socio-economic and demographic characteristics of respondents will significantly
associated with the objective of the study are presented in this section.

4.3.1. Distribution of Respondent’s by Their Sex Composition:

When we sought the sex composition of the respondents, the percentage of respondents
those who are male accounts 63 percent of the total and the remaining 37 percent of the
respondents are females. The detail has shown in the table and graph below.

24
Table 4.2: The Sex Composition of Respondents
Ser. No Sex Frequency Percent
1 Male 79 63
2 Female 47 37
Total 126 100
Source: Filed survey, 2014

4.3.2. Distribution of Respondent’s By Their Marital Status

As the researcher sought the distribution of respondents by their marital status the
respondents those who were single, married, divorced and widowed accounts 32 percent,
59 percent, 7 percent and 2 percent respectively. In this case, those who were married
account the largest proportion which was 59 percent. The detail has shown in the table
below.
Table 4.3: Marital status of respondents
Ser. No. Marital status Frequency Percent
1 Single 40 32
2 Married 75 59
3 Divorced 9 7
4 Widowed 1 2
Total 126 100

Source: Filed survey, 2014

4.3.3. Distribution of Respondents by Their Level of Monthly Income Earned

In order to know the economic status of the respondents the researcher has seen in to their
monthly income. As shown in the table below the respondents those who earned monthly
income of less than 1000, 1001 - 2000, 2001 – 3000, accounts 50 percent, 39 percent, 33
percent and 7 percent respectively. The detail has shown in the graph below.

25
Figure 4.1: Distribution of Respondents by their Level of Monthly Income

250

200 96
150
50
100 39 121
50 63 49
7
9
0
1000> 1001-2000 2001-3000 Total

Source: Filed survey, 2014

4.3.4. Distribution of Respondent’s by their place of birth.

When we sought the respondent’s distribution by their place of birth in the town, those
who were born around the town and other area are, 94 percent and 6 percent the
respondent respectively. In this case, majority of the respondents are migrants around the
town which account 94 percent and migrants from other areas which account 6 percent.
The detail has shown in the graph below.
Graph 4.2: Distribution of Respondents by their place birth.

250
94 100
200
150
100 119 126
6
50 7
0
Other place, Around the city Total

Source: Filed survey, 2014

26
4.3.5. Distribution of Respondent’s by Their Level of Education
As we observed from the table or table below 19 % are those who can’t read and write,
52 % primary level of education, 21 % completed secondary level of education, 5 % are
diploma holders. From the above information we can understand that the majority of
respondents are literate. The detail has shown in the table below.
Table 4.4: Educational Level of Respondent’s
Ser. no Educational level Frequency Percent

1 Can’t read & write 24 19

2 Primary(1-8) 66 52
3 Secondary education 27 21
4 Diploma 5 5
Total 126 100
Source: Filed survey, 2014

4.3.6. Distribution of Respondent’s by Their Source of Income

Regarded to the source of income of respondents collected from the first hand data from
the total of 126 respondents 6 percent are unemployed , 1 percent, 78 percent, 16
percent of the respondents responded that their source of income are from government
employee, Self employee, , Private employee, . As shown above, from the total
respondents collected as a first hand data 78 % or 98 of them were self employed who
work by them self for their livelihood. The detail has shown in the graph below.
Figure 4.3: Source of Income of Respondent’s

250

200 100

150 78

100
126
6 98
50 16
1 20
7
0
unemployed government self employee private employee Total
employee

Source: Filed survey, 2014

27
4.3.7. Religious profile of the respondents
As we can see the detail in the graph--- below out the total 126 household respondents
88% of them are Muslims and 12 % of them are Christian religion adherents. From this
we can understand that most of the respondents are Muslims which necessities the need
to consider religious principles.

Figure 4: Religious Profile of the respondents

250
200 100
88
150
100 12 111 126
50 15
0
Christian Muslim Total

4.4. Findings and Results of the Study

4.4.1. Identify the major challenges & of introducing microfinance service in Samra
Town

4.4.1.1 Sources of borrowing of the respondents

According to the data obtained from the field survey out of the total 126, 65% of the
respondents brow from relatives, 31% from friends and 4% from other sources. From
this we can realize that most of the respondents get access to credit from the community
through their social relationship and there are no microfinance institutions that provide
service to the community.

28
Table 4.5: Sources of borrowing of the respondents

S. No Borrowing source Frequency Percent

OTHERS 5 4

Relative 82 65

Friends 39 31

Total 126 100

Source: survey data 2014

4.4.2. Reason for not borrowing from micro-finance institutions

The data obtained from the field survey has shown that 98% of the household
respondents do not have any information about micro finance institution service and 2 %
of the respondents do not like to borrow because it has interest. From this we can
understand there is no public awareness about MFI institutions and the bureau was not
working properly. The detail is described below in table. In the other hand the data
obtained by the interview from micro and small enterprise show that there was no any
support given by the MFI. They said

“We are neither given financial support nor trainings which improve our skill and our
entrepreneur skill, therefore we have established our enterprise by our self, some time
NGO like the GTZ give us training on building techniques etc ”

In the other hand heads of samara city microfinance institutions said that

“most of the time there is no enough budget allocation to establish give effective
microfinance service in the city , because of lack of awareness within the administration
of samara city while there is negative attitude within the community for interest based
saving and credit”

According to my observation and the data obtained from Samara city Bureau of
microfinance there is no enough educated and skillful man power that can train and
enable the small and micro finance institutions to the intended objective. In the other and
responsible bodies working in the bureau has said that “ the is no enough awareness
29
administrative commitment to implement the MF in the city because the focus is most of
the time to the rural areas so instead the decision makers are interested in building
school , water points etc. by transferring the budget to other sectors

From this we can generalize that the low levels of awareness by the administration and
community, lack of enough capital to run the program is one the challenge that hindering
microfinance service in samara city.

Table ----Reason for not borrowing from MFI

S.n Reason for not borrowing from MFI

o

Frequency Percent

1 I do not have information 123 98

2 Because it interest 3 2

3 Other reason 26 100

4.4.3. Saving culture of the respondents

As indicated in the figure below from the data obtained from the field survey 84% of the
respondents have a saving culture and 16% of the respondents have no a saving culture.
Most of the respondent saves their money in cash form especially in the nearby shops but
not to the formal institutions like micro finance institutions.
Figure -----Respondents answer on the availability saving

30
 250

200 100
84
150

100 126
106
50 16
20
0
No yes Total

4.5. The type of saving

As it is presented in the table------ below out of the total 120 household respondents 87 %
of the respondents save their money in cash form, 8% in livestock form 1 % in jewelry.
From this we can understand that the majority of the respondents save their money in a
cash form. The data obtained by the survey from the household and by interview from the
micro and small institutions has shown that though there is a saving in a cash form they
don’t save their money in formal institutions but most of the time they save in shops etc.
This necessities the establishments of formal effective saving institutions like
microfinance institutions in samara city.

Table ---The modality of saving of respondents

S.no Type of saving Frequency Percent

1 Money (cash) 109 87

2 Livestock 10 8

3 Jewelry 1 1

4 Other 0 0

Total 120 96

Source: Field Survey 2014

31
 4.6. The need of the residents for microfinance service

4.6.1 Need assessment for micro finance institutions service

The data obtained from the field survey that has described in the figure below shows that
28 % of the respondents do not need formal institution of saving like microfinance
institution and 72 % of respondents has responded that they need saving and credit
institution like microfinance institution. From we can generalize the is a need to establish
functional efficient and effective microfinance institutions that can serve the needs of the
community.

250
200 100

150 72

100 126
28 91
50 35
0
no yes Total

Source: field Survey 2014

4.6.1. The attitudes of the respondents on interest for saving in MFI
Out of the total 126 household respondents 88 % of the respondents want formal
institutions for saving like microfinance institutions and 12 % of the respondents do not
need formal institution for saving. From this we can understand that most of the
respondents want microfinance institutions’ to be established in order to get saving and
credit services.
Figure—Respondents response on the on interest for saving in MFI

32
 250
100
200 88
150
100 12 126
111
50 15
0
no yes Total

Source: field Survey 2014

4.6.2 Attitude on credit service that can change their life

According to the data obtained from the field survey out of the total 126 household
respondents 66% of the respondents think that microfinance institutional services can
improve their life and 34 % of the respondents do not think that microfinance institutions
can improve their life.

Table ------: Respondents response on the contributions microfinance institutions

S. No Do you think microfinance institutions can improve your life?

Frequency Percent

Yes 83 66

No 43 34

Total 126 100

4.6.2. The type of job (entrepreneur ship) the respondents want to

create
As it is indicated below in figure ----- out of the total 126 household respondents 37% of
the respondents has said the want to establish trade related activities, 48 % of the
respondents has said that they want to establish skill related activities and 15 % of the

33
respondents want to establish service related activities. From this we can understand that
the majority of the respondents want to establish skill related activities. According the
interview done with the household most of the respondents said
“We want to establishes skill related activities because there is a high market for it”
Graph:----respondents response on the type of entrepreneur they want to establish

250
100
200
150
48 15
100 37 126
47 60
50 19
0
Trade related skilll related service related Total

4.6.3 The Attitudes on credit with an interest rate

As it was indicated in the table ----- 88% of the respondent are Muslim which are highly
influenced by religious principles that forbid credit with an interest. As we can see in the
table below 87% of the respondents don’t like credit with an interest while 13% of
respondents like to take credit with an interest. From this we can understand the majority
of the respondents don’ like credit with interest. Therefore the implementation
microfinance institutions with an interest rate are not easy in such areas.
Table -----Respondents answer on interest relate rate for credit

S.No Do you like credit that has interest rate?

Frequency Percent

1 Yes 16 13

2 No 110 87

Total 126 100

34
4.6.4 The amount of credit they need
The data obtained from the field survey has shown that out of the total 126 respondents
6% need 3000 birr to start their business, 25 % want 3001-5000 birr to start their
business, 30 % of the respondents need 5001-8000birr while 25 % of the respondents
need 8001-11000 and 14% of the respondents want above 11000 birr to start their
business. This indicates that the majority of respondents need above 5000 birr which is
higher than the cost provided by MFI. ” In the other hand the amount of money that
could be credited for customers is maximum 5000 which within maximum one year that
need to be payback. But most of the customer needs the payback period to increase to the
minimum two years and above. In the other hand the amount of money to be credited
because most of the respondents need minimum 5000 and above cost to in order to start
their business. From this we can understand the gap between the provisions of credit by
microfinance institutions (which is 5000 birr) which need to be adjusted.

Figure ------respondent response on the amount of credit they need

250

200 100
150

100
30 126
6 25 25
50 33 38 14
7 31 17
0
3000 3001-5000 5001-8000 8001-11000 11001< Total

Source: field Survey 2014

4.7. The need on the payback period

As it is indicated below out of the total 126 household respondent 5 % of then need 1

35
year for the payback period, 80 % of the respondents need 2 years, 15 of the respondents’
need 3 years for the payback period. From this we can understand that the majority of
respondents need more than 1 years for the payback period. This shows the gap between
the time given for the respondents which is one year and what the respondents need.

Graph -----The time required by the respondents for the payback periods

250

200 100

80
150

100
126
100
50 5 15
19
7
0
1 year 2 year 3 year Total

Source: Field survey 2014

4.7.1. Do you think credit services can improve your life

The data obtained from field survey as it is indicated in the table below ---- has shown
out of the total 66% of respondents think that credit services can improve their life, 34 %
of the respondents think it will not improve their life. Therefore the majority of the
respondents think that the microfinance institutional services improve their life this
indicate the need to start effective and efficient micro finance services.

Table: Attitudes of the Respondents on Microfinance Institutions

S.no Do you think credit service can improve your life

Frequency Percent

36
 1 No 83 66

2 yes 43 34

3 Total 126 100

Source: field survey 2014

4.7.2. Their preference on the type of allocation of credit

The data obtained from the field survey has shown that out of the total 126 household
respondents 95% of the respondents need the credit in cash and 5 % of the respondents
need the credit in livestock form and 1 % in other form. From this we can understand that
the majority of the respondents need the credit in a cash form. In the other hand the
micro and small enterprise has said that they need in cash form because it give them the
freedom to use the money for the purpose intended in a faxable manner. Therefore
microfinance institutions need to consider this to establish effective microfinance service
in the city.

Table:---------The preference of respondents on the modality of credit

S. No Type of credit Frequency Percent

1 In cash 120 95

2 livestock 5 4

3 Others 1 1

Total 126 100

Chapter Five

Conclusion and recommendation

5.1. Recommendations
There should be enough commitment from the government side to establish effective and
efficient micro finance institution in the city. The budget allocated should be use in ac-
cordance to the rule and regulations to the intended community. There should not be in-
terference in the activity of bureau of microfinance institution of samara city. the bureau

37
should incapacitated by allocating the necessary skillful manpower and trained manpower
that can have the ability to establish effective and efficient microfinance institution in the
city.
Enough awareness and trainings should be given to the community on how to create
jobs as micro and small enterprise and save money and use the money (credit) given to
them efficient and effective money.
The MFI office should also organize and train and establish small and micro enterprises
based on the environmental conditions of the area and by enhancing their skill knowledge
through effective trainings .
One of the basic challenge to establish effective and efficient micro finance institution in
the city the discrepancy of the rule and regulation of the institutions with the communities
fundamental value as it already known most of the community living in samara city are
adherents of Islamic religion, and accordingly neither saving nor taking credit ( borrow-
ing ) based on“intrest” is not allowed and most of the people of the city are highly influ-
enced by this. Therefore in order to establish effective and efficient MFI the government
should look at other alternatives which can not contradict with values of the community
for example like giving the service of credit and saving without “interest”. In the other
hand there is gap between the needs of the community and what the government pro-
vides. Therefore the government should increase the amount of money given as credit
and the payback period because most of the community wants more than five thousand
birr as initial capital and more than two years of payback period. In order to provide ef-
fective and efficient MFI the gap between the rule and regulation of the MFI and the ac-
tual need of the community should be harmonized to the actual needs of the people in the
city.

References
Ahmed,H 2002, ‗Financing microenterprises: an analytical study of Islamic microfinance
institutions‘, Islamic Economic Studies Vol. 9, No. 2, accessed 19 Jun 2010
<http://www.irti.org/irj/go/km/docs/documents/IDBDevelopments/Internet/Eng-
lish/IRTI/CM/downlads/IES_Articles/Vol%209- 2..Habib%20Ahmed..Financing
%20Microenterprises..dp.pdf>

38
Campion A., (2001), Challenges to Microfinance Commercialization, paper presented to
audiences in Vietnam, Indonesia, Singapore and the Philippines through a World
Bank multimedia distance education program, Journal of Microfinance Volume 4
Number 2,
Central Statistical Authority, (CSA), 2008, Demographic and Health Survey Report. Ad-
dis Ababa, Ethiopia.
CSA, 2007, The Federal Democratic Republic of Ethiopia Central Statistical Agency
Household Income, Consumption and Expenditure (HICE), Statistical Bulletin
Analytical Report, Survey 2004/5, Volume I, Addis Ababa, Ethiopia.
Cohen, M 2002, ‗Making microfinance more client-led‘, Journal of International Devel-
opment, No. 14, pp. 335–350 accessed 20 Jun 2010, <http://www3.inter-
science.wiley.com/ cgi-bin/fulltext/93518518/PDFSTART>
Dackauskaite, A 2009, ‗Client exit in microfinance‘, Master thesis, Utrecht University,
accessed 20 Jun 2010 a <http://igitur-archive.library.uu.nl/student-theses/2009-
1204- 200259/MSThesis.pdf>
Degefe Duressa, 2009, Microfinance in Ethiopia: Elixiror Poisson, a thesis in fulfillment
of the requirement for the degree of doctor of philosophy in development studies
of social studies, shaker publisher, The Hague, The Netherlands
Dusuki, AW 2008, ‗Banking for the poor: the role of Islamic banking in microfinance
initiatives‘, Humanomics, Vol. 24 No. 1, pp. 49-66, accessed 19 Jun 2010,
<http://www.kantakji.com/fiqh/Files/Economics/c429.pdf>
Fernando, AN 2004, ‗Microfinance outreach to the poorest: a realistic objective?‘ Asia
Development Bank finance for the poor quarterly news letter, March, vol. 5 No. 1
accessed 19 Jun 2010, <http://www.adb.org/documents/periodicals/microfinance/
finance_200451.pdf>

Graeub A. and Kraehenbuehl S., 2004, Micro-finance in Eritrea, An overview of the fi-
nancial landscape of Eritrea and an assessment of the influence of micro-finance
services on the livelihood rationales and strategies of peasants and small en-
trepreneurs in selected areas of Eritrea, Master Thesis, Centre for Development
and Environment, University of Berne, Netherlands

39
Halder S and Mosley, P 2004 ‗working with the ultra-poor: learning from Brac experi-
ences‘, Journal of International Development, No. 16, pp. 387–406 accessed 20
Jun 2010 <http://www3.interscience.wiley.com/cgi-bin/fulltext/107641984/PDF-
START>
Hossain, F and Knight, T 2008, „Can microcredit make a difference? Empirical observa-
tions from Bangladesh‟ Brooks world poverty institute working paper 38 financ-
ing the poor, university of Manchester, Manchester, accessed 19 Jun 2010,
<http://www.bwpi.manchester.ac.uk/resources/Working-Papers/bwpi-wp-
3808.pdf>
International Finance Corporation (IFC), 2008 ‗Pakistan: Microfinance and Financial
sector‘, diagnostic study Final report, April, accessed 19 Jun 2010, <http://
www.frankfurt-school.de/dms/interntional/en/publications/Insuring-microcredit-
against-HIV-AIDS-in-South-0/Pakistan-
copyedit_FINALVERSION_20090428.pdf>
Khan A.A. and Phillips I., 2010, The influence of faith on Islamic microfinance Program-
mers’, Published by Islamic Relief Worldwide Birmingham, United Kingdom,
www.islamic-relief.com
Letenah Ejigu, 2009, Performance analysis of sample microfinance institutions of
Ethiopia, International NGO Journal, Vol. 4 (5), pp. 287-298, University Business
School, Panjab University, Chandigarh, India, Available at <http:// www.aca-
demicjournals.org/INGOJ.pdf>
Lyman, T, Mahieux, T and Reille X 2005, ‗Multi-Donor Mission Microfinance in
Yemen‘Report of CGAP, Jun 2005, accessed 20 Jun 2010, <http://
www.cgap.org/gm/document-1.9.2831/diagnostic_Yemen.pdf>
Luong, E 2010, ‗Sustainable microfinance: The balance between financial sustainability
and social responsibility A business model integrating remittances and cross-bor-
der entrepreneurship to microfinance’ thesis proposal, Jonkoping University, ac-
cessed 19 Jun 2010, <http://www.edamba.eu/userfiles/file/Evans%20Quang
%20Luong%20.pdf>
Matin, I, Hulme, D, and Rutherford, S 2002, ‗Finance for the poor: from Microcredit to
micro financial Services‘, Journal of International Development, No. 14, pp. 273–

40
 294, accessed 20 Jun 2010, <http://www3.interscience.wiley.com/cgi-bin/
fulltext/91013949/PDFSTART
Meyer, R 2002 ‗The demand for flexible Microfinance products: Lessons from
Bangladesh‘, Journal of International Development, No. 14, pp. 351–368, ac-
cessed 20 Jun 2010, <http://www3.interscience.wiley.com/cgi-bin/fulltext/
93518523/PDFSTART
McKague K., Jiwa F., and Pennotti C., 2009, Livestock Marketing and Enterprise Project
and Livestock Purchasing Fund in Kenya, CARE Market Engagement Case
Study, CARE International in Kenya
Mustafa Z and Ismailov, N 2008, ‗Entrepreneurship and microfinance- a tool for empow-
erment of poor- case of Akhuwat-Pakistan‘, Master thesis, School of sustainable
development of society and technology, accessed 19 Jun 2010, <http://
www.akhuwat.org.pk/downloads/Enterpreneurship-and-Microfinance.pdf>
Nagarajan, G and Meyer, R 2006, ‗Rural Finance Today: Advances and Challenges‘,
Asia Development Bank (ADB) finance for the poor quarterly, December, vol. 7
No. 4, accessed 19 Jun 2010, <http://www.adb.org/Documents/Periodicals/ Mi-
crofinance/finance-200604.pdf>
Obaidullahs M 2008, Introduction to Islamic Microfinance, IBF Net (P) Limited, India
accessed 25 Jun 2010, <http://ribh.files.wordpress.com/2007/08/islamic-microfi-
nance-m-obaidullah.pdf>
Yayneshet Tesfay and Kelemework Tafere (2004), Indigenous Rangeland resources and
Conflict Management by the North Afar Pastoral Groups in Ethiopia, A Pastoral
Forum Organized by the Dry lands Coordination Group (DCG) in Ethiopia,
Mekelle, Ethiopia
Pastoralist Forum Ethiopia (PFE) 2002 ‗pastoral development policy recommendations‘,
Proposal submitted to the Ministry of Federal Affairs, Ethiopia July, accessed 25
Jun 2010, <http://www.pfe-ethiopia.org/pub_files/ppdpr.pdf>
Rota A. Calvosa C., 2009, Livestock and rural finance, Thematic Papers Tools for
project design, International Fund for Agricultural Development (IFAD),
< www.ifad.org/lrkm/index.htm>
Save the children, 2008, Livelihood and Vulnerabilities An Understanding of Lively
hoods In Afar Regional state, Ethiopia

41
Schreiner, M 2002, ‗Aspects of outreach: a framework For discussion of the social Bene-
fits of microfinance‘, Journal of International Development, No. 14, pp. 591–603,
accessed 20 Jun 2010, <http://www3.interscience.wiley.com/cgi-bin/fulltext/
96516742/PDFSTART>
Sharma A.,(2001), Developing sustainable microfinance systems, Asian Development
Bank(ADB)
United Nations Capital Development Fund, 2002, Islamic Banking Principles Applied to
Microfinance, Case Study: Hodeida Microfinance Programmed, Yemen,
Special Unit for Microfinance (SUM) United Nations Capital Develop-
ment Fund.
WoldayAmha2008 ‘Innovations in the Delivery of Financial Services through the De-
posit Taking Microfinance Institutions (MFIs) in Ethiopia‘, a paper presented at
Africa workshop on Innovations in Addressing Rural Finance Challenges in
Africa, 22- 25th July, accessed 3 July 2010 <www.afraca.org/publications/40In-
novations%20in%20Building%20financial%20nclusiveness
%20%20EAMFI.doc>
Woller
, G 2002, -From market failure to marketing failure: market orientation as the key
to deep outreach in microfinance‘, Journal of International Development, No. 14,
pp. 305– 324 accessed 20 Jun 2010, <http://www3.interscience.wiley.com/
>
cgibin/fulltext/93518524/PDFSTART
2009, Regional Atlas of Afar Region, Bureau of Finance and Economic Development,
Samara, Afar, Ethiopia

42
5. Time Table and Budgetary Breakdown
Table1. Time Table
Sr. no Date of Implementation
1 10nd Feb – 2014
2 14thFeb- 2014
3 21stFeb – 2014
4 29thFeb – 2014
5 6th Mar – 2014
6 9th Mar – 15th Mar, 2014
7 16th Mar – 20Th Mar, 2014
8 21st Mar – 25th Mar, 2014
9 26th Mar – 8th Apr, 2014
10 9th Apr – 16th Apr, 2014
11 17th Apr – 24th Apr, 2014
12 25th Apr – 3rd May, 2014
13 4th May – 1st June, 2014
14 2nd Jun – 4th Jun,2014
15 5th Jun – 12th Jun,2014
16 13th June – 25 June, 2014
Major Planned Activities
Submission of the 1st draft of the proposal
Feedback on the 1st draft of the proposal
Submission of the 2nd draft of the proposal
Feedback on the 2nd draft of the proposal
Submission of the final thesis proposal
Deep Literature Search
Develop a Questionnaire
Revise and Duplicating Questionnaires
Distributing Questionnaires
Contact Interviewee
Conducting Interviewee with Key Informants
Collecting Questionnaires
Data Analysis, interpretation and Report
Writing by computer
Editing the paper writing
Printing and copy
Prepare for Presentation
Table2. Proposed Budget or Budgetary Breakdown
Ser. Unit Total Amount
no Item Unit Quantity Cost in in ETB
ETB
1 Transport Cost from Addis Ababa Trip/Ticket 4 350.00 1,400.00
to Semra
2 Communication and Internet Mobile card 8 100.00 800.00
Expense
3 Leather Bag Piece 1 800.00 800.00
4 A4 Size Paper Packs 3 140.00 420.00
6 Line Paper Packs 1 80.00 80.00
7 Pen, Pencil, Eraser, CD, Fluid, Total 300.00
Flash, and envelop
8 Secretarial Service and typing Page 100 200 200.00
expense
9 Printing and photo copy Page 1200 1.25 cent 150.00
10 Binding and Finalizing 150.00 150.00
Total 4300.00
Contingency (10%) 430.00
Grand Total 4,730.00
Annex I

Ethiopian Civil Service University

Institute of Public Management Studies
Questionnaire on the challenge and prospects of introducing microfinance service in
Samara City

Questioner for Micro and small scale enterprises operators

Dear Respondents,

This question is prepared by graduating student in department of development management,

Ethiopia Civil Service University for the fulfillment of first degree in development management.
The main purpose of this questionnaire is to collect data which helps to assess the challenge and
prospects of introducing microfinance service in Semra City. Your genuine responses for the
following questions are extremely important for the successful completion of this work. The
information you provide is used only for academic purpose and will be kept confidential.

Thank You In Advance for your cooperation!

General Instructions:

 There is no need to write your name ,Address, Phone No

 Put tick Mark (√) in the box for close ended questions and write your opinion for open
ended questions.

Part I: Background information

1. Sex of respondent A-male B-female

2. Educational status of the respondent

a. Illiterate primary school (1-8), secondary

 Diploma E. certificate F. Degree & above

3. Marital status A. single B. Married C. Divorce D. Widowed

4. Religion A. Muslim B. Christian C. Catholic d. If other, specify--

5. Birth place: a) In Samar city b) Around the city c) Other place,

specify__________

Borrowing Habit of the respondents

6. Did you borrow ever before? A. yes B. no

7. If your response for question No 15 is yes, how many times did you borrow?

8. From where did you borrow the money?

9. For what purpose did you borrow?

10. How much did you borrow on average? _____________Birr

11. Did you made an agreement before the loan?

a. Yes b. No

12. If your response for question No 11 is yes, what kind of agreement?

___________________________________________________________________________
___________________________________________________________________________
13. Did you repay the loan on the agreed time? _______________________________________
14. If your response for question No 8 is no, why?
___________________________________________________________________________
15. If you did not repay the loan for your lender who solved the problem?

Saving Habit of the respondents

16. Do you have saving?
 a. Yes b. No

17. If your response for question No 11 is yes, what is your saving?

a. Money b. Livestock C. Jewelry
d. If other, specify
18. For what purpose do you save?_
19. If your saving is in the form of money, where do you save it
20. Do you need institution which provides you saving service? a. Yes b. No
21. If your response for question no 15, is yes, do you want an interest rate to your sav-
ing?
a. Yes b. No
22. If your response for question no 16, is no, why?
Need of the entrepreneurs for credit
23. Do you know credit services-----------------------------------------------------
24. Do you have an intention to be a beneficiary of the micro credit program? a. Yes _______ b.
No

25. If your response for question no 19 is no, why?

26. If your response for question no 19 is yes, how much you need? _____________Birr
27. If you need credit in what way do you prefer to be?
a. In money c. Goods d. Livestock e. others
28. For what purpose do you need the credit-------------------------------------------------
29. What is your opinion if the credit giving organization charges you interest rate for the the
loan? ----------------------------------------------------------------------------------------------------
30. Do you believe that credit service will change your business/livelihood?

31. Please give your suggestion (if any) to improve the service given by IMF (if any)?
Annex II

Questioner for Households (Residents)

Dear Respondents,

This question is prepared by graduating student in department of development management,

Ethiopia Civil Service University for the fulfillment of first degree in development management.
The main purpose of this questionnaire is to collect data which helps to assess the challenge and
prospects of introducing microfinance service in Semra City. Your genuine responses for the
following questions are extremely important for the successful completion of this work. The
information you provide is used only for academic purpose and will be kept confidential.

Thank You In Advance for your cooperation !

General Instructions:

 There is no need to write your name ,Address, Phone No

 Put tick Mark (√) in the box for close ended questions and write your opinion for open
ended questions.

Part II: Background information

1. Sex of respondent A-male B-female

2. Educational status of the respondent

Illiterate primary school (1-8), secondary

D. Diploma E. certificate F. Degree & above

3. Marital status A. single B. Married C. Divorce D. Widowed

4. Religion

a. Muslim B. Christian C. If other, specify

____________________

5. Occupation: a) Private employee b) Government employee

c) Self- employed d) Unemployed e) NGOs

6. Birth place: a) In Samar city b) Around the city c) from other place
7. If your residence were other than samara city, why you to migrate to Samara?
_______________________________________________________________________

Borrowing Habit of the respondents

8. Did you borrow ever before? A. yes B. no

9. If your response for question No 9 is yes, how many times did you borrow?

10. From where did you borrow the money?

11. For what purpose did you borrow?
12. How much did you borrow on average? _____________Birr
13. Did you made an agreement before the loan?
a. Yes b. No

14. If your response for question No 14 is yes, what kind of agreement?

______________________________________________________________________________
________________________________________________________________________

15. Did you repay the loan on the agreed time?

16. If your response for question No 16 is no, why?

___________________________________________________________________________

17. If you did not repay the loan for your lender who solved the problem?
 Saving Habit of the respondents
18. Do you have saving?
a. Yes b. No

19. If your response for question no 19, is yes, what is your saving?
a. Money b. Livestock C. Jewelry d. If other,
specify________

20. For what purpose do you save?

21. If your saving is in the form of money, where do you save it?
22. Do you need institution which provides you saving service? a. Yes
b. No
23. If your response for question no 23, is yes, do you want an interest rate to your sav-
ing?

a. Yes b. No

24. If your response for question no 24, is no, why?

Need of the people for credit
25. Do you know saving and credit services
26. Do you have an intention to be a beneficiary of the micro credit program? a. Yes __b. No ….
27. If your response for question no 27 is no, why?
28. If your response for question no 27 is yes, how much you need? _____________Birr
29. If you need credit in what way do you prefer to be?

a. In money c. Goods d. Livestock e. others

30. For what purpose do you need the credit
31. What is your opinion if the credit giving organization charges you interest rate for the loan?

32. Do you believe that credit service will change your business/livelihood?
33. Please give your suggestion (if any) to improve the service given by IMF (if any)?

Annex III

Interview for Microfinance institution officials

Dear Respondents,

The main purpose of this interview is to collect data the challenge and prospects of introduc-
ing microfinance service in Semra City in order to produce a thesis required for the fulfillment
of first degree in development and management. Since the success of the study relies up on your
genuine response, I ask you with regard, to be objective, realistic and honest in responding to all
items in the questionnaire.

1. What are the main services you give for the clients?

2. Do you think there are challenges of introducing microfinance service in the city?

3. What the main challenges you faced in providing those services?

 Economic
 Social
 Religious and cultural
 Organizational
4. What kind of role has your organization contributed to solve those challenges?

5. What are the implementing mechanisms of your service delivery?

6. Who are the main actors that work with you?

7. What do you suggest to solve the challenges?

Contents
Table of contents I
Acronyms II
Acknowledgment III

Chapter One: 1

Introduction 1

1.1. Back Ground of the Study 1

1.2 Statement of the problem 2
1.3. Objectives of the study; 4
1.4. Research question 4
1.5. Significance of the study 4
1.6. The Scope of the Study 5
1.7. Organization of the Study 5
Chapter Two: 6

Review of Related Literature 6

2.1 Introduction of Micro Finance 6

2.2 Theoretical Overview Micro finance Institutions 7
2.3 Empirical Evidence of Microfinance Services 14
2.4 Summary of the Review of Related Literature 22
CHAPTER THREE 24

3.0. RESEARCH Methodology 24

3.1. Research Design 24

 3.2. Methods of Data Collection 24
3.3. Sampling Techniques: 25
3.3.2. Sampling Frame 25
3.3.3. Sampling Unit 25
3.3.4. Sample Size 26
3.4. Sources of Data 27
3.4.1. Primary Data Sources 27
3.5. Data Analysis and Interpretation 27
3.6. Method of Ensuring Data Quality 27
3.7. Ethical Considerations 28
Chapter Four: 29

Data Analysis and Interpretation 29

4.1 Introduction 29
4.2 Findings 29
4.3. Socio Demographic Characteristics of Participants 29
4.4. Borrowing Culture of Respondents: 32
4.5. Saving culture of Respondents 37
4.6 Need of the Respondents for Formal Microfinance Services 43
Chapter five: 48

Conclusion and Recommendation 48

5.1 Summary and Conclusion 48

5.2. Recommendations 50
5. Time Table and Budgetary Breakdown 1

References
Annexes