Microfinance Sector in Ethiopia: Strengths and Weaknesses

Microfinance Sector in Ethiopia Strengths Weaknesses

• The delivery of Microfinance services to urban and rural poor is one of the effective instruments to promote poverty alleviation, food production and food security.
• MFIs have good outreach, mostly in terms of number of clients reached.
• There is a significant amount of saving mobilized among the clients.
• MFIs have in general demonstrated good repayment rates.
• MFIs have in general a very good and personalized onship with clients.
• Limited supervision and technical support by the Government.
• Low interest rates charged, affecting self-sustainability.
• Gap in serving more structured micro enterprises.
• Low technical capacity.
• Difficulties in accessing funds from donors.
• Lack of product diversification.
• Inadequate management information system (MIS).

Microfinance – Important Role in Economic Growth

Posted by Fehmeen on February 11th, 2010

In a world where almost half the population lives on less than $2.50 a day, microfinance is one of the better tool for poverty alleviation, economic growth and development in emerging economies. Loans offer the same benefits to major world economies that face growth problems.

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Having said that, one must realize microfinance is not impervious to impact of the global financial crisis. Instead, we realize that loans can help lower-income groups setup and grow the small businesses, which generate income and employment that helps their communities and their economies.

This fact is recognized in theory as well as in practice.

“Jobs must be our number one focus in 2010 We should start where most new jobs do – in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides its time she became her own boss.” Barack Obama, President of USA, at the State of the Union Address, 2010, about the potential of microfinance.

Currently, microfinance services (loans, savings, etc.) are available to over 100 million of the world’s poorest families (Microcredit Summit Report, 2009). That may partially explain the decline in poverty rates over the last three decades. In fact, 5% of the clients of Grameen Banks pull themselves out of poverty each year thanks to loans and most of ACCION USA’s microfinance clients created 2.4 jobs during 2008, when many businesses were downsizing.

The Enterprising Spirit of the Poor is Valuable for the Economy

Poor people do not want to stay poor. Like everyone else, they wish to put an end to their economic hardship and exploitation by either working or exploring self-employment. In the latter case, money can be raised through friends and family, gathered over time through savings, or obtained through loans fron microfinance insitutions. You can read about this in detail at the Radical Frontiers Blog.

Naturally, small business owners are not afraid of failure and their ‘resilience, grit and determination’ has helped them march through the current economic recession, marked by a collapse of debt instruments. Bear in mind that all these are common characteristics of entrepreneurs.

Having said that, many micro ventures do not produce the inflated results we expect of them and some studies show microfinance is not all that it promises to be. This may be because of high interest rates on these loans, or other problems faced by microfinance, or even because of a shortage of tools to measure the social impact of microfinance. It may also be because our expectatio, there is another explanation

Microfinance is a Slow Yet Promising Process – No Rags to Riches Stories

There is a great deal of buzz about the wonders of microfinance which leads us to expect ‘heart wrenching’ and ‘earth shattering’ stories’. These were the expectations an enthusiastic microfinance activist, Taylor Akins (Kiva Fellows) had when he stepped out into the field. Failing to come across dramatic stories, he decided to take off this ‘rose-colored glasses’ and determine the real impact of these loans.

The majority of the people he interviewed ran businesses that were already prospering but they said the loan ‘had a positive impact’ on their lives and that despite the occasional lack in demand, most micro entrepreneurs considered expanding their business in the future. These are very mild yet encouraging responses because it shows microfinance helped contribute to their success over an ‘extended period of time’.

Microfinance Impact on Women – Empowerment

Posted by Fehmeen on November 20th, 2010

One of the reasons microfinance institutions deal largely with women is because they (women) typically lack social and economic assets owned by men in those regions. It is no secret that microcredit, along with micro-savings and group solidarity, brings about visible changes in the lives of women.

Women empowerment, which is achieved by instilling ideals such as justice, equality and freedom of women, is the central goal of many development institutions (including microfinance institutions).

The search for these social virtues is not unique to the field of microfinance, nor is it a recent phenomenon.

They no longer believe they should be dependent (women enjoy greater economic security and tend to jointly make household and business decisions with their husbands)

Women involved in microfinance become leaders, instigating change in social practices and relationships and mobilizing social action (one study reveal a reduction in domestic violence as well).

Women’s status, both in their homes and communities, is improved when they are responsible for microloans and for managing micro-savings (this would enhance the social support offered in the group lending methodology)

Microfinance improves access to networks and markets (for women) giving wider experience of the world outside the home, access to information and possibilities for development of other social and political roles

When they generate and control their own income (through microfinance services), women gain a level of power that means they can make decisions independently and command more respect.

Advantages of dealing with women clients in Microfinance

Posted by Fehmeen on November 26th, 2010

Women in rural areas of developing countries are often associated with extreme poverty, lack of education, poor access to health care, domestic violence, social seclusion, and the list goes on. As a result, the third Millennium Development Goal is to “promote gender equality and empower women”.

Naturally, microfinance institutions are eager to serve women for this reason (among others), but working with women has its own pros and cons. This article mentions some advantages of involving women as clients in microfinance.

According to a survey report by UNCDF, there are several benefits of working with women clients. Some are institutional benefits, where as others are social benefits.

Women make responsible microfinance clients

According to the survey, women are good customers in that their repayment patters are “more reliable and timely” compared to repayment patters of men. Additionally, women tend to save more than men.

Women are loyal customers

Another benefit to institutions is that women are more loyal to their microfinance institutions (MFI) compared to men. This helps perpetuate a strong relationship between the MFI and its clients, and also motivates loan officers to be more efficient in their service delivery to these women.

Women are more honest in their dealings

Compared to men, one microfinance institution found, women generally invest the loan as per program guidelines. In other words, if loans were advanced for the purpose of home improvement, men are more likely to use the loan elsewhere.

Women offer less resistance when called upon to participate in social causes

Some microfinance institutions reported that women are “more easily mobilized for social goals”. When social causes were promoted, women seemed more receptive to these ideas and social change, compared to men.

Women look after their family

This benefit is more social than institutional in nature. Many microfinance institutions reported that female clients were “more likely to than men to spend their profits on household and family needs’ (such as clothing, food, education, health care, etc.). The “multiplier effect” enhances the social impact of microfinance instructions

5 Ways to Measure Social Performance and Impact of Microfinance

Posted by Fehmeen on February 7th, 2010

Grand promise have been made for microfinance over the years. That giving loans to the poor pulls millions out of poverty and improves the level of personal income, health, education and female empowerment, apart from providing handsome returns to investors. The multi-dimensional nature of microfinance makes it harder to decide the exact meaning of ‘social performance’ and to determine its link to financial performance.

As a result, people ‘deal more in anecdotes than data’ (Alex Counts, President of the Grameen Foundation). Not surprisingly, there are only a handful of tools that determine whether financial services for the poor (loans, savings, insurance) are changing lives and societies, namely:

22 Social Performance Indicators by the SPTF

Progress out of Poverty Index (PPI)

Incofin Echos

Scientific Research

Simple Surveys and Case Studies,

22 Social Performance Indicators by the SPTF

By far the most comprehensive social performance measurement tool yet.

The Social Performance Task Force (SPTF) recently developed a detailed list of 22 indicators that measure the environmental and social performance of a typical microfinance program. Click here to see a summary of these highly inclusive indicators.

Progress out of Poverty Index (PPI)

According to Grameen Foundation, the PPI is a simple yet comprehensive tool that measures poverty levels of groups and individuals after assessing the economic and social conditions of each country, to yield context-based results. The tool can be used by Microfinance Institutes (MFIs) to determine their clients’ credit needs, which loan product is most suitable, which programs are most effective, and how quickly clients move out of poverty, through a variety of country-specific indicators.

The tool was developed for CGAP and Grameen Foundation to assess the social and economic impact of microfinance programs in more than 30 countries. They regularly train MFIs in various parts of the world in this regard.

Incofin Echos

Measuring performance from the social investor’s point of view.

Incofin developed a list of 45 questions assess an MFI’s social orientation under the following headings:

Social mission and vision (purpose of existence),

Outreach and access to loans and savings

Quality of service (customer service, financial services),

Human resource policy (developing employees),

Contribution to the community and to the environment.

Incofin (a microfinance investment management firm – debt and equity investments) developed this tool to highlight the social dimension of its investments under the philosophy of responsible finance. MFIs that score high on this tool have a better chance of securing investment funds from Incofin, compared to those who don’t.

Scientific Research

Randomized control trials by researchers offer highly accurate yet mixed results about the social impact of loan programs to the poor, but the biggest limitation of these research methodologies was the short time span of less than two years.

The real impact of microfinance, due to its multi-dimensional nature, takes years to demonstrate, says Bruce MacDonald (SVP of Accion International) so any research will be unsuitable unless it:

spans over several years (to determine long-term impact of loan to the client’s household),

covers various geographical areas (to consider individual social and economic circumstance), and,

has a strictly monitored control group that in no way, has access to loans (access to informal sources of credit may not be necessary).

Evidently, this form of research is pretty difficult to conduct, as Micheal Chu (Accion) points out:

“We’re discussing poverty. Urgency matters. Of course. you can sit on the sidelines and wait for all these trials, but if you need that kind of precision to act, you’re never going to be at the forefront of social action.” Michael Chu, former president and CEO of Accion.

Simple Surveys and Case Studies

Field surveys are easy and less expensive to conduct compared to other forms of impact assessments, and they generally show positive results:

Poverty-alleviation: 5% of micro entrepreneurs pulled themselves out of poverty each year during the 1990s (Grameen Bank, Bangladesh). The direct and indirect impact of these loans is difficult to assess.

Domestic Violence: Women who take out loans around the world experience a decrease in domestic violence (Women’s World Banking)

Job creation: on average, micro entrepreneurs either created or retained an average of 2.4 jobs during 2007 and 2009 (Accion USA)

Wealth Increase: the median hourly wage offered by micro entrepreneurs was 24% higher than the federal minimum wage, which is $7.25 (Accion USA)

Business survival: 98% of existing businesses were still in business by year-end 2008, which is very high compared to a national average of 70% (Accion USA).

Conclusion

This list is by no means exaustive, although it does cover the most prominent social performance and impact assessment tools (read difference) available today. As microfinance continues to emerge as a lucrative business and social opportunity, new tools and techniques will be developed to optimize the performance of MFIs and determine the true impact of offering loans and savings to the poor

Microfinance Credit Bureau – Purpose and Operational Elements

Posted by Fehmeen on March 27th, 2010

Pakistan Microfinance Network (PMN) recently announced it will setup a credit bureau for microfinance providers so information about the credit histories of borrowers can be used to cautiously expand loan portfolios. The need was felt as a result of rising delinquency levels faced by microfinance banks (MFBs) that followed aggressive expansion strategies in recent years. Greater competition fueled this dilemma because if a client defaults, he can simply visit the next MFI and borrow more money.

Several countries, such as India, Peru, and Tajikistan have already setup microfinance credit bureaus and offer benchmarks for organizations such as PMN.

Purpose of a Microfinance Credit Bureau

A microfinance credit bureau helps distinguish between good (low risk) and bad (high risk) borrowers by looking at their professions, skills, loan and repayment histories. The effort will encourage microfinance providers to join hands instead of compete so the industry as a whole can limit default rates, check multiple borrowing and meet its social and financial objectives while ensuring institutional sustainability.

A strategic advantage deliverable by a microfinance credit bureau is the discovery of trends, as well as best practices that will enable MFIs to own healthy microfinance (microcredit, micro-insurance) portfolios.

Operational Elements of a Microfinance Credit Bureau (Examples from Pakistan and Other Countries)

Identifying all borrowers – Each borrower’s credit history can be linked to his/her unique identity number (e.g. in Pakistan, it can be tied to the National Identity Card or Voter ID, or in USA, it can be tied to the Social Security Number).

Gathering data – A credit bureau builds credit histories by seeking data from the computerized financial and operating software used by microfinance banks, which is required by the central bank in Pakistan and most other countries. MFIs will need to overcome a fear of relinquishing internal, competitive data about borrowers and trust an independent entity to handle and secure it. Utility companies that are involved in mobile banking services (e.g. Easy Paisa in Pakistan, or M-Pesa in Kenya) can also be approached to get records of prompt or delayed bill payments.

The perfect software – Technology plays a central role in assimilating, processing and distributing accurate data to MFIs in a timely manner. Data about loan payments can be stored on a smart card that is unique for each borrower, or the ‘Mobile Wallet’ accounts (a feature of Easy Paisa in Pakistan) and link these to a central database.

Access to the database – MFIs will only have indirect access to a central database; full control will belong to credit bureau officers.

If you liked this article, you may be interested in a presentation about credit bureaus in microfinance, and other article about microfinance theory and practice.

What is microfinance?

Opportunity International Australia helps people out of poverty through microfinance. Microfinance includes basic financial services – including small loans, savings accounts, fund transfers and insurance. Alongside non-financial services such as business training, microfinance assists people living in poverty who wouldn’t usually qualify for regular banking services because they have no form of collateral or formal identification.

Loans as small as as $100 help people in poverty start or grow their own small business. This enables them to earn an income so they can afford food, clean water, proper shelter and an education for their children.

Here’s how it works

By helping a mother buy a sewing machine to start a tailoring business or a father buy seeds to plant a vegetable garden, small loans enable people in poverty to earn an income and provide for their families. As each business grows, loans are paid back and lent out again. With 97% of loans repaid, the cycle continues, year after year. Each successful business feeds a family, employs more people and eventually helps empower a whole community.

Microfinance plus

As well as microfinance, we provide people living in poverty with non-financial (community development) services to strengthen their businesses and develop their communities.

Our partners

Opportunity International Australia works through local microfinance institutions in developing countries. This ensures we understand the needs of people living in poverty in the area and allows us to serve them effectively.