Sustainability of Ethiopian Microfinance Institutions
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Date
2006-06
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Addis Abeba university
Abstract
In recent years the growth and expansion of micro finance programs and increasing
attention to micro finance as a poverty reduction strategy has given rise to a number
of questions. What is the interrelationship between scalingup outreach and financial
sustainability of MFIs? Are outreach and financial sustainability positively related or
is there direct trade off between the two? What are the factors that are necessary for
strong outreach and financial Viability? To observe the responses to those questions,
the case of three institutions namely, OMFI and SMFI operating in the Southern
Regions and AdCSL in Addis Ababa were used. The main objective of the study is to
asses the relationship between outreach and financial sustainability and draws
conclusions and make recommendations for improving the financial sustainability of
theMFIs.
The study used both quantitative and qualitative methods to obtain information on
outreach and financial peiformance of the three sample MFIs. Primary data were
collected through semi-structured questionnaires. Focus group discussions were held
with the clients of the sample MFIs. Detailed discussions were held with employees
and executives of MFIs. Secondary data were mainly collected from audited financial
statements. Finally, adjustments to financial data were made and the peiformances of
the MFI were measured by taking selected indicators.
The results of the study revealed that the three sample MFIs have achieved extensive
outreach. The volume of saving as well as the gross loan portfolio has grown
significantly. The participation of women in three sample MFIs was also
encouraging. All sample MFIs under study have not achieving the level of financial
self-sustain ability. However, the trends of their financial performance demonstrate
that there is a good and steady progress towards reaching operational self-sufficiency
in the three MFIs. Both AdCSI and OMFI already achieved operational selfSufficiency.
The results of operation demonstrate that with the increase of outreach,
operational self-Sufficiency has increased. Institutional capacity was identified as the
driving force to attain outreach and sustainability in the sample MFIs. Over all, the
outreach and financial sustainability of the sample MFIs has grown significantly.
However all sample MFIs did not achieve financial self-sufficiency.
The main constraints in improving outreach and financial sustainability of MFIs in
Ethiopia are: - Lack of experienced and competent board of directors, lack of
customer responsive lending mechanism and service design, shortage of commercial
loanable fundfor future expansion, Lack of trained manpower and efficient legal
system to enforce contracts and low interest rate. In order to improve the outreach
and financial sustainability of micro finance industry, the importance of designing
client centered financial service provision, the need to have competent board of
directors and management body is emphasized. Furthermore, the importance of
having human resource development strategy, presence of reliable management
information system, putting in place an efficient legal system to enforce contracts and
adjustment to lending interest rate has been recommended. Financially viable MFI
only delivers flexible financial services to the poor that have significantly contributed
to poverty reduction. Moreover, all development stakeholders should work together
with the micro finance programs to tackle the development challenges of Ethiopia