Innovations in the delivery of financial services through microfinance institutions in ethiopia
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Innovations in the Delivery of Financial Services through Microfinance Institutions in Ethiopia:. by Wolday Amha Presented at AFRACA Workshop Organized in Collaboration with Commercial Bank of Ethiopia (CBE) July 22-25, 2008 Addis Ababa, Ethiopia. Introduction.

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Innovations in the Delivery of Financial Services through Microfinance Institutions in Ethiopia:

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Innovations in the Delivery of Financial Services through Microfinance Institutions in Ethiopia:

by WoldayAmha

Presented at AFRACA Workshop Organized in Collaboration with Commercial Bank of Ethiopia (CBE)

July 22-25, 2008

Addis Ababa, Ethiopia


The study will attempt to respond to the following questions

  • Why are MFIs in Ethiopia rural focused?

  • What is the secret for remarkable growth of outreach?

  • Are the finance providers delivering innovative financial services to households?

  • How is the delivery of financial services to rural households affecting the sustainability of the finance providers?

  • Is the regulatory environment conducive to develop new and innovative financial products?

  • What is the impact of MFIs?

  • What are the strength, challenges, opportunities, and threats?

  • What are the interventions required?

Innovations in microfinance should address the following issues

  • Remote rural clients, including pastoralists

  • High transaction costs

  • Demand for small loans

  • Heterogeneous clients with varying skills and cultural background

  • Information asymmetry

  • High production and marketing risk

  • Lack of property collateral

  • Weak institutional capacity of finance providers

  • Inadequate infrastructure, regulation and supervision

Background of Microfinance Industry in Ethiopia

  • Credit scheme in Ethiopia started in the late 1980s, as part of NGO relief and development programs.

  • Proclamation for licensing and supervision of microfinance businesses in 1996.

  • National Bank of Ethiopia (NBE).

  • 27 MFIs registered by the National Bank of Ethiopia

Rationale to regulate the MFIs in Ethiopia 

  • Separates charity and finance.

  • Sound commercial principles

  • MFIs in Ethiopia are all deposit takers

  • MFIs under Ethiopia’s monetary and financial policy framework.


  • Agricultural loans

  • Micro & small business loans

  • Housing loans

  • Consumption loan

  • Equipment loan

Sectors Financed by MFIs,


  • Compulsory saving

  • Voluntary saving (from members and non-members)

Other financial PRODUCTS

  • Insurance

  • Money transfers

  • Pension administration

Growth of Microfinance Industry in Ethiopia

(June 2005)

  • Outreach: over 1.8 million active borrowers

  • Outstanding loan balance: Birr 3 bln. (315 million USD)

  • Balance of savings: Birr. 1 bln (105 million USD)

Growth of Microfinance Industry in Ethiopia

(June 2007)

Outstanding Loans and Savings

( June 2003-June, 2007)

Active Clients (June 2003- June 2007)


  • Strong focus on the very poor indicated by the relatively smaller loans compared with other African countries.

  • Increase in outreach, particularly the rural poor

  • MFIs have mobilized significant amount of savings

  • Improvements in operational and financial sustainability

  • Transparency of MFIs

  • Attempt to be rated by international rating agencies by few MFIs


  • MFIs revisited their lending methodologies:

    group size, individual lending

  • New financial products:

    housing loan, loans for equipment, commission based savings, joint account saving, micro insurance, micro and small enterprise loans

  • Access to commercial funding

Economic & social Impact:

  • MF services raise the household income

  • Microfinance increases business skills at community level

  • MF reduces the labor force competing for jobs

  • It also eases the burden on the already scarce land, by enabling borrowers to engage in off-farm activities.



  • Enhanced the social and political position of women

  • Boosted self confidence and self esteem

  • Increased women’s ability to economic planning and management

  • Increased women’s participation and influence in community affairs


  • Lack of loan capital

  • limited outreach, particularly women

  • uneven coverage of the regions in the country

  • limited financial products

  • limited opportunities to access foreign capital and inadequate donor funding

  • weak MIS and Governance problems


  • Marketing problem for agricultural products

  • Lack of foreclosure law for MFIs to introduce individual lending methodology

  • Absence of efficient legal system to enforce contracts and denying the foreclosure law to MFIs encourage dishonest borrowers to default .

  • Absence of common regulatory framework for SACOs & MFIs may affects the development of microfinance industry. There must be harmonization of financial standards

  • Limited capacity of NBE to supervise and provide technical support


  • There is clear legal framework

  • Huge unmet demand

  • Existence of general government support

  • Development of telecommunication and power services in rural areas

  • Transformation of MFIs

  • Competition

  • Growing interest of banks, postal services, social investors, private sector

  • Joining WTO and other regional trade organizations


  • Production and marketing risks

  • Distortions of markets by donors, government, etc

  • Inflation

  • Politicizing microfinance

  • HIV/AIDs

  • Over-regulation

Proposed interventions

  • Increase the availability of loan fund to MFIs

  • Increase outreach, particularly women and people living in remote areas

  • Develop demand driven financial products

  • Develop appropriate MIS

  • Develop systems to identify and manage risks

  • Improve the performance of MFIs

  • Improve the capacity of the staff and clients

  • Improve the legal and court system

  • Improve the governance of MFIs

  • Improve the communication infrastructure

  • Establish credit information bureau

Thank You

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