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

1. 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

2. Introduction 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?

3. 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

4. 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

5. 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.

6. LOAN PRODUCTS • Agricultural loans • Micro & small business loans • Housing loans • Consumption loan • Equipment loan

7. Sectors Financed by MFIs,

8. SAVINGS PRODUCTS • Compulsory saving • Voluntary saving (from members and non-members)

9. Other financial PRODUCTS • Insurance • Money transfers • Pension administration

10. 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)

11. Growth of Microfinance Industry in Ethiopia (June 2007)

12. Outstanding Loans and Savings ( June 2003-June, 2007)

13. Active Clients (June 2003- June 2007)

14. BEST PRACTICES IN MFIs • 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

15. BEST PRACTICES IN 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

16. 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.

17. ECONOMIC IMPACT

18. SOCIAL AND POLITICAL IMPACT • 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

19. CHALLENGES OF THE INDUSTRY • 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

20. CHALLENGES OF THE INDUSTRY • 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

21. Opportunities • 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

22. Threats • Production and marketing risks • Distortions of markets by donors, government, etc • Inflation • Politicizing microfinance • HIV/AIDs • Over-regulation

23. 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

24. Thank You