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

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


Introduction

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?


Innovations in microfinance should address the following issues

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


Innovations in the delivery of financial services through microfinance institutions in ethiopia

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

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.


Innovations in the delivery of financial services through microfinance institutions in ethiopia

LOAN PRODUCTS

  • Agricultural loans

  • Micro & small business loans

  • Housing loans

  • Consumption loan

  • Equipment loan


Sectors financed by mfis

Sectors Financed by MFIs,


Savings products

SAVINGS PRODUCTS

  • Compulsory saving

  • Voluntary saving (from members and non-members)


Other financial products

Other financial PRODUCTS

  • Insurance

  • Money transfers

  • Pension administration


Innovations in the delivery of financial services through microfinance institutions in ethiopia

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)


Innovations in the delivery of financial services through microfinance institutions in ethiopia

Growth of Microfinance Industry in Ethiopia

(June 2007)


Innovations in the delivery of financial services through microfinance institutions in ethiopia

Outstanding Loans and Savings

( June 2003-June, 2007)


Innovations in the delivery of financial services through microfinance institutions in ethiopia

Active Clients (June 2003- June 2007)


Best practices in mfis

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


Best practices in mfis1

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


Economic social impact

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.


Economic impact

ECONOMIC IMPACT


Social and political impact

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


Challenges of the industry

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


Challenges of the industry1

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


Opportunities

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


Threats

Threats

  • Production and marketing risks

  • Distortions of markets by donors, government, etc

  • Inflation

  • Politicizing microfinance

  • HIV/AIDs

  • Over-regulation


Proposed interventions

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

Thank You


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