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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
slide4

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.
slide6

LOAN PRODUCTS

  • Agricultural loans
  • Micro & small business loans
  • Housing loans
  • Consumption loan
  • Equipment loan
savings products
SAVINGS PRODUCTS
  • Compulsory saving
  • Voluntary saving (from members and non-members)
other financial products
Other financial PRODUCTS
  • Insurance
  • Money transfers
  • Pension administration
slide10

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)
slide12

Outstanding Loans and Savings

( 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.
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