Micro-finance Policy and Development Framework: Ethiopia
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Free Download - Introduction - Abstract - Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia By African Development Bank |
Ethiopia is the second most populous nation in sub-Saharan Africa with approximately 63 million
people and almost 44% of the population being in the age of 15 years and below. Ethiopia ranks
158 out of 162 countries in the Human Development Index (UNDP, 2001a). Its per capita income
of US $ 110 is roughly one quarter the average for Sub-Saharan Africa. Poverty in Ethiopia is
more persistent in the rural areas and specially amongst the agriculture households. The average
size of poor rural household tends to be larger and approximately 20% of rural households are
female headed. Thus, women-headed households are more vulnerable as they traditionally have
less access to land and other productive resources. Most rural households depend on agriculture
as their primary source of income but lack essential social infrastructure, such as roads, education
and primary health care facilities, safe drinking water supplies and fuel. Furthermore, increase in other development challenges such as the HIV/AIDS, persistent malaria in the low lands, and
other communicable diseases is expected further to increase poverty levels in Ethiopia.
The origins of MFIs in Ethiopia is largely rooted in their NGO past with a clearly defined mission
of rural poverty eradication. A Government decree in 1996 established the licensing and
supervision of MFIs as ‘share companies’ in accordance with the Commercial Code of Ethiopia.
With a network of about 500 sub-branches and branches, the MFIs have expanded their outreach
to many of the regions where the incidence of poverty is highest. As of January 2001, MFIs in
Ethiopia had made loans to and mobilized savings from about 500,000 clients nationally. Some
MFIs have also started to offer other services such as managing pension remittances and money
transfer services (IFAD, 2001; Negash et. al. 2002). At least 41% of the MFI clients, nationally,
are women and in the majority from rural households. However, discussions with some MFIs in
Ethiopia revealed that the number of female borrowers was continuously dropping for reasons
which are yet unclear. MFIs have sustained high loan repayment rates, which varies from 94-
100%. The high repayment rates are mainly due to the kind of loan products offered to women
borrowers, which is micro-loans with weekly repayments, and group pressure.
MFIs, Loan products and delivery mechanisms. The loan products among MFIs in Ethiopia
generally follow the Grameen model with some slight variations. Most of the MFIs have two
types of loan products, namely loans for on-farm activities, which are due in four to twelve
months, and off-farm investments with more flexible repayments on weekly or monthly basis
(IFAD, 2001). On average, 60% of the MFI portfolio represents loans for on-farm investments
while income generating activities and petty trading accounted for about 40%. There are two
types of savings offered by MFIs, namely compulsory, which acts as collateral and will be withheld
by the MFI in case of default, and voluntary savings which the individual can withdraw at any
time. Compulsory savings are the most common and the interest rate on savings is about 6% per
annum (Dejene, 1999). In comparison to Malawi, the interest rates on loans in Ethiopia can be said to be at acceptable levels, and this is mainly because of the highly controlled nature of the
Ethiopian economy and the inflation rate. Interest rates vary among MFIs ranging from 12.5% to
15% per annum, in addition to a loan application fee of about 2%.
The following table gives a profile of the MFIs in Ethiopia. Although, the performance of the
micro finance sector can be considered to be quite impressive, their current outreach is comparatively
small compared to the number of poor rural households living below the national poverty line.
Community based organisations and the Informal Financial Sector
In Ethiopia only about 1% of rural households maintain bank accounts. Thus, the informal financial
sector is one of the most important sources of rural finance and accounts for about 78% of total
agricultural credit (Dejene Aredo, 1993). The major sources of finance in this sector are relatives
and friends (66%), and moneylenders (15%). In Ethiopia, there are a number of commonly found
community based indigenous savings and credit groups, which are also widely used by women.
One of the Community Based Organisations (CBOs), known as iqqub is an informal, ad-hoc
association organized by members for the purpose of pooling their savings in accordance with
rules established by the group. Members agree to deposit monthly or weekly contributions of a
fixed sum with an elected treasurer or, where accessible, in a bank. Lots are drawn weekly or
monthly by turns and members in need can purchase the winner’s lot by paying a premium.
The other common CBO is an iddir which is an informal association whereby savings are made
primarily for the purpose of covering the cost of funerals or weddings. A mehaber is an informal,religious association that draws its members from the church to raise money for medical and
burial expenses. In this sense, moneylenders are well positioned, with terms and conditions that
are quick, simple, convenient and flexible, for most accessible source of funds for the rural poor
outside of family and friends, albeit at an annual rate of interest as high as 245% or more. Therefore,
CBOs play a significant role in savings and beneficiary mobilization, and are considered to be
effective ways of targeting clients as some of the CBOs are uniquely controlled and owned by
women.
Savings and Credit Cooperatives (SACCOs) are almost entirely urban based with membership
largely drawn from salaried employees and generally people who share a common purpose and
locality. Currently there are about 670 urban SACCOs with approximately 150,000 members.
Reportedly, these SACCOs have consistently performed quite well largely due to their political
and financial independence. Most of the SACCO members are men. Members are required to
save 3% to 5% of their salaries on a monthly basis. Borrowers are charged 1.5% per month and
savers paid the regular bank savings rate, which is currently around 6% per annum. All cooperative
societies, including SACCOs, are governed and supervised by the Regional Cooperative Promotion
Bureaus.
ECONOMIC RESEARCH PAPERS
NO 74
(January 2003)
Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia
by
Sunita Pitamber
Microfinance Policy and Development Framework Ethiopia - To learn more about this author, visit African Development Bank's Website.
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