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 941100%. 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
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