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Innovations in Addressing Rural Finance Challenges in Ethiopia


Title: Agricultural Credit Practices And Financial Intermediation In Ethiopia (A Review Of Concepts, Practices, Problems And Prospects) Author – PowerPoint PPT presentation

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Title: Innovations in Addressing Rural Finance Challenges in Ethiopia

  • Innovations in Addressing Rural Finance
    Challenges in Ethiopia
  • Presentation
  • by
  • Berhanu Taye
  • Addis Ababa
  • July 2008

  • Outline
  • 1. Background
  • 2. Trends of Rural/Microfinance Development
    in Ethiopia
  • 3. Factors Contributed to MFIs Rapid Growth
  • 4. Challenges of Rural Finance
  • 5. Best Practices/Innovations
  • 6. Conclusion

  • I.  Background
  • 1.1   Overview of the Rural Sector
  • Ethiopia
  • Population in 2008 about 80 million.
  • GDP per Capita USD 180 in 2006.
  • One of the poorest countries of the world.
  • Poverty is endemic to the country the poor makes
    insufficient money to cover daily meal, health,
    education and other services.
  • Poverty reduction is the central element of the
    Governments development agenda and hence, rural
    financial policies, goals and objectives focus on
    targeting primarily the poorest and disadvantaged
    rural households.

  • The Rural Sector
  • The rural sector involves all villages and rural
    towns where the
  • majority of the population lives.
  • About 80 of the country's population lives in
    rural areas and the
  • majority of the rural population is engaged in
  • production.
  • Apart from agriculture, sizeable portion of the
    rural population is
  • engaged in non-farm activities that have
    gradually increasing in
  • recent years.
  • In Ethiopia, the rural sector plays a decisive
    role in the growth
  • and development of the national economy.
    Agriculture is the
  • dominant economic activity of the economy that
    accounts for
  • nearly 50 of the GDP.

  • Characteristics of the Rural Sector
  • Agricultural activities are the main stay
  • Low level of productivity
  • Constitutes an emerging rural non-farm
  • High level of poverty
  • Underdeveloped infrastructure
  • Poor entrepreneurial development
  • Natural resource degradation
  • Shortage of capital poor saving habit
    leading to
  • seasonal income fluctuations
  • Weak local government institutions

  • The level of development of the rural economy in
    most of development countries like Ethiopia has
    got a direct influence on the overall national
  • Thus, efforts and resources allocated in these
    countries to promote accelerated economic
    development largely focus on the transformation
    and modernization of the rural sector.
  • A prominent obstacle to rural development is the
    problem of mobilization of resources, which is
    crucial in achieving rapid economic growth of the
    rural economy.

  • The initial step in resource mobilization for
    development purposes is the mobilization of
    financial resources that leads to capital
  • Since the rural economy represents a substantial
    proportion of the country's human and natural
    resources, large amount of capital is needed to
    help transform and modernize this sector.
  • Rural financial institutions, i.e. microfinance
    institutions (MFIs) are, thus, relevant important
    financial institutions which are designed and
    expected to encourage and mobilize savings and
    also channel such savings into income generating
    activities in the rural areas.

  • 1.2 The Financial Sector
  • As in the most developing countries , the
    financial system of Ethiopia is characterized by
    the co-existence and operation side by side of a
    formal sector and an informal financial sector.
  • The informal financial market, for the most part,
    is outside the framework of national accounts and
    statistics. However, the majority of the rural
    population is considered to be the direct
    beneficiary of the informal credit sources.
  • Formal credit sources have got institutional form
    and they are organized based upon the economic
    policy of the country.

  • Formal sources of rural credit in Ethiopia are
  • the banking system
  • MFIs
  • 2.2 Importance of Rural Finance
  • Rural finance covers provision of credit, savings
    mobilization, activities and providing other
    essential financial services such as money
  • Rural finance is an effective tool of poverty
    reduction and rural development. Its impact is
    fully observed only when conducive policies are
    in place, markets are functional and
    non-financial services are available.

  • Rural credits are considered as very important
    means of increasing investment capacity of
    farmers for increased employment and food
    production thereby alleviating poverty, famine
    and hunger.

  • 2.TRENDS OF Rural/Microfinance Development in
  • 2.1 Development Role
  • In Ethiopia, formal rural credit service has been
    subject to government policy intervention during
    the last two-three decades.
  • DBE was the main source of agricultural credits.
  • CBE has been providing input credit since the
    1986 NBEs Rural Credit Policy Directive that
    permitted CBE to participate in the rural credit

  • As part of NGO relief and development efforts as
    well as to address the growing demand for
    credits in the rural sector the microfinance
    credit scheme was launched in early 1990s.
  • A proclamation for licensing and supervision of
    microfinance business was issued by NBE in
    1996. Currently, more than 27 MFIs are registered
    by NBE.
  • One of the most important innovations in
    development finance in recent years has been the
    emergence of microfinance.

  • 2.2 Financial Products
  • Microfinance is the provision of financial
    services to the entrepreneurial poor. Most MFIs
    provide limited range of financial services. The
    financial services include
  • Micro loans
  • Micro savings
  • Micro insurance
  • Money transfer (payment)
  • Pension fund management
  • Moreover, they also provide non-financial
    services including
  • Training
  • Sensitization of clients on mainstream issues
    like HIV/Aids

  • Microfinance activities usually involve
  • Small loans, typically for working capital
  • Group guarantee or compulsory savings as
    substitute for collateral
  • Access to successive larger loans based on
    repayment performance
  • Streamlined loan disbursement and monitoring
  • Secure voluntary savings products
  • Informal appraisal of borrowers investments

  • Lending Methodologies
  • Group solidarity loans main method, usually
    small loans, members cross-guarantee each other
  • Individual lending larger size, loans to small
    business graduated from MFIs loans to employee
  • Members owned managed lending SACCOs/RUSACCOs
  • Microfinance in Ethiopia is an infant Industry,
    but the sector is tremendously growing in terms
    of number of MFIs, both geographical and client
    outreach, loan outstanding, saving mobilization,
    capital, assets, etc.

  • 2.2 Growth, Achievements and Lessons
  • Achievements
  • The Ethiopian MF industry manifested a
    remarkable growth since the early 1990s
  • June 2001 March 2008
  • No. of clients 461,326 1,834,007
    4 fold
  • O/S Loan Birr 308.6 million Birr
    3,5 billion 11 fold
  • Client saving Birr 243.3 million
    Birr 1.2 billion 5 fold
  • Moreover, as at March 31,2008 MFIs recorded
  • Total assets Birr 4.5 billion
  • Total capital Birr 1.2 billion
  • Source AMFI Reports 2007 2008.

  • Financial performance- Country Average
  • 2003 2006
  • 1.Operational sustainability 104 131
  • 2.Financial sustainability 77 92
  • 3.Return on assets -5 3.6
  • 4.Portfolio at risk lt30 days 7.6 5.4
  • Source AEMFI 2008.

  • Available evidences from various studies and
    reports show that microfinance services in
    Ethiopia will
  • Reduce poverty through increasing income, smooth
    consumption flows, expand asset base, and
    improved living conditions
  • Improve health care nutrition
  • Womens empowerment
  • Improve children's education, etc.
  • The ability to borrow, save and earn income
    reduces economic vulnerability particularly for
    women and their household.
  • Successful MFIs have manifested that the poor are
    bankable and banking with the poor can be
    profitable and sustainable.
  • MFIs have proved that it is possible to achieve
    both objectives of reaching the poor as well as
    be financially sustainable

  • Only sustainable MFIs can reliably provide
    adequate financial
  • services and continously increse their
    outreach to the poor.
  • The strength of MFIs lies in
  • The ability to develop demand driven products
  • The ability to reduce transaction costs
  • Monitoring mechanisms and to manage
  • socioeconomic, cultural and other risks
  • Allocate scarce resources efficiently
  • Make their resources grow continuously.

  • Lessons
  • Poor women and men have shown that they are
    bankable and responsive to MFI financial
  • MFIs need to be cost effective so as to reliably
    provide adequately provide financial services and
    increase their outreach.
  • Simplification of loan process and reduction of
    loan disbursement lead time will make clients
    confident of being funded on time.
  • Linkage of MFIs with the banking system requires
    timely action.
  • Rural households need to be linked to markets as
    well as rural credit and other support systems.
    The interdependence of credit and product/input
    markets is very important and would remain
    critical for rural development.
  • Support in areas of capacity building, technical
    assistance, marketing information is critical for
    the rapid growth of the microfinance industry.
  • Collection of reliable client information will
    help careful screeninig timely loan

  • Continued lessons
  • Close monitoring of loan performance results in
    high on-time
  • collection rates and reduces loan losses.
  • Introduction of regulations of new instruments
    like warehouse
  • receipt (voucher) system contract
    farming/out grower
  • scheme and assurance to clients based on the
  • economic setting of the country would have
  • contribution.
  • Training of clients need to be strengthened.
  • Beneficiaries participation should be pursued
    at design and
  • implementation
  • There is considerable and sharply growing unmet
    demand for
  • credit
  • Credit services should be demand driven.
  • Provision of repeat loans with a gradual
    increase of the loan size
  • following good loan repayment.

  • 3. Factors that Contrbuted to MFIs Rapid Growth
  • The Ethiopian MF industry has witnessed a
    remarkable growth in the past years. Both
    external as well as internal factors contributed
    to this growth
  • External factors
  • Government support
  • i. Commitment of the Federal Government
  • ii. Regulatory and supervisory framework
  • iii. Institutional capacity building support
  • iv. Support in linking MFIs commercial banks
  • v. Design implementation of donor financed
    special support programs like RUFIP, etc
  • Donor support
  • Grant fund for capacity building
  • Technical assistance

  • Internal Factors
  • Most MFIs have vision, mission and explicit
    objective that make poverty reduction part of
    their organizational culture.
  • At the same time their operation is geared
    towards cost effective way of reaching the poor.
    Operational self-sufficiency of most MFIs is
    higher indicating that their revenues would
    cover their operating costs, costs of loan losses
    and raising their capital.
  • The existence of the MF Network (AEMFI), from
    which they get multi-faceted support like
    training, technical assistance, etc.

  • .continued Internal Factors
  • MFIs ability to strictly operate under the
    regulatory framework, which make them
  • To be healthy financial institutions
  • To stay competitive
  • To install and maintain good governance
  • Most MFIs undergo continuous transformation
    process, i.e.
  • Willing to design and introduce new financial
    products, more
  • flexible enough in light of customer needs
  • Willing to continuously improve delivery process
  • Continuous human resource development

  • 4. Challenges of Rural Finance
  • Shortage of loanable fund to address the growing
  • Limited capacity for smaller MFIs in expanding
    outreach to new areas
  • Weak linkage between MFIs banks
  • Poor saving culture (like depositing in the
    morning and withdrawing in the afternoon)
  • Underdeveloped credit culture - belief that
    credit should be donation
  • Growing drop out rate due to poor group formation
    and preparation
  • High illiteracy lends making training awareness
    very costly
  • Lack of adequate information for loan processing
  • Absence of bank branch network and hence high
    travel cost
  • Involvement in several credit programs by clients
    leading to the case of borrowing from X MFI to
    repay Y MFI.
  • HIV/AIDS other related problems

  • Contnued..Challenges of Rural Finance
  • The major challenges of rural/microfinance
    institutions can be summed
  • to the concept of Critical Microfinance
    Triangle Zeller and
  • Mayer(2002), which requires the need for any
    MFI to manage
  • simultaneously the problem of outreach,
    financial sustainability and
  • impact as shown below

  • Continued Challenges of Rural Finance
  • Outreach reaching the poor in terms of both
    number and depth
  • Financial sustainability meeting operating and
    financial costs over the long-term
  • Impact having observable effect upon clients
    quality of life
  • Based on this concept, MFIs should be able to
  • Choose their target clients ensure large number
    of target clients are reached using
    cost-effective means
  • Develop range of products that could meet
    clients needs
  • Set simple and standard loan procedures
  • Reduce transaction and supervision costs

  • Best Practices/Innovations
  • The following key innovative approaches are
    effective tools for addressing rural finance
  • Firm vision/mission to reach the poor
    increasing outreach with the ultimate goal of
    reaching large number of clients and poverty
  • Simple and innovative products, i.e. development
    of demand driven financial products
  • Cost effective MFI for attaining operational
    financial sustainability control over
    administrative expenses and effective use of

  • d. Diversified funding sources
  • e. Standardized Simple delivery procedures/
  • f. Linkage of MFIs banks
  • g. Continuous institutional capacity of MFIs so
    as to address
  • Good governance
  • Human resource development
  • Portfolio quality improvement
  • MIS strengthening
  • Loanable fund/savings mobilization
  • Quick information on repayment default
  • h. Flexible loan terms conditions, e.g.
    suitable loan repayment schedule tailored to the
    clients cash flow
  • i. Close frequent monitoring follow up
  • j. Appropriate standard criteria (ratios) for
    measuring MFIs performance

  • 6.Conclusion
  • The building cornerstones for achieving MFIs
    financial success
  • are
  • efficiency effectiveness of processes
  • Development of quality services
  • Support for innovation in operation and services
  • Responsiveness to client needs
  • The innovations compliment each other. Using a
  • combination/ integration of approaches in
  • financial services to the rural households
    could be a better
  • alternative of doing things effectively.

  • Thank You!
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