ACHIEVEMENTS AND CHALLENGES OF MICROFINANCE INSTITUTION IN ETHIOPIA (THE CASE OF ADDIS ABABA)

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ABSTRACT

This paper presents achievements and challenges of Microfinance Institutions in Addis Ababa, Ethiopia. When traditional financial institutions have failed to provide the service to help the poor, MFIs were developed to fill this gap. The research address their institutions working in Addis Ababa.

The author’s interest in this topic was enhanced through her personal experiences of living in Ethiopia were examples of acute poverty were abundant. As a poor and developing country, there are many households who lack food to eat and many daily needs. Couple with the economic crisis in 1990s and hunger crisis in early 1980s, life has never been easy with many and till date many are still struggling to meet up with life. This is worst in the rural areas where farmers live a hand to mouth life. Many parents also lacked the means to sponsor their children at school because of low income. The type of farming that many do is for subsistence hence, what they are doing really improving their life and removing them from the poverty line. When microfinance started n the 1990s, the aim was to alleviate people from the low income. So we need to examine how the microfinance concept has helped in dealing with poverty and what has been achieved so far.

The data for the study was gathered from primary and secondary sources, and various rations and indicators were used to measure the performance of the Microfinances institutions. The data from 2002-2007 was used to see the trend in the performance.

In conclusion, all the MFIs studied were not sustainable and profitable without subsidies. The most MFIs studied are strong performers in outreach but are very weak when it comes to ROE. All the MFIs studied did not have an MIS system to finally automate their operation; the trend in the performance of microfinance institutions during those years of operation was encouraging.


Keywords
Microfinance, microfinance institution, microenterprise, microfinance Policy, National Bank of Ethiopia, Grameen Bank, World Bank, world fact book, Miscellaneous

TABLE OF CONTENTS

1 INTRODUCTION
1.1 Conceptual Definition of Microfinance
1.2 Purpose of the research
1.3 Statement of the research problem
1.4 Research questions/objective of the study
1.5 Background of the study
1.6 Hypothesis
1.7 Significance of the study
1.8 Research Method

2 LITERATURE REVIEW
2.1 History of MFIs
2.2 Financial Services for the poor
2.3 The Impact of Microfinance
2.4 Achievements and Challenges faced by Microfinance
2.5 How we measure the performance of MFIs

3 ANNUAL REPORTS OF SELECTED INSTITUTIONS
3.1 Social Performance of MFI’s
3.2 Financial Performance of MFIs

4 CONCLUSION AND RECOMMENDATION
4.1 Conclusion
4.2 Recommendation

REFERENCES
APPENDICES

Appendix 1 Questioner and Analysis


1 INTRODUCTION

Microfinance is regarded as poverty alleviation among the most stricken led to the creativity of making small informal microfinance.

When microfinance was started in the 1990s, the aim was to alleviate people against the effect of low income. Since then, they have either achieved their aim or are still working on it facing related challenges.

The Microfinance institutions help the poor to start their own initiatives and to build assets for their economic security. Conventional financial institutions such as banks fail to lend money to the poor for many reasons. Hence, the poor rarely have a chance to get financial support from them. As a means of getting rid of poverty, Muhammad Yunus from Bangladesh created the formal microfinance concept in 1990s.

Before the creation of the microfinance concept, there have been different microfinance institutions some of them very informal. Microfinance institutions have long existed in most developing countries but in a more traditional way and under different names depending on the country.

In Ethiopia, poverty and food insecurity are fundamental issues of economic stability.

As a poor developing country, there are many households that lack food to eat along with many daily needs. Coupled with the economic crisis in the 1990s and the hunger (famines) crisis in the early 1980s, life has never been easy and till date many are still struggling to meet up with life. This is worst in the rural areas where farmers live a ‘hand to mouth life’. Many parents also lack the means to sponsor their children at school because of low income. The type of farming that many do is for subsistence. Hence, what they are doing is really improving their life and removing them from the poverty line.

1.1 Conceptual Definition of Microfinance

There are many definitions of microfinance but for the purpose of this study a few authors were selected shown below.


Alemayehu (2010), defined microfinance as a provision of financial services to low income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.

According to Grameen’s foundation, Microfinance is sometimes called the ‘banking for the poor’. ‘Microfinance is an amazingly simple approach that has been proven to empower very poor people around the world to pull themselves out of poverty. A key to microfinance is the recycling of loans. As each loan is usually repaid within six months to a year the money is recycled as another loan, thus multiplying the value of each dollar in defeating global poverty, and changing lives of communities(Grameen Trust, 1995).

Microfinance helps the poorest people to work their way out of poverty for good. Giving the loan to help empower women to start their own businesses, enabling them to feed their families everyday (Microloan foundation, 2005).

Microfinance also known as micro credit, as small loans offered to poor households to foster self-employment and income generation (Fazle, Hasan & Abed, 2006).

Yacob (2007), opines that microfinance is the supply of loans, saving, and other basic financial services to the poor.


As the author puts it, Microfinance is a means of getting financial support to start a new business, help to be self-employed. The author has witnessed microfinance instructions letting the people become hard workers by giving them specific time to pay their loans. The poor need to pay their loans back within certain time limit. Thus this system makes them active and productive.

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