Access to Finance in Ethiopia: Sector Assessment Study (Volume 2)

Transcription

Access to finance
in Ethiopia
Sector assessment study
Volume 2
Martina Wiedmaier-Pfister
Dagnew Gesesse
Dr Wolday Amha
Rochus Mommartz
Eric Duflos
William Steel
for the German Technical Cooperation
within the Engineering Capacity Building Project
July 2008
1
Acknowledgements and dedication
This study was possible only because of the continuous and dedicated support of the National Bank of
Ethiopia, especially Ato Lakew Lemma*, Ato Getahun Nana, Ato Muluneh Alemu and the staff of other
departments such as banking supervision and research.
The Association of Ethiopian Microfinance Institutions, the co-author if this study, and Dr Wolday
Amha and his staff have been a permanent and high-quality supporting agency in this process.
Ato Berhane Kidanu of the Cooperative Agency also contributed invaluable information. Dr Eyob of
the Ethiopian Institute for Insurance and Bank shared his data and insights. Representatives of the
Regional Governments were competent and open discussion partners.
Representatives from microfinance institutions such as Amhara Credit and Savings Institute, OMO,
Oromio Credit and Savings Share Company, Aggar and Bufana and some savings and credit
cooperatives were very helpful partners.
Representatives of international development agencies such as the World Bank, US Agency for
International Development, KfW Development Bank, International Fund for Agricultural Development
and Interchurch Organization for Development Cooperation continuously shared their views and
provided information.
*We sincerely miss Ato Lakew from NBE who was the initiator and driving force of this process until his
sudden passing away in May 2007. It will be his legacy to the financial sector in Ethiopia that
stakeholders agree on a visionary Microfinance Strategy – which was renamed Access to Finance
Strategy – as a basis for the future development of pro-poor financing in Ethiopia, which has matured
in the last decade under his authority.
2
About ECBP and GTZ
The Engineering Capacity Building Program (ECBP) is an ambitious reform program aimed at
accelerating industrial development in Ethiopia. “Building Ethiopia” is its guiding motto and it is
committed to improving the living standards of all Ethiopians. The program is the result of close
cooperation between the Ethiopian and the German governments. It was launched in November 2005
and has recorded impressive results. ECBP focuses on developing the private sector and the
institutions that support it. It aims to create new employment, improve the skills of the country’s
workforce, modernize the private sector and make Ethiopian products more competitive in
international markets. ECBP is directed towards the country’s most valuable resource: its people. By
investing in education and better employment opportunities, it helps Ethiopians realize their potential
and break out of the circle of poverty.
The federally owned Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH is an
international enterprise for sustainable development with worldwide operations. It supports the
German government in achieving its development-policy objectives. Its objective is to improve
people’s living conditions on a sustainable basis. GTZ is based in Eschborn near Frankfurt am Main. It
was founded in 1975 as a company under private law. The German Federal Ministry for Economic
Cooperation and Development is its major client. The company also operates on behalf of other
German ministries, the governments of other countries and international clients, such as the European
Commission, the United Nations and the World Bank, as well as on behalf of private enterprises.
3
Contents
Executive summary
8
Chapter 1: Introduction
12
Chapter 2: Background
15
Social, economic, political and historical context
15
The banking sector
17
Financial sector reforms
19
Chapter 3: The micro level – financial service providers
21
Institutions providing pro-poor financial services
22
Microfinance institutions
23
Financial co-operatives
29
Non-governmental organisations
32
Commercial banks
33
Recommendations
35
Chapter 4: The meso level – financial infrastructure
38
Association of Ethiopian Microfinance Institutions
38
Ethiopian Academy of Financial Studies
39
Wholesale financing and guarantee funds
40
Other support services – financial infrastructure
42
Recommendations at the meso level
42
Chapter 5: The macro level – policies, laws, regulation and supervision
43
Legal, regulatory and supervisory framework
43
Role of government in pro-poor orientated financial services
46
Recommendations at the macro level
48
Chapter 6: International development assistance
50
Donor support at micro level
50
Donor support at meso level
50
Donor support at macro level
51
Donor coordination in pro-poor financing
51
Recommendations for donors
52
4
References
53
Annexes
Annex 1
Terms of Reference of microfinance team leader for strategy development process 56
Annex 2
Minutes of round table of development partners
62
Annex 3
Minutes of stakeholder consultation workshops
65
Annex 4
List of resource people
71
Annex 5
Report on Core Team retreat
72
Annex 6
Socio-economic background
77
Annex 7
Historical and political Context
79
Annex 8
Potential demand and outreach projections of microfinance providers
80
Annex 9
History of MFIs in Ethiopia
82
Annex 10
Regional distribution of MFIs in Ethiopia
83
Annex 11
Governance of SACCOs
84
Annex 12
MIF loan product survey
85
Annex 13
MIF saving product survey
93
Annex 14
Other MIF products
99
Annex 15
Outreach, efficiency and sustainability of MFIs
103
Annex 16
History of SACCO development
105
Annex 17
Data on RUSACCOs
106
Annex 18
History of non-governmental organisations in finance
107
Annex 19
Sources of funds of MFIs (September 2006)
108
Annex 20
Urban Financial Intermediation Program (UFIP)
109
Annex 21
Development strategies and policies
113
Annex 22
Targeted lending programs in Ethiopia
117
Annex 23
A rapid assessment of promotional credit schemes in Ethiopia – four field visits
118
Annex 24
Support from international development agencies
124
5
Abbreviations
ACSI
ADLI
ADSCI
AEMFI
AFD
AfDB
AFS
AMS
BDS
CA
CB
CBB
CBE
CBO
CGAP
CSA
DAG
DBE
DECSI
DED
EAFS
ECBP
EPDRF
FC
FCA
FEMSEDA
FI
FSP
GDP
GoE
GNI
GDP
GTZ
HDI
HIVOS
ICCO
IFAD
ILO
INGO
IT
KfW
MB
MDG
MFI
Amhara Credit and Savings Institution
Agricultural Development and
Addis Savings and Credit Institution
Agence Française du Développement
African Development Bank
Access to Finance Strategy
Agricultural Marketing Strategy
Business Development Services
Cooperative Agency
Commercial Bank
Construction and Business Bank
Commercial Bank of Ethiopia
Cooperative Bank of Oromia
Consultative Group to Assist the Poor
Central Statistical Authority
Donor Assistance Group
Development Bank of Ethiopia
Dedebit Credit and Savings Institution
Deutscher Entwicklungsdienst /German Development Agency
Ethiopian Academy of Financial Services
Engineering Capacity Building Program
Ethiopian People’s Democratic Front
Financial Cooperatives
Federal Cooperative Agency
Federal Ethiopian Micro and Small Enterprise Development Agency
Financial Institution
Food Security Program
Gross Domestic Product
Government of Ethiopia
Gross National Income
Gross Domestic Product
Gesellschaf für Technische Zusammenarbeit/German Techncial Cooperation
Human Development Index
Humanist Institute for Development Cooperation (Dutch)
Interchurch Organization for Development Cooperation
International Fund for Agricultural Development
International Labour Organization
International NGO
Information Technology
Kreditanstalt für Wiederaufbau/KfW Development Bank
Microbanks
Millennium Development Goals
Microfinance Institution
6
MFP
MIS
MIX
MOCB
MOFED
MOTI
MRF
MSED
MSME
MSE
NOVIB
NBE
NGO
NIB
NPL
OECD
OCSCCO
PASDEP
PEACE
PRSP
PSTG
RG
ROSCAS
RUFIP
RUSACCO
SACCO
SDPRP
SFPI
SHG
SIDA
SME
SNNP
SNV
TA
TVET
UFIP
UN
UNCDF
UNDP
URSACCO
USA
USAID
VOCA
WB
WOCCU
WHO
WWB
WTO
Microfinance Provider
Management Information System
Microfinance Information eXchange
Ministry of Capacity Building
Ministry of Finance and Economic Development
Ministry of Trade and Industry
Microfinance Refinancing Facility
Micro, Small Enterprise Development
Micro, Small and Medium Enterprise
Micro and Small Enterprises
Nederlandse Organisatie Voor Internationale Bijstand
National Bank of Ethiopia
Non-governmental Organization
National Investment Bank
Non-performing Loans
Organisation for Economic Co-operation and Development
Oromia Credit and Savings Share Company
Plan for Accelerated and Sustained Development to End Poverty
Poverty Eradication and Community Empowerment
Poverty Reduction Strategy Program
Private Sector and Trade Group
Regional Government
Rotating Savings and Credit Organizations
Rural Financial Intermediation Program
Rural Savings and Credit Cooperative
Savings and Credit Cooperative
Sustainable Development and Poverty Reduction Paper
Specialized Financial and Promotional Institution
Self-Help Group
Swedish International Development Cooperation Agency
Small and Medium Enterprise
Southern Nations, Nationalities and People
Netherlands Cooperation
Technical Assistance
Technical Vocational Training
Urban Financial intermediation Fund
United Nations
United Nations Capital Development Fund
United Nations Development Program
Urban SACCO
United States of America
Unites States Agency for International Development
Volunteers in Overseas Cooperative Assistance
World Bank
World Council for Credit Unions
World Health Organization
Women’s World Banking
World Trade Organization
7
Executive summary
The plan to develop a National Access to Finance Strategy for Ethiopia emerged at the end 2005 when
the National Bank of Ethiopia (NBE) presented this idea to the Engineering Capacity Building Program
(ECBP)/German Technical Cooperation (GTZ). A Road Map for developing an Access to Finance
Strategy set the parameters. A Core Team, comprising the NBE, the Association of Ethiopian
Microfinance Institutions (AEMFI) and ECBP, was established to lead the initiative. In February 2007,
the Federal Cooperative Agency (FCA) joined the Core Team. Among the first activities were
stakeholder consultations including microfinance institutions (MFIs), savings and credit cooperatives
(SACCOs), regional governments and international development agencies and donors. The Road Map
was presented at these consultation sessions, and the idea of an Access to Finance Strategy discussed.
This was followed by this in-depth Access to Finance in Ethiopia study.
Evolution of pro-poor finance
After economic liberalisation in 1994, poverty and food insecurity led the Government of Ethiopia
(GoE) to adopt microfinance as a prime component of its new economic development agenda.
Supported by the international development community, the GoE promoted microfinance in the
context of the traditional banks’ poor performance in supplying suitable financial products for small
farmers. Some local and international non-governmental organizations (NGOs) granted credits to poor
communities, although the mixed humanitarian and financial targets led to myraid problems and an
alarming lack of professionalism. Some experimental credit schemes for small farmers did, however,
make a significant contribution. An example is the Oromia Credit and Saving Scheme Development
Project, starting in 1996. In 1996, NBE took the lead in developing a prudential regulatory framework
for microfinance to supply financial services to the poor in a sustainable and growth-oriented way. The
Microfinance Proclamation 40/1996 allowed for the establishment of deposit-taking MFIs, and has
supported the development of the microfinance sector over the past decade. The reasons for issuing
the MFI law were to facilitate expansion and improve growth possibilities, but also to prohibit NGOs
and any other institutions from offering financial services.
Under this prudential framework, which has been continuously adapted, the microfinance sector has
transformed from humanitarian-oriented organisations to MFIs targeting financial sustainability and
outreach.1 Today, Ethiopia has some of the largest self-sufficient MFIs in Africa with significant
outreach, serving more than 1.5 million poor customers. A strong microfinance network exists.
A second important actor in pro-poor financing is the SACCOs. These are growing rapidly and have
been establishing their support structure. However, this development is overly dependent on one
large donor programme. Microfinance is mainly group-based, there is little product diversification,
average loan amounts are small and deposit mobilization is largely based on compulsory savings.
The GoE assumes a predominant role in the provision of microfinance at various levels. Government
involvement through various instruments, such as ownership of the largest MFIs and targeted lending
programmes, is widespread. Nevertheless, financial services for the low-income population, poor
farmers and micro, small and medium enterprises (MSMEs) are still characterised by limited outreach,
high transaction costs for clients, a generally weak institutional base, weak governance and nominal
ownership structure as well as dependence on government and mother NGOs.
1
SOS Faim (2004)
8
Country background and the financial sector
Despite five years of rapid growth, Ethiopia is among the world’s poorest countries with a gross
national income (GNI) per capita of US$130 (2006). Accelerated agricultural and private sector
development, including financial sector development, is therefore high on the reform agenda. The
banking sector is still dominated by state participation but this is slowly decreasing with private banks
accounting for 23.5% of commercial banking assets. Banks’ savings services include small depositors
with 2.9 million accounts under Birr 100 000 (US$11 193). Lending is poorly developed with only
61 248 loans granted by commercial and development banks amounting to 31 billion Birr/US$3.5
billion). Recently, high inflation (May 2007: 17.2%, NBE) has become a threat to economic
development. Among the 77 million Ethiopians, about two million are clients of MFIs and SACCOs in
addition to the urban savers of the banking sector. The remaining population has no access to formal
financial services. Apart from these microloans, small loans for productive and other purposes are
hardly available.
Main findings
Despite a conducive regulatory framework and considerable government and donor support for MFIs
there is a lack of innovative, demand-driven financial services and sustainable institutions that can
cater for the huge unmet demand of poor households, micro and small entrepreneurs and small
farmers. SACCOs have received limited technical support recently, but the regulatory environment in
which they operate limits their growth and sustainability. The proactive role of the government has
pros and cons: some government-driven MFIs are performing outstandingly, but targeted lending
programmes by Regional Governments have severely distorted the market or had little impact.
Nevertheless, compared to other African countries the development of pro-poor financial services in
Ethiopia has shown remarkable progress at all levels over the past decade. This has happened despite
the limited role of international funders in Ethiopia, and the difficult economic and social environment
in the country, To achieve greater outreach, coupled with sustainable institutions, stakeholders can
build on a number of strength in the financial sector, but also face a weaknesses at the various levels
of the financial system (see Table 1).
Table 1 Financial sector strengths and weaknesses
Micro
Meso
Strengths
• The 27 regulated MFIs build a strong
base for expanding outreach and
becoming sustainable.
• SACCOs are growing in numbers and
size.
•
•
AEMFI is a strong network through
which to channel innovative support
services and information.
The SACCO unions are a promising
model for the support of Financial
Weaknesses
• Some MFIs are not clear about their vision (social
and business principles).
• Neither MFIs nor SACCOs have management
information systems (MIS), internal controls,
auditing and costing mechanisms in place.
• Product diversification and demand orientation
are very weak.
• Funding sources for expansion is lacking.
• The governance of microfinance providers (MFPs)
is weak.
• Linkages between different actors of the financial
sector are missing (Banks-MFIs, MFIs-SACCOs,
etc.).
• There is some artificiality in the sustainability of
MFIs because there are hidden subsidies, eg.
government staff time and low-cost funds.
• There is a lack of modern and decentralized
capacity building (training, coaching, technical
assistance).
• MFIs lack funds for on-lending but the commercial
wholesale market is not developed.
9
Macro
•
•
•
Other
levels
•
Cooperatives (FCs).
•
NBE has a clear vision and has been
adapting its regulatory framework for
MFIs continuously.
Regional Governments have enabled
the creation of large MFIs in the past
decade.
The strong backing of Regional
Governments appears to have resulted
in relative high repayment rates and
low transactions costs, as well as rapid
growth.
•
Donors are interested in supporting
pro-poor financing further.
•
•
•
•
•
•
•
The SACCO support system (unions and
federation) is at its very beginning and needs
considerable financial and technical assistance.
Some relevant actors within the GoE are not
aware of best practice for sustainably improving
access to finance.
Foreign investment is not allowed.
The role of the GoE in targeted lending is
inappropriate.
The regulatory framework of SACCOs and other
cooperative-type financial institutions is
inadequate. Supervision is very weak.
NBE’s supervision of MFIs is weak.
The FCA is both promoter and supervisor. The two
roles should be in different hands.
Donors have a limited presence. Most of them
have financial components in development
programs. Donor coordination is weak.
Client education and business development
support for MSMEs is lacking.
Pro-poor financing at a crossroad
The NBE initiative to develop an Access to Finance Strategy comes at a critical time in Ethiopia. To
comply with the reform agenda defined in the Poverty Alleviation Strategy, the government is looking
for more effective ways to serve the population with financial services. Regulators and policymakers
have been learning many lessons. Qualifications of board members, managers and staff have been
improving. Private entrepreneurship is developing along with demand for new financial services.
Financial literacy has been growing at grassroots level through the work of MFIs and SACCOs. Donors
are looking into new ways to support pro-poor financing in Ethiopia.
The Access to Finance Strategy, which is being informed by this study, can contribute to using these
opportunities in a more systematic way. It aims to create a joint vision and agreement on milestones
for the development of pro-poor financing in Ethiopia during the coming years. The strategy will also
orient all stakeholders. To this end, the authors of this study have compiled recommendations to
improve access to finance in Ethiopia (see Table 2)
10
Table 2 Main recommendations
Macro
level
Meso
Level
Micro
level
Other
levels
(1) Update MFI legislation and regulation to current realities and best practices.
(2) Upgrade the supervisory capabilities of the NBE Microfinance Department and the MIS systems
in MFIs.
(3) Pass a separate law for SACCOs.
(4) Establish an appropriate regulatory and supervisory system for the FCA.
(5) Revisit the policy framework for the financial sector for improving broad-based, inclusive access
to finance.
(6) Improve the design of targeted lending for agricultural production, MSME promotion and other
purposes to reduce financial market distortions and improve incentives.
(7) Maintain proactive support of government for the development of financial services while
minimizing the risks involved.
(1) Strengthen support institutions in numbers, service lines and geographical presence.
(2) Upgrade training methodologies and tools to be more innovative and forward-looking.
(3) Reduce dependence of support services on donors and government.
(4) Identify viable solutions to reduce the financing gap (evaluating the feasibility of a wholesale or
mixed apex facility and by establishing a sustainable and market-driven guarantee facility).
(5) Strengthen SACCOs’ vertical structures and support systems.
(1) Improve ownership and governance structures.
(2) Increase savings mobilization and the range of products.
(3) Make interest rates reflect the real cost of lending and reduce dependence on subsidies.
(4) Strengthen MFIs’ management information systems as well as auditing and internal control
practices.
(5) Raise public confidence in the sustainability, credibility and reliability of SACCOs.
(6) Build relationships of MFIs and SACCOs with banks and insurance companies
(7) Banks should develop more pro-poor financial services.
(8) Rationalize the services of NGOs.
(1) Increase donors’ internal technical capacity.
(2) Develop a common vision among donors.
(3) Put increased emphasis on capacity building.
(4) Improve donor coordination.
(5) Create transparency on donor contributions.
11
Chapter 1: Introduction
Financial services for the poor, or microfinance, can be a powerful tool to fight poverty. Access to a
well-functioning financial system can empower individuals both economically and socially, allowing
them to integrate more successfully into the economy of their countries, actively contribute to their
development, and protect themselves against economic shocks. While microfinance is not a magic
wand, and many other areas of development are also necessary to reduce poverty, access to financial
services can help poor people to take control of their financial lives. With microfinance services on
their doorsteps, poor people are enabled to generate additional income and employment to support
their own initiatives. Women, especially, have to struggle against repressive social and economic
conditions. Access to microfinance helps women gain self-confidence and this allows them to
participate more equally in the decisions made in their families and villages. This in turn helps builds
the foundation for social and political involvement and democracy.
The financial sector is central to meeting the Ethiopian government’s developmental goal of poverty
alleviation and private sector growth. It is increasingly understood that adequate financial services
such as loans, savings products, insurance and payment services for the broad population, including
poor households, poor farmers and MSMEs, promote equality and productivity.
Ethiopia has a strong microfinance sector at present, with some of the largest financially self-sufficient
MFIs in Africa and significant outreach in rural areas. Its regulatory framework has been continuously
adapted over the past decade. SACCOs are growing rapidly. A strong microfinance network exists.
However, microfinance is mainly group-based, though recently, MFIs have been introducing individual
lending as a new service. There is little product diversification for both credit and savings. Average
loan amounts are small averaging, Birr 1 374 (US$159).2 Deposit-mobilization strategies are still mainly
based on compulsory savings. Commercial banks also collect small depositors’ funds but have only
granted 61 248 loans, most of them relatively large.3
The story of microfinance in Ethiopia is intimately linked to the country’s historical background. The
Ethiopian government has assumed a dominant role in providing microfinance at various levels. It
owns the largest MFIs and has been directly involved in other ways such as targeted lending
programmes.
Ethiopian microfinance has made remarkable progress over the past decade, reaching almost two
million clients in a country of 77 million people. Nevertheless, financial services for the low-income
population, poor farmers and MSMEs are still characterised by limited outreach, high transaction costs
for clients, a generally weak institutional base, weak governance and a nominal ownership structure as
well as dependence on government and mother NGOs. To change this, the NBE spearheaded the
development of a National Microfinance Strategy, which was renamed Access to Finance Strategy
(AFS) in the course of the process.4 For clarity, the authors propose a new definition of microfinance,
which is in Box 1.
2
3
4
Daily weighted average rate Birr/US$ of 16.05.2007 (1 US$ = 8.9341)
Data from the NBE’s Credit Bureau (March 2007)
The Core Team renamed the strategy in September 2007 as they felt that the term microfinance was too narrow, and in Ethiopia mainly
related to the MFIs, neglecting the relevance of other others such as SACCOs.
12
Box 1 Defining microfinance
In Ethiopia, the current definition and common understanding of microfinance is related to one single type of
institution, the microfinance institutions. The microfinance law (Proclamation 40/1996) defines “Micro financing
business” as “an activity of extending credit, in cash or in kind, to peasant farmers or urban small entrepreneurs,
the loan size of which shall be fixed by the (National) Bank”. This law, views microfinance in terms of groupbased lending, and this view is also held by many stakeholders.
Recently, the NBE introduced regulatory changes, such as allowing individual lending, which introduced a
broader definition of the nature of microfinance and its institutions, consistent with the global trend of placing
microfinance in the broader context of developing an “inclusive financial system”.
For the purpose of this study, microfinance is defined as “a diversity of financial services such as deposit
facilities/savings, money transfers, remittances, loans for different purposes and insurance for a diversity of
poor people among those micro-entrepreneurs, employees, farmers and poor households.” Any type of
5
financial institution can provide these services through different mechanisms. Financial institutions providing
such services are defined as “microfinance providers”, which include SACCOs and MFIs registered under the
microfinance law.
Source: The authors
The AFS initiative goes back to the end of 2005 when NBE invited the Ethiopian Capacity Building
Program/German Technical Cooperation to conduct a first mission to Ethiopia. An international
consultant team developed the Report and Road Map towards an Ethiopian Microfinance Strategy
(see Volume I, Annex 2).6 The Road Map proposed to develop an AFS based on an analysis of the
challenges that poor people and MSMEs in Ethiopia face in accessing financial services. In October
2006, the Core Team was formed. It consists of NBE in cooperation with the AEMFI, and is technically
supported by ECBP/GTZ.7 In February 2007, the FCA joined the process, reflecting the interest it
expressed during the February stakeholder consultations. Table 1 describes the main steps in
developing the AFS.
Table 3 Overview of Access to Finance Strategy development process
1
2
3
4
5
6
5
6
7
Activity
Report and
Road Map
I. Donor
Round Table
I. Round of
stakeholder
consultations
Access to
Finance
Study
Core Team
retreat in
Addis Ababa
Strategy
development
Date
November/
December 2005
(accepted in
October 2006)
November 2006
February 2007
Stakeholders
NBE and AEMFI supported
by ECBP/GTZ
Main results
Agreed on road map for the strategy
development process
Formation of Core Team
International development
partners
MFIs, SACCOs and
Regional Governments
Recommendations for process and
content of AFS
SWOT Analysis of microfinance sector
and SACCOs
Including FCA in the Core Team
Draft Sector Assessment Study
January – July 2007
Authors and Core Team
25 and 26 April
2007
Core Team, participants
from ECBP/GTZ and one
participant from CGAP
Core Team and one
participant from
Consultative Group to
July – September
Development of key inputs for
strategy formulation based on first
results of Access to Finance Study
First draft of the strategy
CGAP (2004)
Martina Wiedmaier-Pfister and Stefan Staschen (2006)
ECBP, a program of the Ministry of Capacity Building, has commissioned this study. The German Development Cooperation through GTZ is
cooperating with the Ethiopian government in implementing the ECBP.
13
7*
8*
Activity
Date
II. Round of
stakeholder
consultations
National
Access to
Finance
Seminar
Beginning of 2008
Mid 2008
Stakeholders
Assist the Poor (CGAP)
MFIs, SACCOs, Banks
Government agencies
Donors
MFIs, SACCOs, banks
Donors
Ministries
NGOs
Main results
Inputs for strategy formulation
Buy-in of stakeholders
Access to Finance Strategy discussed
and accepted
Implementation arrangements
worked out
* Planned
This study is the basis for a more intensive stakeholder dialogue and for strategy development. It
identifies challenges and makes recommendations for developing an inclusive financial services sector
and a country strategy for Ethiopia. The study has been written from information drawn from
secondary literature and data (Annex 4), interviews and field visits, and stakeholder consultations. In
addition, three recent documents on MFIs, SACCOs and the regulatory framework, which were
compiled for the framework of this assessment, provide major sources of information.8 The first draft
of the study was the basis for discussions at a retreat the Core Team, organised in April 2007 to find
agreement on key principles and strategic objectives. This draft was revised after the retreat.
In Chapter 2, the study provides general information on the social, economic, political and historical
background of Ethiopia. Chapter 3 deals with the micro level of the financial system, ie. provider
organisations and clients. Chapter 4 describes the meso level, ie. financial infrastructure organisations.
Chapter 5 encompasses the macro level, ie. policies, laws, regulations and supervision. Chapters 3 to 5
each have a section summarising the main recommendations. The study closes with Chapter 6 on
international development assistance.
8
Wolday Amha (2007c), Dagnew Gesesse (2007), Rochus Mommartz (2007)
14
Chapter 2: Background
Social, economic, political and historical context
Ethiopia has a population of more than
77 million people. The country’s
performance on growth and human
development in recent years has been
strong. Poverty Alleviation Strategy9
achievements indicate a significant
decline in poverty indicators.10
However,
according
to
the
Organisation for Economic Cooperation and Development (OECD),
poverty has increased, possibly
reflecting the aftermath of the severe
droughts of the past years.11 Despite
five years of rapid economic growth
based on sound economic policies and
high levels of aid, Ethiopia remains
one of the poorest countries in the
world. More than 80% of Ethiopians
live on less than US$2 a day.12
Source: CIA World Fact Book (2006)
GNI per capita in 2006 was around US$130,13 and life expectancy, educational enrolment and access
to health services are all low (see Box 2). Reaching the Millennium Development Goals (MDGs)
remains challenging and will require – among other reforms – accelerated agricultural and private
sector development both in rural and in urban areas.14
Box 2 Key figures
Land area, thousands of km²
Population, thousands (2005)
GNI per capita, US$ (2006)
GDP growth rate over the last five years (2001 – 2005)
Purchasing power parity valuation (2004/5)
Life expectancy (2000 – 2005)
Illiteracy rate (2005)
Human development Index (HDI score 2003 according to UN)
Fixed line and mobile phone subscribers (2000, per 1 000)
1.104
77 431
160
8/0/-3/12/9%15
1.021
47.6
54.8
170
3.9
Sources: OECD African Economic Outlook 2005-2006; World Development Indicators Database, WB (July 2006)
9
Data from CSA’s 2004/05 Welfare Monitoring Survey, which has indicators on the non-income dimensions of poverty, education
enrolment (1-6) has nearly doubled (74.2%) from 1995/96 (37.4%). Access to clean water increased from 19% in 1996 to 35.9% in 2004/05.
10
WB IDA (2006)
11
OECD (2006)
12
www.OXFAM America.org
13
World Bank (2006b)
14
World Bank /IDA (2006)
15
CIA World Fact Book (2007)
15
Ethiopia is a multi-ethic country with more than 83 languages. The main languages are Amharic
(official government language), Tigrinya and Oromiffa. Christianity and Islam are the main religions.16
Ethiopia is rich in human and natural resources with a large amount of arable land, a huge livestock
population, a diverse climate, a variety of crop species and in some regions abundant water and
wildlife. Despite such an enormous potential, and compared to some other African countries, the
economy has performed minimally. The country has immense problems of food security,
unemployment, poverty and dependency on external economies.17
Most of the population is dependent on smallholder agriculture and subsistence farming. Agriculture
employed over 80% of the population and contributed 42% of the Gross Domestic Product (GDP) in
2004/5. The sector suffers from frequent drought and poor cultivation practices. Coffee is critical to
the Ethiopian economy with exports of $350 million in 2006, 35.5%18 of total export earnings.
However, historically low prices have pushed many farmers to switch to growing qat19 to supplement
their incomes.20 Severe droughts, such as those in 2003/03 and at end 2005, are a recurrent reality for
regions such as Affar, Gambela and Somali Land. Inadequate roads, water and pastureland, as well as
shallow agricultural markets, means Ethiopia suffers from chronic food shortages, and about five
million people continue to depend on food aid even with favourable weather conditions.
Nevertheless, agricultural was forecast to grow at an average of 7.4% in 2006 and 2007.21 The rural
population, which accounts for about 85% of the population, is in areas where communication and
transportation facilities are poorly developed. Ethiopia has one of the lowest road and telephone
densities per inhabitant in sub-Saharan Africa. Rugged terrain further complicates accessibility and
increases transaction costs in reaching the rural population.22 Annex 6 has more information on other
socio-economic issues such as farming, employment, gender and land ownership.
In November 2001, Ethiopia qualified for debt relief from the Heavily Indebted Poor Countries
Initiative, and in December 2005, the International Monetary Fund voted to forgive Ethiopia's debt to
it.23 On the assumptions of favourable weather conditions and a return to political stability, Ethiopia
appears to have put in place the economic policies that could enable it to achieve its objective of 7%
real GDP growth over the medium term.24
Economic growth performance in Ethiopia over the past few years has been strong and broad-based.
Real GDP growth was estimated at 9.6% in 2006, according to the World Fact Book. After a significant
drought-induced contraction, real GDP growth was 8.9% in 2004/05, following 11.4% growth rate
rebound in 2003/04. According to the NBE, general inflation stood at 14.2% in January 2007, although
this represents an increase over the January 2006 rate of 11.7%, associated with the high level of
16
17
18
19
WHO Country Strategy (2002-2005)
Bezabih (2004)
2006 data from NBE
The qat plant is also known as khat, a tropical evergreen whose leaves are used as a stimulant. Khat originates from Ethiopia but is
consumed today also in other African countries. According to the WHO, khat is a public health problem since it causes addiction and distracts
workers from their job for hours. Evidence from Djibouti suggests that it drains more than half of many families’ income. WHO Country
Strategy for Djibouti (2006)
20
21
OECD (2006)
22
Shiferaw, Ahma (2001)
23
24
OECD (2006)
16
cereal and oil prices.25 Inflation has been increasing (May 2007, 17.2%, NBE) and felt to be much
higher towards the change of the Ethiopian millennium in September 2007.
Ethiopia’s history was characterised by a monarchic rule until 1974, military rule under a socialist
regime from 1974 to 1992, and a young democracy over the past 15 years. More details on the
historical and political context are in Annex 7.
The banking sector
At present, the Ethiopian financial sector is dominated by the banking sector, which accounts for
about 94% of total financial sector assets, with remaining assets accounted for by the insurance sector
(3% in 2006) and MFIs (3%).
Box 3 History of Ethiopian banks
In 1905, the foreign-owned Bank of Abyssinia was established and the Ethiopian banking sector started to
develop. The bank was purchased by the government in 1931 and renamed Bank of Ethiopia, the first nationally
owned bank on the African continent. After a period of Italian and British bank ownership in the 40ies and 50ies,
the Monetary and Banking Proclamation No 206 of 1963 stipulated that a banking license was granted only to
partnerships with Ethiopian ownership of at least 51% of the capital. Accordingly, foreign banks, which had
already started their operations in the country re-applied for a license.26
In the meantime, the State Bank of Ethiopia was established as the Central Bank of Ethiopia. As an agent of the
Ministry of Finance and as the principal commercial bank in the country, the Central Bank also engaged in all
banking activities.27 The banking law of 1963 then determined the separation of commercial and central banking
and created two separate entities, the National Bank of Ethiopia (NBE) as the Central Bank and the Commercial
Bank of Ethiopia (CBE).
Under the socialist government, in 1974 all foreign banks operating in the country were nationalized. The
financial sector the socialist government left behind constituted only of four banks, each enjoying a monopoly in
its respective market, namely the NBE, the CBE, the Construction and Business Bank and the Agricultural and
Industrial Development Bank. Since the economic reform process that started in 1992, the new government has
reorganized these financial institutions to operate based on a market-oriented policy framework.
The Monetary and Banking Proclamation of 1994 established the NBE as a judicial entity separate from the
government and outlined its main functions. Monetary and Banking proclamation No 83/1994 and the Licensing
and Supervision of Banking Business No 84/1994 laid down the legal basis for investment in the banking sector.
Consequently, shortly after the proclamation, the first private bank was established.28
The Ethiopian banking sector consists of one development bank, the Development Bank of Ethiopia
(DBE), two state-owned commercial banks, Commercial Bank of Ethiopia (CBE) and Construction and
Business Bank (CBB), and seven private commercial banks. In 2006, the private banks had 210
branches and paid-up capital of 1.3 billion Birr, compared to 240 branches and a paid-up capital of 1.2
billion Birr of the three public banks.29 Private banks’ participation has increased gradually, and they
account for 23.5% of commercial banking assets at present, with the remainder being the share of the
two public sector commercial banks. CBE is still the main actor in the financial sector, representing
over 74% of commercial banking assets. As of 2006, total assets of public banks in Ethiopia (37.6 billion
25
26
27
www.nbe.gov.et
Bane (2002)
www.nbe.gov.et
28
The first private bank, Awash International Bank, was established in 1994, followed by Dashen Bank (1995) and Bank of Abysinia (1996),
Wegagen Bank (1997), United Bank (1998), NIB International Bank (1999) and Cooperative Bank of Oromiya in 2004.
29
Stern and BKP Development (2007)
17
Birr) are more than double the private banks (16.4 billion Birr), which shows the continued
predominance of the public sector. Box 4 provides important data about the banking sector.
Box 4 Key figures of the banking sector (2005/2006)
Branch network
Lending rates of banks
Total assets of public banks (December 2006)
Total assets of private banks (December 2006)
389 for banks (192 974 inhabitants per branch); 32 for DBE
7% – 14% p.a.
Birr 37 636 million
Birr 16 443 million
Source: NBE Annual Report 2005/6
Deposit mobilization: Total deposits in the Ethiopian banking sector doubled in the past five years30,
which corresponds to an average annual growth rate of 13.9%. Private banks were especially dynamic,
increasing their deposits by 33.5% a year on average, compared to 9.4% in public banks. This
dynamism is relative, since public banks started from a much higher initial value and still held over
70% of total deposits in 2006.31 Despite this growth, there is concern that domestic savings in Ethiopia
remain low. Over the last decade, domestic gross savings stood at an average of 6% of GDP, with a
level of 3.7% at 2005/06.32 The Ethiopian Poverty Alleviation Strategy (Plan for Accelerated and
Sustained Development to End Poverty, PASDEP) targets 13.1% of domestic savings to GDP by the year
2009/10, which implies considerable efforts by all financial sector players.
In terms of small deposits at banks, as of March 2007, the NBE reports 13.5 billion Birr of deposits and
2.9 million accounts in the smallest range reported (deposits below 100 000 Birr/US$11 193). There is
no smaller breakdown that would show how many small depositors have access to a bank account.
The average deposit is US$4 572. This, coupled with the fact that the largest bank, CBE, has a
minimum opening balance of 50 Birr (US$5.59) and some anecdotic evidence about small depositors
in banks, leaves room for speculation about the true number of poor people with bank deposits.
Bank lending: Until 2003, the banking sector had an outstanding loan volume of about 15-16 billion
Birr, which doubled to 26.8 billion Birr in 2006. The share of public banks has dropped continuously
from 95% in 1998 to 59% in 2006. According to NBE’s credit bureau, the number of outstanding loans
in the formal financial sector amount to 61 395 loans (March 2007). This demonstrates one of the key
deficiencies of the sector: access to credit finance is mainly provided to larger companies, relatively
wealthy individuals and especially the GoE; the largest segment of the population, the poor, is
excluded from access to credit services.
Trade financing is the most important product for both public and private banks (between 49% and
80% of total credit for private banks). Despite its importance for the economy, agriculture is
marginalised by the private banks, and is served predominantly by CBE and DBE. The same is true for
industrial lending, with the two recent exceptions of Dashen and National Investment Bank (NIB).
There have not been any inter-bank loans since 2000/2001. Retail lending has also not developed, and
this has focused so far on corporate lending. Personal loans account for a small fraction of loan
30
31
23.1 billion Birr in 2001 to 44.5 billion Birr in 2006
32 Gross Domestic Savings (GDS as % of GNP) is the sum of public and private savings. According to The World Bank (2006c) GDS was at 9.4%
in 1994, 7.5% in 2003 and 4.1% in 2004.
18
disbursements.33 The World Bank reports that private banks’ credit grew by 36% from June 2004 to
June 2005, which is an encouraging sign. 34
Interest rates, loan Quality, liquidity and coverage35: Interest rates on deposits have been at 3% since
2001/2002, when NBE lowered them from 6%. Average lending rates of public banks were lowered
from 10.5% in 2000/2001 and are at 8% (7.5% CBE); private banks charge approximately 1% more.
According to NBE, the bank’s non-performing loans to outstanding loan ratios were at almost 50% in
June 2002 and 14% in June 2006, showing the tremendous effort the banks, especially the public
banks, have made in improving their loan portfolio quality.
The banking sector is characterised by excess liquidity, which grew from 2.5 billion Birr in 2002 to
more than 16.6.billion Birr in 2006. The public banks in particular are highly overliquid, which reduces
the incentive to expand savings mobilisation (see also chapter 3, Banks)
Financial services cover is about 166 000 people per branch, far below international and African
standards. Ghana is 54 000, Uganda 130 000 and Namibia 11 136. This has improved since 1995, when
it was at 253 000 and even since June 2006 when it was at 192 974 (see Box 4). Bank branches are
concentrated in urban areas. More than 52% of all branches are in the eight major towns where only
6.6% of the population live; Addis Ababa alone accounts for 37.6% of all bank branches.36
Financial sector reforms
The preliminary results of the on-going financial sector reforms in Ethiopia signal that financial
intermediation efficiency has improved in the past decade in financial deepening, new entry and
competition. Financial depth, as measured by bank deposits and M2 (broad money supply) as
percentages of GDP (M2 at June 2006 was 46.4 billion Birr/ US$5.2 billion), indicates a growth rate of
broad money supply of 15.3% compared with the previous year. The NBE attributes this growth to the
expansion of domestic credit, mainly to the government and non-government sector.37
While recent progress should not be underestimated, Ethiopia’s financial sector is still in its infancy,
and challenges such as restructuring of the public banks’ non-performing loans, streamlining of
procedures, cost structure and service delivery to clients remain. Over the years, Ethiopia’s banking
sector has improved deposit mobilisation, but the remaining challenge is huge. According to the
Ministry of Finance’s Long-term Strategy Study:38
“…the range of formal financial assets and available saving instruments to the private
sector and individual households in particular in rural areas is still limited. Thus to
promote domestic savings in Ethiopia, a combination of measures targeted at different
sources and instruments of savings (bank/MFI deposits, pensions/provident funds,
insurance, international remittance, etc.) are needed.”
According to the World Bank (2006c), Ethiopia’s financial sector policy aims at more effective
intermediation, and improving soundness and depth based on a distinctive strategic framework for
the financial sector. The government emphasises the importance of building and protecting pro-
33
34
35
36
37
38
Dto.
World Bank (2006c) page 2
Dto.
NBE Annual Report 2005/2006
MOFED /PASDEP (2006)
19
growth institutional capital in the financial sector, further strengthening corporate governance and
accountability of financial institutions, and boosting the capacity of financial sector professionals.
The GoE continues to prohibit the entry of foreign-owned intermediaries, to minimise the perceived
macroeconomic risks arising from a more open financial sector. It prefers to seek the transfer of
foreign financial technology and expertise through advisory assistance.39 However, in the context of
Ethiopia’s accession to the World Trade Organization (WTO), a number of liberalization scenarios are
being discussed. A recent study recognizes that commercial presence of financial institutions, ie. entry
of foreign financial institutions (FIs), is probably the most important way to improve the depth and
breadth of the financial sector.40
39
40
World Bank (2006c)
Stern et al (April 2007)
20
Chapter 3: The micro level – financial service providers
While FIs and SACCOs have had encouraging growth over the last few years, Ethiopia's rural and
poorer households, as well as MSMEs, continue to be significantly underserved with financial services.
An estimated 80% of potential rural demand for loans is still unmet, out of a target group of about 4.2
million rural households that represents an aggregate demand of as much as 2.6 Birr billion (US$291
million).41 The situation in urban areas is relatively better because of the concentration of financial
service providers in urban areas, although financial services for the poor and MSMEs need to be more
fully developed there as well. MFIs and Saccos now reach two million people and this represents
positive progress toward serving Ethiopia’s 25 million households. However, even these clients have a
limited range of financial services and need more flexible lending and deposit products, as well as
insurance and remittance services, and many people continue to have no access at all.
Box 5 Micro, small and medium enterprises in Ethiopia
A 2003 study in Ethiopia identified about one million MSMEs and a small number of large enterprises that were
registered. However, this number does not include small-scale farmers, who are also small entrepreneurs, nor
does it include the large number of enterprises in the informal sector. According to data available through the
CSA, there were 974 676 cottage/handicraft manufacturing establishments; 31 863 small-scale manufacturing
enterprises and 909 medium and lager-scale enterprises registered in the formal MSME sector in 2003. These
42
statistics are based on the definitions issued in 1997 by the Ministry of Trade and Industry (MOTI) in the
framework of the National Micro and Small Enterprises Development Strategy of Ethiopia:
Micro: paid-up capital not exceeding 20 000 Birr (US$2 238) on registration, excluding consultancy firms and
high technology establishments.
Small: paid-up capital of above 20 000 Birr (US$2 238) not exceeding 500 000 Birr (US$5 596), also excluding
consultancy firms and high technology establishments.
Medium and large: all establishments with a paid-up capital above Birr 500 000 Birr (US$5 596).
Source: Svenson (2005)
Ethiopia is missing the “small” part of the MSME sector (see Box 5): those enterprises with 11-50
employees, according to the International Labour Organization (ILO). As in many countries, it appears
that enterprises start on a micro, subsistence level and rarely have the opportunity to move beyond
two to three employees in size. The constraints facing micro and small enterprises in most developing
economies are applicable to Ethiopia:
• Unfavourable legal and regulatory environments and, in some cases, discriminatory regulatory
practices;
• Lack of access to markets, finance and business information;
• Lack of business premises (at affordable rent);
• Low ability to acquire skills and managerial expertise;
• Low access to appropriate technology; and
• Poor access to quality business infrastructure.
41
42
Wolday Amha (2007)
These definitions are currently under review as they refer to a rather static formal criterion (capital declared upon registration) and do not
reflect the actual situation of the enterprise in terms of staff, turnover etc.
21
According to a Central Statistical Authority (CSA) report (1994-1995), the main obstacles for smallscale manufacturing industries were the irregular and erratic supply of raw materials and a shortage of
suitable working premises. The lack of working premises was also a particular difficulty for the
undercapitalised informal sector operators. The problems of raw material shortages, lack of working
capital and effective marketing practices continue to constrain the ability of small manufacturing
industries to expand. The same set of problems, particularly lack of working premises and adequate
working capital, likewise inhibited the establishment, let alone growth, of informal sector operators.43
Low loan sizes in Ethiopia compared to other African MFIs (see also chapter 3) imply that clients are
not getting the larger loans needed for investment and growth.
Evidence that gender inequalities in developing societies inhibit economic growth and development is
growing. Women are disproportionately represented among the world’s poorest people; yet women
spend more of their income on their families. Women microfinance clients tend to have strong
repayment records and social capital, leading to service efficiency and sustainability. Microfinance has
been recognized as an effective way to empower women. An important dimension of empowering
women is the access to resources such as credit, property and money.44 According to Getaneh
Gobetzie (2005) only 39% of Amhara Credit and Savings Institution’s (ACSI) clients are women, and this
seems to generally the case with other MFIs. The same study refers to estimates that about 40% of
Ethiopian households are headed by women. These figures are low compared to other African MFIs,
for which the number of female MFI clients stands at 63.1%.45
The following are recommended as ways to improve financial services at the client level:
• Offering more demand-oriented services rather than supply-driven targeted programmes.
• Offering clients a more diversified range of products, especially savings, insurance, and individual
loans suitable for small enterprise development and growth.
• Making financial services more accessible to poor women and other underserved groups, and
designing suitable approaches (eg. using grants) for high-risk or special groups such as young
people and pastoralists for which existing microfinance methodologies may not be suitable.
• Improving the economic opportunities and the financial and business skills of the very poor, to
facilitate deepening the outreach and coverage of financial services to increase coverage.
Institutions providing pro-poor financial services
As of December 2006, the 27 MFIs licensed by the National Bank of Ethiopia had an active loan
portfolio of about 2.2 billion Birr (US$246 million) delivered to 1.5 million active clients. This excludes
the loans to purchase fertilizer and improved seeds given by the two largest MFIs. They also mobilised
about 816 million Birr (US$91 million) of savings. On average, 39% of the MFIs’ clients are female.
Lending has increased significantly in recent years; however, savings has not increased as expected. In
2001, 78% of the loan portfolio was financed by deposits; this rate went down to 55% in 2003 and to
36% in 2006 (June data, see table 4).
Table 4 Growth of MFIs (number and clients)
June of
Number of licensed MFIs
Customers (million)
Loan portfolio (million
Birr)
Deposits
2000
19
2001
20
0.461
308
243
2002
21
2003
23
0.755
594
2004
23
1 001
993
2005
26
1 214
1 607
2006
27
1 535
1 958
3/2007
28
no data
no data
325
434
595
706
no data
Source: AEMFI
43
44
45
Stevenson (2005)
Getaneh Gobezie (2005)
Dto.
22
At the end of 2006, almost 5 500 SACCOs served more than 380 000 members with savings and credit
services. According to the Cooperative Agency (CA), SACCOs mobilised 994 million Birr (US$111
million) from member contributions. The average deposit size of a single SACCO member is 2 626 Birr
(US$293). The number of loans granted by SACCOs is not available apart from one figure provided for
the Rural SACCOs (RUSACCOs).
Both types of microfinance providers account for deposits amounting to Birr 1.7 billion (US$190
million), which is about 4% of the amount mobilized by the banking sector (Birr 44.5 billion/US$4.9
billion).46 The average amount of savings of the total client and membership base of about two million
is Birr 850 (US$95) per person.
The average loan size of MFIs at end of 2006 was Birr 1 427 (US$159), well below the average of
US$278 for African MFIs in 2005 and about a fifth the global average.47 This suggests that MFIs in
Ethiopia focus on the poor, which may be partly attributable to differences in income per capita. The
average loan size of MFIs has increased by 20% in the last five years, as clients have moved to higher
loan levels. However, the average saving of clients has not increased as expected. The availability of
inexpensive, loanable funds through the Rural Financial Intermediation Program (RUFIP), bank loans,
and other sources has given MFIs little incentive to develop savings products and programmes.
Growth projections for the SACCOs extrapolate 8 500 SACCOs in five years times and 1.7 million
members instead of the 380 000 at present.48 For the MFIs, AEMFI predicts that there will be 10
million potential clients, out of which 50% can be served by MFIs. Estimates of the potential demand
and respective growth perspectives of MFPs in the next five to 10 years are in Annex 9.
Banks hardly cater for the low-income segment. They play a role in small savings but figures are not
available. Among the 61,395 loans reported to NBE in March 2007, a negligible number are micro or
small loans (according to CBE) but their exact number is not monitored.
MFIs in Ethiopia have had a decade of formalisation since the microfinance law of 1996 ended the
previous direct lending by NGOs (see chapter 5). The historical background of MFI development is
described in more detail in Annex 9.
The number of Ethiopian MFIs grew to 27 in the last decade, and their clients and loan portfolios grew
at roughly 20% a year, fuelled by the injection of loanable funds through RUFIP, bank loans, and other
sources (see chapter 5). Following an initial period of rapid growth of new institutions, between 2003
and 2006 the average growth rates of MFI clients, volume of portfolio and savings were 35%, 52% and
25% respectively.49
The largest five MFIs, ACSI, Dedebit Credit and Savings Institution (DECSI), Oromia Credit and Savings
Share Company (OCSSCO), Addis Savings and Credit Association (ADSCI) and OMO are all government
affiliated. Together they dominate the market and have a market share of more than 80%. The two
largest players, ACSI (see Box 6) and DECSI, have a combined market share of 60%, with about 515 000
and almost 400 000 clients respectively (December 2006/AEMFI)
46
47
48
49
Microbanking Bulletin Issue 14 (2007)
Dagnew Gesesse (2007)
Wolday Amha (2007a)
23
Box 6: Amhara Savings and Credit Association (ACSI)
ACSI is licensed under proclamation 40/1996 as a legally registered MFI. It is allowed to lend and mobilize
deposits, and carry out other financial services such as pension fund management. It is effectively controlled,
and partly owned, by the state. ACSI transformed from an NGO in 1995 into one of the largest MFIs in Ethiopia,
serving 536 804 clients (AEMFI, December 2006). Its outstanding loan portfolio is more than 687 Birr (US$ 77
million) (AEMFI, December 2006). The institution makes mainly agricultural loans through its regional network of
10 branches, three microbank branches (for individual lending) and 180 sub-branches. It uses group lending.
One of its main sources of funding is client savings (335 million Birr) making up for 49% of the loan portfolio
(September 2006, AEMFI). The balance comes from the Amhara Government, donors, equity, and the stateowned Commercial Bank of Ethiopia. MicroRate completed an evaluation of the institution in July 2003, noting
its remarkably low operating expense ratio (7.5%), its good portfolio quality (3.6% portfolio at risk over 30 days),
and strong state government support. It covers 65% of Amhara villages reaching between 8% and 10% of
Amhara’s poor people (USAID MicroRate Report # 58 February 2006).
However, MicroRate also noted a key weakness: the state continues to have firm control of the institution,
which carries the risk that political considerations will substantively influence management decision making.
Already ACSI is used to disburse agricultural input loans (at no direct risk to ACSI). ACSI offers an excellent
learning opportunity about state and private partnerships in the delivery of financial services to the poor with a
particular rural focus. ACSI’s loan prices are considered to be well below any others MicroRate has seen in more
than 100 African and Latin American MFIs.
Source: Adapted from Vogel and Young (2005); based on data from MicroRate and AEMFI
Regional distribution
MFIs are concentrated in the three regions of Addis Ababa, Oromia and Southern Nations,
Nationalities and People's (SNNP). There are no MFIs in the three regions of Somali, Affar and
Gambella (see Annex 9), however the Regional Governments are taking steps to set up some.
Ownership and governance
According to the Microfinance Proclamation, MFIs in Ethiopia have to be share companies. Among the
27 MFIs, there are three main types of ownership structure. The first is MFIs that are predominantly
owned by Regional Governments and/or by government-affiliated local NGOs (see Box 7 and Annex 9).
The second type was established by international NGOs; they are in the hands of local, nongovernment affiliated NGOs and their staff while maintaining a strong link to their mother NGO. Aggar
is the only example of the third type, a private MFI representing investment by more than 443
shareholders, including NIB Bank and individuals. Participation by a commercial bank is a striking
example of how liquidity in the banking system might be effectively mobilized to provide both good
governance and funding for the sustainable growth of the industry.
24
Box 7: Government shareholding in MFIs
The Regional Governments of five regions are shareholders of MFIs (Amhara, Tigray, Oromia, Awassa, Addis City
Administration), and are majority shareholders in three of them. Apart from direct shareholding in MFIs, the
Regional Governments are indirectly linked to MFIs through local associations such as the Amhara Regional
Development Authority, a government-affiliated NGO, or other regional or local women or teachers associations.
In specific terms: Addis MFI and Omo MFI are 96.7% and 80% owned by the Regional Government. Regional
Governments hold 25% of the shares of ACSI, DECSI and Oromia MFI. The remainder, in all cases, are held by
government-affiliated NGOs.
There is a clear difference between the five MFIs that have strong support from Regional Governments and the
others, which are supported by international NGOs or private shareholders. This predominantly governmentbased ownership structure is a unique phenomenon among MFIs in Africa.50 Government-backed MFIs in
Ethiopia receive significant assistance and cooperation from the regional and local government administrations.
This assistance comes in the form of capital injections, guarantees, funding lines and personal assistance from
extension or other government workers.
Source: Bekele and Wolday Amha (2001)
After NBE issued proclamation 40/1996, the former NGOs, or government entities, mobilised
shareholders to fulfil these requirements rather than searching for true investors. Individuals and
organizations nominally registered as shareholders in some MFIs did not necessarily understand their
responsibilities as shareholders and as board members. Some assumed that the sponsoring NGOs
would be responsible for supervising and guiding the MFIs they created. This attitude has improved in
some cases but many MFIs still feel the repercussions of this legacy.51 According to Wolday Amha
(2000), although the MFIs are organized as private share companies, dividends are not distributed but
instead set aside to use, such as for capitalizing the MFIs. Shareholders are not investors in the sense
of earning dividends and having a real interest in the economic benefits.
The only true private capital investment in an MFI in Ethiopia is Aggar, reflecting an implicit policy that
microfinance is primarily a vehicle of development support rather than investment. Getahun (1999)
indicates that the nominal shareholders may not have sufficient interest to control and guide the
management of MFIs and, therefore, may not be willing to provide capital quickly when they are in
crisis. This is still valid. Some experts (Itana et al 2004) have suggested that government authorities
sell their shares to MFI clients and private organizations such as banks, universities and foundations as
a step toward governance that is more transparent and attracts private capital. So far this has not
been adopted.
The strong backing of Regional Governments has resulted in relative high repayment rates and low
transactions costs, as well as rapid growth. The downside is that these MFIs depend on this support
and are subject to political influence, which could threaten their financial performance and the clients’
credit discipline. Furthermore, there is some artificiality in their sustainability because there are
hidden subsidies, such as government staff time and low-cost funds.
The UFIP example in Annex 19 and 21 provides insights into the way government offices influence loan
delivery and recovery, and on the related threats and pitfalls. Government-backed MFIs are expected
to channel funds allocated by Regional Governments, which is often not based on best practice.
50
According to Vogel and Young (2005), among the few cases of government-owned MFIs in Africa was National Microfinance Bank
Tanzania, which has built on a former state-owned commercial bank, and was to be privatized in 2005. There are other government-owned
financial institutions providing financial services to MSMEs or the low-income segment such as Senegalese Post Bank, Swazi Bank and Nigeria
Agricultural Cooperative & Rural Development Bank.
51
Microfinance Development Review, Vol. 3, January 2005, page 11
25
The main elements of sound governance are transparency and accountability; board members’
qualifications, experience, and commitment to the institution; and sound policies and procedures.
Many interviewees and participants of the stakeholder consultations52 confirmed that MFIs still have
governance problems, despite some improvements, such as the withdrawal of burgomasters from
chairing MFI boards.
International NGOs may also influence their boards in ways that are not always based on sound
financial management criteria. Although MFIs no longer list governance among their top-priority
problems, improvement is necessary. This includes rules for the selection for board members,
succession and continuity; board members need a clear understanding of the MFIs’ problems and
their own duties; incentives for board members in the light of shareholders not being the owners of
the invested capital; regular attendance of board members; and training of board members in finance
and management.
Products and interest rates
The range of products Ethiopian MFIs offer has expanded slowly over time. For many years,
compulsory savings and group lending were their only financial products, and this limited range still
characterizes many MFIs. Individual lending was introduced only recently, and plays a minor role. A
few MFIs have also started to provide microinsurance, leasing, money transfer and administration of
the pension fund on behalf of the Social Security Authority.
Loan products
MFIs’ loans fall broadly into agricultural loans, micro-business loans, small enterprise loans (microbank loans), employee loans, package loans (food security loans; see Box 8) and housing loans (see
Annex 9). Most of the loans are group loans, followed by individual loans and cooperative loans.
Ethiopian MFIs have recently begun introducing individual lending to micro and small enterprise
operators who require loans above the 5 000 Birr/US$560 limit originally set by the microfinance law.
Many agricultural loans have terms in which the principal is repaid at the end of the loan period, while
interest is paid monthly, or in some cases weekly.
52
From February 14 to 16, 2007, stakeholder consultations on a National Microfinance Strategy with representatives from MFIs, SACCOS and
Regional Governments were conducted in Addis Ababa. They were organised by NBE and supported by AEMFI and ECBP/GTZ.
26
Box 8 Food security loans and MFIs
ACSI and DECSI offer “package” or food security loans to help farmers with food security at the household level.
The package covers about nine agricultural activities (poultry, dairy cow, goat/sheep rearing, fattening of
goat/sheep, fattening of cattle, traditional bee farming, modern bee farming, irrigation and modern inputs).
Eligible farmers have to choose more than one component. The loans are in cash or in kind, in which borrowers
take credit coupons from the MFI that they show to the Bureau of Agriculture and receive the item in the chosen
package. These loans are given on an individual basis when the Regional Governments provide full guarantee in
case of default (for loans not exceeding Birr 5 000/US$560) or asset collateral (for loans exceeding Birr 5 000
Birr. With DECSI, the Regional Food Security Office or Bureau of Agriculture selects beneficiaries and then
provides training relevant to their respective package. The package has better terms and conditions of credit
compared to DECSI regular loans, including no group formation requirement, a lower interest rate, larger loans,
longer maturity period, and a grace period (for in-kind loans only).
According to a recent study, the package loan has the following limitations:
(a) As children are used to look after animals bought with the package loan, it seems to be detrimental to their
schooling (both enrolment and achievement in school);
(b) Farmers are not allowed to take another loan until the package loan is settled;
(c) Inappropriate timing of the loan disbursal and repayment;
(d) The package loan does not include non-farm activities;
(e) It is not female friendly and does not benefit women;
(f) The package is inappropriate for urban and semi-urban poor;
(g) The package restricts farmers to taking only one or two out of the nine components; and
(h) Market saturation as a result of farmers taking similar packages.
Source: Wolday Amha (2007b) and Borchgrevink et al (2005)
Clients use the different MFI loans primarily to buy livestock and agricultural inputs, start new
businesses and expand existing enterprises. About 60% of the respondents of a survey conducted by
Assefa et al (2005) used their loans to buy livestock followed by farm inputs (12%). The same study
revealed that about one fifth of the respondents do not like the group procedure, while 19% see the
unavailability of individual loan facilities as a major limitation, and 17% think that the loan term is too
short. Other problems include the small size of the loan, frequent meetings, poorly designed (uniform)
repayment schedules, uniform duration of loans, poor group supervision, high lending interest rates,
poor customer handling, limited flexibility in rescheduling loans (in case of real emergency situation),
and lack of provision to lend against crop or livestock inventory.
Interest rates
Lending rates of Ethiopian MFIs range between a 9% year-declining rate to a 24% flat rate (effective
about 48% on a declining balance basis), and are thereby relatively lower than other sub-Saharan
countries. The low 9% to 12% rates are often found in MFIs that channel government programmes,
but in some cases are also applied to their own products. A group loan from the largest MFI (ACSI)
costs 18% a year based on a declining balance, which is their most costly loan.
DECSI’s group loan costs 15%. In both MFIs, an individual MSE loan costs 9% to 12.5%. MFIs affiliated
to international NGOs or the privately owned Aggar charge a flat rate of 15% to 24%.53 Effective
interest rates are not always transparent.
NBE removed all interest rate ceilings in the financial sector in 1998, but this has not led to free
market-based determination of interest rates in all cases. Most Ethiopian MFIs still maintain a low rate
of interest for various reasons, including political pressure, cheap funding from public or other
53
See Annex 9
27
sources, and failure to allow for inflation. Furthermore, they have comparatively low operational costs
due to low salary levels of MFP staff and little investment in MIS and operating systems.54
Government-owned or related FIs do not calculate their cost of credit in a commercial way, although it
is not clear to what extent the poor actually benefit from the implicit subsidies on interest rates (see
Box 9). In fact, the lending interest rates of some of the MFIs are too low to cover their operating
costs, let alone their financial costs, with negative consequences for long-term sustainability. MFIs fix
their interest rates at a level they believe is affordable by the client without due consideration of
costs. The government-affiliated ones rely on official structures to allocate and repay loans. Even
though the financial reports of some branches and sub-branches of MFIs reveal that they are
operationally sustainable, they question why they should subsidise unprofitable branches and subbranches of the same MFI, a situation that is normal in Ethiopia.
Box 9 Subsidies and targeting
Although interest rate restriction can mean some transfer of income to loan recipients, such rates run the risk of
inducing excess demand from all types of applicants, poor and non-poor. Influence and patronage tend to bias
the distribution of the subsidised credit in favour of the better off – more so when the local targeting mechanism
is lax. Subsidies inevitably give rise to micro-level rent-seeking by those involved in the decision around
targeting. This problem is not limited to credit delivery: any kind of subsidy is prone to corruption or blackmarketing. One example is the sugar supply in local Kebele shops, which is subsidised by the government, with
the good intention of supporting the poor through lower prices. Frequently is the better off who manage to buy
this commodity and ultimately benefit from the subsidy.
The delivery of health services targeted at the poor is another example. To take advantage of this, people need
to carry proof of their poverty in the form of a letter from their local Kebele administration. Again, it is more
often the better off who manage to obtain these letters, thus benefiting from the subsidised health delivery. The
World Development Report 2000/2001 reports that a study in Guinea and Mozambique found that eliminating
food subsidies did not hurt poor people because the subsidies had not reached them in the first place!
Source: Gobetzie (2006)
Savings products
Ethiopian MFIs offer two types of savings products: voluntary and compulsory (forced) saving. Each
MFI requires the client to deposit 5% to 10% of the loan amount. MFIs pay a 3% to 6% interest rate on
voluntary savings and cover 36% of their loan portfolio with the funds they have mobilized.55
Other products
Some MFIs, mainly the larger ones such as ACSI, DECSI and OMO, offer a limited range of
microinsurance, leasing, pension fund and transfers products (see Annex 11). With pension funds,
ACSI, DECSI and OMO manage the fund of the Regional Governments. According to Wolday Amha
(2007), the major factors affecting product development in Ethiopian MFIs include:
• The regulatory framework, which restricts MFIs to limited financial products;
• Huge demand for low-priced microfinance services, giving little incentive for MFIs to develop
new products or modify existing ones;
• Lack of competition in the industry;
• Donor and government intervention influencing the type of financial products; and
• Limited technical skill and financial resources to test and scale-up new products.
54
55
Only one MFI (ACSI) has begun computerization. See more at http://www.cgap.org/docs/OccasionalPaper_9.pdf
Wolday Amha (2007c)
28
Human resources
As at June 2005, the Ethiopian MFIs employed more than 5 000 personnel, out of which around 3 500
were loan officers. This a reasonable ratio of field staff to total staff, although the ratio varies among
MFIs. MFIs report that they lack skilled labour and need more training.
Efficiency and financial performance
Many MFIs in Ethiopia have progressed to becoming more sustainable in recent years, according to
data reported by the MFIs to AEMFI. In June 2006, 11 out of the 15 MFIs that also report to the
Microfinance Information eXchange (MIX) were operationally sustainable, and five were financially
sustainable (Annex 10). 56 Four of the government-backed MFIs are financially self-sufficient and two
other MFIs are close, and Ethiopian MFIs compare favourably to the rest of Africa in efficiency and
sustainability. The average operational sustainability of Ethiopian MFIs is 123% compared to 104% for
the Africa-wide average, and financial sustainability (92%) is slightly higher than the average for Africa.
According to AEMFI, the ratio of operating expenses to loan portfolio had declined consistently with
significant increase in outreach. Most MFIs have also increased their productivity indicators (borrower
per staff and borrower per loan officer). MFIs maintained and even improved their portfolio quality
while increasing their outreach. Out of the 15 MFIs that report to the MIX in June 2006, 11 had less
than 5% portfolio at risk,57 which is encouraging. Out of the 13 MFIs that registered significant growth
in outreach, nine showed a remarkable decline in their portfolio at risk.
Systems and procedures
Ethiopian MFIs mainly use manual operations. ACSI is the only MFI that had almost succeeded in
establishing a comprehensive MIS by mid 2007. Other MFIs have introduced stand-alone computers or
started to consider computerizing their operations. AEMFI has tried to introduce standard software for
all MFIs, however, this undertaking failed.
Broad-based introduction of MIS in the MFIs is hindered by factors such as low awareness by
management and board, no external pressure to introduce MIS (eg. from shareholders or the NBE),
lack of funds for this huge investment, lack of skilled manpower in the MFIs and in the sector, and lack
of infrastructure support in remote areas. Lack of computerisation has kept operating costs low in
Ethiopian MFIs, especially as salaries are also low. On the other hand, weak MIS systems hinder MFI
development. Besides not giving management timely information to monitor performance and detect
problems, the industry-wide lack of reliable MIS data severely limits the supervision work of the NBE
and hinders modern banking transactions and management practices in many ways (see chapter 6).
Financial cooperatives
Financial cooperatives (FCs) and SACCOs are important in providing financial services to the poor in
Ethiopia.58 For many years, the government has used multi-purpose cooperatives to channel its
programme. However, SACCOs were never instruments of the government59. See Annex 11 for a
history of SACCOs in Ethiopia. There are two main types of SACCOs, urban and rural. In addition,
56
The self-reported data may exaggerate sustainability to the extent that implicit subsidies such as staff time of government officials or
cheap sources of funding have not been adequately adjusted for in this calculation.
57
At 30 days
58
This chapter concentrates on primary SACCOs; the secondary level of SACCOs (unions) is described in chapter 5.
59
The FCA promotes, regulates and supervises SACCOs. In 2006, the FCA started to develop a policy for all cooperatives, including SACCOs
(although the policy does not specifically address the strategic issues of SACCOs). The draft policy addresses general issues such as definition
of the role of the state, declaration of the neutrality of the cooperatives, and establishment of a horizontal structure from primary up to the
federal level.
29
SACCOs are forming unions that will become the basis of the Savings and Credit Cooperative
Federation, which, according to the Federal Cooperative Agency, would be eligible to become a
member of the World Council of Credit Unions (WOCCU). The urban SACCOs (URSACCOs) are mainly
work-based cooperatives. The low average salary of 300 to 400 Birr (US$34 to US$45) per month
implies that members are from the lower-income segment of the population and that URSACCOs
indeed play a role in urban poverty alleviation.
RUSACCOs are small, grassroots-based and semi-formal financial institutions with 50 to 200 members.
With the support of the RUFIP, the rural financial intermediation program, many new RUSACCOs and
17 SACCO Unions have been established since 2004 (see chapter 5). There are 1 166 RUSACCOs, and
as at the end of 2006 they account for 21.5% of all SACCOs.
Rural multi-purpose cooperatives often provide loans from government sources or their own
resources, which tend to distort the financial norms set for SACCOs and is an unsound practice.
Number and growth
From 1998 to 2006, the number of SACCOs increased more than elevenfold from 426 to 5 437, and
membership increased more than threefold from 112 664 to 381 212. Contributions and savings have
grown tenfold from Birr 99 million to Birr 994 million (US$111 million) (see Table 6). RUSACCOs are
new and emerged only after 2003 with the RUFIP initiative.
Table 5 Saving and Credit Cooperative outreach
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Number of
SACCOs
426
497
522
578
620
670
714
2,146
no data.
5,437
Membership
Size
101,299
112,664
116,619
129,216
147,302
150,468
156,938
155,120
no data
381,212
Contribution and members’
savings
86,105,842
99,767,864
111,173,060
124,441,325
159,865,849
167,059,812
174,577,503
504,334,084
no data
994,960,169
Source: Gesesse (2007); Data from Federal Cooperative Agency
The SACCOs grew at a steady rate until 2003, after which rapid growth saw them doubling in number
from 2004 to 2006. The acceleration in growth after 2003 can be attributed to two factors: the
promotion of SACCOs as part of the Addis Ababa City Administration’s MSME Promotion Program;60
and the promotion of RUSACCOs by RUFIP.
A critical issue is that SACCOs are formed sometimes just to access incentives from government
programmes, such as land, credit and marketing support. This undermines the development of
sustainable SACCOs based on sound cooperative principles.
SACCOs in regional states like Afar, Somalia and Gambella, where no single MFI is operational, are
testimony to the significant role SACCOs play in areas not reached by other financial institutions.
Nevertheless, the distribution of RUSACCOs is unequal and dominated by Oromia Region (see Annex
11). Participation by women is 43% higher than in MFIs. This is encouraging, however, stakeholder
consultations and field visits revealed that the high illiteracy of women in rural areas severely limits
their capacity to participate in management.
60
Out of the total 5 437 SACCOs, 53% are in the City Administration of Addis Ababa, 28% in Oromia Regional state, 8.9% in SNNP, and 4.3%
in the Amhara Regional State.
30
Ownership and governance
SACCOs are member-owned organisations with governance and operating procedures defined by their
by-laws. The general assembly, the management and board of directors are in charge of day-to-day
activities. Few SACCOs have employed staff and are managed by a management committee. Other
committees are the control committee, loan, saving, education and dispute committees. Low skills and
weak incentives for committee members limit sound management and growth.
Tax status
Cooperatives are not-for profit organisations61 and are therefore tax exempted, although the rules
relating to profit are not entirely clear.
Reserves
According to proclamation No 147/98, a SACCO is required to set aside a reserve fund for which it shall
deduct 30% of the net profit but not exceeding 30% of the capital of the society. The regulations leave
open the purpose for which the reserve fund will be used should the SACCO dissolve. This, and the
practice of having no separate account for the reserve fund, as prescribed in the proclamation but not
enforced, has created distrust of some SACCOs.
Products
SACCOs offer savings and credit products. The name SACCO suggests that the members first save and
then the SACCO starts to provide loans. SACCOs provide both compulsory and voluntary savings.
URSACCOs are generally more mature with a wider range of products such as housing and
consumption loans, and insurance. URSACCOs collateralise loans with salaries and the loans are repaid
by deducting instalments from the salary. Youth saving is uniquely promoted in the Amhara regional
state. No SACCO offers time-linked deposits yet. Compulsory savings are used mainly to finance the
loan programmes of the cooperatives; other sources of funds were hardly found. In 2005/2006 the
amount of savings of both types reached 986 Birr million (US$110 million), double pervious years and
surpassing the 602 Birr million (US$67 million) mobilized by the MFIs.62 Nevertheless, RUSACCOs have
only a minor share of these savings – less than 1% or 8.8 million Birr (see Annex 11, table 13.1).
RUSACCO’s sole funding source is savings. According to the FCA, saving per RUSACCO is 7 577 Birr
(US$858), which is small compared to the loan demand of their members. As loans are made only up
to five times a member’s savings, which is on average 137 Birr (US$15), members can access only very
small loans until their savings are built up to support a larger loan. Average loan size per member is in
the range of Birr 411 to Birr 685 (US$46 to US$77). Members’ shares of SACCOs are a small portion of
the deposits. However, the breakdown of shares and deposits is not always transparent.63
61
Proclamation No 147/98 includes internationally accepted ICA principles. Nevertheless, with the principle of distribution of surpluses,
discrepancies are noticeable. Proclamation No 147/98 has left out the equitable contribution of capital as well as the democratic control of
capital - a typical feature of cooperatives; members usually receive limited compensation if any on capital; the proclamation wrongly uses
the words “profit” and “dividend” – which is in appropriate for cooperatives - instead of “surplus” and “compensation to members”.
62
Development in Savings and Credit Cooperatives in Ethiopia (2006)
63
According to proclamation 147/98 cooperatives are to be established by members buying shares. The share value, however, is small,
sometimes 10 Birr and the number of shares an individual member can buy is restricted. As a result, the share capital is minimal. The saving,
however, which is a liability to the SACCO, increases over time. Therefore, for SACCOs the share capital is very small while the saving deposit
is relatively large. In reporting, SACCOs sometimes mix saving and contribution (share capital) and put the figures together. This reflects the
lack of reporting skills as the two are different categories: one is capital and the other one a liability (Gesesse, 2007)
31
Loan terms are three to 24 months and lending rates 5% to 20% a year. Loan use is for farm inputs,
animal rearing and some off-farm activities. Given the small loan size and the limited term, loans
generally are not sufficient for buying an ox or milk cow, which limits the economic benefits for rural
households. The interest paid for savings (1.5%-4% a year) is low, compared to the cost of inflation,
driven in part by the desire to maintain a relatively low cost of lending.
URSACCOs operate in a similar way to RUSACCOs but have a higher maximum loan size of 60 000 Birr
(US$6 716). Members are expected to save a minimum of 3% of their salary, up to a maximum of 16%.
While the repayment rate of the RUSACCOs is reported to be 100%, some URSACCOs report arrears.
Financial performance
No aggregated data exists on the overall financial performance apart from the repayment rates of
SACCOs, which is a major constraint for assessing their performance in detail. SACCO reporting to the
FCA does not cover performance indicators.
Funding
SACCOs are constrained to member savings to fund their load portfolios. Overall, RUSACCOs report a
heavy dependence of government support in terms of RUFIP and other promotion programs. Some
NGOs have funded RUSACCOs but to a limited extent. Access to funding from RUFIP has not yet
materialised because of the eligibility criteria, which no RUSACCO has met so far. However, there is a
risk that easy access to external funds could undermine the savings principle underpinning the SACCO
methodology.
Non-government organisations
The financial activities of NGOs built the foundation for the formal MFIs in Ethiopia. Before 1996,
many NGOs provided saving and credit services directly to beneficiaries, often coupled with nonfinancial services. However, they were hampered by a lack of specialised staff, weak loan recovery,
and no clear path towards sustainability, among other weaknesses (see Annex 12. To address these
problems, stakeholders formed a specialized institution under a Board of Trustees to handle the
financial interventions of all NGOs in the country. Before this was implemented, however, the
government passed Microfinance Proclamation No 40/96, which prohibited organizations other than
legally incorporated, licensed and regulated MFIs from providing financial services.
As a result of Proclamation 40/96, Regional Governments created a number of MFIs. Following this,
many NGOs formed their own local microfinance wings as independent, regulated MFIs by putting
their Ethiopian employees up as shareholders, a strategy used by World Vision, Care Ethiopia and
Catholic Relief.
Other NGOs, especially the local ones, chose a different route to provide financial services to their
beneficiaries. Some hired the services of MFIs to handle managed funds. In this model the MFI
manages the financial service without owning the loan fund. Plan International, Christian Children’s
Fund, Concern, Wise, Accord and others formed SACCOs to provide financial services to their
beneficiaries. In most cases, the beneficiaries were expected to join the cooperatives to access the
resources. Except for those organised by Concern and Wise, most of the SACCOs formed in this way
ceased to operate after the mother NGO phased out its programme.
Reports from MFIs indicate that some local NGOs still directly provide financial services, despite the
law. These NGOs generally use the financial services, in some cases including savings mobilisation, to
complement non-financial services such as training, family planning, education and gender
empowerment. While most of these NGOs work with the very poor and in regions where no other
MFIs are operating, they distort the microfinance market. Issues include low interest rates, weak
follow-up, and poor enforcement of repayment of loans, which crowd out the operations of licensed
32
MFIs. The NBE receives regular feedback about the market distortions by such NGOs but has not taken
measures to stop them.
Commercial banks
Commercial banks (CBs) have a limited involvement in financing poorer households or MSMEs, mainly
through a number of guarantee schemes and other minor support activities. Some cases of limited
lending to, or through, MFIs were found. In three cases banks had a shareholding in MFIs and some
limited form of technical assistance. Banks do play a role in small deposit mobilization but it was not
possible to quantify the number of small accounts.
At end 2006, the commercial banks had over 42.1billion Birr US$ 4.7billion) in deposits, but net loans
and advances accounted for a mere 19.4 billion Birr or 46% of deposits, indicating excess liquidity (see
Table 7)
The loan-to-deposit ratios are particularly low for the state-owned banks, averaging 37% in June 2005.
Private banks reported an average loan to deposit ratio of 76.2% in June 2005. A total of Birr 12.8
billion, or 28.7%, were invested in low-yield, low-risk Treasury Bills.64 Like many other banks, CBE is
highly over-liquid, but does not consider itself to be in a position to lend significant amounts to its
clients directly. The reluctance of CBs to use excess liquidity for lending to enterprises (or MFPs) can
be attributed to the relatively rigid collateral-based lending practices and inefficient loan delivery
system, the availability of safe investment in Treasury Bills, and the lack of perceived other profitable
investment opportunities.
Table 6 Trends in the liquidity position of commercial banks (in billion Birr)
Year
Net deposits
Liquid asset
2001
2002
2003
2004
20 639
22 173
25 258
30 359
6 840
9 575
16 461
20 651
Liquidity
requirement
3 096
3 326
3 789
4 554
Excess liquidity
3 744
6 249
12 672
16 098
Source: NBE, Annual Report, 2004/2005
Lending to micro finance providers
In addition to deposit mobilization, accessing commercial funds is a sustainable way for MFPs to
finance on-lending activities. Commercial lending to MFPs is still new in Ethiopia. Shortage of funds is
among the most frequently cited impediments to growth of financial service provision by Ethiopian
MFIs and SACCOs. Despite excess liquidity, very few commercial banks have been willing to lend to
MFIs.65 Except in one case, those loans were fully guaranteed by either an international development
agency or a government authority. According to Dagnew Gesesse (2006), the CBE has been lending to
government-owned MFIs backed by a Regional Government guarantee. In 2006, the government
developed the Urban Financial Intermediation Fund (UFIP); however, this fund was not implemented
as planned (see chapter 4 Wholesale financing and guarantee funds and Annex 14).
Equity investment
Another way to mobilise excess liquidity from CBs for MFIs would be through equity investment.
Commercial bank shareholding in MFIs is still limited. NIB Bank is a shareholder of Aggar MFI. CBE and
64
65
NBE 2006
According to Gesesse (2007), Wasasa was the first MFI to take a loan from a private bank without physical collateral. It paid the 300 000
(US$33 579) loan back according to the agreement. The next loan from the same bank was backed by a guarantee facility. ACSI also has
taken loans from CBE without physical collateral. Addis Credit and Saving Institutions had taken a 20 million Birr (US$2.2 million) loan from
CBE at 5.25% interest for a four years term, with the municipality as the guarantor.
33
Dashen Bank are both shareholders of Specialized Financial and Promotional Institution (SFPI).66 In
Wolday Amhara Region, CBE trained ACSI staff in individual lending techniques.
Micro, small and medium enterprise retail lending
According to a 2005 KfW study, Ethiopian banks are conservative lenders for a variety of reasons. This
is particularly evident in their lending to smaller businesses. Bank managers are cautious of noncollateralized lending. Reasons include concerns of potential fraud.
The government has passed an inter-bank lending law, and from 2001 to 2004, 11 such loans were
made. However, the ability of banks to borrow from each other remains limited for two reasons: all
borrowings must be collateralized with buildings; and fear of seasonal liquidity crunches. While both
private and government-owned banks have demonstrated an interest in finding ways to lend to MFIs
and small and medium enterprises (SMEs), implementing this remains a challenge. Table 8, shows the
activities of selected banks and the activities they expressed interest in.
Table 7 Ethiopian banks – interest in lending
Bank
Commercial Bank of
Ethiopia
Development Bank of
Ethiopia
Construction and
Business Bank
Awash Bank (12/2003)
Dashen Bank
Bank of Abyssinia
Wegagen Bank
United Bank
NIB Bank
Current
SME
lending
unknown
Current
rural
lending
Current
MFI
lending
RUFIP
RUFIP
unknown
unknown
unknown
yes
yes
yes
only
coops
unknown
yes
unknown
Interest
in SME
lending
yes
unknown
Yes
unknown
equity
share in
Aggar
Oromiya Cooperative
Bank
Interest in
rural
lending
Yes
Interest in
MFI lending
Excess
liquidity
Yes
sufficient
RUFIP
RUFIP
unknown
unknown
Yes
unknown
Yes
unknown
yes
yes
sufficient
sufficient
unknown
sufficient
sufficient
equity share
in Aggar
yes
yes
Source: Enterprise Solutions Global Consulting on behalf of KfW (2005)
Apart from these banks’ expression of interest, CBs are slowly showing interest in SME financing.
Some donors offer guarantee schemes for MSMEs to support this kind of operation. A USAID partial
guarantee scheme encourages individual lending that involves Awash Bank, Abyssinia Bank and
Dashen Bank as partner banks.67
In 2006, CBE established a MSME department, which provides SME and agricultural loans. CBE also
manages lending the Birr 5.2 billion fund UFIP targeted at urban borrowers and government-owned
MFIs (see also chapter 4 AEMFI). Fertilizer lending is also offered by CBE (see chapter 5 Legal,
regulatory and supervisory framework and Box 12).
Overall, Ethiopian commercial banks – like most banks in other countries - play no significant role in
serving low-income clients. Adding to the problem is that retail lending to individual customers
66
Self-help Promotion Institution
67
The program is sector and operational area specific and targets agribusiness and SMEs. Loans are short (one year) and medium-term (up
to five years) and loan sizes up to US$750 000. The USAID guarantee scheme, which runs until 2010, is a non-funded portfolio guarantee
which covers 50% of losses on the eligible portfolio.
34
(personal loans) is also generally weak. Banks have recently started to lend to MFIs, but only if the
loan is backed by a government or donor guarantee. Banks consider microfinance to be unsecured
group lending and have not yet recognised the huge potential of this market. According to discussions
between AEMFI and senior commercial bank officials, a loan size below Birr 100 000 (US$11 193) is not
considered attractive or profitable by commercial banks.
Likewise, commercial banks play no significant role in deposit mobilization from the low-income
market. According to Admasie (2005), more than 96% of the respondents of a survey of MFI clients
said they do not have savings with banks and only 3% reported that they have savings deposits in
banks. However, NBE data on deposit mobilisation of commercial banks does not include a breakdown
of deposit sizes. The smallest amount monitored is Birr 100 000 (US$11 193).
The Cooperative Bank of Oromia (see Box 10) is a commercial bank established for cooperatives and
SACCOs. However, the profile of the shareholders – which are all individuals - does not reflect the
original idea of setting up a cooperative bank where, for example, primary cooperatives are owners.
The initial idea of SACCOs becoming fully-fledged cooperative banks was not realised. A bank based on
cooperative principles like a member-based ownership, voting and sharing of any surplus, would be
different from a commercial bank licence. The lack of an appropriate financial cooperative law that
would allow banks to be formed according to cooperative principles meant the bank was registered as
any commercial bank.
Box 10 The Cooperative Bank of Oromia
The Cooperative Bank of Oromia (CBO) is the first of its kind in the country. CBO was registered as a commercial
bank on October 29, 2004 in accordance with Article 304 of the commercial code of Ethiopia, and licensed by the
NBE according to the Banking Business Proclamation No 84/1994.
It entered into banking business operations on March 8, 2005. CBO was formed to provide services mainly to
people organized in cooperatives. According to its mission, CBO “... is to provide full-fledged and customer
responsive banking services for cooperative societies in Oromia, other entities and individuals with special
emphasis to agricultural and agro-based business financing.” About 95% of its portfolio goes to cooperatives that
are engaged in input supply, agro processing, etc. It provides loans to cooperatives without property collateral.
Though the bank is planning to offer a range of service to cooperatives, it has only provided a loan to one: Awash
Saving and Credit Cooperative Union. It strives to expand its outreach to more cooperatives and SACCOs.
However, it also believes that the SACCOs and their unions should be strengthened first before they request
financial services from banks like CBO. The bank management strongly advocates for the strengthening of the
management of the SACCOs and their staff.
Source: Gesesse (2007)
Recommendations
The rapid growth of microfinance in Ethiopia has stemmed in large part from strong government
backing,68 intervention and the provision of funds, directly or through programs such as RUFIP. The
emphasis has been on expanding outreach at low cost, both in interest rates to clients and operating
costs. While there has been considerable success, these strengths pose risks and challenges in moving
to the next phase, which is to build on these gains to improve governance, self-sufficiency, savings and
other product development, and MIS systems to manage sustained growth. Specific recommendations
for microfinance institutions, SACCOs, NGOs and commercial banks are detailed below.
68
MFIs and SACCOS are tax exempted but the details of implementation are still open. The Ministry of Finance is in charge of working out
the detailed guidelines about the MFPs’ tax exemption. However, it has no detailed policy. As a result MFPs find it difficult to fully benefit
from the tax exemption.
35
Improve ownership and governance structures: The ownership structure of MIFs – government
affiliated NGOs and government authorities, and international NGOs represented by local NGOs and
individuals – involves certain risks because of its non-transparent nature and lack of clear
responsibilities. For MFIs to mature, they will need to become increasingly independent of the
influences of government and international NGOs. Improvements are needed to raise additional
capital, especially from the private sector, real shareholder ownership, transfer of shares, profit
distribution, and the capacity and composition of the boards. Substantial international funds, and
accompanying technical assistance, would be available if MFIs were permitted to have limited
amounts of equity from foreign investors, particularly socially oriented investment funds.
Increase savings mobilization and the range of products: Savings will increasingly have to replace
government and other “easy” funds as growth continues. Reaching new market niches, from poorer
clients to MSMEs, will require products that are more specialized. However, diversifying products
(different types of individual loans, voluntary deposit products) and introducing new service lines (e.g.
remittances, voluntary savings, microinsurance) require significant investment in management and
staff training, consultancy services and systems.
Make interest rates reflect the real cost of lending and reducing dependence on subsidies: A realistic
view of the costs of continued growth of Ethiopia’s MFPs must take into account likely rising costs of:
additional funds (whether savings mobilization, commercial loans or private equity); upgrading MIS
systems and staff skills; reduced implicit subsidies from government agencies; and inflation. Hence
interest rates may have to be adjusted to ensure continued progress toward true financial selfsufficiency. Nevertheless, setting a realistic interest rate should not be a licence for higher costs and
inefficiency.
Strengthen MFIs’ management information systems and auditing and internal control practices:
Computerising MFIs will require significant investments in terms of funds and staff capacity. I may
increase the cost of lending even if initial costs are subsidised. However, without these investments,
growth at the planned pace will become increasingly difficult to manage effectively and cannot be
adequately supervised.69
SACCOs
Raise public confidence in the sustainability, credibility and reliability of SACCOs: Poor public
perception is partly related to the past cooperative crisis, but doubts also centre on the many inherent
operational and systemic weaknesses of the SACCOs system. Dependence on donor- driven (RUFIP)
and government support needs to make way for member-based governance and increased savings
mobilization, especially in RUSACCOs. Larger SACCOs will need to pay staff and provide incentives for
those who serve on committees, in order to operate on a more professional basis.
Build relationships with MFIs, banks and insurance companies: Rather than viewing MFIs as a
competitor and threat, SACCOs should seek to build mutually beneficial links with them and other
types of financial institutions.
Strengthen governance, management and internal systems:
• Interest rates should reflect the real cost of the service and safeguard self-sufficiency, ie.
pricing should include operational costs and inflation and financial costs.70
69
In most countries where MFIs are licensed by the central bank, they are subject to essentially the same reporting requirements as
commercial banks, which involves regular and often costly reporting.
70
Apparently, no systems for cost calculations exist and interest rates are set according to non-financial criteria (eg. “what client can pay”).
36
•
•
•
•
•
The knowledge and technical capacity of board members and management should be
strengthened; participation of members should also be stronger.
Internal management and control systems, as well as audit services should be strengthened.
Sustainable sources of funding should be made available, especially for the RUSACCOs with
their limited ability to raise savings.
Representation of primary societies in the union needs clarification, ie. whether SACCOs with
a larger number of members should have more representatives or whether all SACCOs should
have the same number.
Performance indicators and transparency of data on the SACCOs and clients needs to be
introduced.
Non-government organisations
Rationalise the services of NGOs: Providing small loans with other non-financial services in remote
areas not served by MFPs can extend services to the very poor. This could be regularized according to
benchmarks that would not distort the financial market. In particular, it would be best to limit their
involvement to providing credit without mobilizing savings (other than compulsory savings to be held
as security against loans). However, the risk is distorting markets and this could crowd out the entry of
sustainable MFPs. Whether permitted or prohibited, regulation of NGOs providing limited financial
services will remain a problem.
Commercial banks
Expand operations with MFIs and SACCOs: A more systematic approach is needed to better use
excess liquidity in CBs to help meet the enormous funding needs of MFPs. Successful experiences
should be documented and disseminated. Guarantee fund schemes can serve as a tool to help
overcome the reluctance of the banks to lend to MFIs and MSMEs.
Develop more pro-poor financial services: Besides indirect support through lending to MFIs, CBs
could do more to develop direct-lending products, particularly for MSMEs. Deposit mobilization could
also be important if designed to be accessible to the poor (if the current low incentives for financial
institutions to mobilize savings can be addressed).
37
Chapter 4: The meso level – financial infrastructure
Four institutional structures play critical roles in supporting financial service providers engaged in propoor financial services: the network of MFIs (AEMFI); the Ethiopian Academy of Financial Studies
(EAFS); the CA; and the unions and federations formed by the SACCOs. Apart from these
organizations, there is little financial infrastructure relevant to MFPs in the country.
AEMFI is the representative body of the 27 licensed MFIs. Registered in June 1999 under the Ministry
of Justice of the Federal Democratic Republic of Ethiopia, AEMFI’s strategic goals include, among
others, creating an organizational structure that serves as a national industry forum and network for
MFIs. AEMFI’s mission is to reduce poverty and increase consumption and ultimately wealth and
capital creation in Ethiopia through the active intervention of efficient and sustainable MFIs.
The association’s main activities include capacity building of MFIs through training and technical
assistance, creating an enabling policy environment through advocacy, studying the challenges of the
industry, discussing the results of its research, disseminating best practices through workshops, and
monitoring and appraising the performance of MFIs. It serves as the voice of the industry both locally
and in international forums. AEMFI has also supported the industry in fundraising activities.
According to evaluations by Small Enterprise Education and Promotion Network, GTZ and others,
AEMFI has successfully added value for its members. However, in spite of the success of the network
in a short period, there are many challenges in meeting the needs of its members and other sector
stakeholders. First, it faces huge expectations from the industry in terms of capacity building,
research, advocacy and fundraising. AEMFI has prepared a large-scale training program (see chapter
4), which has been conceptualized with donor support from the Netherlands HIVOS. RUFIP will finance
its implementation. Second, even though AEMFI has its own building, and is building a small training
facility on its premises, it lacks adequate office space and a large hall to conduct workshops,
conferences, round table discussions and short-term training for its members and others. Third,
although the transparency of MFIs has improved, members fail to provide reliable data on time
because of limited capacity, lack of computerized MIS systems, and sometimes unwillingness.
Fourth, training has been free to practitioners in the industry. Donors generally cover the full training
cost, which has created a dependency syndrome and lack of awareness of the real cost of training.
AEMFI, in its sustainability strategy, has proposed that MFIs and staff should partially pay for training,
even if donors cover the cost of the training. AEMFI proposes to use the payment by MFIs and staff to
establish an endowment fund for the network. Finally, sustainability is critical, with members
increasingly expected to provide financial support and pay for AEMFI’s services.
AEMFI’s support to SACCOs
AEMFI has started to play a supportive role in capacity building for the SACCOs, with the assistance of
international NGOs such as Interchurch Oranization for Development Cooperation (ICCO) and Irish
AID. Two rounds of training have been given to promoters, saving and credit cooperative experts and
union managers. According to some SACCOs, the training on business planning using Microfine
software71 helped the practitioners to understand basic approaches, norms, and standards of financial
interventions.
71
Software to help MFPs to develop business plans.
38
A study on the performance of SACCOs, with the support of ICCO and in collaboration with AEMFI and
the CA, had showed that SACCOs considered MFIs as a threat rather than as collaborators in the
industry. That AEMFI and CA are co-operating is believed to be useful in narrowing information gaps
and creating a more conducive environment for industry collaboration.
Ethiopian Academy of Financial Studies
In the area of training for inclusive financial services, NBE has taken steps to expand the Ethiopian
Academy of Financial Studies (EAFS) and include a Microfinance Training Program. For more than 13
years, the NBE has owned and run this centre, formerly called the Ethiopian Institute for Banking and
Insurance. A new facility outside of Addis Ababa was constructed, providing space for 500 trainees.72
EAFS planned to offer a Masters Degree Program and 63 short-term programs, including a research
and consulting arm and distance-learning courses. However, a few weeks before its opening, the new
academy was taken away from NBE and now hosts a medical university, so the EAFS is again faced
with limited space. The future of the EAFS is therefore unclear, especially concerning its microfinance
training arm. AEMFI is taking steps to host an initial microfinance-training program, and, the
“software” (concept and course curriculum) of the Microfinance Training Program – which the
Academy and AEMFI developed with considerable donor support – still exists.
Financial infrastructure of SACCOs
SACCOs receive support from government institutions such as the CA, which also supervises them and
is therefore considered a macro level institution (see chapter 5). However, as the CA and its regional
and local offices73 provide a number of functions at the meso level, these are looked at in this
chapter.74
In most of these offices, including the Federal Cooperative Agency, activities are grouped in the
following departments: promotion, marketing, supervision and audit, and legal services and support
activities. The promotion department is sub-divided into teams for agricultural and non-agricultural
cooperatives. The promotion officers often have an agricultural background, as the activities of the
cooperatives are mostly agricultural, rather than specific knowledge on SACCOs.
The non-agricultural cooperative team is mainly in charge of promoting the SACCOs. The marketing
department is responsible for market development and follow-up of agricultural input and crop loans.
This organizational structure is suboptimal in its ability to deal with issues particular to SACCOs. In
addition, there are hardly any specific norms and standards for the financial interventions of SACCOs.
Another systemic weakness in the CA is that the auditing department lacks a sufficient number of
auditors compared to the growing number of cooperatives, including SACCOs. Reports indicate that
some of the activities that cooperatives are undertaking, such as export and import marketing, are
beyond the actual capacities of the auditors. An important step by the CA is to allow cooperatives with
a high volume of trade that are engaged in export and import marketing to be audited by external
auditors in close collaboration with the agency and its departments. The SACCO unions can also access
the services of external auditors after securing the approval of the respective authority, according to
the model by-law for SACCOs.
72
73
NBE finances the centre predominantly. Some limited contributions come from the Commercial Bank of Ethiopia.
These offices are called different in different regions, among others: Cooperative Agency (Oromia, SNNP), in Addis Cooperative
Promotion and Regulation Department, in Afar, Somalia and Gambella Cooperative Bureau.
74
It is generally a problem to have the same agency responsible for both promotion and supervision of financial institutions.
39
Training for SACCOs is available from the CA and from their unions, and some from AEMFI (see
chapter 4). However, technical skills of CA staff in the regions have been frequently reported as low
because of a lack of training and systems for training.
Support within the SACCO system
SACCOs also receive support from their own higher-level organizations: unions, a cooperative bank,
cooperative insurers, a federation and a cooperative league for the SACCOs. As of March 2007, there
are 17 SACCOs. According to the CA, one of the three planned Saving and Credit Cooperative
Federations is to be established in the next budget year. Eventually, these three Federations – the
Saving and Credit Cooperative Federation, Insurance Cooperative Federation, and the Federation of
Cooperative Banks – and other cooperative federations will unite to form the Cooperative League,
which will serve as an apex organization for all types of cooperatives, including SACCOs.
One of the challenges in establishing an overall vertical structure for SACCOs, especially when
establishing SACCO unions in different regions, is the lack of uniformity of cooperatives. In some
regions the multi-purpose cooperatives are members of the Saving and Credit Unions. In other
regions, only the primary SACCOs join hands to form their union, which is in accordance with the draft
policy and the law. In one regional state, a non-financial union is a member of a SACCO union.75 Other
challenges at the meso level are sustainable funding for unions for their operations, loan fund for
unions, organizational capacity building including systems development, staff training, the number of
qualified auditors, and material support for vehicles and office equipment.
At present, support from within the SACCO system is limited to unions carrying out liquidity pooling. In
future, unions plan to offer services such as training, insurance services, joint investments or lobbying.
Wholesale financing and guarantee funds
Wholesale financing, guarantee schemes and liquidity pooling for MFPs are relatively unexplored
fields in Ethiopia. There are some donor programs limited to a few MFIs, and some government
support for the government-owned MFIs, but these schemes are narrowly designed. A demand-driven
and market-based wholesale financing mechanism for refinancing and liquidity pooling is available for
MFIs and SACCOs.
Wholesale financing
The main funding sources of MFIs include savings mobilisation, paid-up equity, grants and donations,
retained earnings, loans from banks, and RUFIP (see Annex 18). MFIs say that, these resources are not
enough to meet the huge demand for loans and sustain their growth.
Box 11 The Rural Financial Intermediation Program
RUFIP is a development program of the International Fund for Agricultural Development (IFAD) and the African
Development Bank (AfDB), supported by the Ethiopian Government and implemented by the Development Bank
of Ethiopia (DBE). It provides loans and capacity building to MFIs and RUSACCOS, although only capacity building
is available for the latter at present. RUFIP provides training, study tours and material support (vehicles) in the
four states of Oromia, Amhara, SNNP and Tigray. RUFIP has established a comprehensive office structure and
pays for coordinators, trainers, and monitoring and evaluation officers and accountants in the regions.
Equipment such as vehicles, motor bikes and computers are given to the regions.
To date the entire fund has been lent to MFIs with the funds allocated for RUSACCOs laying idle because no
RUSACCO yet fulfils the eligibility criteria and qualifies for support (US$ 671 584 remaining for RUSACCOs).
Source: Gesesse (2007) based on information from RUFIP Project Management Unit
75
Dagnew Gesesse (2007)
40
RUFIP (see Box 11) is the largest refinancing facility of both donors and the Ethiopian government. It
assists MFIs and SACCOs to finance loan programs and provides capacity building. Out of the program
volume of US$87 million, 81% is for refinancing. The bulk of its loanable funds (US$70 million) is lent
out to 26 MFIs at an interest rate of 6%. An amount of US$671 584 (6 million Birr) is allocated to
RUSACCOs but not lent out yet.76
One limitation is that loans to MFIs have a seven-year grace period, so that total principal will be due
in a lump sum when the program ends. This repayment method does not encourage financial
discipline and if the MFIs do not make sufficient profits while revolving the funds during that period,
they will face a severe liquidity gap when repayment is finally due. Lending rates are not market-based
which creates distortions in an undeveloped market. As RUFIP funds for MFIs are fully lent out, the
Steering Committee of RUFIP, assisted by an international expert team, is evaluating a plan to
establish an apex facility after the program ends.
In 2006, a second important source of wholesale government funds for MFIs was designed. UFIP is
managed by CBE (see Annex 19). The Ministry of Housing, Works and Urban Development suggested
using the 5.2 billion Birr (US$582 million) Urban Development Fund, which was based on CBE’s excess
liquidity, to create employment and foster construction in urban areas. A high-level committee,
comprised of the Ministry, the Prime Ministers Office, NBE and AEMFI developed UFIP. The fund was
intended to fund government-backed MFIs, for which the Regional Governments would issue a 100%
guarantee. The intention was to lend to MFIs at 4% to 5.25% interest a year with funds used for the
targeted lending programs of the Regional Governments. However, the fund was not implemented as
planned at a central level and today Regional Governments are free to negotiate their loans and
guarantees with CBE.
Guarantee schemes for MFIs
A few MFIs have access to guarantee schemes supported by donors. Overall, guarantee schemes are
new to MFIs: there are only few small pilot schemes and their modes and terms vary. The MFI Wasasa
has entered into a guarantee partnership with Awash International Bank. The term of the agreement
reflects proper risk sharing between the partners: Wasasa deposits 10% of the loan in the facility of
the bank; the guarantee’s coverage is 45% while the bank assumes the remaining 45% risk by itself.
The limitation of the scheme is its low leverage effect. As of end 2006, ACSI was completing
negotiations with SIDA for a 50% partial credit guarantee scheme earmarked for “missing middle”
clients. The guarantee fund amounts to Birr 20 million (US$ 2.2 million). ACSI is currently insisting on
the need for stronger capacity building to accompany the scheme. Eshet MFI is also a partner of a 50%
guarantee fund with a foreign bank.
KfW, the German development bank, is preparing a €4.5 million (US$6.3 million) guarantee fund for
MFIs and MSME financing, the Microfinance Refinancing Facility (MRF). The MRF will partially
guarantee loans (at market-rate) from commercial banks to selected MFIs. MFIs will receive special
assistance to develop individual products for MSMEs. A feasibility study has been completed, for
which KfW consulted a number of MFIs and banks, as well as looked at existing guarantee schemes. An
agreement with the Ministry of Finance and the Ministry of Capacity Building was signed in March
2007. The MRF is due to start operating at the beginning of 2008 and will be implemented within the
framework of the ECBP.
76
Wolday Amha, AEMFI Occasional Paper No 18 (January 2007). RUSACCOs may apply for a loan after having mobilized savings for one year.
However, RUSACCOs have limited capacities to develop the required business plans. Furthermore, it has been reported that the eligibility
criteria are too narrow for the newly emerging RUSACCOs. Improvements are under way, but to date no RUSACCO has been able to borrow
from the fund.
41
Other support services – financial Infrastructure
This kind of support institutions that emerge in more mature microfinance industries are limited in
Ethiopia, for example credit bureaus, consultancy firms, rating agencies, specialized auditors,
microfinance programs in universities and private training institutes, and organizations specialised in
wholesale funding, guarantee and liquidity pooling. MFIs cannot use the NBE’s credit bureau, and
there is no a specialised credit bureau for MFIs though some MFIs are voluntarily sharing information
on borrowers. There are no consultancy firms with experience in liquidity management, MIS, and
coaching of credit technologies for MFPs. International rating agencies have rated several MFIs in the
past, but rating is not widespread among MFIs, and even less among SACCOs. Traditional auditors
conduct audits but the quality is neither verified nor accredited by the NBE. Universities and private
training institutes offer little training oriented to microfinance.
Recommendations at the meso level
The main recommendations for improving financial infrastructure for pro-poor financial services are
detailed below:
Strengthen support institutions in numbers, service lines and geographical presence to address the
following issues:
• Raising the number and quality of training providers and institutions;
• Opening up the credit bureau to MFPs, and/or enhancing the voluntary information-sharing
mechanism of MFIs and opening it to SACCOs;
• Developing the standardizing the service lines of the SACCO unions (eg. liquidity pooling and
funding, training).
Upgrade training methods and tools to be more innovative and forward-looking: Transferring
internationally tested courses and training methods, such as distance learning, best practice
dissemination, training of trainers, and management training.
Reduce dependence on donors and government support: eg. by charging participants cost-covering
prices for training which is subsidized, and making donor’s compensation for providing training or
“public goods” services (eg. transparency work, studies) transparent and results-oriented.
Identify viable solutions to reduce the financing gap:
• By evaluating the feasibility of a wholesale or mixed (including technical assistance) apex
facility: The costs and potential sustainability of a market-based mechanism for the
refinancing and liquidity pooling of MFPs including the related risks of creating disincentives
for private, commercial savings, debt and equity should be assessed. Based on this
information, a decision can be taken to establish such a facility or pursue other options for
expanding funding and using the remaining funds of RUFIP after its closure, and
• By establishing a sustainable, market-driven guarantee facility, MFPs can borrow from
commercial lenders with a third-party guarantor. A guarantee facility can bridge the
time until commercial banks lend to MFIs without requiring collateral but based on
their portfolio quality.
Strengthen SACCOs’ vertical structures and support systems: SACCOs are growing vertically into 17
unions and then into a federation. This shows that they are gradually assuming the responsibility of
handling transactions that are more complex by employing capable manpower. These organizations
require substantial capacity building to become sustainable and to be able to provide valued services
to members. Promotional activities of the CA should be separate so that it can focus on its regulatory
function without conflict of interest. SACCOs need qualified external support from NGOs and other
partners, such as WOCCU and donors, which are experienced in cooperative promotion and support.
42
Chapter 5: The macro level – policies, laws,
regulation and supervision
The Monetary and Banking Proclamation of 1994 lays down the legal basis for the financial sector in
Ethiopia. In this proclamation, the government clearly assigns the task of licensing and supervising
banks, insurers and other financial institutions to the NBE. The key criterion for institutions is that they
carry out banking business. This means the country follows a rather broad approach to banking
supervision, which does not concentrate on deposit taking only, but instead explicitly includes lending
of money as a banking activity, independent of the source of this money. This formulation in the
Monetary and Banking Proclamation has significant implications for the financial sector in general, as
well as for the prudential regulation of microfinance. Unlike in many other countries, which focus on
regulating only those intermediaries that mobilize deposits, the implication of the logic laid down is
that the NBE also has to supervise and licence all institutions that are involved only in credit extension.
Revising the Microfinance Proclamation
The framework created by Proclamation No 40/1996 allowed even extremely small institutions to be
set up with the minimum capital requirement of Birr 200 000 (US$ 22 386). The idea was to serve rural
areas beyond the reach of commercial banks. However, this allowed MFIs that were not necessarily
well capitalized or strong to enter the market. In addition, NBE was inadequately prepared to
supervise the newly created sector of financial intermediaries – an area that remains neglected.
The NBE is now formulating a new microfinance proclamation for three main reasons. First, the
observation that the current regulation is not a major obstacle to entry is largely based on a “friendly
interpretation” of the current legal basis, which is not transparent. Second, it contains a number of
inconsistencies that should be eliminated. Third, during 10 years of microfinance experience in the
country, the NBE has advanced considerably on the learning curve, as has the rest of the world.
Therefore, it is an appropriate time to revise the regulations and clarify the approach and structure for
the next decade.
Three major directions of improvements are reflected in the new draft proclamation:
• Services and lending technologies of MFIs now largely reflect reality and therefore fit much
better than elaborated in Proclamation No 40/1996.
• The NBE would like to reduce the ambiguous relationship or dependence of MFIs on
government decisions; eg. the revised version does not foresee any government involvement
when an MFI accepts international technical assistance.
• Clarifications have been made in the wording, such as members/clients, and the application of
Article 24 of Proclamation No 40/1996, which referred mutatis mutandis to the banking law,
has also been reduced. This makes the new proclamation much more readable and
comprehensive than the previous one.
These planned amendments reflect NBE’s thinking on the direction the market should take. All
intended changes point in a positive direction. However, it has to be stressed that the current
discussion fails to take a broader view on several important issues. This gap means that several
important aspects of what could be achieved in the reform process could be ignored. These issues are
explored in this chapter.
43
Supervision by the National Bank of Ethiopia
The NBE lacked the necessary expertise when it started supervising MFIs ten years ago, and for several
years tried to apply banking supervision practise to the sector. More recently, a separate department
has been established (with 15 staff members) which specializes in microfinance supervision. At
present, however, supervision standards, efficiency, risk assessment, technical capacity and
enforcement levels are not in line with best practise. This is aggravated by the poor quality of the
available data on the MFIs and the lack of enforcement.
Risks are growing as MFIs continue to mobilize deposits and plans to grow at an even quicker pace
could undermine internal controls and loan recovery performance. The NBE is aware of the situation
and is working on these issues at present with the support of the RUFIP, both technically through
training in off-site and on-site supervision. However, it is too early to assess the effect of these
measures.
The MFI supervision department will need well-structured, long-term support to build up the needed
capacity. The NBE needs to attract talent and keep those people within the institution over a longer
time. This will require NBE to address the problem of staff turnover.
It must be noted that efficient supervision of MFIs is difficult and time-consuming when operations are
carried out manually. This is another strong reason to persuade MFIs to use technology, besides the
value of improved MIS systems for the management of the MFIs themselves. The inability of NBE to
carry out on-site supervision at all 27 MFIs with existing staff could be overcome if the MFIs had
adequate information technology (IT) to support this work.
Legal, regulatory and supervisory framework for SACCOs
The Monetary and Banking Proclamation of 1994 is clear that all financial intermediaries, which carry
out banking business, have to be licensed and supervised by the NBE, and it explicitly included the
SACCOs. This approach was fundamentally changed with the establishment of the Cooperative
Commission (since 2006, CA) and the issuance of the Cooperative Societies Proclamation in 1998
(147/98). In this proclamation, the power to supervise and licence all cooperatives, including the
SACCOS, was extended to the CA, nullifying the original concept of the Monetary and Banking
Proclamation. This means that the fundamental concept of having a single regulatory authority in the
country to guarantee the implementing of a level playing field for all financial intermediaries carrying
out similar business no longer holds.
The full consequences of this approach are not yet known as the volume of loans managed by SACCOs
is still low relative to savings. However, their rapid growth in recent years makes it important to
ensure greater consistency between regulation of the financial institutions licensed by the NBE and
the SACCOs, now regulated and licensed by the CA.77
All types of cooperatives are regulated by one single cooperative proclamation. There are no
specialized laws for specialised cooperatives such as SACCOs. The CA developed guidelines for the
promotion of saving and credit cooperatives and model by-laws. These have helped to introduce some
uniformity and standards. However, the basis of these documents remains the general law of
cooperatives, rather than specific rules for SACCOs that accommodate financial norms and standards
for this kind of cooperative. As a result, the Oromia Cooperative Bank has to operate as a regular
commercial bank, rather than a specialized bank for SACCOs.
77
Proclamation No 147/98 incorporates all the ICA principles and most of the standard legal aspects of cooperatives. Proclamation No
402/2004 (amendment) was passed to address the issues of interest rate and the promotion of higher forms of cooperatives, among others.
The law has again provided the authority for the promotion, licensing and regulation of cooperatives to the CA and its regional offices.
44
Proclamation No 147/98 gives regulatory powers to the cooperative promotion offices. Issues such as
distribution of surpluses, borrowing limits, measures to be taken at the time loss of property or fund,
protection of creditors, settlement of disputes, revoking of licenses are under the purview of the CA,
or its regional bureau or offices. However, the CA has little capability to implement the functions,
given its limited workforce, low capacity to render standard regulation, and the absence of systems
that would help it discharge regulatory responsibilities.
The proclamation, guidelines and the model by-laws of SACCOs stress the fact that they and their
unions should be audited at least once a year. The audit report partly helps the regulator to see if
these financial institutions are operating according to the law. The cooperative promotion and
regulation offices can directly, or by delegation, audit the accounts of cooperatives. However, one of
the reported problems of the SACCOs is the lack of auditors to implement Article 36 (1) of the
proclamation. The absence of yearly audit reports means the CA lacks the information he needs to act
timely when necessary. The reports that are sent to the offices lack regularity and may not be reliable
because of the lack of adequate capacity of the SACCO staff and their auditors.
Theoretically, the supervision of SACCOs by the CA should be separate from the promotional and
support activities, in recognition of the fact that the promoters have different objectives and are
undertaking different activities. However, in practice, at the agency/bureau or department levels, the
promotional and regulatory reports are submitted to the same head of department, who provides the
overall guidance for the two main functions. The question is whether the head can be impartial when
it comes to take regulatory decisions about some of the promotional activities on which he or she was
providing leadership.
The insufficient number and weak technical preparation of supervisors compared to the growing
number of SACCOs is another challenge in all regions. In fact, the supervisory responsibilities surpass
the capability of the offices. Nor are the guidelines for conducting on-site and offsite supervision yet in
place. Financial norms and standards such as PEARLS78 are not applied, which would enhance rigour
and standardized performance of SACCOs. A typical example is the management of the legal reserve
fund of the SACCOs. The audit reports show the accumulated reserve fund per the standard of the
proclamation. However, even in the bigger SACCOs, there is no separate account for depositing the
reserve fund to assure it for any unforeseen hazard. Instead, most SACCOs use the fund for lending
without the permission of the authorities. No actual supervision is being carried out, or regulations
enforced, to ensure the proper management of the reserve funds.
According to the rules, SACCOs should report regularly to the authorities. Any supervisory activity
should include both on- and off-site supervision. Off-site supervision mostly depends on the reports
submitted by the SACCOs to the authorities. The reporting format, the frequency of reporting and the
capacity of those preparing the reports determine the quality of the information, which are not well
regulated and implemented, let alone enforced. Though promoters check whether the SACCOs and
the unions are operating according to the law, the guidelines and their by-laws, the supervisors (or
“inspectors”) do not undertake on-site visits because or staff shortages. To conclude: the lack of
capacity of the CA and the absence of a standard reporting system that would help CA to discharge
standard regulations (aging analysis, provisioning, loan write off policies, audit reports, etc.) for every
SACCO hinders the sound implementation of SACCO supervision and enforcement of regulations.
78
PEARLS is a financial tracking system based on standardized benchmarks developed by WOCCU. Each letter of the word PEARLS measures
key areas of credit union, or SACCO, operations: Protection, Effective financial structure, Asset quality, Rates of return and cost, Liquidity and
Signs of growth.
45
Role of government in pro-poor-oriented financial services
Since 1991, economic policy has aimed at reorienting the economy towards a free market. This
included a series of basic measures to liberalize the Ethiopian economy such as a new investment
policy, a new labour law, trade policy reforms, revised taxation rates and dissolution of highly
centralized, bureaucratic corporations. Private sector development and industrialization have become
priority areas among the economic reform measures. This aim is to raise the productivity and
competitiveness of private enterprises as the engine of growth. Given the background of a centrally
planned economy during the socialist area, private sector development has only recently begun
accelerating.
The various government development strategies (see Annex 20)79 clearly state that financing is an
important tool for industrial and agricultural development, private sector development, urban
development, the promotion of specific target groups such as women and youth, pastoral
communities, and poverty alleviation. However, the quality of the strategic documents varies. The
Financial Sector Strategy of 1998 has the objectives to link the financial sector to agriculturaldevelopment-led industrialisation and to develop a sound and liberalised financial system with
efficient financial intermediation serving the development of agriculture and industry.
The strategy emphasizes savings mobilization, modernization of commercial banking, development of
financial markets, and policy-based lending. However, the nine-years-old strategy is outdated and
limited in tackling the challenges of creating an inclusive financial system.
The PASDEP recommends that NBE encourage commercial banks to lend to microfinance institutions,
for example by strengthening the regulatory framework and supervision capacity of the Micro Finance
Supervision Department of the NBE.
PASDEP also recognizes the geographical imbalance of MFIs, with few credit services available in the
less-developed regions and to pastoralist communities. Other strategies suggest solutions not yet
agreed on by the financial sector, such as the concept of “Rural Bank” described in the Agricultural
Development Led Industrialization (ADLI) document. The CA is drafting a new policy for all types of
cooperatives.
There is a clear need to align the various national development policies and strategic frameworks with
the national microfinance strategy to be developed. It should be an integral part of an adjusted
financial sector development strategy. However, since revision of the overall financial sector strategy
may take some time, during its retreat on April 25 and 26, 2007, NBE decided to develop the
microfinance strategy and integrate it later into its revised financial sector strategy.
Development programmes affecting the financial sector
The GoE uses targeted lending intensively to reach underserved households and MSMEs and to
promote its priority sectors. The fertilizer lending program is 100% guaranteed by the Regional
Governments, whether disbursed by them directly or through MFIs, and managed by the Multipurpose Cooperatives. Problems of moral hazard and repayment make the scheme increasingly
unsustainable (see Box 12) and are also crowding out other actors and approaches.
79
The most important strategies of the Ethiopian government are the: Plan for Accelerated and Sustained Development to End Poverty
(PASDEP); Agricultural Development Led Industrialization (ADLI); Industrial Development Strategy; National Urban Development Policy;
National Micro and Small Enterprise Development Strategy; National Youth Policy; Rural Development Strategy; Agricultural Marketing
Strategy (AMS); National Action Plan of Action for Women; Financial Sector Strategy.
46
The food security program is another prominent lending program for the poor that is criticised for
similar inherent weaknesses such as narrow design of the package, over-ambitiousness, and
motivating clients who were able to borrow at commercial terms to downgrade to the food security
program. Besides small farmers, Regional Governments target lending programs to other
development fields such as urban employment creation, women, and MSMEs engaged in the
government’s priority sectors such as leather or textile production (see Annex 21 for more details on
GoE involvement in targeted lending, and Annex 22 for an assessment of some Regional Governments’
lending programs).
Box 12 Fertilizer lending
The government has been extending fertilizer loans to hundred of thousands of farmers. These amounted to
more than Birr 500 million in 2001-02. The Regional Governments assume a 100% guarantee. CBE receives a
5.25% interest payment (2.25% below CBE’s normal lending rate) while it incurs no risk. Some Regional
Governments have these loan distributions administered by both the cooperatives and MFIs; in other regions,
the Regional Government distributes these loans directly, through their extension officers and the Regional
Bureau of Agriculture. Government extension officers are involved in allocating fertilizer loans and enforcing
repayment. The Regional Governments consider this arrangement as unsustainably both technically and
financially, and there is tangible pressure to withdraw from the guarantee arrangement. The governmentbacked MFIs that have been involved in this activity are reluctant to administer these input loans, as they do not
select the clients themselves or analyse the creditworthiness of the farmers. MFI staff sees that this approach
conflicts with the management of their regular loan portfolio. CBE merely acts as a disbursing agent and has little
incentive to collect the loans, given that it has a 100% guarantee.80
Source: World Bank (2005)
To summarize: highly subsidized, targeted loan programs distort and threaten sustainable financial
services and growth in the following ways:
• Government guarantees signal that loans do not have to be repaid and hinder development of
a credit culture;
• Interest rates charged do not cover the real cost of loans;
• Financial institutions do not learn how to allocate loans efficiently based on a sound risk
analysis, since extension workers from promoting agencies of the Regional Government81 preselect entrepreneurs and make loan decisions based on criteria other than the profitability
and risk profile of the enterprise;
• Access to credit is limited to one time for the investment in line with public planning, rather
than following the microfinance methodology of repeat lending to good clients; and
beneficiaries who do not repay become uncreditworthy for future lending;
• Availability of cheap funds creates disincentives for financial service providers to mobilize
savings, which is a much-needed service for many poor people.
80
81
Adapted from a World Bank internal document.
MSME bureau.
47
Box 13 Government support to MFIs
The GoE plays an active and important role in developing financial services for the poor and MSMEs, which has
been a key driver of microfinance. Regional Governments continue to support the strongest MFIs with funding,
guarantees and other support such as staff time82 or office space. As a result, the government-backed MFIs
operate at low cost and serve large parts of the 1.5 million clients of all MFIs. However, there is a downside to
strong government involvement, which includes:
Pressure to handle subsidised lending or grant programs that tend to distort MFIs’ markets by crowding-out
their services, diverting their clients, and undermine borrower selection based on creditworthiness;
Overemphasis on growth rather than on the consolidation of operating systems, with the risk that too rapid
growth could become unmanageable and lower performance of the MFIs;
Lack of transparency and accountability in the capitalization and cost structures of MFIs; and
Dependence on subsidies and cheap funds from government to offset low interest rates, undermining financial
self-sufficiency as growth outstrips funds available.
Source: established by the authors
Recommendations at the macro level
Update MFI legislation and regulation to current realities and best practices: Microfinance regulation
can more effectively be applied to a defined activity carried out by any financial intermediaries than
tied to a particular type of institution. A tiered approach for MFIs could help to structure the market
and set the right incentives for its future development. Allowing foreign investors to participate in the
equity of MFIs, at least with a minority stake, could be a step toward greater access to capital,
technical assistance and more transparent governance. Even if NBE does not directly supervise
SACCOs, introducing common standards and guidelines for all MFPs would help level the regulatory
playing field between MFIs and SACCOs.
Upgrade the supervisory capabilities of the NBE Microfinance Department and the MIS systems in
MFIs: Adequate supervision of both MFIs and banks begins with having well-trained people available
at the NBE, which can be achieved only if the NBE can offer remuneration packages and/or job
security that is comparable to the banking sector. Finding the right staff, building their capabilities,
and implementing enforcement will determine the success of the supervisory process. Furthermore,
to use its staff more effectively, NBE will have to embrace a more IT-based approach and establish
standards and incentives for MFIs to introduce IT and MIS systems that can support the growing
volume of clients and variety of products.
Pass a separate law for SACCOs, consistent with the microfinance proclamation and its directives,
which recognizes SACCOs as specialized financial cooperatives, and also accommodates the higher and
more specialized forms such as cooperative insurance companies and banks. Separate the
promotional and regulatory functions.
Establish an appropriate regulatory and supervisory system for the FCA: Provide specific treatment
for SACCOs distinct from other cooperatives, and get the FCA to focus on supervisory services,
including using accredited auditors to standardize the process. Strengthen the FCA’s ability to
undertake on-site and off-site supervision and enforce requirements, especially for the annual audit.
Besides increasing the number and capabilities of auditors, allow those SACCOs that can afford it to
buy the service and focus government support on the newly emerging ones.
Revisit the policy framework for the financial sector for improving broad-based, inclusive access to
finance: To be effective, the Access to Finance Strategy needs to be embedded in a set of overall
policies and strategies that support the development of a sustainable, pro-poor financial system.
82
Reports from MFIs confirm that staff from government agencies and government-affiliated NGOs such as the local
administration or women associations assists in client selection for lending programs and repayment.
48
Existing strategies are contradictory in some cases and have not integrated globally accepted good
practices in others. Increasing the understanding of the role pro-poor oriented financial services can
play in poverty alleviation and economic growth is needed. This should include awareness of its
limitations and alternative, complementary approaches for financial development. Furthermore, the
possibility of applying the foreclosure law83 to MFIs for larger amounts of collateral should be
analysed, to help create a more level playing field.
Improve the design of targeted lending for agricultural production, MSME promotion and other
purposes to reduce financial market distortions and improve incentives: Regional Governments need
to reduce the high costs of honouring guarantees and allocating loans to low- productivity activities.
CBE and MFIs need to make lending decisions commercially, rather than lending to beneficiaries
targeted by other agencies. This means reducing the role of government agencies and agricultural or
MSME extension officers in loan decisions and implementation.
Maintain proactive support of government for the development of financial services while
minimizing the risks involved: Make the ownership and governance of MFIs more transparent and
independent; make funds available on increasingly commercial terms and develop guarantee schemes
to facilitate greater financing from private commercial sources; and make the full cost of services
transparent.
83
Law that allows MFIs to realize loan collateral at court with a simpler procedures as banks can do.
49
Chapter 6: International development assistance
Ethiopian MFPs receive support from a number of multilateral and bilateral donors as well as
international non-governmental organisations (INGOs). According to a CGAP survey of donor
assistance in Africa, Ethiopia is one of the 10 African countries that have received significantly more
funding than others have over the past few years. As foreign ownership is not legal in Ethiopia, new
types of funders such as investment funds and socially responsible investors are not yet influential.
Donors have programs at the three levels of the financial system (micro, meso and macro) either
through stand-alone specialized programs that focus on micro- and rural finance, or through program
components that are part of a larger development program. The latter is more widely used.84
Donor support at the micro level
A number of NGOs funded start-up MFIs several years ago, but have since transferred the funding to
their local affiliates, such as Wisdom and SFPI. Several bilateral funders provided or currently provide
support to individual MFIs. SIDA and USAID funded ACSI to improve governance and MIS systems, and
the Dutch Platform funded ESHET, PEACE (Poverty Eradication and Community Empowerment) and
WASASA.85 Packard Foundation also supports ACSI. There are many other examples, including funding
by INGOs.
Box 14 Small and medium enterprise program
The European Commission completed its Support Program for Small and Medium Enterprise Financing in 2005,
which provides valuable lessons. It provided financial and technical support to the strongest MFIs in terms of
SME lending. The program closed after its pilot phase because of a number of inherent weaknesses. One
weakness was its targeted lending approach. According to some MFIs channelling the funds, they had only a few
weeks to identify and allocate loans to selected economic sectors. The narrow program focus program and
frequent changes in direction made it difficult for MFIs to comply with the requirements and most of them could
not access a second credit tranche as they had only partly allocated the first one.
Source: Interview with project manager in 2005
Donor support at meso level
Support to MFI association AEMFI
One of the most important contributions that donors have made in Ethiopia is supporting AEMFI,
which is considered strong from a regional point of view. Some of the funders to AEMFI include INGOs
(eg NPA/Norwegian People Aid), the Netherlands NOVIB, HIVOS and ICCO; PACT-Ethiopia Community
Aid Abroad, and SOS FAIM as well as multilateral funders such as IFAD, ADB/AMINA (African
Development Fund), WWB (Women’s World Banking), United Nations Development Program, and
bilateral agencies (Ireland AID). Donors not only supported AEMFI, they also implemented their
programs through AEMFI, eg. capacity building, research and dissemination, MIS support
Wholesale – refinancing program
The largest project in the Ethiopian microfinance sector is the Rural Financial Intermediation Project, a
joint program of the GoE, AfDB and IFAD (see Box 11). The World Bank is monitoring RUFIP on behalf
of IFAD.
84
85
Data from 2005 (Source: Report and Road Map to Develop a Microfinance Strategy); adjusted partly in 2007
CGAP 2006 Regional Funder Survey – Sub-Saharan Africa
50
RUFIP has four components: (1) institutional development within the microfinance and cooperative
sub-sectors, (2) Improved regulation and supervision of MFIs by strengthening NBE and AEMFI, (3)
Equity and credit funds for MFIs and RUSACCOs, and (4) program coordination and management. The
program’s volume is US$95 million, according to the program management at DBE, and RUFIP
provides seven-year grace periods to MFIs that get a loan.
Some broader development programs have refinancing components for MFIs, usually in the form of a
credit line that is then on lent to MFIs at subsidized rates. The World Bank loan to GoE for food
security is an example of these types of programs.
Guarantee funds
Several donors are involved in guaranteeing operations for SME lending to MFIs, such as USAID and
SIDA. In the framework of the ECBP, Kreditanstalt für Wiederaufbau (KfW) has signed implementation
arrangements with ECBP to set up a guarantee facility to (partly) secure commercial banks’ lending to
MFIs. It will also build the capacities of MFIs for MSME lending.
Donor support at the macro level
The World Bank recently launched a Financial Sector Capacity Building Program that provides financial
and technical assistance to build the capacity of the NBE. The GTZ Engineering Capacity Building
Program is providing technical advice to the NBE to develop the National Access to Finance Strategy.
A list of donor programs in Ethiopia is in Annex 2386, which has data from 2005 on the agencies,
objectives and instruments used. A few donors have up-dated information for this study (USAID,
NOVIB, Italy). As CGAP was planning a comprehensive donor mapping in September 2007, this was not
pursued for this study. The results of CGAP’s donor mapping are expected in late 2008.
Donor coordination in pro-poor financing
There is significant evidence, especially from recent work conducted on aid effectiveness by CGAP,
that the quality of aid in a country is highly influenced by how funders complement each other
strengths. Not every donor has the capacity to work at each level of the financial system. Coordination
is crucial to avoid duplication between programs or even the emergence of conflicting programs. In
Ethiopia, donor coordination for microfinance is an open issue. Until 2005, Irish Aid coordinated the
bi-monthly donor meetings of the microfinance and MSME promoting agencies. At that time, the
World Bank signalled that it is interested in coordinating donor’s work in the future. In October 2006,
the Donor Assistance Group (DAG) – private sector and trade group (PSTG) and its financial sector
cluster group – signalled that it plans to set up a special microfinance cluster group.
In the framework of the preparatory activities for the AFS, and in its function as co-chair of the DAG
Private Sector Group, the ECBP/GTZ organised stakeholder consultation rounds and meetings for
international development partners in December 2006 and February and April 2007. These meetings
provided valuable inputs for the development of the AFS. To facilitate donor coordination, it was
agreed to integrate the microfinance donor group in the broader financial sector cluster group of the
DAG/PSTG in future.
Another impression to emerge from these meetings was that interest from prospective donors was
high. Interested development partners such as United Nations Development Program (UNDP), ILO, the
Italian Cooperation, CGAP and Grameen Foundation were present at the December meeting. As the
outcome of the CGAP presentation on aid effectiveness in April 2007, several funders highlighted the
need to understand better who is doing what. Some funders are planning new interventions.
86
This information is mainly based on donor mapping conducted by the ECBP/GTZ conducted in 2005.
51
Recommendations for donors
Increase donors internal technical capacity: The quantity of aid in Ethiopia is high compared to the
rest of Africa, however, focus on the effectiveness of this aid appears lacking. According to a 2006
survey conducted by CGAP, Ethiopia has close to US$80 million donor assistance for microfinance, but
in-country technical capacity within donor agencies is low, and several funders use credit components
rather than specialized programs to support microfinance. Bringing in more specialised support to
develop pro-poor-oriented financial services is crucial.
Develop a common vision: A number of different approaches to supporting microfinance may conflict
one with another. For example, in some cases, donor funding promotes targeting lending which can
cause some distortions in the way MFIs work. The development of common principles for donors is a
priority.
Put increased emphasis on capacity building: While funders have provided several credit lines to
refinance MFIs and SACCOs, demand is increasing for technical assistance to enable the growth of
sustainable microfinance. AEMFI has highlighted the strong need to strengthen MFIs internal systems
– see challenges at the Micro level.
•
•
•
•
•
Improve donor coordination. To better collaborate on new programs, donors need to
revitalise their coordination mechanisms. Some of the coordination group activities may
include the following tasks:
Up-dating sector information for donors and information on donor support to create more
transparency on donor assistance;
Discussing how funders may align their programs with the main objectives of the upcoming
AFS. For example how to avoid distortional support to the development of financial services
for the poor;
Defining different funders comparative advantage and collaborating based on these
comparative advantages; and
Attracting new funders into Ethiopia when some new skills/know how are required.
This work could be based on CGAP’s donor guidelines on microfinance and the Good Practice
Guidelines for Funders of Microfinance (2006).87
To conclude: Funders still have an essential role to play in Ethiopia, but this needs to adapt to the
evolution of the sector and to the new vision of access-oriented financial sector development:
Expanding access to finance: toward commercial, market-based financial services for the poor and
MSEs as an integral part of the financial sector. This vision needs a shift from the support of
microfinance through credit components and targeted lending towards a specialized, coordinated
approach to build the financial system, with a focus on improving access for the financially unserved
and underserved.
87
http://www.cgap.org/portal/site/CGAP/menuitem.929eeda637b63d5167808010591010a0/
52
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Annex 1: Terms of Reference of microfinance team leader
for strategy development process
Engineering Capacity Building Program (ECBP)
Office:
Salfaz Building ( AA-Bole)
Cape Verde St.
Addis Ababa
Telephone:
+251 11 663 9597
Mobile
+251 91 140 5166
Fax:
+251.1.63 02 46
Mail:
[email protected]
Addis Ababa, 11 October 2006
TERMS OF REFERENCE FOR INTERNATIONAL MICROFINANCE CONSULTANT: Assistance of NBE and
AEMFI in implementing the Road Map towards an Ethiopian Microfinance Policy
1.
TERMS OF REFERENCES (OVERVIEW)
1.1
Main Task
1.2
Required Profile
Engineering Capacity Building Program / Ethiopia
Component 4 Private Sector Development
•
•
•
•
•
1.3
Overall
Period
1.5
Location Abroad
State-of-the-art knowledge in Microfinance Policy and
Regulation
Knowledge of Microfinance Sector in Africa and in Ethiopia
Experience in implementation of technical co-operation
projects-/programs
Experience in Ethiopia´s Microfinance sector
Fluent in English (Speaking + Writing)
Time The consultancy shall be carried out in the period between September
2006 and August 2007.
Scope of work:
• Advisory Services in Ethiopia (up to 3 intermittent consultancies
in 2006 and up to 3 in 2007) = up to 50 consultant days
• Backstopping of the process (remote assistance) = up to 10
consultant days
This amounts to a total of 60 consultant days plus travel days
Intermittent Assignments in Ethiopia
56
2.
INFORMATION ON THE “ENGINEERING CAPACITY BUILDING PROGRAM” (ECBP) IN
ETHIOPIA
In seeking to overcome poverty by 2015 the Ethiopian Industrial
Development Strategy (August 2003) stresses the need for industrial
development oriented towards agriculture-led growth, export-led
industrialization, and strengthening labour-intensive industries.
Capacity building has been identified as the key factor in achieving this
goal. Consequently a strategy for a comprehensive “Engineering
Capacity Building Program in Ethiopia (ECBP)” has been developed by
the Ethiopian government, represented by the Ministry of Capacity
Building (MOCB).
This ECBP formulates a mission and corresponding objectives, identifies
four strategic areas of intervention (“components”) and lists “key
issues” for each of these components. It is based on a number of
general leitmotifs:
• Private sector orientation
• Market and demand orientation
• Qualification
• Entrepreneurship development
• Public–Private dialogue
The following areas of intervention and key issues were identified:
COMPONENT 1:
UNIVERSITY REFORM
Specific goal:
Improving academic studies in technical
and managerial fields including
Key issues:
1. Curricula development
2. Human resource development
3. University – industry linkages
4. University infrastructure and
governance
5. Training of Technical Teachers
COMPONENT 2:
OVERHAUL THE TVET SYSTEM
Specific goal:
Creating one coherent system which
includes formal and non-formal initial
and further training for all sectors
Key issues:
1. TVET-Policy and system
development
2. Standardization, testing &
certification (OSAC)
3. Upgrading of technical teachers
and instructors (NCTTE)
4. Support (public and non-public)
TVET providers
5. Promote co-operative and incompany (including informal)
training
COMPONENT 3:
Specific goal:
57
QUALITY INFRASTRUCTURE
Setting a professional customeroriented quality infrastructure
Key issues:
1. Institutional development of QSAE:
2. Laboratories, non-laboratory
services, and transformation
towards a customer-oriented
service organization
3. Awareness creation
4. Promotion of application of
standards
5. Quality assurance and
management
COMPONENT 4:
PRIVATE SECTOR + BUSINESS
DEVELOPMENT
(RE-ENGINEERING)
Specific goal:
Increasing competitiveness in private
business and strengthening (local) value
chains
Key issues:
1. Value chain development and firm
re-engineering in selected value
chains
2. Micro-, small and medium
enterprise (MSME) development
through business services
3. Capacity building for business
services providers
4. Learning platforms for industrial
development and MSME
5. Reinforce the organizations of the
business community (chambers
and associations)
6. Improvement of the business
climate in Ethiopia
7. Micro, Small and Medium
Enterprises development through
financial services
Based on its four components, “vertical projects” will strengthen
institutions and constitutive elements of the system thus contributing
to institutional modernization and improvement of performance. These
vertical projects include packages of technical and organizational
interventions to make universities, the TVET system, quality institutions
and organizations of the private sector more responsive to the needs of
private enterprises. The combined effect will result in a more conducive
and enabling environment for economic activities.
Parallel to this more institutions oriented approach the ECBP will also
include “horizontal projects” which cut across the four components and
focus on the particular bottlenecks of priority sectors. In these projects
the specific chains of value creation in different sectors or sub-sectors
are taken as a starting point and support interventions are designed to
speed up and expand this process. Horizontal projects with ECBP thus
directly contribute to the competitiveness of the private economy in
various sectors.
Following the priority setting of the Ethiopian Government, ECBP will
58
start with sectoral projects in the areas of construction (buildings, roads
and water works) and manufacturing (food processing, textile and
leather, chemicals and pharmaceuticals).
3.
PURPOSE OF ASSIGNMENT
3.1
Main Purpose
The purpose of this consultancy is to assist the ECBP, NBE and AEMFI in
implementing the Road Map towards an Ethiopian Microfinance
Policy.
Microfinance has made remarkable progress in Ethiopia in the last
decade. However, among policy makers, practitioners and donors there
is a lack of a clear vision, and commonly agreed guiding principles for
the sector and not always basic agreement about the role of
microfinance and rural finance. The development of a Microfinance
Strategy would be a major step towards the development of the
Ethiopian microfinance sector since it addresses the bottlenecks of MSE
financing while taking into account the experiences with microfinance
worldwide and in Ethiopia itself. With a leading role in the strategy
development process to be played by NBE and AEMFI and inputs in the
form of advisory services from GTZ, the availability of a Microfinance
Strategy can potentially imply a major step forward for the Ethiopian
microfinance industry. Besides, it can also provide the basis for the
future ECBP support to microfinance (e.g. regulatory support to the
NBE, support to capacity building for MFI.
The strategy will guide government and donors in their future support
efforts. In the medium term, the strategy and the accompanying reform
process are expected to alleviate current problems at the macro level of
the financial sector as well as helping to address problems at the meso
and micro level, which to date make lending and other financial services
to micro and small enterprises (MSEs) very difficult for MFIs and other
financial institutions.
3.2
Specific Job
Description
In general, the consultant has to support NBE in the development of the
Microfinance Strategy according to the road map proposed in the
mission report of February 2006. He/she is in charge of conceptualising
the support and continuously supporting the ECBP in implementing this
activity. The specific tasks of the consultant are as follows:
• Advise ECBP and the partners in all matters related to the
process and organization of this consultancy (other
international and/or local experts, duration, co-funding and
donor cooperation etc.)
• Advise the Core Team (NBE and AEMFI) on organisational
matters (process issues, complementary activities and their
financing) as well as on conceptual matters (as far as the
content of the strategy is concerned)
• Assist the ECBP and the Core Team as far as coordination with
other entities (donors, government, MFIs) is concerned,
59
•
•
•
•
•
•
•
including the justification of a MFI strategy and the mobilisation
of additional funding
Prepare and present other cases of microfinance strategy (or
policy) development (international experiences) and their
relevance for the Ethiopian case
Advise the strategy secretariat (possibly located at NBE) in the
preparation of workshops and complementary activities
Assist in formulating the draft version of the strategy and advise
on comments on draft versions
Advise the Core Team on planning and reporting procedures for
the on-going process
Assist in the identification of complementary measures, e.g. by
selecting consultants (if applicable) for specific issue papers,
choosing suitable countries for exchange visits (if applicable),
etc.
Coordinate with the ECBP Management, the other members of
the Core Team and GTZ-Headquarter (HQ) and report on the
progress of the process.
During the missions to Ethiopia, advise the ECBP in other
matters emerging related to microfinance according to
demand.
Other tasks emerging during the process as agreed upon by ECBP, the
Core Team and GTZ-HQ.
3.3
Deliverables
The final product is a strategy for the Microfinance sector of Ethiopia
that is approved by all stakeholders.
3.4
Milestones
By December 2006, the outline and work plan (including team
members, division of tasks and schedule) for the Microfinance Sector
study are established.
By end of January 200788, the desk research of the Microfinance Sector
Study is finalised and the field research has been commenced.
By End of January 2007, a Government round table and a kick-off
workshop are implemented.
By March 2007, the Microfinance Study is finalized and presented to a
forum of practitioners, regulators, government agencies and donors
By end of March 2007, this forum has discussed sector-wide issues and
prioritised challenges based on which the strategy formulation process
can be implemented (by the Core Team).
Advise the ECBP in terms of the potential roles of DED experts and
future GTZ support in microfinance development.
By August 2007, the consultant has contributed to the adaptations of
the strategy and to the stakeholder seminars as defined by the Core
Team.
88
The schedule in 2007 is still tentative. The exact dates in 2007 have to be agreed upon with the ECBP/GTZ consultant team and with the
Core Team (eg. based on other obligations or new developments).
60
The above dates are tentative (agreed in Core Team Work Plan of
October 2006). The main consultant is in charge of continuously
adapting the Work Plan and informing the ECBP on changes in terms of
schedule and milestones.
3.5
Others
As proposed in the Road Map, the main consultant, in coordination with
ECBP, NBE, AEMFI and GTZ HQ, can propose the recruitment of a 2nd
expert for the team (e.g. on Regulation and Supervision) to be financed
by the ECBP.
It may emerge during the strategy development process that more
travelling or support is required. In this case, timely information of the
ECBP management and GTZ HQ is required in order to potentially adjust
the contract.
4.
QUALIFICATION, PROFILE AND EXPERIENCE
4.1
General
Knowledge in Banking, Microfinance and Policy Advice
4.2
Specific
Background Knowledge on the Ethiopian Microfinance Sector and
related Policy Issues
Engineering Capacity Building Program (ECBP)
Ministry of Capacity Building (MOCB)
Addis Ababa / Ethiopia
61
Annex 2: Minutes of Round Table of development partners
Minutes of Round Table for donor agencies on the development of
a microfinance strategy and donor coordination in microfinance
Date:
Location:
Participants:
December 4th, 2006, 14 – 17 hours
ECBP (Engineering Capacity Building Program), German Development Cooperation
and MOCB;
Yewubdar Building (Bole Road - next to Alem Cinema)
see Annex 1
1. Opening of Round Table meeting (Harald Richter; Key Issue Manager Business Development
Services, ECBP/GTZ
•
•
Reference to decision taken in DAG on the setting-up of regular donor microfinance group lead
by ECBP/GTZ (Michael Nebelung).
Briefing on ECBP/GTZ involvement in microfinance.
2. Rationale for the development of a Microfinance Strategy in Ethiopia (Lakew Lemma, Director
Supervision Directorate; National Bank of Ethiopia).
•
•
Presentation of challenges and trends in the Ethiopian microfinance sector (see Road Map).
Plan of NBE (supported by AEMFI) to develop a microfinance strategy including adjustments of
regulatory framework with assistance of the ECBP/GTZ.
3. The Road Map for Strategy Development (Martina Wiedmaier-Pfister, ECBP/GTZ) see attached
presentation.
•
•
•
The steps for strategy development were presented.
NOTE: two-day-stakeholder workshop (scheduled for end of March 2007).
Donors were encouraged to contribute to strategy development.
4. Microfinance in Africa and CGAPs involvement (Tiphaine Crenn, CGAP); Presententation of the state
of progress in microfinance and financial sectors in Africa in general.
•
Presentation of CGAP’s role and its work in Africa, including the assessment in Ethiopia for a
possible pilot to link food security programs and MFIs.
Discussion and inputs from participants (on agenda items 2 – 4):
A) Strategy:
• Implementation should be realistically planned and monitored;
• Include innovative financing tools for MSME (capital markets);
• Madagascar and Uganda: A coordination unit in the Ministry of Finance was created to
monitor strategy and sector development;
• A clear definition of microfinance is required;
• Transparency of pricing and consumer education are important issues for the future;
• Future: integration of microfinance with real time gross settlement and national payments
systems;
• Innovative instruments (equity capital for MSEs); SNV is conducting a study; include
commercial banks and SACCOs, not just MFIs in narrow sense (also suggested in Road Map);
62
•
•
Will develop separate documents: sector assessment and a microfinance strategy; and
Strategy should cover role of government at both federal and regional level
B) Donor assistance in Ethiopia:
• Some other countries (such as Kenya) get more development assistance in microfinance.
Ethiopia is in the middle field but small MFIs seem to be neglected;
• Technical Assistance (TA) is required more than funding, local funds should be mobilised as
financing the “missing middle” (larger loans) is required for the productive sector;
• Some impact assessments of microfinance were conducted in the past (AEMFI publications)
that prove the value added to family welfare, however, improvements in micro-enterprise
production could be an important objective in future; and
• Importance of continued donor coordination, through on-going meetings like this one
C) Integration of microfinance with business development and skills development of micro and small
enterprises should go hand in hand (is part of SNV, ECBP and other donor programmes). Also
integration of microfinance in the general financial sector.
D) Directed lending to specific productive sectors: This discussion aimed at clarifying participants’
knowledge of, and attitude to, directed lending. Some participants considered that lending to specific
sectors such as tourism were a good idea. Others considered it being against international best practice
in microfinance. A lively discussion on the pros and cons, and its feasibility emerged. The issue could
not be fully clarified. However, the following statements were made:
• It should be clarified what exactly is meant (pushing MFIs to lend to specific sectors (demand
versus supply drive); or competitive bidding for these funds (giving priority to specific sectors if
the MFI itself sees a real market opportunity for the allocation of these funds; in this case a
sectoral allocation could be considered);
• It is a malpractice to push MFIs into business they don’t want to do or they don’t know. MFIs
focus on the feasibility of business to be financed rather than its type; and
• The experiences of the former EU MSE finance programme in Ethiopia were not convincing. Its
conditions were much too narrow (short period for allocation of funds, few sectors) while
promising MSEs in other sectors or areas could not be served.
E) Inputs for Sector Assessment Study (implemented from Dec to March 2006):
• Include business development services and market analysis;
• Gathering of baseline data is important;
• Inclusiveness of study and strategy in terms of financial players; clients levels and support
instruments and tools; and
Analysis of lessons learnt in the past (e.g. focus on funding of households, less than business).
5. Mapping of donor assistance in microfinance in Ethiopia (Martina Wiedmaier-Pfister, ECBP/GTZ)
•
•
Suggestions in terms of the format presented were gathered (see Annex 2), and
Mapping exercise will be done after this meeting by the participants,
6. Next Steps (Harald Richter, ECBP/GTZ)
•
•
•
•
Mapping of donor assistance in microfinance;
Next meeting of donor round is planned for beginning of February 2007;
Inputs from participants will be collected for issues to be discussed in future meetings; and
Information strategy development process: At end of March 2007, a two-day workshop is
planned (presentation of sector study, prioritization of challenges for strategy writing)
December 12th, Martina Wiedmaier-Pfister
63
December Round Table – List of participants
No
Name
Organization
Telephone
Email
1
Harald Richter
ECBP/GTZ
0911-316129
[email protected]
2
Muluneh Alemu
NBE
011-5510416
[email protected]
3
Yared Fekade
ECBP/GTZ
0911-244270
[email protected]
4
5
Michele Boario
Fode Nidaye
0911-175041
0027-22-6035125
[email protected]
[email protected]
6
Gaia Toschi
Italian Cooperation
UNCDF
Johannesburg
UNCDF Ethiopia
011-544224
[email protected]
7
Jürgen Koch
SNV Boam
0911-226979
[email protected]
8
9
Ajmed Kellow
Shannjit Singh
0911-211832
10
Malini Tolat
11
Membere T. Tesfa
SNV (First Consult)
Grameen
Foundation
Grameen
Foundation
World Bank
011-6627700
[email protected]
12
Tiphaine Crenn
CGAP
202-473-0475
[email protected]
13
Gizan Molla
World Bank
011-6627700
[email protected]
14
Lakew Lemma
NBE
011-5515725
[email protected]
15
Martina
Wiedmaier-Pfister
Dagnew Gesesse
ECBP/GTZ
0049-8332-790419
[email protected]
ECBP/GTZ
0911-209628
[email protected]
16
[email protected]
[email protected]
Not participating, but interested in future
16
John M. Stamm
USAID
011-5510088 Ext. 417
[email protected]
17
Shumet Chanie
USAID
Dto.
[email protected]
18
SIDA
011- 518 0000
[email protected]
19
Margaretha
Sundgren
DED
Hartwig Michaelsen
19
Mariel Mensik
ICCO, Netherlands
+31 - 30 - 8801578
[email protected]
20
Mrs Coumba Diop
Boario
ILO
11-5444475
[email protected]
21
Claudia Kerscher
KfW
++49-69-7431-4080
[email protected]
[email protected]
64
Annex 3: Minutes of stakeholder consultation workshop
Consultative workshop on the Road Map for Developing a Microfinance
Strategy
Workshop organisers: AEMFI (minutes) and NBE with the support of GTZ, ECBP project.
Place of meeting: GTZ EBBP building at Addis Ababa, Ethiopia
Date: 14/2/2006
Time of the Meeting: 8:30 -13:00 with the Microfinance Institutions
14:00 -17:00 with the Saving and Credit Cooperatives
Part 1: Meeting with MFIs
Participants of the meeting in the first session with MFIs:
•
•
•
•
•
•
•
•
•
Wasasa Microfinance Institution
Widom Microfinance
Metemamen Microfinance
Aggar Microfinance Institution
PEACE
Addis Credit and Savings (2 persons)
SFPI
ACSI
OMO Microfinance Institution
Presentation by Martina Wiedmaier-Pfister, ECBP/GTZ Advisory microfinance on the Road Map for
Developing Microfinance Strategy in Ethiopia
The major issues discussed in the presentations include:
• Status quo in Ethiopian microfinance
• Challenges in microfinance
• Justification of a national microfinance strategy
• Values of a microfinance strategy
• Objective: More and better financial services for poor families and micro and mall enterprises
• Success factors for a microfinance strategy
• Strategy development process
• Donor contribution to microfinance
Discussion on the Road Map and on SWOT analysis
2.1 Questions on the Road Map:
a) Why do we need Microfinance Strategy while we have a legal framework?
The legal framework is the one used for microfinance operations. But the strategy discusses many
issues which are not covered by the legal frame work, and can include issues like:
• How donors give their support;
• The role of government regional bureaus in MFIs;
• The food security program;
• Upgrading the MIS system of the microfinance industry in general;
• Intervening in the problem of market distortion; and
65
•
The strategy provides a clear vision what microfinance, donors and other microfinance will
look like.
b) Policy and strategy without proper implementation is meaningless. As there is a lack of
good publicity and advocacy with the microfinance institutions, this may hamper the
implementation of the strategy.
According to these comments, microfinance should be advocated with the government that
will approve policies as well as with the general public.
Comments by microfinance institutions on the importance of developing a microfinance strategy:
• Developing a microfinance strategy is essential
• There is a need to specify how MFIs should relate their supporting/mother NGOs.
• It helps to focus the different microfinance stakeholders on the issue of how they address
poverty, which has not yet been adequately addressed.
• It is useful to identify the roles of each stakeholder group.
• There is a need to improve legal protection for MFIs when they provide loans that benefit
society.
• Developing the MIS system of the sector.
• A system or methodologies that help microfinance become sustainable is needed.
• An assessment the internal weakness and threats of MFIs should be undertaken.
• Policies that are based on a strategic plan need to be formulated.
Comments on the issue of ownership and governance of MFIs
MFI ownership structure needs to be amended to enhance expansion and growth of microfinance, eg.
the case of people who are called shareholders but didn’t invest themselves.
It is essential to open the door for private investors to participate in the microfinance sector. Some of
the issues raised that affect private sector participation are:
• Social investors can promote private investors;
• The view that MFIs have of themselves: are they making business, are they profitable etc. can
also influence private investors’ participation; and
• Although Aggar Microfinance is practicing private microfinance it has faces problem such as:
- Price distortions due to subsidized prices of MFIs supported by NGOs and the government;
- It was unable to attract capacity building from donors like other MFIs; and
- A lengthy legal process of collateral realization (no disclosure).
These all have affected its ability to involve private investors.
Microfinance and support from the local officials
As most participants explained, the support is without question. They are getting satisfactory support
from the local government. However, the kind of support that microfinance needs is maybe different.
As leaders of the Woredas the local governments are giving the necessary networking support. But
there should be a system for the support of MFIs, which can work in the absence of the officials too.
SWOT analysis
Strength
I.
II.
III.
IV.
V.
VI.
Ethiopian MFIs have good rural outreach
Smaller loan sizes reach the poor society
Microfinance has a regulatory framework, which NBE continually improves.
The sector has directives, which provides standards.
The institutions are growing in saving mobilization and portfolio quality.
The MFIs are increasing their saving mobilization.
66
Weakness
I.
Absence of appropriate systems to manage portfolios.
II.
Little has been achieved in product development.
III.
Lack of skilled manpower in the industry.
IV.
Poor MIS in the industry in general.
V.
Weak promotion to reach female clients.
VI.
Not able to cover very remote areas.
VII.
Supply oriented strategy of microfinance rather than being client oriented.
VIII.
Charging interest rates, which are far from the cost-covering interest rate.
IX.
No network of microfinance in urban areas.
X.
Not paying attention to urban microfinance in the industry in general.
XI.
The regulation of MFIs is not as stringent as it should be.
XII.
The shareholding company aspect of microfinance.
XIII.
Not operating on a commercial basis.
Opportunities
I.
II.
III.
IV.
Good cultural values.
Good regulatory framework.
Large market potential.
Interest of academics to do research in microfinance.
Threats
I.
II.
III.
IV.
V.
VI.
VII.
Parts of the civil code are old and do not protect MFIs.
Poor legal contract enforcement.
Absence of ownership license.
Poor coordination of the various stakeholders.
Market distortion because of NGO development programs that are working against
sound microfinance practices.
Weak supervision by the NBE towards the sector.
Poor savings habit of the society.
Priority areas for MFIs needing intervention:
Wasasa Microfinance Institution
i.
The regulatory framework of the government.
ii.
Not having proper computerized (MIS) system.
iii.
Lack of coordinated efforts.
Widom Microfinance
i.
The issue of growth.
ii.
Not having enough equity.
iii.
Restrictions on borrowing from foreign sources.
Metemamen Microfinance
i
The issue of capacity building.
- Unable to adapt MIS system.
- The weak capacity of staff to design appropriate products.
ii
Poor law enforcement in the country.
Aggar Microfinance Institution
i. Shortage of loanable fund.
ii. Capacity building issues.
iii. Contract enforcement.
67
PEACE
i. Market distortions.
ii. Capacity building support.
Addis Credit and Saving
i. Capacity building.
ii. Poor MIS system.
iii. Poor loan contract enforcement.
Addis Credit and Saving
i. Capacity building
ii. Poor MIS system.
iii. Loan contract enforcement.
OMO Microfinance Institution
i. Lack of enough loanable funds.
ii. Lack of skilled manpower.
iii. Poor infrastructure facility.
SFPI
i. The specification of roles and responsibilities of practitioners.
ii. Coordination of MFIs.
iii. Training for clients and for the MFIs.
ACSI
i. Market distortions.
ii. Capacity building.
iii. Integration issues.
Regulators
i. Institutional autonomy.
ii. The issue of ownership and governor.
iii. Poor participation of private investors in the area of microfinance. The issue of
commercialization of microfinance.
iv. Microfinance which is part and parcel of the distortion process.
Part 2: Meeting with SACCOs
Participants of the meeting in the second session with SACCOs
•
•
•
•
•
•
South Sidama Chalala Money Saving and Credit Institutions.
West Welga Cooperative Union
Addis Ababa SACCOs Union
Gofa SACCOs Union
Oromia SACCOS
Sidama SACCOs Union
Presentation by Martina Wiedmaier-Pfister, ECBP/GTZ Advisory Microfinance on the Road
Map for Developing a Microfinance Strategy for Ethiopia.
Issues on the Road Map
I.
SACCOs have similarities with MFIs while they are operating in the financial market, but there
are differences. Unlike MFIs:
a. SACCOs are member-owned institutions.
b. SACCOs are income tax exempted.
c. SACCOs perform other activities like opening markets for their members’ products.
d. As investor SACCOs can form MFIs
68
e. SACCOs have nationally bound operations
f. The history of SACCOs goes back 40 years without regulation under the supervision of
NBE.
g. In terms of saving mobilization SACCOs are more active than MFIs.
h. Government supervision for MFIs is big compared with SACCOs.
i. The structure of SACCOs is different to MFIs.
These differences make it difficult to formulate a common strategy for SACCOS and MFIs. These
differences need to be taken into consideration but the road map is biased towards MFIs. The road
map should include more issues on SACCOs.
II.
III.
IV.
V.
VI.
SACCOs have their own internationally accepted principles and values, and the road map must
be developed based on that.
Different experiences and options from other countries on SACCOs should be considered. The
experiences of other countries have to be mentioned to apply the useful ones which can go in
line with the Ethiopian context.
It is mandatory to have a general law for SACCOs but it is a gradual process. SACCOs can’t be
governed by the Microfinance Law. A new regulatory framework has to be developed giving
special consideration to SACCOs.
As the competition between SACCOs and MFIs is healthy they should benefit of the poor. So
the strategy should focus on competition and collaboration between the SACCOs and MFIs.
In the formulation of the strategy, the role of MFIs and the role of SACCOs and the different
stakeholders has to be defined.
Discussion on the priority areas where SACCOs need interventions
South Sidama Chalala Money Saving and Credit Institutions.
i. Problems in giving credit.
ii. Problems in interest rate setting.
iii. Problems in collateralization.
West Welga Cooperative Union.
i. Lack of office facilities.
Addis Ababa SACCOs Union
i. Lack of capacity building and organizational capacity.
ii. Lack of national umbrella like federation.
iii. There is no additional support.
iv. There is no enabling environment to accommodate the resources.
v. Lack of preferential treatment.
vi. Lack of finance.
vii. Lack of effort to pull recourses from the members which have excess money.
viii. Lack of trust.
Gofa SACCOs Union
i.
Lack of office facilities.
ii.
Lack of permanent manpower.
Sidama SACCOs Union
i.
It is based on experience that a budget is given.
ii.
Leadership problems.
Oromia SACCOS
i.
The number of members is increasing but the number of staff is small.
ii.
Poor accounting system.
iii.
Lack of clear procedures of forming SACCOs.
69
Part 3: Meeting with government oficials
Date: 15/2/2006
Time of the Meeting: 8:30-1:00
Participants at the meeting
Regional Officials of Gambela, Diredawa, Addis Ababa, and Oromia (Bureau of Agriculture, Bureau of
MSME Development)
Presentation by Martina Wiedmaier-Pfister, ECBP/GTZ Advisory Microfinance on the Road
map for Developing Microfinance Strategy for Ethiopia
Discussion on Road Map and concerns for strategy development
a. Why government support given to NGO-supported MFIs is not equal to government owned
MFIs? In Amhara region other than Wisdom, Harbu and Gion, the government gives more
support to ACSI. In Oromia region there is more support to OCSSCO than to other MFI-NGOs
active in the region.
b. The regional governments don’t have a clear vision of MFIs. They forced MFIs to give
subsidized loans, to expand without assessing their capacity. They don’t see MFIs as a business
that has to operate viably.
c. The law-enforcement problem of the court system.
d. Lack of support to MFIs from the regional government.
e. The awareness of officials, especially at Woreda level, at the grassroots level, is limited.
The regional official responded to the above points as follows:
• There is no systematic neglect of NGO-supported MFIs. MFIs are part and parcel of the
development process in all regions, which is why there is support for them. According to the
response from the Amhara regional official, the regional government supports ACSI in terms of
lending from formal banks in the framework of the enterprise development fund. Again since
ACSI is providing different loan products beyond what other MFIs offer, ACSI’s products are
highly relevant for the development of the region. For agricultural input loans and food
security loans the regional government is promoting and supporting ACSI in its participation in
the development of the region.
• The regional officials agree that there is a lack of awareness about the microfinance sector.
They feel that this coordination will have great impact on their awareness in the future.
Furthermore, in Amhara region the regional government is trying to make the key sectors like
agricultural, youth and sport, and the MSE sector more aware of microfinance.
• Regarding alliance in the court system not only MFIs suffer. There is also general public
complaint about the efficiency of the court system. The government is now implementing civil
service reform, so there will be some improvement regarding the court system.
• Regarding support from the regional government: the regional government believes that
unless it gives support it is impossible to address poverty reduction issues. So with this
understanding they are supporting MFIs. According to the Diredawa region’s response, as
Diredawa MFI is achieving results with financing of woman and people in general, especially
because of the natural disaster that happened in the region, Diredawa MFI is doing great
through providing loans to those exposed. Seeing this impact, the regional government of
Diredawa is giving enough support.
70
Annex 4: List of resource people
Person and function
Institution
Email address
Getahun Nana
Director Supervision (from April 2007)
Lakew Lemma
Director Supervision (until May 2007)
Directorate
Muluneh Alemnu
Manager Microfinance Supervision
Inspectors Frezer Ayala and Abate Meteku
Dr. Wolday Amha, Director
Tigist Tesfaye
Yohannes Solomon
Deputy Bureau Head
NBE
[email protected]
NBE
[email protected]
[email protected]
NBE
[email protected]
Bureau Head Trade and Industry,
Ato Mekuria Haile
Advisor to the Bureau Head Trade &
Industry, Ato Musema Chali
Chamber of Commerce, Awassa, Ato Fasil
Haile Gebre
Commissioner
Bedru Dedgeba Ejabo
Deputy Commissioner
Berhane Kidanu Gebru
Programme Coordinator RUFIP
Cooperatives
Merkorewos Hiwet
Project Manager
Werqu Memasha, Country Director
Jim Dempsey Representative
Kibru Fonda
Head Monitoring and Evaluation Division
Tadesse Haile
State Minister
Sileshi Lemma
Head Textile & Leather Development
Department,
Jürgen Koch, Senor Advisor PSD
Awash Abitew
General Manager
Dr Eyob Tesfaye
Director
Ato Makonnen
Gobetzie Getaneh
Jörn Bernhardt
Thorsten Becherer
AEMFI
Addis Ababa City Government
Trade and Industrial Development
Bureau
Bureau of Trade and Industry,
AWASSA Regional Government
Bureau of Trade and Industry,
AWASSA Regional Government
Chamber of Commerce Awassa
Federal Cooperative Agency
[email protected]
dto.
dto.
[email protected]
[email protected]
dto.
Project Support Unit MSE
Development Programme
Volunteers Overseas Cooperative
Assistance (VOCA) Ethiopia
Agricultural Cooperative Development
International/VOCA
Development Bank of Ethiopia
RUFIP
MOTI
[email protected]
[email protected]
MOTI
[email protected]
SNV Netherlands Development
Organization
Addis Credit & Saving Institution S.C.
[email protected]
EAFS
[email protected]
[email protected]
[email protected]
[email protected]
ACSI
ACSI
ECBP/GTZ Regional Program
[email protected]
Coordinator, Awassa, Southern Region
ECBP/DED Expert
71
Annex 5: Report on core team retreat
Report on the retreat for the development of a National Microfinance
Strategy, Addis Ababa, April 2007
In the context of the development of a National Microfinance Strategy for Ethiopia, NBE, AEMFI, and
the Cooperative Agency, with support from German Technical Cooperation (GTZ), conducted a twoday retreat at the International Livestock Research Centre, Addis Ababa, on April 25 and 26, 2007.
Participants came from the National Bank of Ethiopia (NBE), the Association of Ethiopian Microfinance
Institutions (AEMFI) and the Cooperative Agency (CA). The retreat was organised by the Engineering
Capacity Building Project (ECBP) supported by the German Technical Cooperation (GTZ). GTZ invited
an international expert team including a representative of the Consultative Group to Assist the Poor
(CGAP) to join the retreat and contribute to the discussion (see Annex 5a).
The first day (Agenda see Annex 5b) started with a presentation and discussion on the historical
background of microfinance in Ethiopia. Then participants presented preliminary results of a sector
assessment study: first the view on the sector from the MFIs’ point of view (micro level), then the
macro level and finally the meso level.
On the second day, “principles” that agreed on day one were presented and discussed. Issues that had
come up during the first day but not sufficiently dealt with were discussed in detail on the second day.
The following main issues were discussed:
• The historical background and status-quo of the microfinance sector;
• Lessons from MFIs of the first decade and challenges for the next decade;
• Lessons from four decades of SACCO development;
• Roles of key players such as microfinance Providers (MFP), government, sector institutions
(such as AEMFI) and donors;
• Principles for sound microfinance development in terms of sustainable growth and increased
outreach;
• Strategic priorities of the strategy; and
• Next steps towards a broadly accepted and understood National Microfinance Strategy
(NMFS)
The main results of the discussions are summarized in Annex 6c.
The last session on day two dealt with the next steps. It was agreed that stakeholder consultations are
important to create ownership at both the practitioners’ and policymakers’ levels. NBE, supported by
AEMFI, CA and ECBP/GTZ, will lead the process.
Process of adapting the NMFS:
Date 2007
May
June
June
July
August
September
Activity
Draft strategy writing
Core team agrees on draft
Draft submitted to the
governor
Draft sector assessment study
First round of consultations
Responsible
Core team
Core team
Group consultations
- MFIs
- SACCOs
- Regional
Governments
MWP
NBE formally invites,
AEMFI and CA organize
these meetings
72
Consultations with line
ministries
Comments and feedback from
the consultations submitted to
Core Team for
integration/discussion
NBE (AEMFI, CA)
CORE TEAM
End
of
August/
September
Second round of consultations
Two-day best practice
workshop (selected
members of each group)
MFIs
SACCOs
Banks
NBE invites, supported by
GTZ
September
Integration of comments
Core Team
October
NBE Board
Prime Minister approves
strategy
NBE
NBE
Annex 5a: List of participants – Retreat 25 and 26 April 2007
1
Name
Ato Getahun
Institution
NBE
Interim Director Supervision Directorate
AEMFI
2
Dr Wolday Amha
3
Muluneh Alemu
4
Ato Frezer Ayala
NBE
Director Microfinance Supervision Department
NBE, Inspector
5
Ato Abate Meteku
NBE Prinicpal Inspector
6
Ato Brehane
Cooperative Agency/ RUFIP
7
Michael Nebelung
Deputy Director ECBP
8
Yared Fekade
ECBP/GTZ
9
Karen Losse
GTZ Head office
10
Team Leader Microfinance Strategy Development ECBP/GTZ
11
William Steel
12
Rochus Mommartz
Univ. of Ghana/ISSER
Consultant ECBP
Consultant ECBP/GTZ
13
Eric Duflos
CGAP
14
Dagnew Gesesse
Consultant ECBP/GTZ
73
Annex 5b: Agenda of the retreat
Day 1
8.30 – 9.00
9.00 – 10.00
10.00 – 10.30
10.30 – 12.00
12.00 – 13.00
13.00 – 14.00
14.00 – 15.00
15.00 – 16.30
Day 2
8.30 – 9.30
9.30 – 10.30
10.30 – 11.00
11.00 – 12.00
12.00 – 13.00
13.00 – 14.00
14.00 – 15.00
16.00 – 17.00
Introduction
Session 1: History and background to microfinance
development in Ethiopia
Discussion
Coffee Break
Session 2
Macro level: Policy environment, financial sector and
access agenda
Session 3:
Macro level: Legal, regulatory and supervisory framework
for microfinance
Lunch
Session 4 continued.
Macro level: Legal, regulatory and supervisory framework
for microfinance
Session 5
Meso level: Financial infrastructure
Discussion of results of day one – principles of
microfinance strategy
Continuation of day one discussion
Coffee break
Red Flag Topics:
Role of government in retail service provision
Red Flag Topics:
Funding
Interest Rates
Taxation
Lunch
Red Flag Topics:
Role of donors
Minimum capital requirements clients
Next steps
Presentation
Ato Muluneh, NBE
Michael Nebelung, GTZ
Dr Wolday Amha
Rochus Mommartz
Rochus Mommartz
Presentation/Moderation
Karen Losse
Rochus Mommartz
Eric Duflos
Annex 5c: Ethiopian National Microfinance Strategy Retreat
Draft inputs to principles and objectives
Overall objective: Broaden access to financial services on a sound sustainable basis.
Main theme: Expanding access to finance: Towards commercial, market-based microfinance as part of
the financial sector
Principles of microfinance strategy
The focus of microfinance in Ethiopia is to broaden access to financial services on a sound, sustainable
basis. Microfinance is part of the financial sector, and the strategy should be linked to the financial
sector strategy.
74
Striking an appropriate balance between economic (financial) and social objectives means that the
microfinance strategy should be responsive to national development objectives without compromising
prudent and sustainable operations of microfinance providers (MFPs). MFPs can include any financial
institution.
Government commitment to sustainable microfinance outreach is important for successful long-term
development. At the same time, microfinance institutions should be independent from direct political
interference.
Transparency is a key principle for implementing this strategy, as well as for the operation of MFPs.
Decision-making should be based on clearly established and disclosed criteria and procedures.
MFIs should be private shareholding entities. Given that they mobilize savings from the public, they
should be profitable and sustainable.
Strategic themes and priorities
Role of government
Government’s main goal should be to establish an enabling environment, including the legal and
regulatory framework, contract enforcement, infrastructure and communications. Government
should not provide microcredit directly, as this tends to undermine sustainable microfinance. Funding
for development of the microfinance sector should be provided transparently.
Sensitization
Ministries, regional and local governments and NGOs should be sensitized on sound microfinance
principles and the legal options and procedures for engaging in microfinance.
Product development
Microfinance development includes an increasing variety of products suited to different clients and
market niches, as well as institutions providing them.
Targeting underserved groups
There are demands for microfinance from regions and groups that are presently not served by existing
services, MFIs and SACCOs. As part of the strategy to extend outreach in an inclusive manner, MFPs
need to develop products and technologies that can serve these clientele (eg. women). Nevertheless,
microfinance cannot serve all objectives, and non-financial programs and institutions may be more
appropriate for some purposes.
In developing the microfinance strategy, other ministries and stakeholders should be included in
discussions of appropriate ways of achieving their objectives consistent with good microfinance
principles and without distorting microfinance markets.
Where government has development objectives involving finance or MFPs, it should work with MFPs.
MFPs should be ready to respond and work with government to see if appropriate products and
services can be developed to serve the objectives without compromising sustainability. When the
objective or proposed program doesn’t pass the test of consistency with MF principles, the alternative
is to investigate innovative approaches that complement microfinance or don’t undermine it.
Design of other development programs
Government, donor and NGO development programs should be designed so as not to introduce
distortions that adversely affect the sustainable development of the microfinance sector.
Improved regulation and supervision of MFPs is critical for the sound development of the
microfinance sector. This requires increased staffing and training at the NBE; significant improvement
of MIS and financial accounting systems and skills in MFIs, and developing MIS for SACCOs.
75
SACCOs, as providers of microfinance services, are important in the financial landscape. A special law
for financial cooperatives (SACCOs) is needed. Regulation of SACCOs should be strengthened in costeffective ways.
NBE should consider minimum capital requirements for the objectives of overall growth of the sector
through sound, sustainable MFIs.
Funding gap
A funding gap is emerging and should be addressed strategically both through strengthening existing
sources of financing and developing new sources. The primary strategic focus is on savings
mobilization as the long-term foundation for sustained funding. Developing linkages to commercial
bank lending is another strategic objective. The feasibility of an autonomous apex facility is being
investigated, and should draw on international lessons learned. While other sources of funding are
being developing, interim solutions, such as an apex facility, should be designed to be efficient and
transparent and should not undermine savings mobilization.
Capacity building
Substantial funding will be required for capacity-building at all levels, including: policy; institutional
(NBE, AEMFI, SACCO apex bodies); and retail institutions. Coordination of government and donor
funding, criteria and modalities for capacity-building is essential.
Capacity building should be results-oriented toward achieving outreach and sustainability. Efficient,
performance-based models for capacity building and to coordinate funding and implementation are
needed.
Training for MFIs should move toward a private sector, market-based approach. AEMFI has a role in
facilitating this, which will involve developing more private institutions and service providers. As a step
toward this approach, all training offered to MFIs should require partial cost-sharing by the
participating MFIs. Training for SACCOs also requires the development of a new approach.
Financial infrastructure
MFPs should have access to information-sharing mechanisms.
Clients
Financial literacy, business and financial skills form the basis of a strong microfinance sector And client
capability should be strengthened. In principle, business development services should be provided by
specialized institutions other than MFPs. Consumer education and protection programs should be
developed to promote greater transparency, information and appropriate use of financial services.
April 28, 2007
76
Annex 6: Socio-economic background
Ethiopia is located in the Horn of Africa and bordered by Eritrea, Djibouti, Somalia, Kenya, and Sudan.
The country has a high central plateau that ranges from 1 800 to 3 000 meters above sea level, with
some mountains reaching 4 620 meters.
Agriculture
The settled population’s main occupation is farming. The agricultural sector is hampered by frequent
droughts and poor cultivation practices. Coffee is critical to the Ethiopian economy with exports of
s$350 million in 2006 – 35.4% of total export earnings – but historically low prices have seen many
farmers switching to khat89 to supplement their income.90
Severe droughts, as in 2003/03 and at the end of 2005, are a reality for regions such as Affar, Gambela
and Somali Land. Lack of road infrastructure, along with shortages of water and pastureland as well as
shallow agricultural markets, mean that Ethiopia suffers from chronic food shortages. Around five
million people continue to depend on food aid even with favourable weather conditions.
Nevertheless, agricultural production is forecast to grow at an average of 7.4% in 2006 and 2007.91
The rural population, about 85% of the population, live in areas with poorly developed communication
and transportation facilities. Ethiopia has one of the lowest road and telephone densities per
inhabitant in sub-Saharan Africa. The country’s rugged terrain further complicates the problem of
inaccessibility and increases the transaction costs of reaching the rural population.92
Farming in Ethiopia is characterised by the following features: 93
Lack of storage facilities: Farmers in Ethiopia cannot afford to build even simple structures to store
their grain and other crops. As a result, food surpluses cannot be placed in reserve to help feed at-risk
populations or stabilise prices. Coffee is the major produce. According to the Ministry of Finance,
more than 35% of Ethiopia’s export revenue comes from the sale of coffee as the country’s main
expert commodity. Due to the collapse of coffee prices internationally, the government (and farmers)
is losing twice as much as it gained in recent interim debt relief from the World Bank.
Dependence on rain-fed agriculture: This makes economic growth vulnerable to a natural
phenomenon. The heavy reliance on rainfall has a negative multiple effect on production levels and
hence rural incomes. A shock in one period is often carried over into the next as drought deprives the
farmer not only of current income but also of assets, such as oxen, which may be lost or sold.
Pastoralists
The World Health Organization (WHO) estimates that 10% of the population living in the lowland
areas are pastoralists. According to the Plan for Accelerated and Sustained Development to End
89
The qat plant is also known as khat, a tropical evergreen whose leaves are used as a stimulant. Khat originates from Ethiopia but is also
consumed in other African countries. According to the WHO, khat is a health problem as it is addictive and distracts workers from their work
for hours. Evidence from Djibouti suggests that it drains more than half of many families’ income. WHO Country Strategy for Djibouti, (2006)
90
91
OECD (2006)
92
Shiferaw, Ahma (2001)
93
Source: www.oxfamamerica.org; Kassahun (2003)
77
Poverty (PASDEP), there are 12 to 15 million agro-pastoralists, living in seven regions. Unpredictable
and unstable climatic conditions as well as ecologically fragile environments characterise the
pastoralist areas. At the same time, the livestock population in the pastoral areas is high compared to
the country's total, and the pastoral areas are rich in cultural and traditional heritage, flora and fauna
diversities, valuable minerals and other resources. The regions are also characterised by frequent
calamities (conflict and drought), food insecurity, and lack of adequate social services and institutions.
Historically, the pastoralist areas have been sidelined in the development process: policies and
programs have overlooked pastoralists' way of life and living conditions and, until recently, they
experienced decades of socio-political exclusion. Because of all these factors, pastoralists have
remained the poorest of the poor and become more vulnerable to increasing impoverishment.
Employment
Levels of unemployment and underemployment in urban areas are high and closely related to urban
poverty. In 1992, the government stopped automatically guaranteeing employment for graduates of
higher institutions of learning. Most young adults who have completed 12 years of schooling are
unemployed. Demobilisation of soldiers and redundancies from public enterprises contribute to this.
Underemployment is widespread, caused by the increased use of casual labour. The alarming increase
in HIV/AIDS is eroding the income-generating power of households especially in urban areas.
Ethiopia’s national adult prevalence was estimated at 4.4% for 2003, with a 12.6 % urban rate and a
2.6 % rural rate. AIDS accounts for about one-third of all young adult deaths in the country.94
Gender
Widespread gender-based barriers limit women’s participation and reinforce power gaps in Ethiopia,
as in many African countries. Discrepancies between men and women exist in fields such as access to
education,95 employment opportunities and pay, and asset ownership. Women bring far fewer assets
into marriage.96 Discrimination is most acute in rural areas. Early childhood marriage is common there,
and families do not prioritise education for girls because of cultural reasons. In urban areas, women
are grossly under-represented in professional and technical categories. The proportion of urban
women in the “professional” category is 16% and 28% in the “technicians and associate professionals”
category. Women’s access to formal credit is limited to those who are household heads and have a
land allocation. Violence against women is prevalent in the country and harmful traditional practices
such as female genital mutilation and abduction are common. These have negative consequences on
the health of women. Therefore, mainstream gender issues in all aspects of development, including
health, are important. Access to health facilities is very low both for men and women.97
Land ownership
Under Ethiopia's land tenure system, the government owns all land and provides long-term leases to
the tenants; the system continues to hamper growth in the industrial sector, as entrepreneurs are
unable to use land as collateral for loans.
94
95
US President’s Emergency Plan for AIDS Relief: Country Profile Ethiopia
In both urban and rural areas, the literacy rate of men is higher than among women. The level in urban areas is 77.4% for
men and 60.6% for women; in rural areas the level is 21.3% for men and 8.6% for women. (Ahmed et al, 2001)
96
According to Quinsumbing and Maluccio (1999), in Ethiopia, total assets, including land and livestock, brought into a
marriage by husbands averaged 4 200 Birr in 1997, while wives brought in just under 1 000 Birr. These asymmetries in asset
ownership persist throughout life, often beginning a cycle of dependence and dominance that leads to domestic abuse.
97
WHO estimates that only 75% of urban households and about 42% of rural dwellers have access to health facilities. There
is a seasonal shortage of medicines and medical supplies. As in many other African countries, the main causes for the
shortage of medicines and medical supplies are lengthy procurement procedures, limited access to information and an
inefficient distribution system. The issue of healthcare services delivery to the pastoral communities, which account for 10%
of the population, calls for special attention. WHO Country Cooperation Strategy: Ethiopia (2002 – 2005)
78
Annex 7: Historical and political context
Ethiopia is the only sub-Saharan African nation that was not colonised by Europeans, though it was
briefly occupied by the Italians between 1936 and 1941. Emperor Haile Selassie, who reigned from
1930-1974, implemented reforms and modernised the state. However, increasing internal pressures,
including conflict with Eritrea and severe famine, contributed to the 1974 military rebellion that ended
his reign.
After the coup d'etat, Lieutenant Colonel Mengistu Haile Mariam reoriented the government and
national economy from capitalism to Marxism. He also headed the Coordinating Committee of the
Armed Forces, Police, and Territorial Army, called the Derg (Committee). In 1987, the Derg was
formally dissolved and the country became the People's Democratic Republic of Ethiopia under a new
constitution. Ethiopia under the Derg became the Socialist bloc's closest ally in Africa. During the 17
years of the military-controlled government, the economy deeply worsened, while civil unrest grew
beyond the control of the military. Growing civil unrest and a unified force of Ethiopian people
organised in the Ethiopian Peoples Revolutionary Democratic Front (EPRDF) rose against their
communist dictators, which finally caused the demise of the Mengistu regime in 1991.
Between 1991 and 1995, the transitional government of Ethiopia, a coalition of 27 political and
liberation organisations, embarked on a path to transform Ethiopia from a centralised, militarycontrolled country to a free and democratic federation.98
In 1994, the new constitution set up a bicameral legislature and a judicial system, guaranteeing equal
rights and freedom of expression to Ethiopian citizens. In May 1995, Ethiopia's first democratic
elections were held in which both Meles Zenawi (Prime Minister) and representatives to the
Parliament were elected. In 2000, Ethiopia's second national multiparty elections took place and
Meles Zenawi was re-elected Prime Minister. The third national elections, this time openly contested
with 35 parties vying for seats, were held in 2005.
Ethiopia can look back on more than a decade of political stability under the rule of the EPDRF. In
parallel, the dispute between Ethiopia and Eritrea over the demarcation of their shared border
remains unresolved.99 New tensions originate from the recent presence of Ethiopian troops in
Somalia.
98
99
Embassy of Ethiopia, Washington (2001)
Country Brief Ethiopia, World Bank (2006b)
79
Annex 8: Potential demand and outreach
projections for MFPs
Potential demand to be addressed by MFIs in the next decade (2007-2016)
Household
heads
Year
Population
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
77,250,000
79,567,500
81,954,525
84,413,161
86,945,556
89,553,923
92,240,541
95,007,757
97,857,990
100,793,730
15,450,000
15,913,500
16,390,905
16,882,632
17,389,111
17,910,785
18,448,108
19,001,551
19,571,598
20,158,746
% of
Household
heads
addressed
by MF
Potential
clients
Average
loan size
Total loan
required
30%
30%
35%
35%
40%
40%
45%
45%
50%
50%
4,635,000
4,774,050
5,736,817
5,908,921
6,955,644
7,164,314
8,301,649
8,550,698
9,785,799
10,079,373
1,649
1,979
2,375
2,850
3,420
4,104
4,925
5,910
7,092
8,510
7,643,115,000
9,447,844,950
13,624,940,375
16,840,424,850
23,788,302,480
29,402,344,656
40,885,621,325
50,534,625,180
69,400,886,508
85,775,464,230
Year
Population
Household
heads
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
77,250,000
79,567,500
81,954,525
84,413,161
86,945,556
89,553,923
92,240,541
95,007,757
97,857,990
100,793,730
15,450,000
15,913,500
16,390,905
16,882,632
17,389,111
17,910,785
18,448,108
19,001,551
19,571,598
20,158,746
Average
saving
Potential
saving
Funding of
MFIs from
other sources
559
615
677
745
820
902
992
1,091
1,200
1,320
2,590,965,000
2,936,040,750
3,883,825,109
4,402,146,145
5,703,628,080
6,462,211,228
8,235,235,808
9,328,811,518
11,742,958,800
13,304,772,360
5,052,150,000
6,511,804,200
9,741,115,261
12,438,278,705
18,084,675,600
22,940,133,428
32,650,385,517
41,205,813,662
57,657,927,708
72,470,691,870
Assumptions:
(a) population will grow by 3% per annum;
(b) microfinance will target 30 - 50% of the household heads in the coming ten years;
(c) the average loan size will increase by 20 % per annum;
(d) average saving will grow by 10% per annum
Source: Wolday (2007b)
80
SACCOs
Outreach projection of SACCOs
1
2
3
4
5
6
7
8
9
10
11
12
13
Number of primary
SACCOs/year
Cumulative
Number of members
Number of unions
/year
Cumulative number of
unions
Number of SACCO
Federation
Cooperative league
Number of Cooperative
Banks
CBs
Cooperative Insurance
Cumulative Coop Ins
Audit Cooperatives
Audit Cooperatives
2006
5437
2007
615
2008
615
2009
615
2010
615
2011
616
381,212
6050
1,210,000
70
6665
1,333,000
77
7280
1,456,000
77
7895
1,579,000
77
8511
1,702,200
78
17
87
164
241
318
396
0
1
0
1
1
1
1
1
1
2
3
4
4
5
0
1
1
0
0
1
2
1
1
1
3
1
2
1
4
1
3
1
5
1
4
0
0
1
Assumptions: Average number of SACCO members is taken as 200 (the last 10 years average).
The next five years growth of SACCOs and Union is taken from CA (still on draft level)
Source: Dagnew Gesesse (2007)
81
Annex 9: History of MFIs in Ethiopia
Non-governmental credit schemes and informal sources of finance such as Rotating Savings and Credit
Associations, known as Iqqub and Iddir, and moneylenders have existed in Ethiopia for many years.100
After economic liberalization in 1994, poverty and food insecurity led the government to adopt
microfinance as a prime component of its new economic development agenda. The government,
supported by international development community (bilateral donors, international NGOs,
multilateral projects), promoted microfinance in the context of the poor performance of traditional
banks in supplying suitable financial products for small farmers. As in many developing countries, the
banks had focused on granting medium- and long-term credits to more solvent clients.
From the 1970s, some local and international NGOs granted credits to poor populations, often to try
out innovative methods. However, the mixed humanitarian and financial targets led to many problems
and an alarming lack of professionalism. As in many other countries, NGOs active in Ethiopian
microfinance were also criticised because loans were granted according to the NGO’s perception of
the client’s needs rather than on the basis of a thorough analysis of the demand; because of the
borrower’s lack of ability to pay back the loan within the agreed period; and because of the lack of
follow-up of the loans. Furthermore, loan terms and sizes were often inappropriate; risk insufficiently
diversified; systems to manage lending properly were not in place; and interest charges did not cover
the true cost of capital, operations, inflation rate, loan loss provisions and at least a modest return on
assets.101 To some extent, this picture still applies to MFIs today.
Experimental credit schemes for small farmers such as the Oromia Credit and Saving Scheme
Development Project (starting in 1996) demonstrated potential. A review highlighted its
achievements and recommended expansion and institutionalization at a regional level. The scheme
was later incorporated as the share company Oromia Credit and Saving Share Company (OCSSCO). 102
In 1996, NBE developed a regulatory framework for microfinance to supply financial services to the
poor. Apart from facilitating expansion and improving growth possibilities, the need to prohibit NGOs
and other institutions (government agency or NGO) from offering financial services drove the issuing
of Microfinance proclamation No 40/1996. This allowed for deposit-taking MFIs and has underpinned
the development of the microfinance sector in the past decade. Under the prudential framework,
which has continuously been adapted, the sector has been transformed from humanitarian-oriented
organizations to MFIs targeting financial sustainability and outreach.103
Until recently, the microfinance sector comprised only the MFIs licensed under the NBE’s prudential
framework. NGOs cannot legally provide financial services in Ethiopia. Until recently, SACCOs were
formally considered part of the cooperative sector, rather than the microfinance sector. This issue
came up while preparing the National Microfinance Strategy for Ethiopia, ie. when the consultants
elaborated on the Road Map and during stakeholder consultations.104 Because SACCOs are important
providers of financial services at grassroots level in urban and rural areas they are now considered
part of the microfinance sector as a specific type of member-based financial services provider.
100
101
102
103
Aredo (1993)
Wolday (2005)
Admassie (2006)
SOS Faim (2004)
104
In the consultations held by NBE, AEMFI and supported by ECBP/GTZ (Core Team) in February 2007 for, the Cooperative
Agency expressed the view that it sees itself as an integral part of microfinance. This was unanimously confirmed by
participants and supported by the Core Team. CA was then included in the Core Team.
82
Annex 10: Regional distribution of MFIs in Ethiopia
NUMBER
of MFIs
14
12
10
8
6
4
2
0
Number of MFI’s in Ethiopia
Tigray
Amhar
a
Addis
Ababa
Oromi
a
SNNP
Dire
Dawa
Harari Benshangul
REGIONS
Source: AEMFI (2007)
1
2
6
8
3
7
4
5
1. DECSI
2. ACSI, Meket,
Wisdom
3. ADCSI,
Aggar, Asser,
AVFS, Digaf,
Eshet,
Gasha, Ghion,
Meklit, SFPI,
Wisdom
4. AVFS, Bussa
Gonfa, Eshet,
Gasha, Harbu,
Letta, Wisdom,
Wassa,
Metemamen,
OCSSCO,
PEACE, SFPI
5.Letta,
Metemamen,
Omo, PEACE,
Sidama,
Shashimene,
Wisdom
6.Dire
7.Harari
8.Benshangul
83
Annex 11: Governance of SACCOs
SACCOs are member-owned organizations. Issues such as governance, surplus distribution and voting
are defined by their by-laws. The general assembly of members that meets at least once in a year is
the supreme body. With the unions, the supreme body consists of the representatives of the member
SACCOs.105
At present, the representation of primary societies in the union is unclear in terms of the number of
representatives, ie. whether SACCOs with a larger number of members should have more
representatives or whether all SACCOs should have the same number.
The Management and Board of Directors elected by the General Assembly are in charge of day-to-day
activities. Few primary cooperatives have employed staff headed by professional managers. Most
SACCOs are managed by a management committee. The capacity of the management committee is
often questionable in its quality of financial management, even when they have employed managers.
Evidence has shown that the committee often cannot control the professional manager and his staff in
their daily activities, eg. adequately analysing the financial reports submitted to them by the manager.
The second committee, the control committee, is elected by the General Assembly to make sure the
activities of the SACCO are done according to the law, guidelines, by-laws and above all according to
the decisions of the General Assembly. The control committee is accountable to the General
Assembly. Besides the two main committees, there are also loan, saving, education and dispute
committees responsible for specific activities of the SACCOs. In many cases, education and dispute
committees are nominal and not as active as the loan committee. In general, the quality of these
committees is also subject to doubts because of various factors, among those, the part-time
dedication of their members and related time limitations for their cooperative tasks.
105
The representation differs according to the by law of each cooperatives. In the case of Addis Saving and Credit
Cooperative Union two representatives from each member SACCO were the members of the first General Assembly.
However, as the membership size increased the representation was limited to one member that by definition should be
member of the management of the primary cooperative.
84
Annex 12: Loan product survey of MFIs
(AEMFI 2007)
Type of loan product
Product description
MFI
Loan size
( Birr)
Min
Max
150
150
5000
5000
Amhara Credit and
Saving
Institutions( ACSI)
Group loan
Installment
End term
Individual loan
Micro-bank loan
Loan
period
Interest rate
Collateral
Repayment
frequency
2 Years
2 Years
18 % (Declining)
18 % (Declining)
Peer pressure
Peer pressure
Monthly
End term
50,000
5,000
500,000
50,000
5 Years
2 Years
12.5 %
(Declining)
10 % (Declining)
3,000
1,000
150
15,000
5,000
5,000
3 years
1 Years
3 Years
18 % (Declining)
18 % (Declining)
18 % (Declining)
Micro loan
500
5,000
22
Mounts
10% (Flat)
Small loan
5,001
60,000
Consumption
500
10,000
Long term
Short term
Asset loan
House
contr.
House furn.
Food security loan
Addis Credit and
Saving
Institutions (ADCSI)
36
Months
24
Months
60
Months
6
Months
Monthly
10% (Flat)
Group
Monthly
10% (Flat)
Collateral or
Property
Monthly
1% (Flat)
Month
Monthly
50,000
Short-term loan
Agar Microfinance
Institutions
5,001
50,000
Micro business loan
1000
10,000
12- 24
Months
12% (Flat)
General loan
1000
10,000
12- 24
Months
12% (Flat)
Small business loan
Asser Microfinance
Institutions
5001
20,000
Group loan
300
5,000
Individual loan
300
5,000
6
Months/
12
Months
6
Months/
3% Service
charge
12% (Flat)
500
24
Months
Leased land,
house,
machines,
salaries
Group
Any other
option
other than
Group
Housing loan
12% (Flat)
7%/14% (Flat)
7%/14% (Flat)
Other
descriptions
3% Service
charge
Group and
third party
guarantee
Group and
third party
guarantee
Property and
third party
guarantee
Monthly
3% service
charge
Monthly
3% service
charge
group
Collateral
Personal
Guarantor
Bi-Mounthly
on Weekly
Bi-Monthly
on Weekly
Monthly
3% service
charge
85
12
Months
Africa Village Financial
Services S.C
Trade
Agriculture
Construction
Consumption
Manufacturing
300
300
300
300
300
8000
1yr to
2yrs
8000
1yr to
2yrs
8000
1yr to
2yrs
8000
1yr to
2yrs
8000
1yr to
2yrs
13% to 16% (Flat)
Group, land
certificate and
personal
guarantor
Group, land
certificate and
personal
guarantor
Group, land
certificate and
personal
guarantor
Group, land
certificate and
personal
guarantor
Group, land
certificate and
personal
guarantor
Group, land
certificate and
personal
guarantor
12.5% (Flat)
Group
Services
Benshangul Gumuz
Microfinance
300
8000
1yr to
2yrs
Agriculture
200
5000
One year
13% to 16% (Flat)
13% to 16% (Flat)
13% to 16% (Flat)
13% to 16%(Flat)
13% to 16% (Flat)
Weekly.
Bi-weekly &
Monthly
Weekly.
Bi-weekly &
Monthly
Weekly.
Bi-weekly &
Monthly
Weekly.
Bi-weekly &
Monthly
Weekly.
Bi-weekly &
Monthly
Weekly.
Bi-weekly &
Monthly
Depending
on the
Product
type
Petty trade
Services
200
200
5000
5000
One year
One year
12.5% (Flat)
12.5% (Flat)
Group
Group
Small manufacturing
Asset loan
1500
750
5000
5000
One year
One year
12.5% (Flat)
12.5% (Flat)
Group
Group
Individual loan
5000
100,000
1-5 Years
10.5% (Flat)
Fixed Asset
Input loan
Bussa Gonofa
Microfinace S.C
300
7.5% (Flat)
Group
Monthly
Monthly
Depending
on the
Project type
Monthly
Depending
on the
project type
Harvesting
Season
24% (Flat)
none
Weekly,
biweekly,
monthly
12.6% (Flat)
Salary
Monthly
Group
Group
Monthly,
quarterly,
semiannually
8 months
General purpose loan
100
5,000
Employee loan
Dedebit Credit and
Saving
Institution(DECSI)
500
10,000
Regular loan
Agricultural input loan
50
50
5000
5000
6 – 24
months
24
months
2 years
2 years
15% (declining)
15% (declining)
Crop one Year
Fattening
(Depends on
the type of
project)
86
Rural household
package
loan
50
5000
2 years
9% (declining)
Guarantee
Urban
householdpackage
loan
50
5000
2 Years
9% (declining)
Guarantee
TVET loan
50
5000
2 Years
12% (declining)
Group/
Guarantee
3 Years
10% (declining)
Building
Monthly,
quarterly,
semiannually
Monthly,
quarterly,
semiannually
Monthly,
quarterly,
semiannually
Monthly,
quarterly,
semiannually
5 years
9.9% (declining)
Building
Monthly
2 years
12% (declining)
Group
Monthly
MSE business loan
5000
MSE housing loan
5000
Civil servant loan
Diredawa
Microfinance
Institutions
50
Up 5%
of
capital
Up 5%
of
capital
5
Months
salary
300
5000
1years
15% (declining)
Group
Monthly
500
2500
1years
15% (declining)
Group
4-6 Month
5000
50,000
2-3 years
15% (declining)
Cooperative
Monthly
16% (Flat)
Group/salaried
cosignatory/pr
operty/busines
s/postdated
checque/share
certificates/se
mi blocked
saving account
Monthly
24% (Flat)
Group
guarantee
Bi-weekly,
monthly
& balloon
24% (Flat)
Group
guarantee
Bi-weekly,
monthly
& balloon
under
development
24% (Flat)
Group
guarantee
Bi-weekly,
monthly
& balloon
under
development
13% (Flat)
Group
Weekly, biweekly,
monthly
13% (Flat)
Salaried
person,
house and
Vvehicle
Bi-weekly,
& monthly
Urban solidarity(group
oan)
Group loan
To micro operation
Rural solidarity
Group loan
Cooperative loan
Digaf Micro Credit
Micro business loan
Eshet Microfinance
Institution
Individual loan
500
500
200
5000
5000
5000
5000
6
Months
9
Months
200
5000
Employee loan
Gasha Micro Finance
Share Company
Group guaranteed Loan
Special loan
200
12
Months
200
3-24
Months
1000
15,000
20,000
12-18
Months
New clients
are charged
birr 5.00
passbook fee,
birr 3.00
registration
fee.
For business
loan
87
Consumption loan
Cooperative lLoan
MSE Loan
Ghion Micro finance
Institution S.C
1000
200/Indivi
dual
5,000
500
Agricultural input loan
10,000
12-18
Months
2000/In
dividual
18
Months
20,000
12-18
Months
1,500.0
0
12
Months
13% (Flat)
Salaried
person,
house and
vehicle
Bi-weekly, &
monthly
13% (Flat)
The
cooperative/
house/vehicle/
group
guarantee
Monthly/
depends on
the
business
13% (Flat)
Salaried
person, house
and vehicle
Bi-weekly
and
monthly
Registered
and
Licensed
The business
has to
employee
minimum of 2
workers and
the size of its
capital should
be above Br.
20,000
Group
1Month
eg purchase
of
fertilizer
15% + 3% (Flat)
Group
1Month
15% + 3% (Flat)
For
consumption
Purposes
Agricultural business
loan
Category 1
500
2000
Category 2
500
5000
12
Months
12
Months
15% + 3% (Flat)
Personal
1Month
eg for
fattening
eg for
fattening
14% + 3% (Flat)
Personal
12 - 24
Month
eg diary
farming
14% + 3% (Flat)
Group
12 Month
eg trade and
production
Category 3
Business loan
500
5000
12 - 24
Months
Category 1
500
2000
12
Months
15,000
12 - 24
Months
14% + 3% (Flat)
Personal
12 - 24
Month
12
Months
14% + 3% (Flat)
Group
12 Month
Category 2
Consumption loan
Harbu Micro finance
Institution S.Co
Agricultural loan for
cattle rearing,
dairy, small animal
rearing and fatting,
horticulture
500
1,500
5,000
1-2 yrs
15% (Flat)
Group
Yearly
1,000
5,000
12
Month
12% (Declining)
Group
Monthly
300
5,000
12
Month
12% (Declining)
Group
Monthly
Cereal banks (CBs) loan
for producing
and selling cereals
1,500
5000/pe
rCleint
12
Month
12% (Declining)
Self-help group (SHG)
300
5,000
6-12mth
12% (Declining)
CB's(primary
level
cooperative
CLA(cluster
level associ.)
Micro & small scale
industries loan
for wood work, metal
work and others
Petty trade loan for
grain species, fruit and
horticulture, honey ad
butter
eg trade and
production,
housing
for any type
of
consumption
Monthly/
yearly
Monthly
88
Value chain
(agriculture) chain for
agricultural productions
to market supply
Letta Microfinance
Institutions. Co
Petit trade loans
Farm loans
Enterprise loans
Meklit Microfinance
Institution S.Co
Individual civil servant
loan
Individual business
enterprise loan
Cooperative loan
Group loan
Seasonal loan
Staff loan for housing
Staff loan for school fee
Metemamen
Microfinance
Institution
clients
5,000/
Per
client
6-12mth
12%(Declining)
Group
Monthly/
yearly
1,000
1,000
2,000
2,000
2,000
7,000
One year
One year
Two year
12% (Flat)
12%(Flat)
12%(Flat)
Group
Group
Asset
Monthly
Quarterly
Biannually
1,500/
500
500
500
500
500
10,000
20 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
Based on
the
agreement
with
the
borrower
Based on
the
agreement
with
the
borrower
Based on
the
agreement
with
the
borrower
Based on
the
agreement
with
the
borrower
the group
16 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
22 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
10,000
6
month,9
months,
12
months,
18month
s and 24
months
based on
the
amount
of the
loan and
with the
agreeme
nt made
with the
borrowe
r
5,000
3
Months
25 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
Once in
three
months
Three
years
7.5 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
Monthly
One year
9 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
Monthly
10,000
10,000
9 months net salary
The amount is equal
to the tuition fee
18 birr per birr
hundred per
annum (Flat)
Personal or
property
guarantor
Hebret
1000
5000
3-10
months
18% per year
(Flat)
NA
Bi-weekly/
monthly
Enideg
1000
5000
3-10
months
18% per year
(Flat)
NA
Biweekly/
monthly
The
repayment
periods of the
institution
are weekly,
bi-weekly,
monthly,
quarterly,
semi annually
as per the
agreement
reached with
the borrower
Groups are
organized in
village banks.
the product
targets urban
poor
Groups are
organized in
small
solidarity
groups. The
product
targets urban
poor
89
Eshet
1200
5000
3-10
months
18% per year
(Flat)
NA
Biweekly/
monthly
Siket
2000
No
minimu
m
amount
5000
3-10
months
18% per year
(Flat)
NA
Biweekly/
monthly
5000
12
months
NA
Monthly
Qirs
14.4% per year
(Flat)
Groups are
organized in
village banks.
The product
targets
farmers living
in rural areas.
Groups are
organized in
small
solidarity
groups. The
product
targets clients
that are in a
relatively
better
economic
status
Groups are
organized in
small
solidarity
groups. The
product
targets
salaried
employees
working in
government,
NGO and
private firms
Oromia Credit and
saving
Institution S.C
Rural
1,100
5,000
1 Year
11.5 % (Decline
base)
Group
End term
Urban
1,100
5,000
1 Year
11.5% (Flat)
Group
Installment
base
Installment
base
1Year
1-3 Months
MSE
Omo Microfinance
Institution
Share Company
Agricultural loan
Small business loan
Small investment loan
Poverty Eradication
and Community
Empowerment
None agricultural loan
45,000
500,000
1 Year
10.5% (Flat)
Guarantee
letter
from
municipality
500
500
5,000
5,000
1 Year
1-2 year
18% (Declining.)
15 % ( Flat)
Group
Group
100
10,000
3-12
months
15% per annum
flat
Group
guarantee for
small loans,
and material
guarantee for
loan
equivalent to
birr 10,000
Monthly
3% service
charge on
1%
application
fee
The loan
period ranges
from 3
months to 12
months
depending as
per type of
the business.
the loan size
90
and term is
decided by
clients
themselves.
Agricultural
100
10,000
6- 12
months
18% per annum
(flat)
Group
guarantee for
small loans,
and material
collateral for
bigger loans
starting 10,000
birr.
100
5,000
1 year
16% (Flat)
Group
Monthly
Third party
Monthly
with grace
period
Collateral can
be salaried
people
16% (Flat)
Third party
or asset
Monthly
with grace
period
Grace period
if the loan is
for fixed Asset
purchase
13% (Flat)
Group joint
liability
Bi -weekly
or 3 month
(quarterly)
Month
Interest will
be paid
monthly,
and
principal
lump sum
The loan size
of both
agricultural
loan and nonagricultural
loan depends
on the step
(cycle of loan)
Specialized Financial
and Promotional
Institution (SFPI)
Group loan
Individual loan
Cooperative loan
5,000
10,000
15,000
198,000
2 years
2 years
16% (Flat)
Shasemene Eddir
Yelimate Agar
Group loan or center
loan
500
5,000
One year
Individual business
4,000
7,000
One year
15% (Flat)
Fixed asset
building
with plan
Consumption
1,000
7,000
One year
15% (Flat)
Personal
guarantee
Month
Rural oxen loan
500
1,500
One year
13% (Flat)
- -------------
Annually
Agriculture loan
500
5,000
6
Months
8% (Flat)
Group
Once
General loan
500
5,000
12
Months
15% (Flat)
Group
Monthly
Petty trade loan
1,000
5,000
12
Months
15% (Flat)
Group
Bi-weekly
Service & handcraft
loan
1,000
5,000
12
Months
15% (Flat)
Group
Bi-weekly
Sidama Microfinace
Institution S.C
91
Housing loan
6,000
25,000
24
Months
20% (Flat)
Owner
certificate or
salary
Monthly
Wasasa MFI
Large group loan
100
5,000
Max 1
Yr.
18% (Flat)
Group
guarantee
Weekly, biweekly
(for urban)
and
monthly
(rural)
Small group loan
2,000
5,000
1yr.
18% (Flat)
Group
guarantee
Monthly
Individual loan
5,000
NBE
Policy
2 yrs.
11% to 15% (Flat)
Asset
Monthly
100
Amount
payable
by
deductin
g 1/3 of
the
monthly
salary at
15% (Flat)
Support letter
from
employer
Bi-weekly
Employees loan
1 yr.
Community managed
savings
and credit facilities
Pilot program
Wisdom Microfinance
Institution
gricultural loan
Agri-business
Business loan
1,500
1,500
1,500
3,000
12
months
5,000
12
months
5,000
12
months
Enterprise loans
2,501
5000
12
months
Consumption loan
1,000
3,000
24
months
Individual loan
3,000
50,000
36
months
15% (Flat)
Group
guarantee
End of loan
term
15% (Flat)
Group
guarantee
Every two
months/
quarterly
12.5% (Flat)
Group
guarantee
Weekly/biweekly/
monthly
12.5% (Flat)
Own/third
party
asset and/or
salaried
guarantor
Weekly/biweekly/
monthly
15% (Flat)
Salaried
guarantor
Monthly
12.5% (Flat)
Own/third
party
asset and/or
salaried
guarantor
Weekly/biweekly/
monthly
92
Annex 13: MFI saving product survey
(AEMFI 2007)
Type of Saving
Product
MFI
Product Description
Saving Size (Birr)
Min
Max
Amhara Credit and
Saving
Institutions( ACSI)
Voluntary
Pass book
saving
Time deposit
Joint account
Minors’ account
Compulsory
Group Loan
Installment
End term
Addis Credit and
Saving
Voluntary
Pass book
saving
Term deposit
Commission
Compulsory
Individual
Group
Association
Agar Microfinance
Institutions
Interest
Rate
Collateral
-
-
4%
4.25%
4%
4%
4%
5.25%
5.25%
4%
5% of loan
3% of loan
-
-
-
Withdrawal
Frequency
Other
Descriptions
5%
4%
4%
4%
Voluntary
Voluntary
saving for
clients and
non-clients
20
Special
saving
Compulsory
Compulsory
saving for
micro and
general loan
Compulsory
saving for
small loans
Asser Microfinance
Institutions
Voluntary
Voluntary
saving
Compulsory
10,000
6%
10%
10%
Any amount
Any amount
93
Regular
saving
Africa Village
Financial
Services S.C
Voluntary
Clients
Compulsory
Clients
Benshangul Gumuz
Microfinace S.C
Voluntary
Passbook
saving
10% of the
loan
pre-loan
saving
and 5% of
the loan
through
loan period
5
Depending on
the
interest of the
saver
4%
Institutional
5
Depending on
the
interest of the
institution
4%
Time deposit
10,000
4.25-5.25%
above 3 million
Compulsory
Regular
compulsory
saving
Loan security
saving
Bussa Gonofa
Microfinace S.C
Voluntary
Compulsory
Loan tied saving
Dedebit Credit and
Saving
Institution(DECSI)
Voluntary
Loan client
Non-loan client
Government
Non-government
Compulsory
Group
Center
12
12
25
600
2
5
5
5
5
5-10%
upfront Plus
one birr per
month per
loan
One birr per
month
per loanee
4%
No limit
No limit
No limit
No limit
3%
3%
3%
3%
No limit
3%
No limit
3%
At the end of
loan
cycle
94
Diredawa
Microfinance
Institutions
Voluntary
Client( Group
Members)
None client
Association
Compulsory
5
5
100
Client( Group loaner)
3
Association
Degaf Micro Credit
Provider
Institution S.Co.
Voluntary
Passbook Saving
Time Deposit
20
Open saving account
Contractual saving
Compulsory
Gasha Micro Finance
Share Company
Voluntary
Inidividual Voluntary
Saving
10% of their
loan
10% of their
loan
Monthly
As they want
Monthly
3%
Monthly
3%
Monthly
3.50%
Up to 6%
Compulsory
Compulsory Saving
Eshet Microfinance
Institution
Voluntary
Regular saving
100
300,000
20,000
Depending on
the
size and
Duration
3%
4 birr/period
6%
Biweek/monthly
Under pilot
test
Under dev’t
3%
Institutional Saving
4%
Compulsory
Compulsory Saving
3%
Withdrawable
at
any time
Withdrawable
at
any time
Weekly,
Biweekly
and Monthly
Used as
collateral
Ghion Microfinance
Institution S.C
Voluntary
Pass book saving
Time Deposit
Compulsory
Upfront /Security
saving
Regular /monthly
saving
Harbu Microfinance
Institution S.Co
Voluntary
95
600
2,000
4%
5,000
20,000
4%
5
5,000
4%
15
250
5% up fro.
50
250
5% up fro.
5
Any amount
3%
15%
Group by SHGs and
others
Organizations
and Associations
Personal Saving by
Individuals
Compulsory
Group by SHGs and
others
Personal saving by
individuals
Letta Microfinance
Institutions S. Co
Voluntary
Voluntary
Compulsory
Compulsory
Meklit Microfinance
Institution S.Co
Voluntary
3 birr per birr
hundred per
annum
20
Loan Client Voluntary
Saving
New Saving
should not be
withdrawn
before the end
of one month.
However, after
the first month
request for
saving
withdrawal will
be entertained
The minimum
amount of
money
required to
open saving
account is birr
20, the
frequency of
saving will be
determined
based on the
wish of the
saver.
Non-Loan Client
Voluntary Saving
Compulsory
Loan Client
500
5,000
Loan Client
5,001
10,000
3 birr per birr
hundred per
annum
3 birr per birr
hundred per
annum
The client
cannot
withdraw total
amount of the
compulsory
saving while
he/she is in the
program. But
50% of
previous
cycle's
mandatory
saving can be
withdrawn
after paying
For 500-5,000
birr loan the
loan tax will
be 10%. The
client will also
regularly save
10% with the
loan
repayments.
For 5,00110,000 loans
the loan tax
will be 7.5%.
The client will
96
Loan Client
Metemamen
Microfinance
Institution
Voluntary
NA
Compulsory
Compulsory saving
• 8% of the loan
amount before the
first loan
• 10% of the loan
amount on all loans, to
be deposited on equal
installment together
with the loan repaid
Oromia Credit and
Saving
Share company
(OCSSCO)
Voluntary
Client Saving
Non Client Saving
Organization
Compulsory
Group Saving
Center Saving
Omo Microfinance
Institution
Share Company
Voluntary
Voluntary
Personal
Time Deposit
Non- Interest Bearing
Compulsory
Personal
Group
10,001
3 birr per birr
hundred per
annum
2
2
2
4%
4%
3%
10% of Gross
loan
per Client
4Birr per
Month
per Client
4%
No limit
back the first
cycle's loan in
full.
also regularly
save 7.5% with
the loan
repayments.
For more than
10,000 loans
the loan tax
will be 5% and
the client will
also save the
same amount
regularly with
the loan
repayments.
4%
4%
(Commission
Basis)
4%
4%
97
Poverty Eradication
and Community
Empowerment
Voluntary
Voluntary saving
Regular voluntary
Institutional
Compulsory
Mandatory saving
Specialized Financial
and Promotional
Institution(SFPI)
Voluntary
Individual Saving
Compulsory
Security
Regular
Group
Center
Shasemene Eddir
Yelimate Agar
Voluntary
Individual Vo – Saving
Institutional saving
Compulsory
Individual saving
5
-
4%
4%
4%
10% of the loan plus 8 birr per a
mounth
Group saving
Sidama Microfinace
Institution S.C
Individual Saving
Group Saving
Compulsory
Group Saving
Initial Saving
Wasasa MFI
Voluntary
demand deposit
Compulsory
Compulsory
Wisdom
Microfinance
Institution
Voluntary
4%
25
25
25
Unlimited
Unlimited
Unlimited
4%
4%
4%
10
20
4% of the Loan dispersed
10% of the
loan
No limit
6%
10% of the
loan
10% of the
loan
3%
Compulsory
Security Deposit
Regular
10 or15% of the Loan
approved depending on the
type of loan
5 per
months
98
Annex 14: Other MFI products
Microinsurance survey of MFIs (AEMFI 2007)
Microfinance
Institutions
Type of Micro
insurance
Size of
Micro insurance(
Birr)
Min
Max
Product Description
Repaymen
Interes t
Period
t Rate
Frequency
Other Descriptions
Addis Credit and
Saving
Life Loan
Insurance
Business
Insurance
Property
Insurance
1 % of the
Loan to
Individual
1% to group
association
2% to
Housing
Loan
Agar Microfinance
Institutions
Death Insurance
1%
2%
Benshangul Gumuz
Microfinace S.C
Clients Life
Insurance
1.50%
Degaf Micro Credit
Provider Institution
S.Co.
Loan Fund
Insurance
To cover loan Loss
in
the case of client
death
1%
Eshet Microfinance
Institution
Under
development
Loan insurance
Gasha Micro Finance
Share Company
1% per
annum
Death Insurance
only for death
Ghion Micro finance
Institution S.C
Insurance
service for
credit clients
Harbu Microfinance
Institution S.Co
* MI
Meklit Microfinance
Institution S.Co
Loan Client
500
1,00
0
Based on
the
agreeme
nt
It is paid once at
the beginning of
the loan term. For
500-1000 loan the
insurance premium
will be 1%, for
1001-2000 loan it
99
Loan Client
1,001
2,00
0
Based on
the
agreeme
nt
Loan Client
2,001
3,00
0
Based on
the
agreeme
nt
Loan Client
3,001
4,00
0
Based on
the
agreeme
nt
5,00
0
Loan Client
4,001
Based on
the
agreeme
nt
Once at
the
beginning
of
the loan
term
Once at
the
beginning
of
the loan
term
Once at
the
beginning
of
the loan
term
will be 1.2%, for
2001-3000 loans it
will be 1.3% for
3001-4000 it will be
1.4%, for 40015000 loans it will
be 1.5% and it will
continue like this
for the respective
increases on the
loan amounts. This
implies when we
reach 10,000 birr
loan, the insurance
premium will each
2%
Once at
the
beginning
of
the loan
term
Oromia Credit and
Saving
Share company
(OCSSCO)
1% Scheme
1% of
Gross Loan
1.5% Scheme
1.5% of
Gross Loan
Claims Settlement
is
based on
outstanding
Balance+ interest
Claims Settlement
is
based on
outstanding
Balance+ interest
Omo Microfinance
Institution
Share Company
Death Insurance
2% Premium
Sidama Microfinace
Institution S.C
Death Insurance
1% of Loan
Wasasa MFI
Credit insurance
1% of the
loan
1%
of
the
loan
in case of any
death
the loan will be
written off against
the premium
Wisdom
Microfinance
Institution
Loan Insurance
Fee
2% of Loan
approved plus
interest
(P+I)
100
Leasing product survey of MFIs (AEMFI 2007)
Microfinance
Institutions
Type of
Leasing
Product
Product Description
Leasing Size (birr)
Min
Max
Leasing
Interest
Period Rate
Collateral
Repayment
Frequency
36 Month
15%
Association
13%
Insurance for
the lease
item
Monthly
Government
1-5 Years
Addis Credit and
Saving
Micro
leasing
5001
100,000
Africa Village
Financial Services S.C
Pallet
project
1yrs to 3
yrs
Dedebit Credit and
Saving
Institution (DECSI)
up to
0.5%
of
Capital
Micro
leasing
10%
Ghion Microfinance
Institution S.C
Buying
Machinery
and
equipments
and lend to
credit
clients
through
lease.
Omo Microfinance
Institution
Share Company
Leasing
5,000
300,000
1-5 Year
10%
101
Pension product survey of MFIs (AEMFI 2007)
Microfinance
Institutions
Pension
Product Description
Pension Size( Birr)
Min
Max
Other Descriptions
Amhara Credit and
Saving
Institutions( ACSI)
Pension Fund
Management
Service fee of 2.5% per pensioner
Dedebit Credit and
Saving
Institution(DECSI)
Pension
payment to
retired
and military
personnel
No limit
Omo Microfinance
Institution Share
Company
Pension
This service is offered on commission base
Money transfer product survey of MFIs (AEMFI 2007)
Microfinance Institutions
Money transfer
Product description
Size (in Birr)
Min
Max
Other descriptions
Amhara Credit and Saving
Institutions (ACSI)
At a rate of 2% ar transfer,
mainly for organizations
Money transfer dervice
Dedebit Credit and Saving
Institution (DECSI)
Local money
No limit
102
Annex 15: Outreach, efficiency and sustainability of MFIs
Association of Ethiopian Microfinance Institutions (AEMFI)
Basic Data for Forth quarter December 31 2006
December 31,2006
No of
Activeclient
loan
outestanding
Client
savings
Total
asset
Total
liability
Total
capital
Name
ACSI
515,686
687,389.000
365,778,000
842,352,000
616,118,000
226.234.000
ADCSI
83,000
142,444,000
43,677,000
222,848,000
74,901,000
147.947.000
Aggar
2,115
3,354,992
1,547,316
5,629,631
2,397,301
3.232.330
Asser
1,338
425,638
254,935
748,280
286,347
461.933
AVFS
7,739
7,733,422
1,994,003
12,107,094
7,388,699
4.718.395
Benshangul
16,940
19,795,821
6,027,290
25,759,260
7,906,298
17,852,962
Bussa Gonofa
18,217
10,147,669
2,415,784
14,880,978
4,965,080
9,915,898
392,693
749,491,631
201,042,607
1,039,642,963
820,777,095
218,865,867
2,296
4,809,542
1,215,760
15,652,832
4,966,024
10,686,809
DECSI
Dire
Digafe
551
504,260
435,710
626,550
445,360
181,190
Eshet
23,734
24,701,387
2.889.274
31,107,794
21,311,807
9,795,987
Gasha
10,337
13,216,397
5,126,180
17,632,616
13,190,691
4,441,924
Ghion
169
309,818
305,294
482,383
320,208
162,175
Harbu
3,457
2,982,456
1,475,377
4,061,476
2,668,811
1,392,666
Letta
47,690
708,725
Meket
7,426
10,262,990
4,643,627
14,445,872
10,908,362
3,537,510
Meklit
19,285
27,207,938
6,030,026
29,192,747
21,338,090
7,854,657
7,002
3,544,810
146,640
5,071,000
167,270
4,903,730
Ocssco
181,403
232,431,896
83,084,776
274,861,728
152,013,770
122,847,958
Omo
106,460
114,238,271
51,242,081
144,037,906
PEACE
20,546
27,207,938
6,030,026
29,192,747
21,338,090
7,854,657
SFPI
19,169
20,378,965
7,333,362
23,185,571
11,820,706
11,364,865
Metemamen
Shashimene
309
511,085
47,527
756,415
1,917
2,314,864
527,228
3,735,727
Sidama
26,567
17,932,215
4,852,850
25,208,115
Wasasa
22,572
18,480,600
5,632,526
26,008,390
Wisdom
Total
126,941,637
636,038
12,610,624
17,453,908
17,096,269
3,099,689
12,597,491
8,554,483
44,165
48,341,143
12,856,984
54,302,926
32.154.849
22,148,077
1,535,093
2,190,158,748
816,612,182
2,863,531,000
1,985,073,754
878,457,246
Source: AEMFI
103
June 2006
No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
No of active
clients
Loan volume
outstanding
Client
savings
Efficiency
Operating
expense
ratio
MFI
6.2%
ACSI
503,262
590,225,000
301,929,000
4.1%
ADCSI
59,700
123,932,000
40,239,000
Aggar
1,914
3,399,097
1,922,428
Asser
1,352
566,258
273,076
14.7%
AVFS
6,904
7,325,220
2,037,320
Benshangul
16,940
15,540,240
4,893,092
30.4%
Bussa Gonofa
14,845
9,480,757
1,511,809
2.8%
DECSI
401,190
725,506,156
193,014,703
Dire
2,644
5,141,005
922,413
Digafe
330
296,110
319,800
11.8%
Eshet
17,838
18,434,860
2,094,768
14.6%
Gasha
9,133
13,616,098
6,156,446
Ghion
149
331,765
291,986
Harbu
1,430,297
765,452
Letta
Meket
2,357
1,477,966
259,737
17.4%
Meklit
7,596
7,603,814
1,921,260
Metemamen
5,425
1,573,500
13,400
7.5%
Ocssco
181,403
220,571,724
73,097,217
10.3%
Omo
101,800
96,653,561
43,645,394
12.1%
PEACE
16,570
21,610,114
4,658,220
13.5%
SFPI
18,033
17,348,831
6,933,617
Shashimene
2,036
2,122,368
517,599
15.9%
Sidama
26,726
14,710,598
4,542,429
16.5%
Wasasa
18,985
17,011,377
3,579,238
19.5%
Wisdom
39,615
43,064,539
11,115,667
Total
1,456,747
1,958,973,254
706,655,069
Average
60,698
78,358,930
28,266,203
13%
Africa-Average
35%
Efficiency and financial performance indicators were taken from 2005 audit report
Source: Amha (2007)
Financial performance
Operational
Financial selfself-sufficiency sufficiency
200.0%
197.3%
150.1%
106.6%
76.8%
61.9%
76.5%
197.3%
64.2%
151.4%
148.0%
109.7%
117.2%
91.4%
85.3%
79.3%
146.8%
111.6%
103.1%
104.4%
110.1%
82.6%
80.6%
80.7%
74.8%
99.2%
107.1%
41.7%
75.9%
90.9%
123%
104%
92%
90%
104
Annex 16: History of SACCOs
A unique feature of the Ethiopian cooperatives is their rise and fall through the changing political
regimes. This explains why views about the importance, creditability and above all the sustainability of
cooperatives differs. The present legal environment, the way of cooperative promotion by the Federal
Cooperative Agency and the participation of the members is relatively better than in the past when
internationally accepted cooperative principles, norms and ethics were distorted, violated and
intentionally ignored (Gesesse 2007).
The first two SACCOs were formed by the Ethiopian road authority (1958) and Ethiopian Airlines
(1964). At that time, the promotion, formation and management of the SACCOs was based on
Proclamation No 241/58. After the fall of the monarchy, the main legal instrument for promoting and
regulating cooperatives was Proclamation No 138/70. The new socialist government gave the
authority for the promotion, registration and supervision of SACCOs to the NBE. NBE, however, simply
used the general cooperative proclamation passed for different kinds of cooperatives promoted under
the command economic policy. SACCOs were not considered one of the country’s financial
institutions, licensed and regulated by the NBE. NBE made no effort to come up with regulatory or
legal instruments for the promotion, licensing and supervision of SACCOs. The promotion of SACCOs
was limited to urban areas, partly necause of the absence of NBE outlets outside of Addis and
especially in rural areas.
After the downfall of the command economy. Proclamation 147/91 and other directives were passed
to facilitate the promotional activities based on internationally accepted cooperative principles. The
authority for the promotion, licensing and regulation of cooperatives was once more given to one
organization: The Cooperative Commission, since 2006 called Cooperative Agency (CA). CA is in charge
of all kind of cooperatives, including agricultural, multipurpose, housing and other cooperatives.
Modern SACCOs in Ethiopia have by-laws that reflect the principles and norms of the International
Cooperative Alliance. In principle, people join cooperatives based on informed decisions, which was
not always the case under past cooperative regimes. The rights to form and liquidate cooperatives, to
withdraw and join again are respected today. Cooperatives are no longer promoted as part-time tasks
of ministries and other authorities which, in principle, is also true for the SACCO movement of the past
decade.
105
Annex 17: Data on RUSACCOs
Distribution of RUSACCOs by region and gender
Table 18
No
Regional States
1
2
3
4
5
6
7
8
Afar
Amhara
Benshangual
Gambella
Oromiya
SNNP
Somalia
Tigray
No of
RUSACCOs
8
167
47
16
532
219
13
164
1,166
Membership
Size
308
9,293
770
2410
28,081
15,447
730
7,616
64,655
% of Women
Members
34.4
20.2
18.3
72.9
59.4
44.7
67.00
29.3
43.28
Source: Gesesse (2007) based on information from CA (Sept. 2006)
Table 19: Financial services of RUSACCOs (December 2006)
Items
Remarks
No of RUSACCOs
1,166
RUSACCOs
Total number of members
64,655
Members
Average number of members 55
Members
Total savings mobilized
8,834,702
Birr
Average saving /RUSACCO
7,577
Birr
Average saving /member
137
Birr
Rate of interest on savings
1.5 - 4% per annum
Uniform rate to all types of savings.
(p.a./per year)
Rate is lower than the rate of inflation
Size of loan in relation to
3 - 5 times
Size of the loan depends on the amount of loan
savings
Major activities the loans are Inputs, fattening,
used for
animal raring, offfarm activities
Loan terms
3 - 24 months
Usually one year
Value of loans disbursed in
5.7 million
Indicates that there are RUSACCOs that did not
2005/2006
report.
Lending rate of interest
5-20% p.a.
Repayment rate
100%
To date RUSACCOs report there are no arrears.
As RUSACCOs are small and a recent
phenomenon it is not astonishing that the new
loans are paid on time with no arrears.
However, as the number of loans increases
then arrears may come to picture. To date, and
based on the report of the CA all the loans of
RUSACCOs are paid in time: repayment is 100%.
Source: Gesesse (2007) based on information from RUFIP
106
Annex 18: History of non-government organisations
in finance
NGOs have been participating in development programs in the country for a couple of decades. Before
1996 many NGOs used to directly provide saving and credit services to their beneficiaries. NGOs such
as World Vision International/Ethiopia, Redd Barna, Save the Children USA, Christian Childrens Fund,
Care Ethiopia, Accord, Concern and Ethiopian Aid provided loans for inputs, oxen, sheep and goats.
The loan size, term and conditions differed from NGO to NGO. Before 1996 most NGOs did not charge
interest on loans at all, or they charged very low rates. Often loans were mixed with other handout
interventions.
At that time, the NGOs did not have specialized credit staff, and the cost of program administration
was not covered by the income generated by the program but from other sources. Loan recovery was
weak and hardly enforced, and therefore, “beneficiaries” believed that the loans were not meant to
be repaid. Some beneficiaries knew that the money was provided by donors and the NGO that
channelled the funds would not be serious about the repayment of the loans. Apart from this image of
the program, the delivery systems lacked standards of financial programs as the NGOs mostly did not
consider it as a main focus area, nor did they keep separate accounts for the financial operations.
The NGOs did not have the mandate to make a profit by charging interest on the loans they provided
to the beneficiaries. They had to report the full disbursement of the loan fund to access additional
resources from their mother NGO or from donors; however, there was no requirement for them to
use the outstanding loan amount, ie., to revolve the previously budgeted resources.
As a result there overdue loans mounted up, which contaminated the credit environment of the
country. Concern over this was shared by the same NGOs and their donors.
After a series of consultations between 1992 and 1995, an agreement was reached to form a separate
and a specialized institution under the ownership of a Board of Trustee to handle the financial
interventions of all NGOs in the country. Concerned government bodies such as the Ministry of
Agriculture, Trade and Industry, Women Affairs in the Prime Minister’s office, and the Commercial
Bank of Ethiopia were involved in seeking solutions for this problem. It was agreed to conduct a study
on how to establish the specialized institutions that was intended to handle the financial aspects of
most NGO interventions. The project was financed by Redd Barna (Save the Children Norway) and
UNDP. A private firm undertook and produced a feasibility study and the corresponding legal
documents. Nevertheless, before the specialized institution could be established, the government
passed proclamation 40/96 which prohibited other forms of organizations from offering cater financial
services apart from the newly regulated “microfinance institutions”.
107
Annex 19: Sources of MFI funds (September 2006)
Saving
Paid-up
equity
Loan from
bank
Loan from
RUFIP
ACSI
ADCSI
Aggar
Asser
AVFS
Benshangul
Bussa Gonofa
DECSI
Dire
Digafe
Eshet
Gasha
Ghion
Harbu
Letta
Meket
Meklit
Metemamen
335,168,000
41,341,000
1,868,005
257,467
2,161,556
5,721,410
1,932,501
98,115,406
1,204,688
367,610
2,644,101
5,240,486
305,294
1,055,245
N/A
253,438
2,585,990
60,900
46,734,000
20,942,000
4,247,601
1,817,000
204,000
300,000
899,708
4,775,001
6,001,000
215,000
225,000
203,700
353,100
200,000
N/A
1,300,000
200,000
200,000
8,570,700
20,000,000
2,180,507
307,000,000
-
Ocssco
Omo
76,515,595
43,645,394
69,600,000
14,211,036
5,350,286
7,204,695
520,839
4,542,429
4,573,967
200,000
406,000
2,649,760
13,087,305
201,000
MFI
PEACE
SFPI
Shashimene
Sidama
Wasasa
Wisdom
12,009,745
22,240,525
Total
754,646,045
311,412,736
Grant/donation
equity
Net income
from lending
Total
85,253,898
8,703,000
1,530,959
2,175,030
46,000,000
6,043,453
3,600,000
759,997
344,700
2,805,990
-
71,629,000
4,526,000
4,799,097
7,805,671
53,074,506
3,250,000
30,000
6,279,041
6,143,516
645,633
1,587,205
1,750,446
6,436,000
133,625,000
11,688,000
188,638
994,749
233,194
28,191,787
3,546,986
435,143
13,108
1,352,494
-
680,980,598
207,200,000
6,115,605
2,074,467
9,533,797
8,547,118
13,046,104
637,156,700
10,455,688
612,610
18,738,581
15,622,845
658,394
2,660,875
3,498,451
8,694,920
6,696,900
8,570,700
-
40,890,643
11,500,000
24,784,453
14,319,603
25,385,761
2,162,990
245,747,151
85,839,022
6,503,535
6,581,000
2,366,000
6,843,598
4,000,000
4,342,589
2,403,715
12,428,495
348,506
17,663,307
6,253,326
563,949
103,149
26,100
21,865,082
24,142,339
3,545,204
41,812,225
18,647,019
361,772,442
7,483,200
32,277,057
Percentage
36%
15%
17%
11%
Source: Amha (2007) based on quarterly reports of MFIs September 30, 2006
910,137
246,157,518
12%
86,589
41,820,059
209,507,774
2,115,649,940
10%
108
Annex 20: Urban financial intermediation program (UFIP)
Background
MFIs came into the picture after the passing of Proclamation No 40/96. Large MFIs. owning about 80%
of the total portfolio, operate in the rural areas. The City Administration of Addis Ababa enjoys the
services of one municipality owned, a number of NGO-backed and one private MFIs.
In 2006, the EU had embarked a grant program that targeted SMEs in some sectors operating in
selected cities. A grant exclusively used for loan purpose was administered by a local consulting firm
that was subcontracted by the EU. Some participating MFIs were able to initiate urban programs in
selected cities. Since then, even the MFIs that were totally engaged in rural programs have initiated
programs that target urban clients. Issues of individual lending, collateral, loan size and terms have
become areas of new challenges for MFIs that have started SME lending programs.
MSE development is central to the Federal Republic of Ethiopia’s Five years Development and Poverty
eradication program. The Federal Government’s MSE program covers the period from 2007-2010. It
aims to alleviate unemployment rampant in the cities and create a basis for further industrialization. It
is also believed that such intervention would help to make cities centers of development that would
contribute to sustainability of the overall rural development.
Providing credit services is one of the support elements of the program.
Regarding credit supply, discussion was held between Work and Urban Development Ministry, NBE,
CBE and AEMFI on July 5, 2006 on agendas of availing the services to SMEs and building the capacities
of the MFIs believed appropriate to handle the task. An agreement was also reached to improve the
policy and legal environment under which the services were to be rendered. Further, a committee was
appointed to study the financial and capacity building needs of the MFIs that provide the service to
the potential clients.
Outcome of the assessment
The 26 MFIs in the country had the following operational status as of June 2006.
•
•
Outstanding loans
Number of borrowers
639 million Birr
1.4 million
On the other hand, according to the SME development program that is due to be launched from 20072010, a total of 5.2 billion birr is needed to deliver services to 1.2 million operators. Table 1 shows
resources needed per year for selected regions.
Table 1 Financial needs for SME development (billion)
Region
Amount of loan needed
(2007-2010)
Addis Ababa
1,967
Oromia
1,441
Amhara
796
Tigray
342
SNNP
430
Dire dewa
210
Total
5,187
No of Clients
1,201,579
Financial needs per year (in Million)
2007
2008
2009
2010
492
492
492
492
360
360
360
360
199
199
199
199
86
86
86
86
108
108
108
108
53
53
53
53
1,297
1,297
1,297
1,297
300,395 300,395 300,395 300,395
Source: Work and Urban Development Ministry (2006)
109
The committee responsible for the study further estimated the financial needs of MFIs and the
possible sources for the same four years. The liquidity gap of the MFIs is Table 2.
Table 2 Liquidity gap of MFIs
Items
Total needs
over the
four years
2007
2008
2009
2010
Loan fund needed
in Birr
11,781
2,223
2,544
3,289
3,725
6,089
902
1,170
1,708
2,287
5,692
1,321
1,378
1,581
1,438
449,292
515,156
635,640
783,521
Amount to be
coved from own
and other sources
in Birr
Liquidity gap in
Birr
Nunmber of clients 2,416,039
Source: MFIs
To reach 2,416,039 clients, the financial need of the MFIs would be 11.781 million Birr, out of which
the MFIs would cover 6.089 million from their own contributions and other sources. Consequently the
liquidity gap would be Birr 5.692 million.
On top of the assessment of the financial needs of the MFIs, the committee further assessed the
financial status of commercial banks and their policies regarding SME development. This showed that,
at the time of the assessment, the banks in total had 18.447 million Birr in excess liquidity and 77% of
this belonged to CBE. Commercial bank has opened one department that is responsible for financial
services for SMEs.
Choice of the eligible bank to provide credit service to MFIs
The committee recommended CBE as most suitable to handle the credit facilities of MFIs that would
eventually channel loans to SMEs, for the following reasons:
• It has already opened a department that deals with SMEs;
• The bank has a policy that guides SME lending; and
• It has lowered the guarantee level of SME lending to 75%.
According to the views of the committee, Regional governments, relevant organizations and NGOs are
all expected to guarantee the loans of the MFIs accessed from CBE. The committee finally forwarded
the following additional recommendations about CBE:
• CBE can provide loans without conventional collateral to the best-performing MFIs;
• Though the bank needs to secure the recovery of its loans, it is further recommended that it
should lower the guarantee level from 75% to 50%. To this end (1) Regional governments
should guarantee regional MFIs taking loans from CBE, and (2) NGO- based MFIs should be
approached to guarantee funds to secure the loans from CBE; and
• It is essential to establish guarantee fund schemes for all the MFIs for accessing loans from
CBE. At that level, the deposited fund as guarantee can be 20% of the loan instead of 50%.
110
Options for accessing loans from CBE
Options recommended by the committee to make loans available from CBE, based on the above
recommendations, are:
Establising a general guarantee fund
The first option offered by the committee is establishing a general guarantee fund worth 50% of CBE’s
loan to MFIs. The remaining 50% is to be lent out by CBE to MFIs free of guarantee (see Table 3).
Table 3 General guarantee fund for all MFIs
Number
Particulars
2007
1
Amount of loan
1,297
needed
2= (1*50%)
50% free of
648
guarantee
3= (1*20%)
Amount of
259
guarantee fund
2008
1,297
2009
1,297
2010
1,297
Total
5,187
648
648
648
2,593
259
259
259
1,037
Regional governments guarantee MFIs established under them and establish a central guarantee
fund for the other MFIs
Table 4 Loan amount to MFIs to be guaranteed by Regional Governments (billion Birrs)
MFIs
2007
2008
2009
2010
Total
ACSI
219
248
386
272
1.125
ADCSI
196
167
363
Bens-Gumuz MFI
43
43
43
43
172
Dedebit
86
86
86
86
344
Diredawa MFI
10
19
34
63
126
OCS S.C
323
355
409
491
1,578
Omo MFI
91
93
89
81
354
Total
968
1,011 1,047
1,036
4,062
Table 5 Amount of loan fund needed by MFIs that may use the central guarantee fund and the
corresponding guarantee fund (billion Birr)
Number
Particulars
2007
2008
2009
2010
Total
1
Amount of loan
529
289
251
62
1,128
2= 1*50%
50% (no
265
143
125
31
564
guarantee )
3= 1*20%
Amount of
106
57
50
12
256
guarantee fund
Suggested sources of the central guarantee fund for those MFIs that may not access guarantees from
regional governments are:
• Regional governments
• NGOs
• Federal Government
• The MFIs themselves
The national bank has been recommended to administer the guarantee fund scheme because of its
sufficient foreign trade guarantee administration experience.
111
Capacity building
A total of 828 million Birr is needed to finance the capacity building program for MFIs over the four
years (see Table 6).
Table 6 Resources needed for capacity building per year (million Birr)
Items
Year
2007
2008
2009
2010
Amount of
172
167
209
280
funds needed
Total
828
Table 7 Resources needed per capacity building areas
No Areas of capacity building
Amount of funds needed
1
Training of staff, experience sharing, staff
215
development
2
Improving MIS systems
82
3
Product development
103
4
Infrastructure development (office
325
equipment, transport, computer, printing
services, office building/office rent etc
5
For studies
103
Total
828
Of the total resources needed, 40% is for funding infrastructural needs, 26% for staff training and
development and the balance for the remaining items shown in Table 7.
The committee also indicated that some MFIs had shown an interest in covering some of the capacity
building expenses even though the sources are not specified. RUFIP has some resources for training
and other capacity building, although these are insufficient to cover all the different needs..The
National Bank of Ethiopia (NBE) has already identified types of training to be offered, the number of
trainees and the institutions that would provide the services.
The final recommendation of the committee is to give priority to the capacity building interventions by
mobilizing resource from NGOs, Federal and Regional governments and from the MFIs themselves.
112
Annex 21: Development strategies and policies
The Agricultural Development Led Industrialization (ADLI) is the chosen growth strategy of the
Ethiopian Government. ADLI is expected to strengthen the interdependence of agriculture and
industry by increasing the productivity of peasant farmers, expanding large-scale private commercial
farms, and by reconstructing the manufacturing sector. Resources such as land and – though mainly
unskilled – manpower are available in abundance. By promoting the use of technologies, the
government aims to transform Ethiopia’s agrarian economy into a modern economic system.
According to Kassahun,106 the economy has an acute shortage of capital. Improving rural banking is
essential for building a sound and competitive financial sector, and this is among ADLI’s priority areas.
Other priorities include improving the external environment of banking such as the foreclosure law,
increasing efficiency by more capacity building, tightening banking supervision while making bank
management more autonomous, facilitating the transformation of MFIs into rural banks, and
facilitating the flow of funds from commercial banks to MFIs for on-lending.
The government’s Industrial Development Strategy aims to accelerate economic development and to
improve the population’s living standards. The strategy is based on ADLI and implementation began in
2001/02. Its underlying objective is to increase the benefits earned from economic integration with
the ultimate goal of becoming an industrialized country (see Box 4). This involves strengthening
domestic inter-sectoral linkages, such as between agriculture and industry, and through exploiting the
opportunities of regional and global economic integration. The rural-centered ADLI within the
framework of a free market economy is the principal driving force of the strategy. In this strategy, the
provision of financial services (loans and savings products) is seen as crucial for industrialisation (see
chapter 3 on the creation of a modern and conducive financial system). Building a functioning and
well-regulated financial sector is a strategic goal under this strategy. The strategy clearly rules out
foreign ownership of financial institutions for the near future, and promotes the establishment of a
development bank.
Industrial production in Ethiopia
The industrial sector contributes about 12% to GDP, 9.5% of employment opportunities and 22% of
foreign currency earnings. It supplies consumer goods to both the domestic and foreign markets. Out
of the industrial sector’s 12% contribution to GDP, the manufacturing sub-sector is nearly 7%.
The main manufacturing products are textile goods, leather and leather products, foodstuffs, tobacco,
cement, beverages, metallic and non-metallic products. Manufactured export products include leather
and leather products, frozen meat, sugar and textiles. The sector is characterized by a low level of
development and is still dominated by light manufacturing and afro-industrial activities. It is primarily
oriented towards the processing of agricultural commodities. Petroleum refining and the production
of textiles are the second and third most important industries. The principal manufacturing centre is
Addis Ababa.
Source: Private Sector Development in Ethiopia (Bezabih, 2004)
Another major strategic document is the Poverty Reduction Strategy Program (PRSP). In its first
phase, the strategy was called Sustainable Development and Poverty Reduction Paper (SDPRP)107 and
built on four pillars: (1) agricultural development led Industrialization and food security; (2)
governance, decentralization, and empowerment; (3) reform of the justice system and the civil
106
107
Kassahun R (2003)
The Ethiopian budget year starts on July 8 and needs on July 9. The Ethiopian new year is the 12 September.
113
service; and (4) capacity building. In addition, the SDPRP identified key sectoral measures and crosscutting priority issues, including HIV/AIDS, private sector development and trade, education, health,
roads, water and sanitation, and gender. Micro and particularly rural finance were key issues.
Cooperatives are assigned an important role for providing loans to smallholder farmers.108 The Plan
for Accelerated and Sustained Development to End Poverty (PASDEP) represents the second phase of
the PRSP process and is intended to cover the 2005/06 until 2009/10 period. PASDEP is now
considered a national plan for guiding all development activities during the coming five years. The
Millennium Development Goal (MDGs) Needs Assessment Synthesis Report109 recommends linking
PASDEP and the MDGs. Among the key policy issues the report refers to are export growth and
domestic financing based on improvements in the tax system and promoting private saving and
investment. The PASDEP carries forward important strategic directions pursued under SDPRP. these
relate to infrastructure, human development, rural development, food security and capacity-building
but also embody some bold new directions. Growth in the five-year period emphasises greater
agriculture commercialization, enhancing private sector development, industry, urban development
and a scaling-up of efforts to achieve the MDGs.
The main objective during the PASDEP period is to achieve the goals of the National Urban
Development Policy approved by the Council of Ministers in March 2005. One of the four pillars of the
urban development strategy is support for MSEs and job creation, under which “expanding
microfinance institutions that focus on the needs of the urban poor” is one approach. The Urban
Financial Intermediation Programme (UFIP) has been created to further this aim.
The national Integrated Housing Development Program combines government funding or guarantees
and housing construction in large and medium-sized cities targeted at middle and low-income
households with development by private property developers, private home builders, employers and
housing cooperatives, for which the government will provide serviced land, public infrastructure and
services. The government intends creating a new instrument for revolving finance: the Housing
Development Fund, which will receive a parentage of the house purchase price from buyers at the
point of transfer, and subsequently long-term repayment of capital and interest. The National Urban
Development Policy aims at “ensuring that the private sector has adequate access to land, building
materials, and finance.”110
Another strategy in which financing is central is the National Micro and Small Enterprise
Development Strategy. According to PASDEP, with the growing urban and small-town economy, and
increased domestic demand, there are substantial opportunities for MSE development.111 The
government’s support is mostly channelled through the Federal Micro and Small Enterprise
Development Agency (FeMSEDA), and increasingly through regional MSEDAs. Activities include basic
training in technologies and business skills, developing low-level serviced working premises, providing
microcredit and information on markets and techniques, and working with producers to identify
constraints and bottlenecks.
108
SDPRP: Chapters 5.2.1 ADLI and Food Security, 7.1.6 Rural Finance, 8.2.1 Banking Sector, 11.2.4 Financial Sector Reform, as well as in the
Annexes Table 5.1 and 6.
109
MOFED (2006)
110
MOFED, Ethiopia: Building on Progress: A plan for Accelerated and Sustained Development to End Poverty (PASDEP), September 2006
111
The MSEs are particularly important in the context of Ethiopia’s poverty reduction strategy as they are seedbeds for the development of
medium and large enterprises (vertical integration), and because they absorb agriculturally under-employed labor, and diversify the sources
of income for farming families (horizontal integration). Areas of high potential for MSEs include animal husbandry, poultry, silk harvesting,
honey production, small-scale garment manufacturing, metal work, construction, and increasingly urban-based services (for example solid
waste collection, parking lots, small shops and repair services). It is estimated that to date about 96 000 MSEs were strengthened and some
280 000 jobs have been created.
114
As mentioned, one of the four pillars of the SDPRP/PASDEP is decentralization and empowerment.
After 15 years of far-reaching political decentralization and improvements in good governance, the
government’s agenda for improvement is still ambitious and the reform agenda remains valid. In 2005,
the World Bank112 recommended for future key structural reforms required to raise growth - among
others - measures to accelerate private sector and financial sector development and strengthen
administrative capacity. The capacity of Regional Government in terms of financial systems
development is an important element.
The National Youth Policy stresses the importance of self-employment. As many young people are
engaged in the informal sector, particular attention is being given to micro and small enterprise
development (MSED). The MSED strategy underpinning PASDEP pays particular attention to femaleoperated enterprises, school dropouts, and unemployed youth. Under this strategy the government
plans to provide entrepreneurship and business management training, appropriate technology
research, market support, information and counselling, business support services, and help with
access to credit and basic infrastructure for MSEs.113
PASDEP will also address the needs of pastoral populations as poverty remains intense in pastoral
areas. Strategies include, among others, facilitating local and cross-border livestock trading, with
better market information and credit provision, and the establishment of MFIs tailored to pastoralists'
needs to support trading as well as livestock activities.114
The five-year National Action Plan of Action for Women includes safeguarding women’s rights such as
access to land, and specifically mentions credit and other productive resources that protect women
from multiple forms of deprivations, such as longer working days, and violence and discrimination
against women, which are widespread in the country.
Evidence from field visits has shown that local women organisations and the Ministry of Women
Affairs including Regional Women Bureaus have important links to financial service provision. On the
one hand, local women organisations are themselves owners of MFIs. In the regions we have found
evidence of MSME promotion programmes targeted at women which are said to be implemented
under the Ministry of Women Affairs. The programmes are subsidized and target loans to specific
women projects.
The Rural Development Strategy mentions rural finance and the role of cooperative societies and
rural banks in assisting rural development. The same is true of the Agricultural Marketing Strategy
(AMS), which refers to the lack of access to finance. The donor assistance group in comments it issued
in 2004 emphasizes that finance is a central problem in the development of agricultural markets, and
should be recognized as a constraint in the AMS and that appropriate links be made with the rural
finance strategy.115
According to PASDEP, the Food Security Program (FSP) is designed to address problems of shortfalls in
food production, vulnerability to falls in consumption and incomes and consequent hunger that the
country has faced repeatedly, through adaptation of development alternatives to bring about a lasting
solution. Under this umbrella programme, the FSP Safety Net Program is addressing asset-building
interventions with 8.29 million people from chronically food-insecure households. The Safety Net
Program, through its anticipated transfer of resources, will help “prevent asset depletion”, which is an
important factor for the attainment of food security at household level. Under the FSP, support
112
World Bank (2005), Poverty Reduction Progress Report (DOCUMENT No 65)
113
PASDEP (2006)
114
PASDEP (2006)
115
Comments of the DAG, see www.dagethiopia.org
115
includes promoting supplementary income sources in non-farm activities such as strengthening
market effectiveness and credit services through microfinance institutions.
The Financial Sector Strategy of 1998 has the following objectives: to link the financial sector to the
agricultural-development-led industrialisation, and bring about the development of a sound and
liberalised financial system with the final objective of efficient financial intermediation serving the
development of agriculture and industry. The strategy emphasises on the following fields:
• Savings mobilization;
• Modernization of commercial banking;
• Development of financial markets;
• Prudential banking;
• Specialised banks; and
• Policy-based lending
116
Annex 22: Targeted lending programmes in Ethiopia
There are a number of government development programmes with a credit component, the major
ones being the food security programme and the fertilizer lending programme. As dictated by the
microfinance law, government development programmes or projects and institutions are not allowed
to directly deliver financial services. Nevertheless, Regional Governments (knowingly or unknowingly)
are violating this law, for example through efforts to implement the food security package loan
through multipurpose cooperatives or using their local government administration office.
Some regional bureaus have started delivering MSE loans through banks by providing 100% credit
guarantee. The Women Fund, under the Ministry of Women, is also distorting the microfinance
market by providing a “revolving fund”, which is unlikely to be sustainable. The Regional Governments
are eager to implement the development programmes of their region through microfinance. However,
these programmes have weaknesses in terms of efficiency, impact and negative implications for
sustainable access to financial service provision.
In the realm of employment promotion, agricultural production and food security, the Regional
Governments are actively using targeted lending as a development instrument. Annex 23 details the
results from field visits in four regions (Bahir Dar, Awassa, Addis and Oromia) and describes the
lending practices in which government is involved. Targeted credit programmes, which are highly
subsidized, are an integral part of the government's poverty alleviation efforts and MSE development
strategy. These credit programmes are based on disbursement plans as part of a MSE development
package. Disbursement problems (delays, below-plan disbursement) seem to be common.
In most cases, the extension officers select borrowers. The government agencies promoting these
credit programmes are also involved in enforcing repayment using non-financial means of pressure
such as moral suasion. Credit is not based on sound analysis of the creditworthiness of the person and
the project being financed. Regional Governments determine the price (interest rate) of these
targeted loans based on development considerations and not with a focus on the sustainability of the
service and the financial institution. Interest rates charged in the targeted programmes are much
below the real cost of the loan. There is no clear separation between development and financial
programmes. Programmes for the very poor such as food aid programmes or employment creation
programmes for the youth or women are often declared as a loan but repayment is not enforced. MFIs
report that these programmes severely distort the market and sometimes good MFI clients even
desert the MFI in favour of a subsidised programme. This practice destroys credit discipline and harms
the business of MFIs.
Lending to cooperatives is another weak area. Government programmes motivate the formation of
cooperatives by young people to get free land, market access and credit services. These types of
cooperatives are extremely risky in terms of loan recovery and sustainability as the members did not
choose the cooperatives but were rather seeking the incentives made available through them. In
Addis, young people in the construction sector form cooperatives to access land and then sell their
produce to government. Credit is part of this programme but the whole set up is not sustainable.
Some MFIs reported that people take the interest rates of publicly subsidised schemes as “market
rates” and therefore the benchmark. They perceive higher rates, which MFIs need to cover their costs,
as an abuse which threatens the credibility and viability of microfinance. Such an approach fosters a
recipient mentality among programme beneficiaries.
117
Annex 23: A rapid assessment of promotional credit schemes
in Ethiopia – four field visits
Martina Wiedmaier-Pfister, ECBP/GTZ Consultant, 28th February 2007
Background
The Ethiopian government has adopted several economic reforms to address poverty including
policies and strategies to encourage savings, private investment, increasing income opportunities and
the promotion of small-scale industries in the informal sector. The Federal Government’s Rural
Development Strategy, the Industrial Development Strategy, the Food Security Strategy, the Poverty
Alleviation and Sustainable Development Plan (PASDEP) and other documents emphasise
microfinance as a good entry point to achieve the development objectives of the region, curb the
dangerous increase in poverty, and meet the United Nation’s Millennium Development Goals (MDGs).
The objective of these strategies is to reach more and poorer people. At the same time, the strategies
aim to improve the supply of credit to promote private investment in profitable businesses and
thereby strengthen self-employment.
This paper describes evidence from MFIs, the Commercial Bank of Ethiopia (CBE) and Regional
Government (Micro and Small Enterprise Promotion Bureau) offices collected during the consultant’s
field visits in January and February 2007. Based on these findings, it summarizes several fields for
further discussion. The document focuses on targeted lending approach including subsidised interest
rates being discussed in the Engineering Capacity Building Programme (ECBP).
The Urban Financial Intermediation Programme (UFIP)
In 2006, the Ministry of Housing, Works and Urban Development established an 5.2 billion Birr Urban
Development Fund using CBE excess liquidity for the purpose of creating employment and fostering
construction in urban areas. The fund, fuelled by the excess liquidity of CBE, provides funding for
government-backed MFIs for which the Regional Governments issue a 100 % guarantee. It is lent to
MFIs at 4% to 5.25% interest per year (still being negotiated) and used for the targeted lending
programmes of the regional Governments (see examples below).
Amhara Region
The Amhara Regional Bureau for MSE Development planned to disburse 260 million Birr in 2007,
continuing with this until 2009. The programme is for town and urban development. It is being
implemented in partnership with two financial partners, Amhara Credit and Savings Association (ACSI)
and Commercial Bank of Ethiopia (CBE).
Regional Government and CBE – urban package
Of the 260 million Birr, 120 million will be delivered by CBE at between 7.5% and 10%. The interest
rate varies according to the project being financed. The programme is limited to selected towns. The
bureau selects the borrowers and takes the credit decision. CBE merely acts as a disbursement stop.
More details are in the box below. Funding comes from the Urban Financial Intermediation
Programme.
118
Urban Package of the Regional Government Amhara and CBE
•
•
•
•
•
•
Policyholder level: Target group – the very poor without collateral.
Delivery structure: Regional Government forms Urban Cooperatives or individual loans.
The amount of 119.2 million Birr is to be disbursed to 65,366 small business operators.
The loans are fully guaranteed by regional government .
RG takes credit decision.
CBE disburses the loan (and collects it) but has no say in the credit decision. In practical terms CBE gets
lists of borrowers/beneficiaries to which loans shall be disbursed.
• Disbursement of CBE loan funds is within tree days if RG has approved it.
• Loan duration one to three years.
• Interest rate charged by CBE is 7.5 %
Ato Tesfaye Getachew (Regional Government, MSE Bureau Bahir Dar) states that “quick loan delivery is very
important”. The three days which CBE needs to disburse the loan do not reflect the duration of the loan
analysis, since this is done in the RG.
ACSI and the Regional Government
The Regional Government’s mode of cooperation with ACIS is different to that with CBE. In the urban
programme framework, the RG guarantees the working capital loans for MSEs in the construction
sector as well as ACSI’s funding from UFIP.
ACSI is among the biggest MFIs in the country and the major microfinance service provider in Amhara
Region. As of the end of 2006, it has more than 536,000 clients and is a profitable MFI expanding in
new areas and diversifying its products. For example, ACSI is venturing into individual and collateral
based lending through its urban branches, called “Microbanks”. Three such urban branches are
already operating. Three more were planned for 2007.
ACSI implements its "Productive Safety Net Programme" via the Microbanks. The programme is for
condominium construction and related micro-enterprise activities, eg. to produce material and sustain
the production process. Funding comes partly from UFIP. The interest rate the MFIs pay is still subject
to discussions in the UFIP committee. According to information from CBE (MSME department) it was
set at 5.25 %.
Apart from UFIP funds, ACSI uses own funds (savers money and other funding sources) for these loans.
Under this programme, ACSI gives two types of loans: for equipment which is secured by a leasing
contract; and for working capital which is fully secured by a 100% guarantee of the City
Administration.
At beginning of February 2007, actual disbursement was 50 million Birr and another 20 million were in
the process of being approved. Interest rates charged vary between 10% and 12,5%. Loan amounts
are on average 15 000 per person, eg. 150 000 Birr for a cooperative of 10 people.
According to ACSI, credit demand is higher than loanable funds available. UFIP is a funding programme
for urban construction and it does not finance other kinds of projects. Another critical aspect is that
ACSI has had high drop-out rates among its clients when they join the relief programmes (see box).
119
Amhara Credit and Savings Institution
ACSI was established in the Amhara region to fill the gap of formal institutions by meeting the
needs of small-scale borrowers in income-generation schemes. It was initiated by the Organization
for the Rehabilitation and Development in Amhara, an indigenous NGO engaged in development.
In a move to depart from the more usual direct provision of relief, the NGO set up a department
to start supplying small credit to rural people on a pilot basis. That department grew in to a
separate institution, and ACSI was licensed as a microfinance share company in April 1997.
ACSI delivers four types of financial products: credit, savings, pension fund management and
money transfer. Through its 10 branches and 174 sub-branch field offices, it has reached all
Woredas in the region, and operates in more than 2 133 Kebeles or Peasant Associations (nearly
69% of the total). As of December 2006, ACSI had an outreach of over 536 000 active credit clients
in its regular credit programme and a 2 190 million Birr outstanding loan balance. With an
estimated potential market of about 2.9 million people in the region – according to the
management of ACSI – ACSI and other smaller MFIs and SACCOs in the region only reach between
10% and 12% of the demand.
ACSI needs more funding even though the Urban Financial Intermediation Programme (UFIP) has
been established, which is said to be “inflexible and very bureaucratic (many restrictions and
requirements),“ according to the Managind Director of ACSI. ACSI could have allocated – and
recover – 1 billion Birr in 2007 if they had funds. It covers 54% of its lending volume from savers’
money and planned to increase this to 72% in 2007 by applying new mobilization strategies.
A loan guarantee fund with the Swedish Development Agency (SIDA) and the local government
was established on a 50/50 risk sharing basis amounting to 20 million Birr with CBE. Other MFIs in
the region may also access this fund (PEACE and WISDOM).
According to the managing director, ACSI does not agree with the RG's approach to form
cooperatives since they tend to be unsustainable. Cooperatives are also said to distort the market
as many are formed only to disburse money, eg. from the Food Security Programme. One reason
for this is that cooperative promoters are salaried people. They form coops as repayment is not
important to them (short-term view). Loan clients of ACSI/MSEs need “finance plus services”, eg.
marketing and business management, for which ACSI refers them to the government extension
workers. In terms of directed lending and subsidized interest rates in the region, ACSI complains it
was pushed to reduce its interest rate from 12,5 % to 10%.
ACSI has two loan programmes: One for rural joint liability groups (Grameen technology) at 18%
interest rate (loans up to 5 000 Birr) and one for individuals, ie. larger loans. ACSI can now lend up
to one million Birr, but has an internal limit of 500 000 Birr. Loans are channelled by urban
branches called Microbanks (MB). MBs have been established in three places (Matama, Barhir
Dar, Sakaota) and it was planned to open another three MBs in new places in 2007. ACSI plans to
grant 3 000 to 5 000 loans through the MBs. MB staff have completed a four-week training course
carried out in the region by the CBE.
Data at the end 2006:
Loan clients: 536 000 (23 % growth compared to end 2005)
Branch network: three Microbanks (urban branches); 10 branches; 174 sub branches
Disbursement in 2006: 662 million Birr
A new MIS was due to be finalized in June 2007.
Source: Information from ACSI and USAID on ACSI (February 2006)
120
Awassa Region
The Regional Government in Awassa (MSE Buereau) also uses the government-affiliated MFI OMO for
its development plans. In six entrepreneurial sectors (among those textile and garment, construction,
agro processing) its extension workers deliver support coupled to credit.
Recently, OMO – traditionally only involved in rural microfinance operations– has established an
urban credit department and hired and trained 150 new credit officers for its 70 branches. OMO does
not rely on a MIS to communicate with its branches.
Since the RG considers OMO’s lending capacity as limited, it has been considering establishing a new
MFI to significantly improve loan supply. Experiences from a previous lending programme were not
satisfactory for the Regional Government.
The consultants highlighted that the establishment of a sustainable MFI, for which external know-how
could be made available, requires that basic conditions are in place. These conditions are related to
the out-phasing of subsidised lending programmes. They signal a price for loans which is much too low
compared to the cost of lending and thereby severely distort the market. Furthermore, a sound
governance structure with a non-politicised board experienced in financial matters is crucial. Related
to this is the neeed for a diversified ownership structure, ie. not only the government but also private
investors such as local banks.
Oromia Region
In 2006, the Bureau of Trade and Industry in Oromia introduced the one-stop-shop concept. Eight
hundred extension officers were trained and 300 towns region-wide were selected.. Training for
extension workers on credit delivery forms part of the new approach.
Oromia Microfinance Institution is the financial institution in charge of the financial side. The Regional
Government embarked on discussions with other MFIs (PEACE and WIDSOM), however, theyse were
found to charge interest rates the RG considered too high. The RG also found them to be not flexible
enough in terms of the new strategic approach.
For example, in Adama, a middle town, extension workers and one credit officer share one office. The
extension workers help interested MSEs to develop their business idea further, prepare business plans
and understand the loan requirements.
In the budget year 1999/2006-2007, the Oromia Bureau – via Oromia MFI - planned to allocate loans
amounting to 323 million Birr. Nothing has been disbursed so far although 80 million Birr has been
approved. Out of UFIPs 5.2 billion Birr, 1.5 billion has been allocated to Oromia for five years.
Findings from MFIs in Addis
The consultants visited two private and NGO-based MFIs in Addis. Both MFIs have slightly over 2 000
and 7 000 clients respectively, are not yet covering their costs and require funding to increase lending.
These MFI do not have access to UFIP as no government agency would provide a guarantee for them.
They charge effective interest rates of between 27% and 30% a year.
Aggar MFI
Aggar is the only fully private MFI in the country – 443 shareholders, including NIB Bank, established it
in 2004. After three years of operations the MFI serves about 2,000 loan clients. Aggar has two
branches in Addis. It offers three loan products and charges a 12% flat rate (which is an effective
interest rate of 24%) plus an upfront 3% service charge. Borrowers are obliged to contribute
compulsory savings upfront of 6% and 10 to 20 Birr monthly, depending on the loan product.
121
According the managing director, Ato Haile Leta, who has long-standing experience in MFIs in
Ethiopia, Aggar is struggling to become operationally self-sufficient, for which a significant increase in
customers is necessary. Therefore, with the help of CIDRE (a French NGO) Aggar plans to open rural
branches in an area 150 km away from Addis to expand and diversify its business. Lending in urban
areas is reported to have inherent threats such as false documents and people moving and not being a
reliable guarantor. Furthermore, the competition of Addis MFI (owned by the City Administration),
which lends at 10% and is aggressively expanding its business, makes its business rather difficult.
Meklit MFI
Meklit is a NGO-based MFI with about 7 000 clients. It is not yet able to fully cover its operational
costs (operational self-sufficiency). Demand for loans, even at an interest rate similar to that of Aggar,
is high but funding is reported to be among the major constraints. Meklit plans to increase its interest
rate for voluntary savings to 4% to attract new funds. However, in general, clients prefer to save in the
CBE as – according to the Meklit manager – they consider this a safer place.
The managing director of Meklit is concerned about the excess liquidity channelled solely to the
government-owned MFIs for the urban programmes. Meklit fears that these loans will crowd out its
operations as they are given at a very low interest rate.
Findings and conclusions
(1) In all visited regions, targeted credit programmes are an integral part of the government's
poverty alleviation efforts and MSE development strategy. Modes of implementation vary
according to the region. Generally, these programmes are highly subsidized (final interest rates
between 7.5% and 12% effectively). Government-backed MFIs116 are used as the vehicle. In all
but one case (ACSI), the regional government selects the borrowers.
(2) Outreach based on disbursement plans is not the same as sustainable outreach. Programmes
designed with a disbursement plan often suffer from problems (delays, below-plan
disbursement). Planned credit allocation can hardly be matched with qualified credit demand. A
quick look at the list of selected borrowers in one region in food processing revealed that some
MSEs no longer exist or had not yet begun operating. The question is whether the initial
investment plan will still materialise. Often, for the entrepreneur, targeted lending either comes
too late or too early. This approach does not ensure proper loan use.
(3) Experience in other countries has highlighted cases of targeted loans that were used for
something other than the planned investment or even for consumption. We have no empirical
evidence from the field in Ethiopia as to whether loans are used for the initially stated purpose.
(4) We have heard that some government agencies are promoting loan programmes and enforcing
repayment with non-financial and sometimes unethical means of pressure which. from a purely
financial point of view, may look positive. Its questionable whether these means are helpful in
developing a credit culture in the long term. Also, the question arises whether these borrowers
understood that a loan – promoted by a government agency – has to be repaid and that the
investment risk is with the borrower, despite the extension workers advice.
(5) Combining extension work and credit, as in the Amhara RG-CBE and Oromia one-stop-shop
programmes, is not conducive to proper loan analysis and an independent credit decision. The
risk is that credit given is based on extension work and the related planning of disbursement for
employment creation (clear interdependence of credit and extension services) and less on sound
credit analysis assessing the creditworthiness of the person and the project to be financed.
116
The term government-backed MFIs refers to MFIS owned by regional government or by local NGOs which are government driven.
122
(6) The targeting of credit through the UFIP programme117 using a quota system for each region and
for construction work is a rather narrow funding source for MFIs. Some complained about the
bureaucracy of the fund. This may result in low compliance in some regions or zones, whereas
other MFIs or regions with a more vibrant and qualified credit demand may fall short. In Oromia
Region, out of 323 million Birr funds earmarked for 2007, only 80 million were approved, which
signals that disbursement targets for 2007 would not be reached. Disbursement pressure in the
remaining time may negatively affect the programme. The result is that programmed funds for
urban construction are underused while promising enterprises in other sectors cannot be
financed because of a shortage of funds.
(7) The price of these targeted loans is determined by the Regional Governments, based on
development considerations and the sustainability of the service and the financial institution.
With the latter, the cost of the financial product would have to determine its cost. Actual prices
charged in the targeted programmes are a lot below the real cost of the credit.
(8) There is no clear division between development and financial programmes. Programmes for the
very poor such as food aid programmes or employment creation programmes for the youth or
women should be given as a grant. MFIs have reported that disbursements under those
programmes are often declared a loan whereas later repayment is not enforced. This destroys
credit discipline and negatively effects the lending efforts of MFIs.
(9) The highly subsidized and targeted loan programmes severely distort the microfinance industry
and threaten its sustainability and growth in the following sense:
• People take the interest rates of publicly subsidised schemes as market rates and a
benchmark. They perceive that higher rates, for example the 7.5 % of the CBE-RG programme
which MFIs need to cover their costs, as an abuse that threatens the credibility and viability of
microfinance. Such an approach fosters a recipient mentality among “beneficiaries” of the
programme.
• In some cases, a government guarantee may signal that loans do not have to be repaid and
this hampers the development of a credit culture among people. This has been reported from
loans to cooperatives.
• The growth of sustainable financial service providers is impeded since the interest rates
charged do not provide for the real cost of loans.
• Access to credit is limited to one time for the investment in line with public planning (eg.
construction) and based less on professional business and entrepreneurial decisions.
• MFIs are pushed into a business they hardly know, some of them even expand rapidly and in
an unhealthy way, such as OROMO MFI and OMO MFI.
• Independent assessment through the market of good entrepreneurs for commercial loans is
not effective. Extension workers pre-select entrepreneurs and take loan decisions based on
development criteria rather than the risk profile of the enterprise.
• The downside is that MSEs have only limited access to credit as access is based on criteria
other than creditworthiness or the entrepreneurs personality or project. This fosters
inefficient loan allocation.
“Targeted loans are not used properly, and don’t go to the right people. Experiences from similar programmes (Food Security)
are that often the better off receive funds and not the extreme poor. Furthermore, these programmes target the same people
as microfinance, mostly group lending.” Ato Makonen, Managing Director of ACSI
117
Urban Financial Intermediation programme established by the Ministry of Work and Urban Development
123
Annex 24: Support from international development agencies
The French AFD
The French Agence Française du Développement (AFD) has appraised the establishment of a
guarantee facility for MFIs in 2005.
German Development Cooperation (ECBP)
The German Development Service (DED) plans to support five centres in regional capitals with a
combination of TVET, the work of the Regional Micro and Small Enterprises Development Agencies, a
Business Development Services (BDS) expert, a voucher scheme expert and a microfinance expert (the
latter only in three or four centres).
The German Development Cooperation (Gesellschaft für Technische Zusammenarbeit, GTZ) as main
partner of the Engineering Capacity Building Project (ECBP): under its component 4 (Private Sector and
Business Development) it supports the process of developing a NMFS.
The German Financial Cooperation Kreditanstalt für Wiederaufbau (KfW) has singed implementation
arrangements with the ECBP to set up a guarantee facility to (partly) secure commercial banks’ lending
to MFIs. It will also build the capacities of MFIs for MSME lending.
Ireland
Irish Aid supports AEMFI technically. Formerly, it coordinated the donor forum but has now cut down
on its support.
Italy
The Italian Development Co-operation has been active in the microcredit sector through the Arsi and
Bale Rural Development Programme, an Ethio-Italian Development Cooperation support programme
to Arsi and Bale Zones. The programme started in 1996 and planned to exit in 2007. Its overall
objective was to improve food security and reduce poverty through interventions at Woreda level
while fostering a decentralized planning. To achieve this objective, it supported five MFIs (OCCSO,
PEACE, BUUSAA GONOFA, Meklit, Wasasa) providing credit, savings and insurance products to
smallholder farmers and rural small entrepreneurs. Italy is also providing co-funding with the World
Bank and CIDA to the Food Security Programme in Ethiopia, which includes a component of
Community Grants.
Netherlands
The Netherland’s Cooperation, SNV, plans to set up a small Financial Intermediation Fund for
innovative financial products directed at value chain financing as part of its programme “Support to
business organizations and their access to markets”. (Data from 2005)
ICCO is supporting both MFIs and RUSACCOs through its Terrafina program. Terrafina assists six MFIs
and 14 RUSACCOs. Terrafina also plans to establish a guarantee fund scheme for MFIs. Banks have
been invited to offer their terms.
Oxfam Nova
Oxfam is supports AEMFI to streamline the entire Ethiopian MFI sector with research studies and
related pilot projects on product development, the introduction of MFIs in pastoralist communities,
mainstreaming gender as well as HIV/AIDS in MFIs, awareness raising and advocacy and campaign
124
lobbying. Oxfam Nova also supports three MFIs, namely ESHET, PEACE and DECSI through both loans
and grants to support mainly the expansion of their MFI programmes both in geographic outreach and
the number of clients.
Sweden
The Swedish International Development Cooperation Agency (SIDA) has supported the
implementation of Management Information Systems (MIS) for a number of MFIs. It has also provided
ACSI with funds for on-lending amounting to about US$5 million as part of SIDA’s Amhara Rural
Development Programme (which is in its last phase now).118
United States
The United States Agency for International Development (USAID) creates and supports community
savings and credit groups in food insecure areas (2004 – 2008) and is providing MIS software and
training to the Amhara Credit and Savings Institute (ACSI). Since 2004, USAID has been implementing
a ten-year credit guarantee facility that serves small and medium sized enterprises through three local
private banks. In a previous program, USAID established rural savings and credit organizations
(RUSACCOs).
RUFIP
The largest development programme is described in the main text (Box 11).
International Labour Organization
Three years ago, ILO assisted the Cooperative Agency to work out cooperative policy. The document is
still on draft level.
June 20, 2007
118
Part of this support financed the rating of ACSI by Microrate where it was rated “a“
125

Access to Finance in Ethiopia: Sector Assessment Study (Volume 2)

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