Microfinance in Ethiopia

The history of modern banking in Ethiopia dates back to the turn of the last century (1906), during the reign of Emperor Minilik II, with the establishment of the Bank of Abyssinia, managed by the British-owned National Bank of Egypt (National Bank of Ethiopia (NBE), 2001). However, access to a secure and formal financial service continues to be a problem for the majority of the rural and urban poor. Historically, the major sources of finance for the rural and urban poor in Ethiopia is the informal sector, which includes friends and relatives, local money lenders, the eqquib, the iddir, traders, etcetera. Relatives, friends, and private money lenders are the most important informal sources of finance (Emana et al., 2005; Dejene and Kibre, 1995, cited in Amha, 2003).

32 _{The reasons include: if a woman burns food; argues with a husband, goes out without telling her husband;} neglects the children; and refuses to have sexual relations with her husband.

Country profile, the study’s areas and the study’s microfinance institutions

Emana et al., (2005) have found that only one percent of the households in their studies accessed credit from commercial banks. This could be partly because commercial banks are mostly located in the urban centres, where less than 20 percent of the population resides. Demeke et al., (1998) have demonstrated that over three-fourth (79%) of the districts in Ethiopia did not have a formal bank branch. Access to credit from the formal financial institutions is also constrained by the heavy collateral requirements of the banks. Historically, the Development Bank of Ethiopia, the former Agriculture and Industrial Development Bank of Ethiopia (AIDBE), has been engaged in lending for fertilizer and improved seeds through farmers’ cooperatives. The input loan of the then Agricultural and Industrial Development Bank of Ethiopia was characterized by a high loan default rate (Shiferahu and Amha, 2001) particularly in the early 1990s (Demeke et al., 1998). In 1992, the AIDBE was renamed the Development Bank of Ethiopia. The National Bank of Ethiopia revised the Rural Credit Policy (1988) in 1992, and raised the lending interest rates. In 1994, the commercial Bank of Ethiopia started to deliver rural credit (Demeke et al., 1998).

In Ethiopia, providing credit to poor men and women has a recent history. In 1990, a pilot microcredit scheme (in selected urban areas) was initiated and implemented through an agreement between the Ethiopian government and the International Development Association (IDA). Other major government- and donor-supported credit projects in the 1990s include the microcredit scheme for microenterprises implemented by the Regional Trade and Industry Bureaus, and the fuel wood carriers project of the Ministry of Labour and Social Affairs. In recent years, the World Bank, the Italian Cooperation, other donors, and the Ethiopian government initiated the “Ethiopian Women’s Development Initiatives Project” to finance women microentrepreneurs, and to provide skill training courses and organizational capacity building activities to women.

The history of the operation of NGOs in Ethiopia can be traced back to the provision of relief services during the Ethiopian famine in the early 1970s. Following the famine, NGOs gradually shifted to long-term development work. Microcredit had been one of the key development components of NGO poverty alleviation interventions in the country. The NGO microcredit programmes in Ethiopia used flexible methodologies that were intended to fit the needs of target groups, and introduced innovative approaches, such as organizing groups and providing training to support income-generating initiatives to their target groups. Nevertheless, in the mid 1990s, following the global microfinance movement, various criticisms emerged regarding the role of NGOs in the microfinance service delivery in Ethiopia. According to Amha (2003), the microcredit activities implemented in Ethiopia prior to the issuance of the country’s microfinance law in 1996 had several limitations. The main criticism was that the NGO financial delivery system was not based on sound and sustainable financial principles (Amha, 2003, citing ACDI/CEE, 1995). The microcredit initiatives had been largely project-oriented, and had not been designed to address the financial needs of the poor in a continuous manner. In addition, credit was subsidized with a low lending interest rate. The main focus was on microcredit, with little focus on other financial services, savings included.

As described in Chapter 1, in 1996, the Federal Democratic Republic of Ethiopia issued Proclamation No. 40/1996 for the licensing and supervision of microfinance institutions in the country. The proclamation has laid the ground for the establishment of microfinance institutions in Ethiopia that could play a financial intermediary role to address the various financial needs of the rural and urban poor in a sustainable manner. Since then,

microfinance has gained particular prominence as a poverty reduction and development strategy in Ethiopia. Until 2008, about twenty-seven Microfinance Institutions (MFIs) were registered under the National Bank of Ethiopia to deliver financial services to the poor in the different parts of the country, of which six MFIs were regionally based institutions, initiated and supported by their respective regional governments. By mid-July 2007, about twenty-seven microfinance institutions in Ethiopia had over 1.6 million active clients, with an outstanding loan balance of over ETB 2.5 billion and a client saving balance of nearly ETB one billion. The two regional based MFIs, namely the Amhara Credit and Saving Association (ACSI) and the Debit Credit & Savings Institution Share Company (DECSI) accounted for over half (55%) of the total active clients of the MFIs in the country, and another three regionally based institutions, the Oromiya Credit and Saving Share Company, the Omo Microfinance Institution, and the Addis Credit and Saving Institution all together comprised over a quarter (28%) of the total active clients of the MFIs in Ethiopia (See Appendix, 4.1) (AEMFI34, 2008). This shows that the Ethiopian microfinance sector is largely dominated by regional microfinance institutions.

Recent data about the proportion of female clients of microfinance institutions in Ethiopia are not available. In 2001, women accounted for about 38 percent of the active clients of twenty microfinance institutions in Ethiopia. The extent of the proportion of female clients ranges from 13 percent in the Oromiya Credit & Savings Institution S.C (OCSSCO), to 92 percent in the Asser MFI (AEMFI, 2001 cited in Amha, 2003; see Appendix, 4.2).