In a vibrant and colorful ceremony, Ethiopian Microfinance Institutions last month celebrated a significant milestone: the 25th anniversary of their association. The event brought together executives, shareholders, industry experts, and champions of the sector’s development.
Amidst an atmosphere of excitement and appreciation, attendees engaged in lively discussions and panel sessions on various contemporary microfinance topics, shedding light on the remarkable journey of these institutions over the past quarter-century.
However, amidst the festivities, an important issue appeared to be overlooked—the growing deviation from their core mission.
Microfinance institutions exist to combat poverty, as emphasized by the late Wolday Amha, widely regarded as the Father of Microfinance in Ethiopia. Wolday believed that while microfinance couldn’t single-handedly address all the challenges associated with poverty, it played a crucial role in empowering the poor and marginalized. Unfortunately, the current state of microfinance in Ethiopia seems to have strayed from this noble objective.
One glaring example of mission drift is the difficulty faced by individuals seeking credit from microfinance institutions. Whether it’s financing housing or funding a small business, collateral has become a prerequisite. This trend has been observed among private MFIs for years, and now even the larger state-affiliated institutions-turned-banks are following suit. Consequently, access to finance may appear to be improving based on surface-level figures, but anecdotal evidence suggests otherwise.
Delving deeper into these statistics, while credit has grown by 28.8 percent, this does not necessarily indicate that the financing needs of impoverished households are being met.In fact, the average interest rate charged by microfinance institutions is over 20 percent, surpassing even the average rates for banks. Private lenders are even more exorbitant, imposing interest rates as high as 27 percent, often coupled with bureaucratic hurdles. Furthermore, MFIs typically deduct four percent of the credit as administrative expenses, adding to the burden borne by borrowers.
Regrettably, these indicators paint a picture of mission drift within Ethiopia’s microfinance landscape. However, there is an opportunity to reverse this trend and realign these institutions with their original purpose.
The first step is to establish an independent regulatory body dedicated to governing MFIs. Such an entity would actively listen to the concerns of these institutions and implement appropriate measures to support their growth. This would alleviate the burden on the National Bank of Ethiopia (NBE), which is currently overwhelmed with addressing macroeconomic issues.
The second measure involves allowing MFIs to collect savings directly from citizens, which necessitates introducing a legal framework. Currently, MFIs resort to purchasing deposits from investors with savings at banks at higher interest rates, making it an expensive endeavor. Enabling direct deposit collection by MFIs, as already permitted by existing proclamations, would require the revision of rules and the introduction of a single directive.
This legal revision is vital as it addresses a major factor contributing to the high cost of loans provided by MFIs.
Lastly, MFIs themselves must undergo a transformative change in their operational practices. This entails reassessing their approach and refocusing on their core mission of poverty alleviation. By placing greater emphasis on their intended purpose, these institutions can regain their original vision and make a meaningful impact in the lives of the underprivileged.
In the ever-evolving landscape of microfinance, MFIs must explore new avenues to enhance their services and reach a wider population. Two promising areas of focus are digitizing savings and introducing digital microlending, which hold great potential for transforming the sector and serving customers more efficiently.
One of the key advantages of digitizing savings is the convenience it offers to clients. Traditional savings methods often involve physical transactions and paperwork, leading to inefficiencies and time-consuming processes. By leveraging digital platforms and technologies, microfinance institutionscan streamline the savings process, allowing customers to deposit and withdraw funds easily through mobile banking or online platforms. This not only saves time but also provides a secure and transparent environment for customers to manage their savings.
Moreover, digital savings have the potential to reach underserved populations in remote areas. By utilizing mobile banking and other digital channels, MFIs can overcome geographical barriers and extend their services to individuals who may have limited access to physical branches. This inclusivity enables a broader customer base to participate in formal financial systems, fostering financial inclusion and empowering marginalized communities.
In conclusion, while the current state of Ethiopian microfinance institutions may indicate a shift away from their primary mission, there is hope for change. By establishing an independent regulatory body, introducing a legal framework for direct deposit collection, and reevaluating operational practices, these institutions can reclaim their purpose and contribute effectively to poverty reduction in Ethiopia.
Zelalem Tamir is an economics graduate with expertise in business and economics. The views expressed in this article are his own and do not necessarily represent that of the Magazine. He can be reached at [email protected].
