Microfinance in Ethiopia: Performance, Challenges and Role In Poverty Reduction

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The 1999/2000 Household Income Expenditure Survey and Welfare Monitoring Survey (WMS) conducted by the Central Statistical
Authority (CSA) states that about 44.2 percent of the people of Ethiopia live below the absolute poverty line. Poverty in the country is the result of many complex factors and the interventions needed to reduce it are diverse. The delivery of financial services to the poor
is one of the important instruments in reducing poverty in Ethiopia. The provision of financial services to the poor in Ethiopia has increased through MFIs in a short period of time. The outreach and sustainability of microfinance institutions have increased
significantly. There is clear empirical evidence that microfinance institutions are efficient but unprofitable due to low lending interest rates. The MFIs have mobilized significant amounts of savings and addressed the difficult task of reaching the rural poor. This is partly the result of a favorable legal and policy environment in the country. The limited impact studies also indicate that the delivery of microfinance services has increased income, and social services of households and improved the conditions of women clients. In spite of the significant outreach of the microfinance institutions, clear regulatory framework, mobilization of huge public savings, and solid
government support to the industry, there are various problems which include: difficulties in addressing the financial needs of the
poorest of the poor, limited support to micro and small enterprise development, limited awareness on the role of microfinance in
poverty alleviation, lack of loan fund, weak legal system, delivery of supply-driven financial products, low lending interest rates, limited capacities of the National Bank of Ethiopia and microfinance institutions, poor infrastructure and HIV/AIDS. The Ethiopian MFIs should focus on the responsiveness of their financial products to the needs of their clients, i.e., MFIs should learn from what their clients wanted and then produce products by incorporating the information from market research or needs survey, on one hand, and develop built-in tools to measure the impact of their program on the needs of their clients on the other

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