Livelihoods Through Micro-enterprise Services? Assessing Supply and Demand Constraints for Microfinance in Ethiopia

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In this interesting paper, which was presented at the 3rd International Conference on the Ethiopian Economy, Getaneh Gobezie reviews the background to rural financial intermediation as a key development intervention in poor countries. He notes that despite some successes, there continue to be significant problems which limit both the supply of and demand for financial services in poor countries such as Ethiopia. In Ethiopia the rural financial landscape is still dominated by informal suppliers – formal services are weak or non-existent. Informal sources do not generate enough affordable finance for business to stimulate economic development. The government has provided encouragement and an improved regulatory environment but despite this the spread of modern financial services, including microfinance, remains extremely limited.

The author explores this problem using an analytical framework developed by Claudio Gonzalez-Vega which focuses on three gaps: the inefficiency gap, the insufficiency gap and the feasibility gap. He first focuses on the supply side and examines policy, regulation and supervision issues, organizational behaviour and ownership, and institutional capacity for innovative service delivery. For example, he notes that the emphasis in microfinance policy and regulation that limits loan size and terms in an attempt to focus on the poorest, may prevent more entrepreneurial people from obtaining the finance they need. Some people suggest that the secondary income and employment effects of providing services to the vulnerable non-poor and the “missing middle” helps the poorer (usually risk adverse and non-entrepreneurial) people more effectively than requiring all to become business people.

With regard to organizational behaviour, Getaneh considers that NGOs involved in micro-finance delivery without a license are becoming real dangers to the growth of the industry. Often, their system of lending involves some irregularities including subsidized interest rate, mixing business with charity and not following strict business discipline in the treatment of delinquency etc, which would make clients dependent on such operations and would potentially endanger the healthy operation of the whole micro finance industry. Another issue is that most MFIs start by replicating the microfinance methodologies and products from other MFIs. Clients are then forced to fit to procedures, terms and conditions of the MFIs. Little regard has been accorded to the importance of “market research” to understand the financial needs and preferences of clients (and potential clients), how borrowing and saving fits into their money management strategies to meet day-to-day needs, manage risk, and take advantages of opportunities, etc. In Ethiopia the solidarity group method has been reasonably acceptable but for some the endless weekly meetings are not popular.

Challenges also remain on the demand side. For the majority poor, the communication system in rural areas, particularly the road network, bars them from accessing services. Where access is possible, clients limited skills in business development ensures their financial absorptive capacity remains weak. Many are risk averse, or don’t like (for cultural reasons) to venture into non-traditional activities, while others have a very low income perspective and simply don’t have the demand for such income-improving services. Such problems manifest themselves more profoundly among women, whose very access and benefit from financial services is further limited by the male-dominated patriarchal societal system prevailing in the country.

Closing the supply and demand gap is a daunting task but not impossible. The author concludes with the following suggestions: better supervision of charity-oriented NGOs involved in microfinance, removal of interest ceilings on savings accounts, diversifying the lending methodology towards more individual lending, better training for micro-bankers, improved rural infrastructure (particularly the road network), expanded business advisory services which are linked with activities to bring about cultural transformation.

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