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Regulating Microfinance in Ethiopia: Making it More Effective

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The fact that the Ethiopian government has established the regulatory framework early-on in the development of the microfinance industry has helped to lay out the roadmap for the development of the sector. In particular, the provision allowing MFIs to mobilize small savings from the public has enabled them to finance a substantial portion of their portfolio from internally generated sources. Subsequent improvements in the regulatory framework include the revision of the loan size ceiling for individual borrowers, the revision of repayment periods on loans from one year to two years, and removal of the interest rate ceiling on credit. This removes some of the key regulatory problems faced by the industry. But more needs to be done.

The Ethiopian MFIs still have no way of learning new insights from foreign banks, yet indirect foreign ownership cannot be fully controlled, and not enough Ethiopian-owned MFIs are forthcoming. The poor still do not have enough microfinance service providers from which to choose. While the interest rate ceiling on credit has been removed, a minimum on interest to be paid for savings persists, hampering savings mobilization in remote rural areas. Existing microfinance institutions, while targeting to reach the poor, are serving mainly men. Thus, the regulatory framework not only needs to find ways and means of helping the industry become more competitive and efficient in delivering flexible financial services to the majority poor, the regulatory mechanism also needs to be better equipped to supervise and monitor the industry.

This paper is one of a series of studies commissioned by the CGAP / IRIS Microfinance Regulation and Supervision Resource Centre.

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