Challenges and Prospects of the Ethiopian Microfinance Sector

Research Paper (postgraduate), 2015

11 Pages, Grade: Masters



1 Introduction

2 Statement of the problem

3 Research Methods

4 Challenges and Problems of the Sector
4.1 Fund shortage
4.2 Governance problem

5 Conclusion

6 Recommendations


1 Introduction

Unlike conventional banks, micro finance institutions provide diverse micro financial services as well as nonfinancial services, so as to address the diverse socio-economic needs of the poor who cannot afford collateral requirement of other formal financial institutions. Literatures have witnessed that microfinance plays indispensible role in poverty reduction, inclusive and equitable development, gender equality and HIV aids. This is because they serve economically and socially deprived groups of the society; they play not only financial intermediation role but also consultancy role in entrepreneurial skills; personal financial management and business plan development. Moreover, they empower and bring women and deprived groups together and let them share socio-economic information and knowledge as mostly they use group lending model. As result, micro financial services not only raise income of deprived groups, but also improve their health and level of education, and their influence on public decisions; these all credit their vital social role. Thus, it contributes a lot for human development which is an increasingly important sphere of development.

Countries may show high average growth rate, but in most countries the question of equitable distribution of income remains unanswered. Lack of equal financial access is one of the biggest reasons for high income inequality which, in turn, leads to crime and political instability which hampers the processes of economic development. These days, those countries which have introduced microfinance into their policy domain have reduced income disparity substantially; meaning these countries have successfully reduced poverty (Hisako Kai and Shigeyuki Hamori, 2009). Thus, micro finance institutions became one of vital tools to ascertain inclusive/equitable and sustainable development. As result, the importance of micro finance for poverty reduction has got momentum in the policy agenda of several countries like Ethiopia.

Since 1990s, reducing pervasive poverty and ensuring human development have been the objectives of the Ethiopian government. Accordingly, Ethiopian government has implemented various types of poverty reduction programs; such as micro and small enterprises development, access to finance, and different donor aided programs; and as result, proportion of population below poverty line has declined steadily to 29.6 percent in the year 2010/11 (Ministry of finance and Economic Development, FDRE). In this respect, the government of Ethiopia has a firm belief in pivotal role of microfinance in poverty reduction. Thus, microfinance is considered as one of the important tools for combating poverty by supplying credit for productive poor and giving them opportunity to save; thereby ascertaining access to finance.

This paper primarily targeted at identifying the current problems and challenges of the Ethiopian microfinance sector and to, subsequently, recommend remedial measures.

2 Statement of the problem

Ethiopia is one of world’s fastest developing countries which has prepared intensive development plan and exerting greater efforts to alleviate poverty so as to realize inclusive and sustainable development. In this respect, the country has well recognized microfinance services as one of important tools for poverty reduction or inclusive development. Ethiopian microfinance sector is showing high growth trend from time to time, but there are a plenty of financial and governance problems in the industry that may result in systemic risk unless appropriate measures are taken as early as possible. So, the issue is how we can create sustainable microfinance sector that can serve the poor on continuous basis and let the sector realize the very mission of poverty reduction and inclusive development.

Many studies have depicted that Ethiopian microfinance institutions are faced with numerous problems and challenges, such as low outreach, fund shortage, limited product diversification, limited research and innovation, and weak internal control system and MIS (Dr Woldey A, 2001; Yigirem K, 2010; Microfinance transparency, 2011 ). However, giving solutions for these problems is unlikely to provide long-lasting relief from the undesired effect. Thus, the question is what the root causes of these all problems are? This is yet not answered. Thus, this study is primarily aimed to identify the root causes of aforementioned problems, and to recommend subsequent measures to be taken.


Excerpt out of 11 pages


Challenges and Prospects of the Ethiopian Microfinance Sector
Addis Ababa University  (National bank of ethiopia)
Catalog Number
ISBN (eBook)
ISBN (Book)
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589 KB
Ethiopia, Microfinance, Challenges, Prospects, Microfinance Institutions, Remedial Measures
Quote paper
Sintayehu Desalegn Ossa (Author), 2015, Challenges and Prospects of the Ethiopian Microfinance Sector, Munich, GRIN Verlag,


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