Loan Provision by Micro Financing Institutions for Poverty Reduction and Its Linkages with Local Economic Development Strategies in Ethiopia

Abstract

Micro Financing Institutions (MFIs) loan provision to poor is proving as a key strategy for poverty alleviation and inadequate access to credit by the poor has been identified as one of the contributing factors to poverty. To this end, this studies aims at assessing linkages between MF loans Provision in line with local economic development and provide basis for policy formulation at regional and national level in regard to MFIs and LED. To attain this objective, studies from Ethiopia and other countries have been reviewed. Empirical reviews showed that these institutions provided opportunities for self-employment; improved women's security; autonomy, self confidence and status within the society and household; helped in improving children’s Education. Above all, as pro-poor program; they targeted the most vulnerable groups in society, particularly women, who remain confined to households with little or almost no assets. In Ethiopia, great efforts are being made since last two decades by expanding MFIs loan provision services to the various groups of the people specifically the poor to facilitate poverty reduction effort. Despite the increasing reliance on MFIs as one of the instrument to reduce poverty in Ethiopia; very little work has been undertaken to examine the linkage of the microfinance expansion with local economic development (LED) strategy of the particular region. The studies reviewed revealed that there has been duplication of business undertaken in various parts of the region. This is due to lack of linkage and synergy of the loan provision by MFIs to the LED strategy of a given local area in particular and regions in general. The reviewed literature indicated that on account of decentralization of the development plan to optimize the potential of each region and mobilize resources; the local governments have been empowered to undertake social and economic development endeavor.

It has also been found that, the Growth and Transformation Plan (GTP) (2010/11-2014/15) and LED were closely aligned. The interconnection between GTP and LED existed directly through the micro-small scale enterprises (MSE), cooperatives and other associations. Since LED aims to create efficient and functioning local economies as a consequence it has a direct alignment with growth and transformation efforts. Therefore, linking the microfinance loan provision to the local development priority appeared is very critical for the sustainability of the MSE businesses to benefit from local available potential resources for poverty alleviation program. Empirical evidences reflected that the current urban policy, the MSE strategy and the regional development framework provided additional opportunities for the implementation of LED and creating synergy between MFIs & MSE in Ethiopia. In light of the above view, the current MFIs loan provisions and local development priority of various regions as very important point of emphasis unseen in Ethiopia. Moreover, the findings of the study revealed that there is clearly identified lack of synergy between MFIs, MSE, Cooperatives Agency, Local administrative apparatus and LED in various regions in Ethiopia. This necessitates  the stakeholders have to set policy that fills up  the gap and create strong linkage between MFIs loan provisions to LED priority of particular regions to assure the sustainability of MSE businesses; and enhances the contributions of MFIs for poverty alleviation in Ethiopia. All in all, the researcher recommends that both Federal, regional government and other concerned stakeholders to work towards digging deeper to find keys to success.

Key words: MFIs Loan Provision, Linkages, LED strategy