A Comprehensive Examination of the Sustainability Status of Microfinance Institutions in Ethiopia

Abstract

This article tried to present an overview of the Micro Finance Institution Sectors in Ethiopia and a Brief Profile and Empirical Findings of 4 Microfinance Institutions which are selected as samples for this article. Out of eight MFIs which are included in my PhD dissertation, only four MFIs are considered because of researcher’s access to their financial data available in their archives and their importance in achieving the purpose of this article.

The main purpose of this article focuses on a comprehensive examination of the sustainability status of 4 MFIs against the existing performance indicators and to pose a bold question of research framework to researchers regarding the appropriateness of the indicators used in my article.

I was very much interested to write this article recalling that Ethiopian Economy Financial System is not backed up by Credit Scheme while most of MIFs in Ethiopia are giving Credit Facilities to clients. If that is the case, I have a strong belief that MFIs should stay sustainable in their performance so that they could fill the gap which is missing in the Country’s Financial Economic System. For achieving the purpose of my article, performance indicators which include Client Outreach; Saving Mobilization; Number of Branches; Clients Served/Active Borrowers; Number of Clients Received Loan; Amount of Loan Disbursed; Number of Clients by Gender; Average Loan Size; Asset, Liability & Capital; Outstanding Loan; Revenue Generated & Expenses Incurred; and PAR & Operational Sustainability are used to make a comprehensive examination on the sustainability status of MFIs in Ethiopia. The rationale behind selecting these performance indicators is that they have been used by the institutions during their operational years to evaluate their performance in line with sustainability corridor and please note that the used indicators in my article are mutually exclusive.  The examination revealed that MFIs are having a positive/upward movement/ impact towards sustainability once their performance was measured against those indicators. This tells us that MFIs are doing well provided that the indicators are appropriate to measure sustainability.

Yet, in spite of the success of these microfinance institutions (MFIs), many difficulties remain which must be urgently resolved in view of their ambitious objectives. First, based on my practical observations, a large number of the rural households still lack access to financial services. This implies that even if the number of branches has been expanded and has had a positive impact on the sustainability of the sampled MFIs, the question of sustainability is still bold. In other words, we could say that most of the existing MFI are not yet sustainable especially considering the prevailing economic condition, consumerism behavior and the political affiliations. Second, these MFIs still need solid foundations to avoid management failures which are a major headache for them. Third, the MFIs’ clients should be given a due attention knowing that most of the time clients perceive that once they borrow money; they perceive that money as if it is from the government and feel that they should not repay it back which is a critical problem for MFIs here in Ethiopia to maintain their sustainability. I, therefore, would say that MFIs should first consider the character, creditworthiness and capacity of their clients before loan disbursement. Because it does not mean that having a large number of clients leads to sustainability as it is shown from the findings of this article.

Furthermore, this article poses a research framework question to academicians and researchers in the area whether these performance indicators are appropriate enough or not as far as sustainability is measured against them and if it is possible to draw a sort of conclusions just based on only big positive numbers. In other words, this article paves a way for a further research in this area of research.

Keywords: Ethiopian MFIs, Sustainability Status of MFIs, Sustainability Performance Indicators