Review on Performance of Formal Rural Financial Institutions in Ethiopia

Abstract

The main objective of this paper is to review performance and challenges of rural financial institutions in Ethiopia. Performance of the industry was reviewed in terms of outreach, financial sustainability and welfare impact. The main challenges of the industry were also reviewed. Relevant secondary data for the study were collected from published sources. The total number of active borrowing clients of the microfinance institutions in Ethiopia reached over 2.4 million customers in 2011 whereas the total credit extended by all microfinance institutions amounted to Birr 6.9 billion. Of the total credit granted, the share of the three largest Microfinance institutions is Birr 5.1 billion. Dependency ratio measured by the ratio of donated equity to total capital decline, ratio of retained earnings to total capital is rising letting the industry to be financially self-sufficient. Microfinance programs have improved savings of the respondents through letting access to saving services and increasing household income out of which they can use to save. After joining microfinance programs, mean monthly expenditure of the respondents has significantly increased in food, clothing, housing furniture, health, education, and service items.  Limited loan products, absence of legal title of assets in rural areas, less willingness from commercial banks to lend to MFIs without collateral, the less conducive legal environment in enforcing the loan contract, and shortage of logistic in rural areas are the major challenges reviewed.

Keywords: Microfinance, Sustainability, Outreach