Efficiency and Productivity of Microfinance Institutions of Ethiopia: A Case Study on Specialized Financial and Promotional Institution (SFPI)

Abstract

Ethiopia has an estimated population of more than 90 million. Agriculture is the mainstay of the economy and approximately 83.2% of the country's population live in the rural areas. Ethiopia is one of the least developed countries. The per capita income of the country is only USD 550 during the current period. Poverty and food insecurity are the main challenges and fundamental issues of economic development in Ethiopia. To address the issues of development and food insecurity, several micro finance institutions (MFIs) have established and have been operating towards resolving the credit access problem of the poor. The motivating philosophy of this paper is that unless MFIs become viable and sustainable financial institutions, they can never fully realize their objective of reaching a greater number of poor people. In light of this, this paper has attempted to look at the Financial and Operating Performance of Specialized Financial and Promotional Institution (SFPI) at firm level and compare against the Industry Average (I.A) from Efficiency and Productivity. The major theme of this study is to examine the institutional-level Efficiency and Productivity of SFPI.Data for the study were from secondary sources and various ratios and indicators were used to measure the performance of SFPI. Fifteen years data from 2000 to 2014 were used to see the trend in its performance and revealed through tables, figures and ratios. The major finding of the study indicates that, SFPI’s productivity of the staff and credit officers has decreased from year to year. Number of active borrowers per staff has gone down from year to year. Similarly, the borrowers to credit officer ratio / borrowers per loan officer has decreased from year to year until 2010. However; SFPI’s Number of Active Borrowers per Loan Officer has shown a continuous incremental during the year 2011 to 2014 as compared to industry average. During the period of 1999 up to 2010 SFPI were scoring lower number of active borrowers per loan officers. On average SFPI has been able to serve only 461.69 active borrowers per loan officer during the study period which is lower than the average number of active borrowers per loan officer of the Industry Average (508.13). So, it is possible to say that on average SFPI is inefficient and unproductive than the industry average by using the productivity and efficiency measures. Similarly, the average cost per borrower for the Industry Average is 15.93% for SFPI which is higher than the average cost per borrower of the Industry Average (8.72%).This rate is very high compared to the industry average thus SFPI operates at highest cost per borrower compared to the industry average. So SFPI is not efficient in comparison to the operating expense ratio of the industry average. Therefore, SFPI is required to adjust its policy that affect the poor achievements may be factored into, ineffectual Human Resource Management (HRM) and high operating costs resulting from cost-inefficiency. The higher cost per borrower is a measure of inefficiency achieved by SFPI compared to other microfinance institutions in the same industry during the study period. Finally, the financial ratios independently are not enough to measure the performance of microfinance institutions. Thus, alternative financial measures such as Data Envelopment Analysis (DEA) and adjustment of the financial statements of the Microfinance Institutions (MFIs) shall be considered by further researchers.

Keywords: Efficiency, Productivity, Microfinance