Ethiopia's microfinance institutions play a key role in accessing the nation's 'unbankable' population. By making the provision of loans available to more people, they open up opportunities that would otherwise be closed off to the vast majority - in particular by enabling groups to share the burden of debt. As several MFIs consider transitioning into banks, this 'missing middle' must not be forgotten. Fortune Staff Writers DAWIT ENDESHAW & MENNA ASRAT report
Ethiopian banks and financial institutions are currently reporting their earnings to shareholders. In the midst of increasing expenses and diminished earnings, their profits have shrunk. In the pursuit of much needed profits by banks, microfinance loans – a fixture for Ethiopia’s rural agriculturalists and micro-entrepreneurs – are beginning to be identified as a way to improve the performance of some private banks.
As Ethiopia’s banking system seems closer to opening itself up to international ownership and competition, and as its environment and needs change, Micro Finance Institutions(MFI) are looking at expanding their services for Ethiopia’s growing population. This comes as a Deloitte survey indicates that 65pc of the Ethiopian banking market is restricted to competition because of the record amount of capital imposed by the government to enter the market. On top of this, it is also reported that 78pc feel that existing regulations obstruct growth.
Ethiopia’s financial sector makes up 10pc of the country’s total GDP.
Ethiopia currently has 3,187 bank branches throughout the country. Out of these, 34.4pc are within Addis Abeba. MFIs have the bulk of their branches in rural areas, with 1,360 branches and satellite offices. These satellite offices are smaller agents of the microfinance institutions, which aren’t official branches but work within existing businesses.
Based in Bahir Dar, entrepreneur Askal Admassu dreamed of starting a private school a decade ago. Finding a loan from the banks in here was challenging.
“At the time, the process of getting loans from private banks was difficult for me,” reflected Askal. “I didn’t understand the bureaucracy involved.”
She discovered an alternative form of financing with the Amhara Credit & Saving Institution (ACSI).
The ACSI was established in 1995, as a division of the Ethiopian Relief Organisation. In 1997, it was re-established as a share company and was licensed by the National Bank of Ethiopia. Starting with a capital of three million birr, it has now reached a capital of 3.8 billion Br – with 436 branches and satellite offices – in just under two decades.
“It was the cumbersome process of getting loans from commercial banks that pushed me to look into ACSI,” said Askal. “Though the interest on loans is higher and the return period is shorter than commercial banks, I still prefer ACSI.”
In Ethiopia, MFIs play an integral role in providing access to financial services to people in rural areas, as well as to micro and small scale urban and rural entrepreneurs. Individuals who would not otherwise have access to financial loans, have the chance to borrow and venture in to an arena they would otherwise be restricted in. MFIs emphasise the need to be accessible to rural farmers and small scale urban actors.
Micro-financing – an idea that originated from Bangladesh’s Nobel award-winning economist, Muhammad Yonus – was started in the 1970’s. In Ethiopia, it was started by offshoots of charity and relief organisations, trying to rehabilitate drought and war affected communities. The first experiment was in Tigray in 1994. In 1996, it became a self-contained entity via a proclamation. Since then, 35 microfinance institutions have been set up. These have now expanded their outreach and services to millions. Out of the 35, 11 are government owned.
Like any financial institution, MFIs are governed by the National Bank of Ethiopia (NBE) and are required to have policies that enable lower income citizens, more-so in rural areas, to access financial credit. Its noted service is allowing group guarantees substitute for collaterals. This basically enables citizens to save and borrow together, while being jointly responsible for ensuring the debt is paid back – sharing, and thus reducing, the risk.
There are 16 private banks and two state owned banks active in Ethiopia.
Given higher risks of no return, the interest rates on loans from MFIs are considerably higher than those of banks. Rates range from eight to 25pc, with no collateral requirements – and often few necessity for adequate work or life experience.
“Average MFIs have lending rates of 15pc, so it isn’t a huge difference,” says Wolday Amha (PhD), head of the Association of Ethiopian Microfinance Institutions.
“The Missing Middle” small enterprises, mostly women-owned, that find it difficult to access financing and loans. The collateral requirements for receiving a loan from bigger banks usually mean that medium and large enterprises are better served. Small businesses are left out of the running.
The Ethiopian microfinance sector has grown leaps and bounds since its inception.
Currently, the minimum amount of capital required to start a microfinance institution is two million Br – 250 times lower than the capital required for a bank. In total, the 35 MFIs have mobilised savings of 16.5 billion Br – 43pc higher than the previous fiscal year. In 2015/2016, Ethiopian MFIs increased their total capital to eight billion birr – a growth of 11pc (though that number is still five times lower than the aggregate capital held by the 18 commercial banks). This is slightly better than banks that are seen as mid-sized, like Wegagen, United, Abyssinia and Nib Bank.
Despite the fact that this method of micro financing is easy and accessible, they only serve 15pc of people considered to be poor.
According to the Harvard Entrepreneurial Finance Lab Research Initiative, small enterprises are not getting funding because it is too expensive for banks to have dedicated officers evaluating business plans and estimating cash flows. Venture capital firms are not willing to invest in businesses without a clear exit in case of failure.
There are 3.7 million active borrowers from microfinance institutions in the country. Nearly 90pc of the active borrowers are members of major institutions owned by the state – the Amhara Credit and Savings Institution (ACSI), Oromia Credit and Savings (OCSSCO) and Addis Credit and Savings (AdCSI).
The OCSSCO has achieved the most in terms of mirco-financing. Established two decades ago to meet the expected demands of accessible financing in the Oromia region and Addis Abeba, it now has 4.72 billion Br in assets and a total capital of 1.2 billion Br. It now aims to graduate into a conventional bank.
One of the celebrated components of micro-financing is that it offers financial education on savings and gives out vital community training on entrepreneurship. This is because they predominantly deal with loans that banks would not venture in.
“Microfinance institutions tend to work banking the unbanked,” an analyst observed. “Whereas banks work with already ‘bankable’ populations.”
For instance, OCSSCO has seen the demand for its services increase over the years. Just five years ago, it loaned a total of 1.59 billion Br to 546,602 clients; now, that figure has been increased to 3.429 billion Br and 786,864 clients.
In the same pattern, it has managed to boost the number of its branches from 247 to 312.
“Unlike the commercial banks, where by design they work with the rich, we work with the poor,” explained Tefera Abdeta, zonal manager at the OCSSCO.
Looking at its client base, OCSSCO has the same business model as most microfinance institutions – giving priorities to its rural poor and urban clientele.
The majority of its benefits, however, remain unknown to many.
“I personally use a bank for my financial needs,” a working class client reflected. “Because MFIs are inconvenient, but banks you can find on every corner.”
He noted how most MFI branches are placed in compounds and inside government-owned buildings.
“I think more people would use microfinance institutions if they knew exactly what they did,” said Maleda Tesfaye, an employee at the Boon House Café. “I myself use a bank and I think it’s partly because I don’t know other systemes.”
“There aren’t enough opportunities for people to learn about and use MFIs,” she added.
Mekonnen Yelewemwessen, CEO and Managing Director of the ACSI, agrees that awareness is a stumbling block to the sector.
“We don’t conduct advertising campaigns or awareness initiatives, like banks,” Mekonnen explained. “It becomes a problem with us sometimes.”
The lack of adequate employee training, technology and promotion of its services are some of the challenges that Ethiopia’s MFIs face.
The naturally high-risk populations that MFIs deal with means that their rate of return on investment is negative 2.3 pc. This means that MFIs have not seen any overall return on their investments yet. On the other hand, their annual average losses total over 800 million Br a year – a fraction of the 15 billion Br annual profit of banks. Banks have a return on investment of more than three percent.
The future of MFIs looks bright, however. The necessity for providing a service to the needy in hard-to-reach parts of the country is growing and such institutions are looking at expanding their services.
“If these microfinance institutions turn into regular banks, even though they have a comparable capacity already, their transformation may leave the poor with no option when it comes to finance,” said Tassew Woldehana (PhD), an economist, in an exclusive interview with Fortune. “If their transformation is said to be inevitable, there must be an alternative to replace their primary objective of serving people with low incomes.”
Oli Teferi, communications head at the OCSSCO, has contrasting thoughts on this subject, however.
“The microfinance institutions can give a parallel service as banks and microfinance providers,” he claims.
Within major cities, like Addis Abeba, MFIs are not well-known, nor are their benefits understood. Most entrepreneurs, even those restricted in their access to loans, see private banks as the only viable option.
However, MFIs seem to be making inroads and are beginning to be noticed in an industry in need of new initiatives.
The example of Askal is being repeated in many areas of the country. For her, traditional banks will not replace MFIs, even if her MFI becomes a bank itself.
“I will always prefer to use microfinance institutions, even if my ACSI transitions into a bank,” she told Fortune.
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