Table of Contents

Advisors approval sheet …………………………………………………………………… I

Declaration ………………………………………………………………………………… II
Table of Contents ……………………………………………………………………….… III
List of tables ……………………………...………………………………………………. IV
List of Acronyms ……………….………………………………………………………….. V
Abstract …………………………………………………………………………………… VI

CHAPTER ONE......................................................................................................................5

INTRODUCTION...................................................................................................................5

1.1.BACKGROUND OF THE STUDY.........................................................................................5

1.2.STATEMENT OF THE PROBLEM .......................................................................................8
1.3. OBJECTIVE OF THE STUDY.............................................................................................9
1.3.1. General objectives of the study..............................................................................9
1.3.2. Specific objectives..................................................................................................9

1.4.THE SCOPE OF THE STUDY....................................................................................10

1.5.LIMITATIONS OF THE STUDY........................................................................................10

1.6. SIGNIFICANCE OF THE STUDY..................................................................................10
1.7. SCHEME OF CHAPTERIZATION..................................................................................11

CHAPTER TWO...................................................................................................................11

LITERACTURE REVIEW....................................................................................................11

2.1. DEFINITIONS OF PHRASES AND TERMS.........................................................................11

2.2. THE EVOLUTION OF MICRO FINANCE AT GLOBAL LEVEL............................................12
2.3. EVOLUTION OF MFIS IN ETHIOPIA..............................................................................15
2.4.CONCEPT OF POVERTY..................................................................................................16
2.5.MEASURES OF POVERTY...............................................................................................17
2.6.RECENT PROGRESS IN POVERTY REDUCTION...............................................................18
2.7.POVERTY IN ETHIOPIA..................................................................................................19
2.8.POVERTY REDUCTION...................................................................................................19
2.9.RELATED EMPIRICAL EVIDENCE...................................................................................23
2.10. SUMMARY AND GAP IN THE EXISTING LITERATURE.................................................26
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CHAPTER THREE................................................................................................................27

RESEARCH METHODOLOGY...........................................................................................27

3.1. DESCRIPTION OF THE STUDY AREA..............................................................................27

3.2. RESEARCH DESIGN......................................................................................................27
3.3. TYPES AND SOURCE OF DATA.....................................................................................27
3.4. TARGET POPULATION..................................................................................................28
3.5. SAMPLE DESIGN AND SAMPLING PROCEDURE..............................................................28
3.6. METHODS OF DATA COLLECTION.................................................................................29
3.7. METHODS OF DATA ANALYSIS....................................................................................29

CHAPTER FOUR..................................................................................................................30

DATA ANALYSIS AND INTERPRETATION...................................................................30

4.1. DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS.................................................30

4.1.1.Sex of respondents.................................................................................................30
4.1.2. Age of the respondents.........................................................................................31
4.1.3.Distribution of respondents by Marital Status......................................................32
4.1.4.Family size of Respondents...................................................................................32
4.2.CLIENTS LOAN USAGE..................................................................................................33
4.3.CLIENTS LOAN REPAYMENT SITUATIONS......................................................................34
4.4.CLIENT’S SAVING SITUATIONS BEFORE AND AFTER THE LOAN....................................36
4.5.THE CHANGE OF INCOME OF THE CLIENTS....................................................................37
4.6.Clients asset ownership changes before and after joining the SMFI .........................39
4.7.EDUCATIONAL STATUS BEFORE AND AFTER THE LOAN...............................................40
4.8.IMPROVEMENT OF THE CLIENTS HEALTH CARE BEFORE AND AFTER THE LOAN..........42
4.9.THE NONFINANCIAL SERVICES GIVEN BY THE SMFI AND THE CLIENTS PERCEPTION..43
4.9.1.Training.................................................................................................................43
4.9.2.Monitoring and supervision..................................................................................44
4.10.CLIENTS SATISFACTION/DISSATISFACTION................................................................46
4.11.FACTORS AFFECTING THE WELL-FUNCTIONING OF THE SMFI....................................48

CHAPTER FIVE....................................................................................................................50

SUMMARY, CONCLUSION AND RECOMMENDATIONS............................................50

5.1. SUMMARY AND CONCLUSION......................................................................................50

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 5.2. RECOMMENDATION......................................................................................................54

REFERENCES.......................................................................................................................56

APPENDIX I..........................................................................................................................61

QUESTIONNAIRE...............................................................................................................61

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 CHAPTER ONE

INTRODUCTION

1.1. Background of the study

It is very important to start with the meaning and definitions of the concepts of microfinance
and poverty as they are the main topic of the research looking in to their relationship and the
impact of one on another. According to Parker (2000) Microfinance is defined as the
provision of small scale financial services including microcredit, savings, payment services,
micro insurance and other services to the rural and urban poor clients who has no access to

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the banking services on sustainable basis. Dileo and Herbert (2007) defined Microfinance as
the provision of small scale financial services, primarily credit and savings, to low income
households and enterprises which have traditionally been excluded from the mainstream
financial system because they were thought not to need financial services, were considered
un-creditworthy or too expensive to serve.

As World Bank defined Microfinance, it refers to the provision of financial services to

low-income clients, including the self-employed. Microfinance is not simply banking, it is
a development tool. Microfinance activities usually involves: Small loans, typically for
working capital, Collateral substitutes, such as group guarantees, access to repeat and
larger loans, based on repayment performance, Streamlined loan disbursement and
monitoring, Secure savings products (Ledger wood J.2002).

Similarly, authors have given different definitions for the term poverty. Birrie (2015)
defined Poverty as by far a multidimensional concept which includes inadequacy of
income, deprivation of basic needs and rights and lack of access to production assets as
well as to social infrastructure and markets. In the past, poverty was largely described to
inadequate income. Recent studies however, emphasize that poverty is a multidimensional
phenomenon encompassing, among others, lack of resources and assets, poor or lack of
access to basic social amenities such as access to education, access to health care service
and clean water, absence of employable skills and limited knowledge as well as
deprivation of basic human rights that has economic, social and political implications
(Parker, 2000). Due to its multifaceted nature, combating poverty effectively and
sustainably requires integrated efforts. Poverty reduction measures should incorporate,
among others, social, economic and physical interventions. The provision of financial
service to the poor is one of the measures that can contribute to efforts aimed at alleviating
poverty. As noted by Rajasekhar (2004) and Schreiner (2002), financial outreach programs
aimed at providing material and other opportunities for the poor should be seen as one of
the tools being practiced by developing countries in their efforts to deal with poverty
reduction.

Schreiner (2002) argued that one of the bottlenecks in improving the wellbeing of the poor
people in developing and under developed poor countries is lack of access to credit from
formal financial institutes that requires collateral. Most of the loan available to the poor in

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such developing countries is obtained either from family, friends or informal money
lenders. When the poor tried to get loans from informal credit providers such as money
lenders, business men and pawn brokers, they are usually charged a very high interest rates
and forced to handover any valuable items they may possess as collateral which in the case
of failure to pay may not be collected back; and this may lead them to a worse than their
pre-loan situation. As compared to the above situations, microfinance emerged as a better
alternative method for satisfying the credit needs of the poor in their efforts to improve
their livelihood and move out of poverty. Microfinance appears to be an alternative and
organized means of getting credit service for those financially excluded portion of the
population and subject to exploitation by the informal money lenders. The customers of
MFIs are in the main low income persons who are self-employed and hence engaged in
micro and small enterprises (ibid).

Microfinance first started by Grameen Bank of Bangladesh in 1970s as a poverty reduction

strategy. Its practice has been expanded to various parts of the world; Asia, Latin America
and Africa (Aghion and Morduch, 2004). Some authors mentioned different roots for
microfinance, but the most widely accepted historical foundation is the story of the
renowned economist Professor Muhammad Yunus and the Grameen Bank. Muhammad
Yunus is the founder of Grameen Bank in Bangladesh. He started a series of experiment by
lending a small amount of money to the poor households in a small village called Jobra in
the year 1976. Through his experiment, Yunusassured that the poor not only make profit
from the loan they get but also that they can repay the loan in a reliable way. Microfinance
becomes a viable poverty reduction strategy and the experience of Grameen Bank
considered as a best practice during the 1970s and has seen considerable expansion and its
introduction in other parts of Asia, Latin America and Africa (Aghion and Morduch,
2004). Professor Yunus and Grameen Bank assured that the poor can not only profiting
greatly by access to loans but also they were repaying reliably. Khandker (1999) noted that
women making the majority of Grameen Bank borrowers were more reliable than their
husband. This practice also displays, if the poor gets access to credit /finance/, they can
make a reasonable amount of saving as the result of engagement in microfinance activities
and accumulate resource out of the income generating activities. In the process, Grameen
Banks approach had put a distinction between poor and working poor which refers that if
proper financial intermediation is provided to the poor, they can generate income and

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reduces poverty.

In Ethiopia, as other developing countries, financial services that can be provided to the
poor by banks are extremely limited. High costs of administering small loans and lack of
acceptable collateral are the major factors that hinder formal financial institutions from
serving the poor. As a matter of fact, the delivery of financial services and micro credits to
the low income poor households has a relatively short history in Ethiopia, which has its
roots in micro lending packages that were introduced as a component of relief related
operations conducted by non-governmental organizations‟ (NGO‟s) in the late 1980s.

The decision of the government of Ethiopia to re-organize and restructure the financial
sector in the 1990s had a significant impact on the growth of MFIs. Ethiopia put a legal
framework for microfinance institutions (MFIs) by proclamation No. 40/96. The issuance
of these proclamation is seen as an important breakthrough followed by a number of
regulatory directives and policies that help to protectand ensure the Prudential
safety of Microfinance institutions. According to Hailu (2006) Similar to Banks, MFIs
service provision also involve public property in the form of savings and credit that
requires supervision and regulation of the activities of MFIs by the state with a view to
ensuring sustainability and protection of depositors interest. Following the issuances of this
proclamation, several micro credit programs that were previously operated by non-
governmental organizations or various central and regional government departments were
transformed in to licensed microfinance institutions subject to regulation and supervision.
The institutional structures and operational procedures of the Ethiopian MFIs are the direct
copy of GrameenBank’smode and group lendingpractice is widelyused.

According to World Bank report (2014) In 2000 Ethiopia had one of the highest poverty
rates in the world, with 56% of the population living on less than US$1.25 PPP a day.
Ethiopian households experienced a decade of remarkable progress in wellbeing since then
and by the start of this decade less than 30% of the population was counted as poor.This
Poverty Assessment documents the nature of Ethiopia’s success and examines its
drivers.Even though, micro finance is said to be an effective toolto reduce several social and
economic problems of rural mass, still there is a gap to bridge between the targeted
objectives and reality. There is a need to study how micro finance institutions are
functioning in Sidama Zone Daleworeda towards alleviation of poverty and evaluating their

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performance. And, it is also believed that these findings will be helpful to responsible body
for better decisions.

1.2. Statement of the problem

Microfinance in developing country is a recent phenomenon and the poor households in
the country remain with limited access to formal financial services. Despite the recent
progress in the poverty reduction, 30% of the population of Ethiopia still living under
poverty line which requires various types of measures including access to financial
resources. In connection to these, improving the operational performance of the existing
MFIs and upgrading the scale of branches requires due attention and policy intervention to
reduce the prevalence of poverty in the country. Different empirical studies were
conducted on MFIs role on poverty reductions among them.

According to study conducted by Malepat and Gorwi (2011) a review of Ethiopian micro
finance institutions and their role in poverty reduction: a case study on Amhara credit and
saving institution (ACSI) found that MFIs are playing a dynamic role to uplift the poor and
downtrodden from centuries together. In contrast theefforts made by MFIs so far does not
even satisfy 10 per cent of the poor, particularly rural poor. They added that there is a huge
gap between the demand and supply parameters.

As per Guruswamy (2012) the study conducted on the role of microfinance institutions on
poverty alleviation in Ethiopia a Case Study with Special Reference to Dedebit Credit &
Savings Institution Mekelle branch after following the information collected from both
MFI’s managers and their clients, it was revealed that MFI have changed the life of poor
people in a positive way. Despite these achievements was further observed that some
conditions like high interest rates, loan application process & approval, collateral, service
delivery and lack of close relationship between institution management and the borrowers
have been limiting factors for poor people to access the MFI services. As disclosed above
there are a number of studies conducted on Impacts of MFIs on poverty reduction at
different areas in different MFIs. But Wolday (2002) argued that very limited researches
towards improving the financial sector have been observed. Even those limited researches
are more concentrated on institutional sustainability rather than client impact or
sustainability. Thus, studying the impact of microfinance intervention is important to fill
this gap. Comparatively as per knowledge of the researcher there is no researches conducted
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in Sidama zone on contribution of Sidama micro finance institution on poverty alleviation.
SMFIs have not undertaken an impact assessment study to understand or evaluate whether
or not its interventions leads to change by comparing the conditions without the
intervention. This particular study attempted to assess the impact of microfinance
intervention on poverty reduction by taking a case study of Sidama micro finance Dale
branch. Some indicators of poverty, which were used to assess impact in this study includes
change in asset ownership, income level, and housing, education and health condition. The
justification of selecting Sidama micro finance institution Dale branch, as a case study is
that, it focused on the marginalized poor people and its geographic coverage included both
urban and rural clients.

1.3. Objective of the Study

1.3.1. General objectives of the study

The ultimate objective of Microfinance institutions in Ethiopia is to contribute its role for
poverty alleviation. The general objective of this study is therefore, to assess the impact of
Micro finance institutions on poverty reduction.

1.3.2. Specific objectives

The study has the following specific objectives.

 To reveal the loan usage and repayment situations of the clients

 To evaluate the change in income and saving of the clients
 To analyze the changes in asset ownership, educational status and the health care of
the clients
 To identify and evaluate the non-financial services given by the SMFI
 To evaluate the satisfaction of clients with the overall services of the SMFI

1.4. The scope of the study

The scope of the study is limited to assess the Impact of Micro finance institutions on
poverty alleviation with special reference of Sidama micro finance institution of
Daleworeda branch house hold clients. In the study area there are two micro finance
institutions namely Omo micro finance institutions and Sidama micro finance institution.
The rationale to select Sidama micro finance is it provides its service for both rural and
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urban poor people. WhereasOmo microfinance has independent branch for rural people and
urban people therefore the researcher may not get urban and rural clients data from one
branch. In these studies only those clients who were active during last three years were
evaluated.

1.5. Limitations of the Study

The scope of the study area is limited due to finance, time and resource constrains. There is
also the problem of getting reliable information from respondents. Due to absence of an
initial survey before the implementation of the program, respondents may not recall the
situations before taking loans properly. In addition to this, limited empirical information in
the area causes the limitation. Because of this limitation, the study depends only on Sidama
micro finance Dale branch. Therefore, the study was conducted in Sidama Zone dale
woreda and Yirgalem town house hold clients.

1.6. Significance of the study

The main significance of the study is expected to contribute a part on how the microfinance
institutions and credit market should operate, the level of risk MFIs faces and the
appropriate financing structure that suggests sustainable business. The study indicated the
deficiencies in service provision by collecting data from the customers and helps the MFIs
to design their products and services in accordance with their customer’s demand. In
addition to the above importance, the study indicated the performance level of Ethiopian
MFIs in comparison with the best practice from Grameen Bank of Bangladesh and helps to
indicate the weakness and strength for futuredevelopment.

1.7. Scheme of chapterization

This study is structured in five chapters.

Chapter One: This chapter is introductory chapter and is focused on background of the
study, statement of the problem, objectives of the study, significant of the
study, scope and limitation of the study and organization of the study.

Chapter Two: is literature review focused on the review of different researches and related
literature dealing with assessing the quality of financial reports, factors that
affect the quality of financial reports, studies variables and hypotheses
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 development.

Chapter Three: The third chapter presents research methodologies that were used in
conducting the study, description of the study area, research approach, survey
design sample selection, data sources, data collection instruments and
measurement of variables.

Chapter four: was the main body of the study analyzing results and discussion of statistical
data was presented in this chapter.

Chapter Five: The final chapter represents the summary of findings, conclusion and
recommendations of the study.

CHAPTER TWO

LITERACTURE REVIEW

2.

2.1. Definitions of phrases and terms

Microfinance is defined as the provision of a broad range of financial services such as

Deposits, loans, payment services, money transfer, and insurance to poor and low-income
households and their micro enterprises. Microfinance does not only cover financial services
but also non-financial assistance such as training and business advice (Kessy&Urio 2006).
Microfinance is commonly defined as providing small loans and other financial services to
the poor people (Ananth 2011). According to the Report of the Committee on Financial
Inclusion (2008) microfinance services regulation bill which defined microfinance as
providing financialsupport to an individual or an eligible client, either directly or through a
group mechanism for(i) an amount, not exceeding Rupees Fifty Thousand in aggregate per
individual, for small and tiny enterprise, agriculture, allied activities (including for
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consumption purposes of such individual) or, (ii) an amount not exceeding Rupees One
Lakh and Fifty Thousand in aggregate per individual for housing purposes, or, (iii) such
other amounts, for any of the purposes mentioned at items, (i) and (ii) above or other
purposes, as may be prescribed (ibid).

Poverty at its broadest level can be expressed as a state of deprivation prohibitive of decent
human life. This is caused by lack of resources and capabilities to acquire basic human
needs as seen in many, but often mutually reinforcing parameters which include
malnutrition, ignorance, prevalence of diseases, squalid surroundings, high infant, child and
maternal mortality, low life expectancy, low per capital income, poor quality housing,
inadequate clothing, low technological utilization, environmental degradation,
unemployment, rural-urban migration and poor communication (Kessy and Urio 2006.). As
world bank report (1990) Poverty is defined as inability to attain a minimum standard of
living, a shortage of having enough to eat, a low life expectancy, a higher rate of infant
mortality, low educational standard, enrollment and opportunities, poor drinking water,
inadequate health care, unfit housing conditions and lack of active participation in decision
making process.

2.2. The evolution of Micro Finance at global level

One of South Asian man pioneered developmental policies which was called microfinance.
His name was Muhammad Yunus. In the late 1970’s, Yunus obtained his Ph.D in
economics in US. After these he started an organization called Grameen Bank. In his
hometown in Bangladesh, Yunus saw the extreme poverty in his country. Yunus was angry
with the formal institutions (e.g. the World Bank, commercial banks) because they had
failed to help his fellow citizens. Yunus believed that formal institutions pronounced a death
sentence on the poor because they rejected the poor as unworthy of credit, imposing a
financial apartheid (Laikem 2012). Yunus decided he would help the poor by stepping
outside of the formal institutions and providing small loans without collateral to groups of 5
borrowers; this became known as the Classical Grameen model. One village bank (of
several groups of borrowers) grew to two, and two grew to three, until Grameen Bank
became one of the largest microfinance organizations in the world. Yunus classical
Grameen model came to be known as microfinance (ibid).

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The challenge of reducing poverty and improving living conditions for the poorest
population is a difficult one. The betterment of poor people requires an effort that spans all
sectors of the economy and may be difficult to achieve through economic growth alone.
Improved access to financial services and training helps poor people by enabling payment
transactions then bring them into the formal sector. As Kumar (2005) &Wolday
(2003).Financial services serve poor people to use profitable business opportunities and
increases earnings. But most of the time financial markets serve poor people negatively.
However poor people often have insufficient traditional forms of collateral to offer, they are
often excluded from financial markets. The formal financial institutions are relevant to
provide credit facilities to the poor but they fear that loans would not be repaid. Poor
borrowers may face high transaction costs when they sought loans from formal financial
institutions. Those costs are time, travel and paperwork involved in obtaining credit. From
the 1950’s governments and international donors provided subsidized credit to small
farmers in rural areas of many developing countries. It was assumed that poor people faced
great difficulty in obtaining adequate amount of credit and were charged high interest rates
by monopolistic money lenders. Development finance institutions, like Agricultural
Development Banks were responsible for the delivery of credit services to poor farmers
easily. These institutions attempted to guide /control/ the uses to which loans were put and
repayment schedules were based on the expected income flow from the investment incomes,
which were often over estimated. As the result, most of the time loans may not be repaid.
The credibility and availability of these subsided credit systems were further weakened.
Hailu (2005) noted that fluctuating whims of governments and donors, together with poor
investment decisions and low repayment rates made many of development finance
institutions unable to sustain their lending programs. Donors and other resource providers
criticized the model of subsidized credit. They recommend that the model should transfer
from government intervention subsidy to market based solutions. Policy makers were
reminded that credit should be expressed as debt and that the over-supply of subsidized
credit without realistic assessment of people’s ability to repay could result in
impoverishment for borrowers (ibid).

Robinson (2001), noted that there are two known approaches in microfinance development.
They are poverty lending approach and financial system approach. Both approaches share
the goal of making financial services available to poor people throughout the world. The

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poverty lending approach focuses on reducing poverty through credit and other services
provided by institutions that are funded by donors and government subsidies and other
concessional funds. A primary goal of this approach is to reach the poorest of the poor
people with credit. Saving is not a material part of this approach. But involuntary saving is a
precondition for receiving the loan. The emphasis is on micro- credit, not microfinance.
These approaches were first realized in Grameen bank in Bangladesh. It has wide branch to
poor borrowers. But the approach has required large amount of continuing subsidies and
does not satsfy poor people’s demand for saving services. Due to these it has not proven a
globally acceptable model (Robinson, 2001). Hailu (2005) argued that with the failure of
credit institutions to address the households’ financial needs, the situation demanded an
innovative approach to address the lower segment of the population. The new approach
should correct the drawbacks of the old approach. This approach is called financial system
approach. The financial system approach focuses on commercial financial intermediation
among poor borrowers and savers; and also emphasis is given to institutional self-
sufficiency. The approach targets lending to the economically poor people, i.e. people with
the ability to use small loans and the willingness to repay and to voluntary save
mobilization. Bank Rakyat andBancoSol are models of profitable microfinance institutions
(Robinson, 2001). Bank Rakyat refers to Indonesian’s micro-banking system and Banco Sol
refers to salvia’s banking system.

Relevant targeting policies are needed to strengthen financial access for those groups where
services are most needed. The new paradigm was introduced as loans are made available in
small amounts at market rates, with low level of formality and limited requirements of
collateral repayment is undertaken frequently and rates of repayment in many microfinance
ventures are cited to be high. Many microfinance ventures also offer deposit-taking services.
In this context, microfinance is defined as “the delivery of such services by financial
institutions, which are small in size and informal in nature,” (Kumar, 2005). Many associate
microfinance with the provision of small loans to the poor. Both the products (loans) and the
market (the poor) fall within the preview of microfinance but they are more of its origins
than its present and future. Today microfinance has grown to cover a wide range of products
and services, from credits and savings to insurance and money transfers.

Today many people’s /authors/ agrees in the definition of microfinance as provision of

financial services to those excluded from the formal financial system in broader terms
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(Special Unit forMicrofinance, 2002). Joan Parker (2000), defines microfinance as the
delivery of financial services such as credits, savings, insurance and other services to clients
who are without access to the services of formal financial institutions on sustainable basis.
This is the broadly used definition of microfinance. Microfinance programs that focused on
the delivery of financial services to the poor gained a worldwide acceptance since
1980’s.The developments in the 1980’s expressed as a turning point in the history of
microfinance development. worldwide survey of 206 microfinance institutions that are
opened in or before 1992 found that, only 7 percent had been in operation before 1960; and
48 percent had been founded between 1980 and 1989 (Robinson,1995). Robison (2001)
noted that microfinance provided large-scale outreach and profitability in 1980’s for the first
time. In 1990’s it began development as an industry. Different microfinance institutions
were created in the 1990's. Some donor agencies have offered strong support for the shift
from donor-driven micro-credit programs to self-sufficient microfinance institutions, and
have initiated and coordinated the dissemination of best practices in microfinance on
regional and global scale (ibid). Recent studies recognize that poor and low-income people
shift from one poverty category to another as the opportunities and risks change. These
studies helped changes on the levels of poverty at which more poor people are reached by
today’s successful microfinance institution.

2.3. Evolution of MFIs in Ethiopia

The decision of the government of Ethiopia to liberalize and re-organize the financial
sector in the 1990s had a significant impact on the growth of MFIs. Ethiopia laid down a
legal structure for microfinance institutions (MFIs) by proclamation No. 40/96. The
issuance of this proclamation is seen as an important breakthrough followed by a
regulatory directives and policies that help to protectand ensure the Prudential
safety of Microfinance institutions. According to Hailu (2006) Similar to Banks, MFIs
service provision also involve public property in the form of savings and credit that
requires supervision and regulation of the activities of MFIs by the state with a view to
ensuring sustainability and protection of depositors interest. Following the issuance of this
proclamation, several micro credit programs that were previously operated by non-
governmental organizations or various central and regional government departments were
transformed in to licensed microfinance institutions subject to regulation and supervision.
The Ethiopian MFIs institutional set up and operational procedures are the direct copy of

V
GrameenBank‟smode and group lendingpractice.

2.4. Concept of Poverty

Poverty is a complex concept which does not fit into a neat definition. It entails a complex
interconnection of descriptors surrounding the livelihood status of people in communities.
According to the World Summit for Social Development held in Copenhagen in 1995,
“Poverty has various manifestations including lack of income and productive resources
sufficient to ensure sustainable livelihoods; hunger and malnutrition; ill health; limited or
lack of access to education and other basic services; increased morbidity and mortality from
illness; homelessness and inadequate housing; unsafe environments; and social
discrimination and exclusion. It is also characterized by lack of participation in decision
making and in civil, social and cultural life”.

The World Bank Institute (2009) pronounced poverty as “deprivation in well-being”. The
conventional view links well-being primarily to command over commodities, so the poor
are those who do not have enough income or consumption to put them above some adequate
minimum threshold. This view sees poverty largely in monetary terms. Poverty may also be
tied to a specific type of consumption; thus someone might be house poor or food poor or
health poor. These dimensions of poverty can often be measured directly, for instance by
measuring malnutrition or literacy. Moreover, World Bank defines poverty in terms of
“capability” of the individual to function in society. Thus poverty arises when people lack
key capabilities, and so has inadequate income or education, or poor health, or insecurity, or
low self confidence, or a sense of powerlessness, or the absence of rights such as freedom of
speech.

United States Department of Agriculture’s Economic Research Service, on its side stated an
individual’s as poor when they have income that will not purchase the basic needs of food,
shelter, clothing, and other essential goods and services. Poor people have an impressive
ability to generate savings if given the opportunity. Even though solid evidence shows that
many poor people are creditworthy, they are often denied access to credit and financial
services and thus face a strong disadvantage in terms of capital. The poor also suffer from a
lack of access to markets and information and from an inability to enforce their rights and
organize themselves.

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Given that poverty is very much complex phenomenon, in this study it is defined as a
condition in which individuals lack the basic necessities like food, water, shelter and
clothing as well as other fundamentals to life like health, education, security, opportunity
and freedom (Wanyama et al, 2008). Deprivation of these basic and fundamental demands
of life results into the exclusion of the individual in society due to lack of capability to
function and exercise the freedom of choice.

2.5. Measures of poverty

Measures of poverty are different in different countries. Commonly the income or
expenditure level that can sustain minimum standard of living measures it. Also poverty can
be commonly measured by constructing a line called poverty line. Getahun (1999)
expressed that the cross cutting level which is constructed from monetary estimates of
minimum needs is said to be poverty line. According to world Bank (1991) poverty line is
also defined as a threshold level of per capital income or consumption level below which an
individual is labeled to be poor. The poverty line represents a minimum level of economic
participation in a given society at a given period of time. People below this line is said to be
poor. Poverty line can be estimated in absolute poverty and relative poverty approaches.
Absolute poverty is a condition in which people barely exist. In these situations, the
availability of the next meal will be a matter of life or death. Absolute poverty is a critical
condition in which people live on aid, food relief or their own meager returns from squatter
farming, prostitution, scavenging on refuse tips and so on (Todaro, 1997). It tends to
identify those who are starving without any comparison made with others. According to
world Bank report (2014) in Ethiopia, absolute poverty is measured by comparing a
household’s consumption per adult equivalent to the national poverty line defined as 3781
Birr in 2011. The poverty line indicates the minimum money required to afford the food
covering the minimum required caloric intake and additional non-food items. The following
three poverty measures are commonly used to assess poverty:

i) Incidence of poverty (headcount index): The headcount index for the incidence
of poverty is the proportion of individuals in the population living below the
poverty line.

ii) Depth of poverty (poverty gap): The depth of poverty indicates how far, on
average, poor households are from the poverty line. It captures the mean
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 consumption shortfall relative to the poverty line across the whole population. It
is obtained by adding up all the shortfalls of the poor (considering the non-poor
are having a shortfall of zero) and dividing the total by the population. Thus, the
depth of poverty shows the total resources needed per capita to eliminate poverty
assuming that all poor individuals would obtain exactly the shortfall between
their consumption and the poverty line.

iii) Poverty severity (squared poverty gap): The poverty severity takes into account
the distance separating the poor from the poverty line (the poverty gap) as well
as the inequality among the poor. Conceptually, poverty severity puts a higher
weight on households/individuals, who are further below the poverty line.

2.6. Recent Progress in Poverty Reduction

Today the average household in Ethiopia has better health, education and living standards
than in 2000. Life expectancy increased and progress wasmade towards the attainment of
the MillenniumDevelopment Goals (MDG), particularly in gender parityin primary
education, child mortality, HIV/AIDS,and malaria. While in 2000, only one in five women

in rural areas had an antenatal check-up, more than one in three women attended an
antenatal check-up in 2011. At the same time, the prevalence of stunting was reduced from
58% in 2000 to 44% in 2011. The share of population without education was also reduced
considerably from 70% to less than 50%. Finally, the number of households with better
living standards measured by electricity, piped water and water in residence doubled from
2000 to 2011. Trends in household consumption and monetary poverty during this time also
point to consistent (World Bank 2014)

2.7. Poverty in Ethiopia

Poverty is mostly the disclosure of developing countries like Africa, Asia and Latin
America. Ethiopia is among the developing countries in the world facing bitter poverty. As
per UNDP (2003) it ranks 169th out of 175 countries. According to World Bank estimation
that the per capita income of the country is less than USD 110. Poverty remains the worriers
issue for the political, economical and social Stability of the country. The majority of
Ethiopian populations are living in rural areas where poverty is more widespread than in
urban areas. From total population, about 45% of the rural populations are below the
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nationally defined poverty line, while it is 37% for urban population. These shows that
poverty is also deeper and severer in rural areas than in urban areas. On average, the income
of the rural poor is 12.1% far from the poverty line, while it is 10.1% for the urban poor
(Tassew, 2004). Similarly MoFED (2002) estimated the poverty incidence of 45.4 % and
36.9 %, depth of 12 % and 10 % and severity of 4.6% and 3.9% for rural and urban Ethiopia
respectively.

According to Wolday (2003) extreme poverty manifests itself in terms of different social,
cultural and economic indicators, such as backward and dominantly rural population, high
illiteracy rates, repressed women, high reproduction rates, high dependency ratios,
overcrowded housing system, unsafe drinking water, widespread of HIV/AIDS, drought etc.
Most of the poor are women, children, the elderly, small scale farmers and unskilled
workers. These people faced lack of financial capacity to meet the minimum standards of
living (AEMFI, 2005). Generally the socio-economic situation of the country is
characterized by low rise of income, inadequate social services, high population growth
rate, economic inefficiency and high unemployment rate.

2.8. Poverty Reduction

The problem of poverty is stronger with several interrelated characteristics in developing
countries. Poverty reduction has remained a very complex and critical concern among
developing countries for a long time. It has been major agenda for policy makers and
development workers. However, a large number of governmental and non-governmental
organizations and international funding agencies all over the world have been engaged in
attacking poverty using several strategies and instruments (Rao and Bavaiah, 2005). The
model to reduce poverty has evolved over the past 50 years in response to understanding of
the complexity of development. In the 1950’s and 1960’s, many scholars considered large
investments in asset and infrastructure as the primary means of development. In the 1970’s
the transfer of emphasis grew that physical capital was not enough for development but also
health and education were important not only in their own right but also to promote growth
in the incomes of poor people. In 1980’s another shift of emphasis was developed on
improving economic management and allowing greater role for market forces, promoting
labor-intensive development through economic openness and investment in infrastructure,
and providing basic services to poor people in health and education (WB, 2001). In 1990’s

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the paradigm designed the strategy to attack poverty in three ways towards improving
governance and institutions to address poverty. These strategies are promoting opportunity,
facilitating empowerment and enhancing security (ibid).

The overall economic growth and equity are vital in the effort of reducing poverty. In this
situation the role of the state is greater to support the buildup of human, land and
infrastructure assets that poor people own or to which they have access. Strengthening the
participation of the society, particularly the poor, in political process and in decision
making, removing the social and instructional barriers that resulted from distinctions of
gender, ethnicity and social status and also establishing sound and responsive institutions
are important to bring the overall growth and benefit to the poor. Reducing vulnerability to
either natural or man-made hazards enhances the well-being of the people and encourages
investment. This can be done by building the assets of poor people, diversifying household
activities and providing a range of insurance mechanisms (ibid). The multidimensional
nature of poverty leads to greater complexity in poverty reduction. Thus, there is no
universal blue print instrument in poverty reduction. Developing countries need to prepare
their own policies to reduce poverty on the basis of national priorities and local realties.
Their choice may depend on the economic, political, social, structural and cultural context
of the countries. But action at national and local levels may not be enough for rapid poverty
reduction. International cooperation is required to ensure gains to poor countries and to poor
people within developing world through debt relief, material as well as technical assistance,
loan and providing market opportunities. Even if developing countries have coherent and
effective homegrown policies in poverty reduction, rich countries and international
organizations have an important role in promoting global financial and environmental
stability, lowering market barriers to the products and services of poor countries.
Simultaneous actions to expand opportunity, empowerment and security can create a new
and dynamic change. If the developing world and the international community work
together by combining real resources, experience, knowledge and imagination, there will be
a rapid progress in poverty reduction in new millennium (WB, 2001). The world
development report reviewed seven systems for change, which needs urgent priority for
poor people around the world. They are change from:

 Material poverty to adequate assets and livelihoods

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  Isolation and poor infrastructure to access to services

 Illness and incapability to health, information and education access

 Unequal and troubled gender relations to equity and harmony

 Fear and lack of protection to peace and security

 Exclusion and impotence to inclusion, organization and empowerment

 Corruption and abuse to honesty and fair treatment

Poverty reduction strategies are the outcomes of the insights and lessons drawn from the

liberalization drive of structural adjustment programs experienced by the IMF, the world
bank and the world community at large during the 1980’s and 1990’s. In this approach,
growth has never sufficiently trickled down to reduce poverty reduction. The two
institutions reached to an agreement that country owned poverty reduction strategies be the
basis for World Bank and IMF concessional lending and guide the use of resources freed by
debt relief under the enhanced HIPIC initiative. This was the genesis of poverty reduction
strategy at the global level (MOFED, 2002). World leaders agreed to a set millennium
Development Goals (MDG) of time-bound and measurable goals and targets for
overcoming poverty and hunger, disease, illiteracy, environmental degradation and gender
inequality. This is called The Millennium Development Goals endorsed by all members of
the United Nations set out eight specific crosscutting and interrelated goals that are essential
to reduce poverty. The first seven goals focused on the duties of poor countries to meet the
goals. The eighth goal is aimed at the rich countries and their commitment to respond to
developing countries political and economic reforms with increased economic assistance,
lowered import barriers and the deduction or elimination of unsustainable debt (UNDP,
2003). The main precondition for achieving the millennium goals is sufficiently fast and
equitable economic growth in developing countries to provide the material resources for
reducing all kinds of poverty including human poverty.

The governments of developing countries are the most important actors in the development

process. No amount of foreign aid can be effective in any country where the government is

V
corrupt or fails to implement good policies. Formulating comprehensive national
development priorities and coordinating their achievement is a crucial task that can never be
entrusted to the private sector or to any foreign aid providers (WB, 2003). Ethiopia is one of
the developing countries, which is faced with a complex, deep, broad and structural problem
of poverty. The proportion of the population below the poverty line is estimated at around
44%. Thus, poverty reduction has become the core development agenda in Ethiopia like of
other developing countries (Assefa, 2004). Several reforms are undertaken in social,
political and economical aspects to reduce poverty in the country. Ethiopia’s development
policies, strategies and programs adopted since 1992/93 have been concerned with how to
bring sustainable and equitable development and then reduce poverty. With the above
objectives, Ethiopia has formulated a Sustainable Development and Poverty Reduction
Strategy Program (SDPRP) in 2002. The program produced the basic framework for
achieving fast and sustainable development and reduces poverty. The focus is on some
selected key social and economic sectors. The main sectors on which development efforts
would concentrate and which are considered as priority areas are agricultural and rural
development, infrastructural development (road, water, telecommunication, electric power),
and education and health sectors (MOFED, 2002). Women and men have different access to
critical economic resources and varying power to make choices that affect their lives. This
leads to unequal roles and responsibilities of women and men.

The government of Ethiopia has recognized that any development effort ignoring or limiting
the participation of women cannot be successful. Thus, the government of Ethiopia
committed to reduce poverty in addressing gender dimensions and targeting poor people.
The government of Ethiopia has taken encouraging steps by privatizing the nationalized
institutions and facilitating the establishment of new organizations. One of the outcomes is
the liberalization of the financial sector and the establishment of legal framework that
allows the emergence of microfinance institutions to serve poor households (Tsegaye,
2005). The government tries to solve the problem of financial access to the poor by
promoting the microfinance institutions. The government believes that microfinance
institutions are one of the instruments in poverty reduction. The delivery of financial
services has been viewed as one of the antipoverty tools of the development programs
because of creating employment opportunities by increasing their income and consumption
and then reducing poverty. Improving financial access to the poor also facilitates economic

V
growth by easing liquidity constraints in production, by providing capital to start up new
production. Therefore, the introduction of microfinance will have a significant effect in
reducing poverty at macro and micro levels (Wolday, 2003)

2.9. Related Empirical Evidence

As other developing countries, in Ethiopia financial services that can be offered to the poor
by conventional banks are extremely limited. High costs of administering small loans,
process of application acceptance, lack of management cooperation and lack of acceptable
collateral are cited as the major factor that affects formal financial institutions from serving
the rural poor. As a matter of relevant facts, the delivery of financial services and micro
credits to the low income poor households has a relatively short history in Ethiopia, which
has its roots in micro lending packages that were introduced as a component of relief
related operations conducted by non-governmental organizations‟ (NGO‘s) in the late
1980s.

Like other studies these study has review of empirical studies on the impact of micro
finance institution on poverty reduction. Some of them are presented as follows:-
According to the study conducted by Noreen et al (2011, p12) they Presented study
examined the role played by microfinance in poverty alleviation using concepts like
education of children, housing, security of food, expenditure by households and assets
owned by households. A sample of 384 customers of four microfinance institutions was
selected using multi-stage cluster sampling. The results shows a positive and significant
effect of microfinance programs on children education and household expenditure,
whereas, there was no significant impact of microfinance on housing conditions,
consumption of food items and ownership of household assets (ibid).

Obeng (2011) conducted a study on Impact of Micro finance credit on poverty reduction in
rural areas a case study of Jaman North District, Ghana. The researcher was used
questionnaire for data collection from program beneficiaries and microfinance institutions
and analyzed the data using tables, percentage and diagrams. The objectives of the study
were to assess whether microfinance has engendered positive or negative outcomes in
reducing poverty. The result shows that that people, especially vulnerable and
marginalized were getting access to credit which impacted positively on the poverty levels
of the beneficiaries.
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The empirical relationship between microfinance loan disbursement and poverty alleviation
was tested in their paper by employing chi-square test, F-test and T-test. The result of the
study shows that there is a significant difference between those people who used
microfinance institutions and those who do not use them. There is a significant effect of
microfinance institutions in reducing poverty by increasingincome and changing economic
status of those people.The study concludes that microfinance institution is indeed a potent
strategy of poverty alleviation and a viable tool for purveying credit to the poor. Also they
recommend that microfinance can be more viable tool for sustainable poverty alleviation if
more is done on program outreach and depth than the present outreach (Jegede et al. 2011).

As the study of Ado (2012) the potential of microfinance to contribute to poverty alleviation
was widely recognized for about twenty years ago, as a result many third world countries
including Ghana have witnessed an increase of organizations providing financial services to
clients, including loans, saving plans, insurance and payment transfers. The objective of this
study was to find out the impact of microfinance as a strategy for poverty reduction on the
poor people, using Cedi Finance Foundation, Garden City and Opportunity International
microfinance system. The population of the study comprised the management and staff of
the three microfinance scheme and selected clients of the institutions. Questionnaires and
personal interviews were used to collect the data. The indicators used were income levels,
welfare and self-reliance. From the study, it was found that majority of clients had their
income increased and it is this increased in income that has helped them to send their
children to school, accessing health care which are critical for their continue well-being as
well as increased in productivity. Findings also shows that the microfinance have
contributed to the development of the wellbeing of clients, personal empowerment,
strengthening of client entrepreneurial awareness and skills, building social capital through
the developing and strengthening the poor social network and inculcating saving behavior
among and between members of the institution.

Okibo and Makanga (2014) were conducted a study on Effects of micro finance
institutions on poverty reduction in Kenya. The study focused on PAWDEP located in
Kiambu District a case study. Its aim is to cover credit facilities provided by the MFI and
client perception on income improvement and/or reduced poverty levels. The researcher
was used descriptive survey design. The population of the study was 46 clients of
PAWDEP and 9 employees from staff member. The study was used stratified sampling
V
technique to select staff of the selected MFIs and clients. Both qualitative and quantitative
data analysis methods were used. The study set that microfinance is a strategy of poverty
reduction and the way credit can reach the poor. If used properly, microfinance institutions
are useful tools for poverty alleviation.

In a review of Ethiopian institutions and their role in poverty reduction: A case study of
Amhara Credit and Saving Institution (ACSI), most of the time private Banks and
Government sector banks have many limitations in this providing credit to poor people.
Because their aim is to earn high profit and they used to put many restrictions to sanctions
loans to the poor. In this concern, Microfinance is said to be an effective instrument
discovered in 21st century to mitigate rural poverty in the world. Microfinance helps the
poor to come out from many wicked problems. The beauty of the MF is in safeguarding a
variety of interests of its members. In his paper an earnest attempt is made to review of the
need of Micro Financial Institutions (MFIs), the role of MFIs in alleviation of poverty in the
country and how woman can get assistance from these institutions with a special reference
to ACSI (Ramanaiah&Gowri 2011).

In popular study Guruswamy (2012) argued that microfinance can be a critical element of
an effective poverty reduction strategy mostly for third world countries. Particularly in
Ethiopia there is lack of improved access and efficient provision of savings, credit, and
insurance facilities to change their businesses, enhance their income earning capacity, and
enjoy an improved quality of life. The objectives of this study was to assess the role of MFI
(DECSI) on poverty reduction, to evaluate how the MFI (DECSI) helps to change their poor
economy and to point out the significance of the provision of MF service to combat
poverty. In this paper both secondary and primary data via self administered questionnaires
and interviews were used. Following the information collected from both MFI’s managers
and their clients, it was found that MFI have changed the life of poor people in a positive
way. Despite these achievements it was further observed that some conditions like high
interest rates, loan application process & approval, collateral, service delivery and lack of
close relationship between institution management and the borrowers have been limiting
factors for poor people to access the MFI services.

2.10. Summary and Gap in the Existing Literature

In order to change the economy of the country as well as poor people’s living standard MFI
V
has vital role. Different authors found different results that MFI has positive impacts on
education, household expenditure, business expansion, changes economic status of the
people, and also microfinance have contributed to the development of the wellbeing of
clients, personal empowerment, strengthening of client entrepreneurial awareness and skills,
building social capital through the developing and strengthening the poor social network
and inculcating saving behavior among and between members of the institution. Those
studies investigated the Impact of MFI on poverty reduction for poor people in different
countries in different methods. The above indicated literatures do not show the impact of
sidama micro finance institutions on poverty reduction. In addition to these there was no
study conducted on the role of microfinance institutions on poverty alleviation especially in
Sidama micro finance institution at Dalle Branch.

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 CHAPTER THREE

RESEARCH METHODOLOGY

2.

3.1. Description of the study area

Dalleworeda is an area which is located in SNNPRS Sidama Zone. Currently Sidama Zone has 19
rural area woredas and 4 town admnstration. From these Dalleworeda is the older woreda among
others which is found in Sidama Zone. Before 2004 Yirgalem town administration was under
Dalleworeda. After new reform program the Yirgalem town admnstration established and up now
it is admnstered by its own town admnstartionstrcture. Sidama Micro finance institution of Dalle
branch serves both societies i.e. Dalleworeda and Yirgalem town admnstration. Dalleworeda has
population number male131,657 and female 128,382 total 260,027 and the population of
Yirgalem town are male 37,671 and female 35,919 total 73,590.

3.2. Research Design

Research designs plan of collecting and analyzing data in an economic, efficient and relevant
manner. It is a plan of organizing framework for doing the study and collecting the necessary
data. It is also defined as a procedural plan that is adopted by the researcher to answer questions
validly, objectively, accurately and economically. The research design is the conceptual frame
with in which the research is conducted, it constitutes the blue print for the collection,
measurement and analysis of data and outline of what the researcher will do from writing the
hypothesis and its operational implications to the final analysis of data (Kothari, 2004). This study
has intent to assess and identify the impact of micro finance institutions on poverty alleviation
sidama Zone Dalleworeda SMFIs branches. In this study explanatory type of research design was
used to achieve research objective. Because these type of research design helps to identify how
MFIs are playing their role in alleviating poverty and to what extent that Dalle branch is
contributing its role on poverty reduction.

27
3.3. Types and Source of Data

For this research the main sources of data include both primary and secondary data. By using both
qualitative and quantitative collecting data method, the mix use of these data types minimizes
insufficiency and incompleteness of data. Primary data was collected by using semi-structured
questionnaires from active clients of micro finance. Secondary data was obtained from published
and unpublished relevant documents like published and unpublished from public organizations,
journals, books, internet, magazines, records, and reports. In addition to this Personal interview
with managers and officers/workers of micro finance institution was conducted to collect
qualitative information. Personal interview is preferred in order to gain feedback and for probing
purposes; because individuals may be reluctant to issues which they thought are sensitive.

3.4. Target Population

As the researcher disclosed prior Dalleworeda has population number male131, 657 and female
128,382 total 260,027 and the population of Yirgalem town are male 37,671 and female 35,919
totals 73,590. Total population that SMFI Dalle branch serves is 297,698. From these 19,748
peoples are clients of SMFI Dalle branch. Having said these about population, the study focused
on 10,251 clients who were clients of SMFI Dale branch for the last three years from 2006 E.C up
to 2008 E.C. The rationale to identify these clients is to evaluate the Impact of SMFI Dale branch
contribution on poverty reduction by comparing before three years status with after loan life
status.

3.5. Sample design and sampling procedure

The statistical investigation can take two forms. The researcher studies every unit of the field of
study (survey) and drive conclusion by computing the sum of all units. This type of survey is
called census survey.Or the researcher study only a unit in the field of survey and this type of
survey is called sample survey. Having said this about sampling the researcher selected to study
only a unit in the field of survey. The study employed sampling formula presented by Yamane,
(1967) to select sample from each client’s sector.

n = N/ (1 + N (e2)).

Where,

28
 n= Sample size

N = Total population

e = Error (0.05)

Therefore n= 10,251/ (1+10,251(0.05)2)

n= 384.98 ~ 385

Therefore total sample sizes of the study were 385 clients of SMFI.

3.6. Methods of data collection

In this research both qualitative and quantitative data were collected from both primary and
secondary data sources. The mix use of these data types is from the standpoint that insufficiency
and incompleteness was minimized. Primary data was collected by using semi-structured
questionnaires from active clients of micro finance who were clients of SMFI. Secondary data
was obtained from published and unpublished relevant documents like published and unpublished
from public organizations, journals, books, internet, magazines, records, and reports. In addition
to this Personal interview with managers and officers/workers of micro finance institution was
conducted to collect qualitative information. Personal interview is preferred in order to gain
feedback and for probing purposes; because individuals may be reluctant to issues which they
thought are sensitive. FGD was also held with relevant participants

3.7. Methods of Data Analysis

Completeness, validity and comprehensibility of collected data through questioner were

checked. Data was summarized, coded and tabulated. Descriptive statistics such as percentage
and frequency distribution was used to analyze the data. Statistical package for social science
(SPSS) was used to code and analyze data. Summary of the data was computed using tables.

29
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

It is well known that data analysis is the major part of the study. During data collection some the
respondents i.e. 7 respondents were not responded. From total samples 378 respondents were
respond questioner the rest seven respondents were missed or not responded. Thus the analysis
was conducted on 378 respondents.

4.1.Demographic Characteristics of Respondents

It is important to find out the individual characteristics such as sex, age, level of education,
marital status, family size, and occupation of sample respondents they have. These specific
characteristics would affect their participation in the microfinance program. The demographic
characteristics were discussed as follows

4.1.1. Sex of respondents

The micro finance institutions have increased its’ efforts to provide credit to women because they
are very susceptible to poverty, concerned to the welfare of their household members and reliable
to pay their credit.

This finding is indicating some improvement in the participation of women in microfinance

services compared with previous study result by Getaneh(2010) which concluded that in Ethiopia
women constitute only forty five percent of those reached by microfinance institutions.

Although the number of women participants (51.3%) is to some extent higher than number of
men participants (48.7%) in this study, there is a need to attract more women to participate in the
service since they are more concerned to the welfare of their household members and they are still
more at risk to poverty than men and their participation in microfinance program would help more
to alleviate poverty. The following table provides the sexual distribution of the respondents.

30
Table4.1: sex of the respondents
Sex Frequency Percentage
Male 184 48.7%
Female 194 51.3%
Total 385 100

Source: field survey

4.1.2. Age of the respondents

Majority of the respondents (59.3%) were found in the productive age group of 18-35.The reason
for majority of borrowers to be in productive age group might be attributed to the fact that people
in this age group have been promoted by the current government to create their own income
generating micro and small scale businesses so as to reduce poverty and improve their living
standards.

Table 4.2: age category of the respondents

Age category Frequency Percentage
18-35 224 59.3%
36-45 119 31.5%
>45 35 9.3%
Total 378 100

Source: field survey

31
 4.1.3. Distribution of respondents by Marital Status

The information on the marital status and family size of the respondents was also collected
through interview questionnaires because the size of family and marital status has implications to
the family income, expenditures and repayment of loan.

The response of sample borrowers on their marital status size is shown in table below. The
research reveals that, the majority 55.3% of respondent are married, 35.7% of respondents are
unmarried, 5% of them are divorced and only 4% is widowed.

This evidence proves that SMFI gives loan to more married clients than unmarried and any other
marital status group clients. According to the staff of SMFI, the reason for participation of more
married clients than other marital group clients in the credit program is due to the fact that the
demand for basic necessities by married people is higher than single people and they are more
stable and faithful in loan repayment than the single persons who would default and easily run
away from the area without paying. With this reasons the SMFI is providing its microcredit to
more married clients than other marital status groups

Table4.3: respondent’s distribution by marital status

Categories Frequency Percentage
Married 209 55.3%
Unmarried 135 35.7%
Divorced 19 5%
Widowed 15 4%
Total 378 100

Source: field survey

4.1.4. Family size of Respondents

The analysis of family size of respondents shows that majority (59%)of respondents have 1-4
family member. The number of dependents is contributory factor to the need and utilization of the
loan from the MFI. This is because the bigger the family means the greater the demands for the
basic necessities of life such as: food, clothing, shelter, health and education. Generally when
there is more demand than the supply for these basic services the household head searches for
alternatives to enable him to provide basic necessities for the family.

32
According to the staff of SMFI, the clients with large family size are frequently using the loan
provided by the institution to create additional income to the family by using family members as
facilitators to the income generating activities around their villages

Table 4.4: family size of respondents

Family size Frequency Percentage
1-4 223 59%
4-6 115 30.4%
>6 40 10.6%
Total 378 100

Source: field survey

4.2. Clients Loan usage

In general, credit increases the income of clients, when it is used in income generating activities.
These activities enable clients to generate net income to support their families and pay their loans.
In table below, the large majority of clients (94.2%) reported that they used the loan for the
intended purposes. More than 94% of the loan was invested in income generating activities.

From this most of it was invested in small business activities (60.3%) followed by agricultural
activities(24.1%). Relatively smaller proportion of loan is used for services (7.7%), other
activities (5.3%), and manufacturing activities (2.6%). The use of the loan for unintended purpose
and consumption is insignificant (less than 6%). In general, the above described loan usage of the
clients seems healthy.

Table 4.6:Clients’ loan usage

Indicators Responses Frequency Percent

33
Using the loan for the intended purpose Yes 356 94.2
No 22 5.8
Spent the loan on income generating activities Yes 358 94.7
No 20 5.3
Activities for the loan was spent Small business 228 60.3
Manufacturing 10 2.6
Service 29 7.7
Agriculture 91 24.1
Other 20 5.3

4.3.Clients Loan repayment situations

In relation to repayment Godquin (2004) stated that, improving the repayment rate could help to
reduce the dependence on subsidies and help the MFI reach a better sustainability level. It is also
argued that high repayment rates reflect the adequacy of MFI's services to clients’ needs and
restrict the cross subvention1 of the borrowers. Repayment performance also acts as an important
positive signal when the MFI has to raise new funds.

For all these reasons, higher repayment rates are largely associated with benefits both for the MFI
and the borrower. The MFI will thus firstly tends to reach the first best level of a 100% on the
time repayment rate and, if such a level of repayment performance cannot be reached, it will try to
allocate higher loans to borrowers with lower probability of default and reduce the delay in
repayment.

Loan repayment capacity may show the positive or negative impact of the credit. The assumption
is that if the clients used the loan for productive activities to generate income, they can pay their
loan. Otherwise the credit may increase indebt ness on clients.

Improving the repayment rate could also help to reduce the dependence on subsidies and help the
MFI reach a better sustainability level. It is also argued that high repayment rates reflect the
adequacy of MFI's services to clients’ needs and restrict the cross subvention of the borrowers.
Repayment performance also acts as an important positive signal when the MFI has to raise new
funds. For all these reasons, higher repayment rates are largely associated with benefits both for
the MFI and the borrower (Godquin, 2004).

The below table indicates that about 88.8% of clients repaid their loan early
34
and in accordance with the schedule of the institution. Few clients (about 11.2%) were unable to
pay their loan according to the schedule.

The survey results reveal that there is an attitudinal change of clients from considering
microfinance institutions as charity organizations to finance service delivery institutions.

Table4.7: loan repayment status of the clients

Loan repayment situations Frequency Percentage
Early 58 15.3
According to the schedule 278 73.5
Lately/arrears 42 11.2
Total 378 100

Source: field survey

Delay and failure of repayment is related with the performance of the institutions. The data above
indicate the seriousness of the case. Though high percentages of the clients are paying back the
loan, some percent of clients have failed from repayment due to different reasons.

Godquin (2004) found out social ties among the group had a negativeimpact on the repayment;
the age of the borrowing group had a significant negative impact on repayment rate; group
homogeneity proved to have no significant impact on repayment performance in the whole
sample. On the other hand, group homogeneity in terms of sex showed a positive impact, whereas
homogeneity in terms of education showed a negative effect. Homogeneity in terms of age also
showed both a negative and positive effect on the repayment performance. His study mainly
focused on loan repayment of group borrowers.

If there is an organized system of monitoring and support, the institution can have the chance to
know the borrower's capacity of repayment earlier and can minimize the amount of loan at risk.
On the other hand, provision of training helps the borrowers invest the money in profitable
business and to be an entrepreneur. So the business condition of the clients plays a great role on
many areas of the institution.

4.4.Client’s saving Situations before and after the loan

MFIs are spending much cost on awareness creation among their users so as to mobilize huge
amount of saving and made that saving as a source of money for further lending (Meyer 2002).
35
Saving culture of a people can play indispensable role in assuring sustainability of microfinance
services. With more savings, financial capital is accumulated resilience to shocks is improved and
the capacity to invest is enhanced. In addition, the need to borrow at high interest rates from
private money lenders is reduced and the ability to purchase more productive assets improved.
Savings can be used in case of emergencies, or to finance major purchases, investments or to
smoothen out consumption.

Of the total number of clients surveyed, 62.4% reported that they managed to earn small money
and open savings account in the SMFI only after joining SMFI While 19 percent of them save in
eqqub and women’s associations. The rest 18.5% do not currently have a savings account at all.
However, before joining SMFI, only 12% of them had a saving account with eqqub, women’s
associations, credit cooperatives and the rest did not have their own savings account at all. This
indicates that the number of clients that are able to save has increased after joining SMFI.

36
Table 4.8: Respondent Saving Status Before and After the Loan
Description Before the loan After the loan
Frequency percent Frequency percent
Has a saving account in bank 0 0 236 62.4
Saved in eqqub women association or others 46 12.2 72 19
Didn’t have a saving account at all 332 87.8 70 18.5

Source: field survey

One of the options for promoting household welfare is the development of facilities for safe but
liquid savings deposits. Early microfinance programs were not effective in mobilizing savings and
showed little interest in doing so. Partly, it was thought that poor house hold saving were too poor
to save (Morduch, 1999).

Robinson (1995) cited in (Morduch, 1999) stated that, from an institutional viewpoint, in
cooperating savings mobilization in microfinance programs makes sense for a variety of reasons.
First, it can provide a relatively inexpensive source of capital for relending. Second, today’s
depositors may be tomorrow’s borrowers, so a savings program creates a natural client pool.
Third, building up savings may offer important advantages to low income households directly:
households can build up assets to use as collateral, they can build up a reserve to reduce
consumption volatility over time, and they may be able to self-finance investments rather than
always turning to creditors.

One of the requirements to get loan is saving some percentage of the loan requested. This
approach has two basic advantages. First, it encourages saving habit of the borrowers for the
future. Secondly, it helps to solve the problem of loan capital shortage.

4.5.The change of income of the clients

One of the immediate impacts of having access to credit from the micro financing program is on
income. This induced income may have impact on other outcomes such as household
consumption, access to education and medical facilities, etc.

Determining whether the benefits of microfinance programs are sustainable and large enough to
make a dent in the poverty of participants and society at large is important for guiding policy
(Coleman, 2006).

37
This is because an expanded income gives the households many options, increases consumption
possibilities, allows the households the possibility of saving for future, reduces the vulnerabilities
arising from future income failures and gives the children better educational opportunities. Hence,
rising household income has a particular place in all poverty reduction programs including SMFI
microfinance programs.

Therefore, the role of SMFI on the income of its participants needs to be evaluated to see the
extent to which microfinance programs have been successful in alleviating poverty. SMFI client
respondents have been asked if their income changed as a resultof their participation in
microfinance programs.

A Substantive number of households (68.5%) indicated that it was indeed the case. In fact the
clients associated the increase in income with the fact that they have managed to expand their
business by the credit money received from SMFI.

On the other hand a smallest percentage of the clients (i.e. 22.5percent) stated that the income
indeed has decreased. Whereas the least small percentage of households (i.e. 9 percent) seems to
think that there was no change of income as a result of their participation in SMFI microfinance
institutions. Nevertheless, the fact that SMFI microfinance programs have enabled 68.5 percent of
clients to increase their income is welcome relief given the difficulties that development planners
experience in raising incomes of poor people in developing countries owing to a well-known set
of constraints.

Table4.9:The change in income of the clients

Income situation Frequency Percentage
Increased income 259 68.5%
Income remained the same 85 22.5%
Income decreased 34 9%
Total 378 100%
Source: Field survey

4.6.Client’s asset ownership changes before joining and after joining the SMFI
Assets accumulation plays a multitude of roles among clients of microfinance service. The ways
in which households use assets to smooth out consumption is a well-documented process.
38
 Households purchase assets when their income are better and sell them during the loan periods
therefore assets also serve as a form of saving. Besides an asset accumulation by borrowers is
expected to have a positive impact on loan repayment performance having the perception that the
assets will be under liability in case of default. In fact material assets which included other
physical and financial assets like for instance land, housing, livestock, saving and jewelry, enable
people to withstand shocks and expand their horizon of choices (World Bank, 2002).

As a result the researcher holds the position of evaluating the effectiveness of SMFI Micro-
financial service on the level of asset accumulation of the clients. Subsequently based on the
survey result the impact of SFPI microfinance service provision on the respondent asset
accumulation will be exhibited in the next table below

Table4.10: Distributions of Respondents based on their Asset Accumulation

S. No_ Description Frequency Percentage
Did you have fixed property before being a member in
1 SMFI?    
  Yes 243 64.3
  No 135 35.7
  Total 378 100

Do you have bought (including House) and movable

2 asset after being engaged in SMFI program?    
  Yes 305 80.7
  No 73 19.3
  Total 378 100
What assets do you have after being engaged in SMFI
3 program?    
  Owner of a house 12 3.2
  Bought household furniture and house equipment’s 136 36.0
  The saving has increased 104 27.5
  Own land 31 8.2
  Bought livestock 22 5.8
No answer 73 19.3
  Total 378 100
Source: field survey

According to the above tabular demonstration out of all respondent 64.3% of them confirmed that

39
they used to have fixed property before joining to SMFI. Whereas 35.7% of them have stated that
they didn’t have any fixed property whatsoever.

Correspondingly, 53.2% of them confirmed that they have fixed and movable asset after joining
the microfinance provision and 27.5% of them avowed that they didn’t possess any movable asset
after being the client of SMFI but the data shows that those clients are saving to acquire assets.
However the rest 19.3% have not fixed and movable assets as well as no savings.

In addition among the survey respondents, 3.2% of the respondents stated that they have become
the owner of a house owing to the fact that they have become the client of SMFI. Nevertheless,
majority (36%) of them has avowed that they have owned household furniture. Moreover 27.5%
of them have said that they have observed increment in their saving yet the remaining 8.2% and
5.8% owned a land and livestock respectively after joining the SMFI.

4.7. Educational Status Before and after the loan

Education development is one of the priority areas of intervention under the poverty reduction
strategy. Education plays an important role in increasing human potential and development at the
individual and community level. According to the research conducted by Appleton (2003) cited in
Assefa (2004), education can lift people out of poverty. The returns from investing in education
are on the average lower but the return in income increment is much higher for those with higher
levels of education. On the other hand, returns to education rise with the level of education.

Another study (Aoki et al., 2002, cited in Assefa, 2004), confirmed that lack of educational
opportunity is one of the most powerful determinants of poverty and unequal access to
educational opportunity is strongly correlated with income inequality. The provision of relevant
education significantly contributes to any poverty reduction exercise. The evidences from
Assefa’s (2004) study revealed that educated farmers are more likely to adopt new technologies
and get higher return on their land.

It is assumed that microfinance services of SMFI may improve the possibility of increasing
expenditures on education and increases the opportunity of households’ access to education.

From the theory, improved education level leads to improvement in acquiring knowledge which
had a positive relationship with livelihood improvement. Moreover, according to the World Bank,
40
educational status improvement of the people will improve their livelihood. As a result, in this
study, whether the educational level of the respondents improved or not after the loan from micro
finances was examined.

Table 4.11: Educational Levels of Respondents before and after the loan

Educational Status Before the loan After the loan

# % # %
Illiterate 0 0 0 0
Primary 0 0 0 0
Secondary 127 33.6% 23 6.1%
Diploma 162 42.9% 189 56.1%
Degree 81 21.4% 112 29.6%
Masters 8 2.1% 54 14.3%
Total 378 100% 378 100%
Source: Field Survey

Before the loan, 42.9, 33.6, 21.4 and 2.1 percent of the respondents’ educational status was
diploma, secondary, degree and masters level respectively. After the loan, their educational status
was clearly improved.

Thus, the number of the respondents with secondary level was reduced to 6.1%. The percent of
respondents with diploma, degree and masters level was increased to 56.1, 29.6 and
14.3respectively.

The reason for improvement in educational status of the respondents was access to finance. The
result of FGD shows that SMFIs encourage members to take a loan to upgrade educational level.
On the other hand, the respondents’ capability to send their children to a better school is improved
after SMFI loan due to improved income from additional employment and investments. This
entails that the access to finance and benefits help some respondents and their family to improve
the educational status.

The majority of the respondents were found to be highly educated due to the fact that none were
found to be illiterates. One reason for this unexpected good academic status of sample
respondents is due to the current government policy which is promoting high school dropouts and
fresh graduates from colleges to be organized and create their own micro and small scale business

41
enterprises, using different financial source, including microfinance, rather than waiting for
government employment opportunities. This education level of the respondents has positive
implication on the use and management of the loan by the borrowers. The issues of business
expansion and diversification of products, asset accumulation and interest calculations can easily
be understood and practiced by these educated clients.Theresults of the study reveal that school
attendance is better after the loan than before the loan.

4.8. Improvement of the clients Health Care before and after the loan

Poverty and poor health have bi-directional relationship in which poor health leads to poverty and
poverty leads to poor health conditions. Apart from lack of financial resources to pay for health
services, food, clean water and good sanitation, the poor also suffer from poor health facilities
(Daniel, 2004). Thus, provision of financial services to the poor may improve access to medical
facilities and improve the health conditions of the poor.

According to CARE (2004), the health security of families is directly related to their level of
access to appropriate medical care. The availability of finance increases a household’s ability to
finance and thus access healthcare, eventually improving the household’s health status. Savings
groups greatly improve access to decent healthcare and provide families with better nutrition
(Grace, 2011).

Table4.12: Status of Healthcare of the Respondents after the becoming client

Status of Healthcare Number of respondents Percentage
Remain the same 96 25.4%
Improved 282 74.6%
Total 378 100%
Source: filed survey

The above table shows that, majority (74.6 percent) of the respondents explained their own and
family healthcare was improved after becoming the client of SMFI. The factors which helped to
increase the healthcare of the respondents were improved income. This indicates that the
enhanced income enables the respondents to improve the health care of the respondents and their
42
family which is important to pursue different livelihood strategy that leads to livelihood
improvement.

4.9. The Nonfinancial services given by the SMFI and the clients perception
4.9.1. Training

According to Chakra arty and Bass (2013), MFIs can adopt two strategies regarding their
services. One in which the MFI follows its basic mission of solely providing financial services,
and the other in which MFIs provide supplementary knowledge services in addition to financial
services to borrowers.

The first MFI strategy specifically focused on the past and present financial status of the
borrower. That is, the purpose of the transaction between the MFI and borrowers is to provide
borrowers who are determined creditworthy, with loans. These loans might be used to start
microenterprises.

The second strategy, which encourages entrepreneurship by additionally providing knowledge

resources for borrowers, focuses not just on the past and present financial status of the borrower
but also in the borrower’s future entrepreneurial plans. MFIs that choose to provide impoverished
borrowers with knowledge services in addition to financial services do so to equip these
borrowers with the tools necessary to take the risks needed to create and grow microenterprises.
In principle most of MFIs agree with the second strategy, to give different types of training for
their clients.

Training is one of the non-financial services provided by SMFI. Providing training to the clients
helps to aware the clients on many issues such as in the proposed business, on the area of
entrepreneurship, on the issue of saving and on other related issues to support and strengthen the
capacity of the borrower both on the repayment of their loan and in their life.

The table below indicates the trainings delivered to the active clients of SMFI. About 91.5 % of
clients received training, while about 8.5 % didn’t. The trainings were focused on loan utilization,
marketing, and savings.

Most of the clients (54.5 %) received training on loan utilization. Most of the clients were trained
not less than three times. However, during the focus group discussions, most of the participants
43
reported that the training delivered by SMFI is not satisfactory.

Table4.13: clients training

Activities Indicators Frequency percent
Training taken Yes 346 91.5
No 32 8.5
Type of training taken About loan utilization 206 54.5
About marketing 16 4.2
About saving 46 12.2
General training 78 20.6
No answer 32 8.5
Number of training Once 69 18.3
Twice 46 12.2
Three times 103 27.2
More than three times 128 33.9
No answer 32 8.5
Source: field survey

4.9.2. Monitoring and supervision

Supervision is an important element in improving the performance of microfinance institutions

and to assess the demand and success of clients. Regular monitoring and supervision of loan
utilization is expected to help in reducing diversion of loans towards unintended activities (Assefa
et al., 2005).

Monitoring the business condition of the clients is one of the regular tasks of the institutions.
There are employees responsible for monitoring and providing assistance for the clients. In the
institution, there are agents at kebele level, which are responsible to mobilize saving and collect
payments from the borrowers.

Sample clients are asked whether monitoring and supervision is useful, regular and satisfactory.

As per the results in table below, about 92.9 % of the respondents reported that SMFI staffs
supervised them to assess the use of loans, whether they used their loan to the intended purpose or
not and ensure repayment of loans in accordance with the schedule. About 26.2% of the clients
were been supervised more than three times in one loan cycle. Moreover, about 24.3 % were
supervised conditionally i.e. when supervision was necessary. Most of the clients (84.4 %)accept
the supervision of SMFI as satisfactory. Furthermore, participants of the focus group discussions
were satisfied with supervision where they received advices to help them to achieve better success
44
and encouraged them to repay the loan on time. In one group discussion, participants reported
“we sometimes consider the institution as ‘father’ of us”. However, they suggest that more
improvement is needed in monitoring and supervision, which will encourage clients to increase
their performance and reduce defaults.

Table 4.14: Supervision of clients

Activities Response Frequency Percent

Any supervision on loan Yes 351 92.9
No 27 7.1
utilization and repayment
Quality of supervision Satisfactory 319 84.4
Not satisfactory 32 8.5
No answer 27 7.1
Number of supervision per None 27 7.1
Once 60 15.9
one loan cycle
Twice 18 4.8
Three times 64 16.9
More than 3 times 99 26.2
Conditionally 92 24.3
No answer 18 4.8

Source: field survey

The institutions check their business when the clients fail to repay their loan. If the institutions
have no information about their client’s business condition, it becomes difficult to be confident
about the repayment. Knowing the condition of the clients helps the institutions to take different
corrective actions.

4.10. Clients Satisfaction/Dissatisfaction

According to Fernando (2006), MFI's main objective is to provide poor and low income
households with an affordable source of financial services. Interest charged on loans is the main
source of income for these institutions and, because they incur huge costs, the rates are
correspondingly high. Four key factors determine these rates: the cost of funds, the MFI's
operating expenses, loan losses, and profits needed to expand their capital base and fund expected
future growth. In order to have these advantages, the selected microfinance institutions also
charged high interest rates from their clients.

45
The main objective of microfinance institutions is to provide microcredit and saving service to the
poor. The loan size of microfinance institutions is known by its small size. The amount of the loan
matters both the borrowers and the lender institutions. Today the value of money has declined and
situations to start a new business as well as to improve the existing business need high amount of
money. The poor are out of the normal banking service. So microfinance institutions are the best
option to get loan for micro businesses.

Satisfaction/dissatisfaction of clients about the program was collected. The below table
summarizes the response of clients regarding their satisfaction and dissatisfaction with the
program. In general, Majority of the clients appreciated appropriate time of loan
disbursement, appropriate time of loan repayment, appropriate interest rate, sufficient advice
and supervision. However, a few complained the existing interest rate. Majority of the clients
complained the loan size and the loan term of one year.

It is observed that most of the clients (about 91.8%) appreciated appropriate time of loan
disbursement. About 93.9% of the sample clients reported that the timeliness of
loan repayment is appropriate. However, 6.1% of the sample clients reported that
timeliness of loan repayment was not appropriate. The inappropriate loan repayment time
may lead the borrowers not to repay the loan within a given period of time. Few respondents
suggested that the program has not considered loan repayment time with the possible failure of
crops and poor market.

About 85.7% of sample clients reported that the interest rate on loan was appropriate but the
remaining clients (14.3 %) argued that it was high. Arguing high interest rate may discourage
clients from continuing with the program. Only 29.6% of sample clients responded
sufficient loan size but 70.4% of sample clients complained the sufficiency of loan size.
Only 36.8% of clients argued sufficient loan length of one year but majority of the sample
clients, 63.2%, reported that loan length of maximum one year is not sufficient. About 98.9%
of sample clients reported the trend that advising and supervision of staff members were
appreciated. This indicates that the borrowers may not divert the loan to non-income
generating activities. This helps borrowers to earn profit and helps the company to make
sustainable.
Clients’ attitudes to continue with the program were also collected .In this regard, 96% of
46
sample clients gave their opinion to continue in the program. However, 4% reported not to
continue with the program. Insufficient loan size, high interest rate, delay of loan issue,
shortage of loan length, conflict among members, obtaining enough capital and decided to
close the business were reported as the major reasons for the opinion of few clients not to
continue with the program. The following table provides the summary

Table4.15: satisfaction of the clients with the SMFI

Particulars Response
Yes No Total
# % # %
Appropriate time of loan
disbursement 347 91.8% 31 8.2% 378
Appropriate time of loan repayment 355 93.9% 23 6.1% 378
Appropriate interest rate 324 85.7% 54 14.3% 378
Sufficient loan size 112 29.6% 266 70.4% 378
Appropriate loan length 139 36.8% 239 63.2% 378
Sufficient advice and supervision 374 98.9% 4 1.1% 378
Attitude to continue with the
378
program 363 96.0 15 4%

Source: field survey, 2012

Most researchers indicate that microfinance institutions are serving the poor and the poor is
coming out of extreme poverty by using MFIs as a means. Littlefield et al 2003 and Dunford
2006, cited in Hermes and Lensink (2007) stated that, the advocates of microcredit argue that
microcredit can help to substantially reduce poverty. In addition, microcredit can contribute to an
improvement of the social and economic situation of women. Finally, microfinance may have
positive spillover effects such that its impact surpasses the economic and social improvement of
the borrower.

4.11. Factors affecting the well-functioning of the SMFI

The key informant interview and FGD was held so as to identify the factors affecting the well-
functioning of the SMFI. The following list shows the factors categorized into two: these are the
clientele related and the institutional related factors.

 Clientele related factors

47
 o Poor borrowing experience of clients
o Small proportion of money invested in income generating activities
o weak voluntary saving experience
o Business condition of the borrowers
 Institutional related factors
o Absence of strong training for borrowers
o Weak monitoring and support system
o Relatively high Interest rate of micro finance institutions
o Uncomfortable loan repayment schedule
o Loan capital shortage
o Lack of use of appropriate software [technology]
o Shortage of Human resource
o

48
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1. Summary and Conclusion

 The study identified the demographic characteristics of the respondents. Accordingly, number
of women participants (51.3%) is to some extent higher than number of men participants
(48.7%).On the other hand, Majority of the respondents (59.3%) were found in the productive
age group of 18-35. The reason for majority of borrowers to be in productive age group might
be attributed to the fact that people in this age group have been promoted by the current
government to create their own income generating micro and small scale businesses so as to
reduce poverty and improve their living standards. The research reveals that, the majority
55.3% of respondent are married, 35.7% of respondents are unmarried, 5% of them are
divorced and only 4% is widowed. This evidence proves that SMFI gives loan to more
married clients than unmarried and any other marital status group clients. According to the
staff of SMFI, the clients with large family size are frequently using the loan provided by the
institution to create additional income to the family by using family members as facilitators to
the income generating activities around their villages. The analysis of family size of
respondents also shows that majority (59%) of respondents have 1-4 family member. Duration
of clientele is an important indicator of the size and frequency of access to loan from the
institution. In this regard, a great majority of the respondent clients have participated in the
SMFI program for more than three years (4-6 years).
 With regard to usage of loan, the large majority of clients (94.2%) reported that they used the
loan for the intended purposes. More than 94% of the loan was invested in income generating
activities.From this most of it was invested in small business activities (60.3%) followed by
agricultural activities (24.1%). Relatively smaller proportion of loan is used for services
(7.7%), other activities (5.3%), and manufacturing activities (2.6%). The use of the loan for
unintended purpose and consumption is insignificant (less than 6%). In general, the above
described loan usage of the clients seems healthy.
 Improving the loan repayment rate help a better sustainability of MFI. The study indicates that

49
 about 88.8% of clients repaid their loan earlyand in accordance with the schedule of the
institution. Few clients (about 11.1%) were unable to pay their loan according to the schedule.
 MFIs are spending much cost on awareness creation among their users so as to mobilize huge
amount of saving. Of the total number of clients surveyed, 62.4% reported that they managed
to earn small money and open savings account in the SMFI only after joining SMFI; while 19
percent of them save in eqqub and women’s associations. The rest 18.5% do not currently
have a savings account at all. However, before joining SMFI, only 12.2% of them had a
saving account with eqqub, women’s associations, credit cooperatives and the rest did not
have their own savings account at all. This indicates that the number of clients that are able to
save has increased after joining SMFI.
 One of the immediate impacts of having access to credit from the micro financing program is
on income.A Substantive number of households (68.5%) associated the increase in income
with the fact that they have managed to expand their business by the credit money received
from SMFI. On the other hand a smallest percentage of the clients (i.e. 22.5 percent) seem like
to think that there was no change of income as a result of their participation in SMFI
microfinance institutions.Whereas the least small percentage of households (i.e. 9 percent)
thinks that there is no change on their income. Nevertheless, the fact that SMFI microfinance
programs have enabled 68.5 percent of clients to increase their income is welcome relief given
the difficulties that development planners experience in raising incomes of poor people in
developing countries owing to a well-known set of constraints.
 Assets accumulation plays a multitude of roles among clients of microfinance service.Out of
all respondent 64.3% of them confirmed that they used to have fixed property before joining
to SMFI. Whereas 35.7% of them have stated that they didn’t have any fixed property
whatsoever. Correspondingly, 80.7% of them confirmed that they have fixed and movable
asset and their saving increased after joining the microfinance provision. However, 19.3% of
them avowed that they didn’t possess any movable asset after being the client of SMFI.In
addition among the survey respondents, 3.2% of the respondents stated that they have become
the owner of a house owing to the fact that they have become the client of SMFI.
Nevertheless, majority (36%) of them has avowed that they have owned household furniture.
Moreover 27.5% of them have said that they have observed increment in their saving yet the
remaining 8.2% and 5.8% owned a land and livestock respectively after joining the SMFI.

50
 Education development is one of the priority areas of intervention under the poverty reduction
strategy.Before the loan, 33.6, 42.9, 21.4 and 2.1 percent of the respondents’ educational
status was diploma, secondary, degree and masters level respectively. After the loan, their
educational status was clearly improved. Thus, the number of the respondents with secondary
level was reduced to 6.1. The percent of respondents with diploma, degree and masters level
was increased to 50, 29.6 and 14.3 respectively. The reason for improvement in educational
status of the respondents was access to finance.The result of FGD shows that SMFIs
encourage members to take a loan to upgrade educational level. On the other hand, the
respondents’ capability to send their children to a better school is improved after SMFI loan
due to improved income from additional employment and investments. This entails that the
access to finance and benefits help some respondents and their family to improve the
educational status.
 Poverty and poor health have bi-directional relationship in which poor health leads to poverty
and poverty leads to poor health conditions. Majority (75.0 percent) of the respondents
explained their own and family healthcare was improved after becoming the client of SMFI.
The factors which helped to increase the healthcare of the respondents were improved income.
This indicates that the enhanced income enables the respondents to improve the health care of
the respondents and their family which is important to pursue different livelihood strategy that
leads to livelihood improvement.
 With regard to the Nonfinancial services given by the SMFI, about 91.5 % of clients received
training, while about 8.5 % didn’t. The trainings were focused on loan utilization, marketing,
and savings. Most of the clients (54.5 %) received training on loan utilization. Most of the
clients were trained not less than three times. However, during the focus group discussions,
most of the participants reported that the training delivered by SMFI is not satisfactory.
Sample clients are asked whether monitoring and supervision is useful, regular and
satisfactory.
 Concerning the supervision, about 92.9 % of the respondents reported that SMFI staffs
supervised them to assess the use of loans, whether they used their loan to the intended
purpose or not and ensure repayment of loans in accordance with the schedule. About 26.2 %
of the clients were been supervised more than three times in one loan cycle. Moreover, about
24.3% were supervised conditionally i.e. when supervision was necessary. Most of the clients
(84.4%) accept the supervision of SMFI as satisfactory. Furthermore, participants of the focus
51
 group discussions were satisfied with supervision where they received advices to help them to
achieve better success and encouraged them to repay the loan on time. In one group
discussion, participants reported “we sometimes consider the institution as ‘father’ of us”.
However, they suggest that more improvement is needed in monitoring and supervision,
which will encourage clients to increase their performance and reduce defaults.

 Satisfaction/dissatisfaction of clients about the program was collected. It is observed that most
of the clients (about 91.8%) appreciated appropriate time of loan disbursement. About 93.9%
of the sample clients reported that the timeliness of loan repayment is appropriate. However,
6.1% of the sample clients reported that timeliness of loan repayment was not appropriate.
The inappropriate loan repayment time may lead the borrowers not to repay the loan within a
given period of time. Few respondents suggested that the program has not considered loan
repayment time with the possible failure of crops and poor market.
 About 85.7% of sample clients reported that the interest rate on loan was appropriate but the
remaining clients (14.3) argued that it was high. Arguing high interest rate may discourage
clients from continuing with the program. Only 29.6% of sample clients responded sufficient
loan size but 70.4% of sample clients complained the sufficiency of loan size. Only 36.8% of
clients argued sufficient loan length of one year but majority of the sample clients, 63.2%,
reported that loan length of maximum one year is not sufficient. About 98.9% of sample
clients reported the trend that advising and supervision of staff members were appreciated.
This indicates that the borrowers may not divert the loan to non-income generating activities.
This helps borrowers to earn profit and helps the company to make sustainable. Clients’
attitudes to continue with the program were also collected .In this regard, 96% of sample
clients gave their opinion to continue in the program. However, 4% reported not to continue
with the program.
 The key informant interview and FGD was held so as to identify the factors affecting the well-
functioning of the SMFI. The following list shows the factors categorized into two: these are
the clientele related and the institutional related factors.Clientele related factors:Poor
borrowing experience of clients; Small proportion of money invested in income generating
activities; weak voluntary saving experience; Business condition of the borrowers.
Institutional related factors: Absence of strong training for borrowers; Weak monitoring and
support system; Relatively high Interest rate of micro finance institutions; Uncomfortable loan
52
 repayment schedule; Loan capital shortage; Lack of use of appropriate software [technology];
Shortage of Human resource.

5.2. Recommendation
Based on the findings and conclusion of the study, the researchers suggested the following
recommendations to improve the performance of microfinance institution
 Strong ad continuous training must be in place so as to equip clients with business skills
and inculcate the saving habit.
 MFIs must find innovative ways to improve their productivity and efficiency, and reduce
operating costs. Essential to this process is cost-reducing innovations. Governments in the
region can help to facilitate innovation in the microfinance industry by recognizing and
rewarding innovators, thereby encouraging further innovation. Similarly, governments can
help ensure that information on more efficient MFIs is disseminated widely.
 In order to solve problems related to clients like diverting the loan to non-business
activities…It is better to have continuous monitoring system for clients to support the
borrowers by working with different concerned bodies. For instance, micro and small
enterprise office facilitate different trainings for micro businesses and arrange market for
them. So through working with different concerning bodies, the institutions can solve
many problems with minimum cost.
 By considering the number of clients it is better for the institutions hire an adequate
number of employees to use them as a means to facilitate monitoring, to mobilize saving,
to give training and so on.
 careful screening of the borrowers helps to reduce loan default
 Women are the most vulnerable group of the society. They are the first target of
microfinance institutions. But in the selected MFIs, participation of women is very
limited. In order to achieve MFIs’ objectives, it is expected to create different systems that
encourage the involvement of women in microcredit and saving services. Arrangement of
different types of loan for women with lower interest rates, with minimum collateral and
other requirements can improve the participation of women in microfinance services. In
addition to this supporting the loan with different trainings can strengthen the capacity of
women to be active clients and to repay their loan according to the institutions repayment
schedule
53
 Limited resources and the sheer numbers of borrowers prevent assessment of individual
loan applications. To create a sustainable self-funding, the challenge then is to design a
system which will lower monitoring costs, create a committed and creditworthy client
base, and help poverty alleviation. Their loan portfolios are likely to be more volatile, the
potential for a loss of capital significant. There is a need for close and continuous
monitoring, and for the establishment of mechanisms to assess, continuously monitor
credit worthiness, and for early detection of problem loans.
 At the national level, by considering the role of microfinance institutions for poverty
alleviation, the researchers recommend the government to provide sufficient amount of
loan with lower interest rate for the SMFIs. This helps the institutions to increase their
loan size and to increase the number of poor served by the institutions

54
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 APPENDIX I

QUESTIONNAIRE

Hawassa University
College of Business and Economics
School of Management and Accounting

Questioner administered to explore information regarding the Impact of Micro

Finance Institutions on Poverty Reduction.

Dear, sir/Madam:
The intent of this questionnaire is to explore information regarding the Assessing the Impact of
Micro Finance Institutions on Poverty Reduction. It‘s made as a partial fulfillment of Master’s
Degree award in accounting and finance from Hawassa University. The questionnaires will be
distributed to the client of Sidama Micro Finance institution of Dalle branch. The results of the
study are expected to identify the impact of Micro Finance Institutions on Poverty Reduction. The
conclusions of the study will be drawn in aggregate terms, without any reference to specific
individual respondents.
I would also like to assure you that the information you provided will be treated as strictly
confidential and used only for the purpose of this research.

BezabihBerasaDebeko (Researcher)
Thank you in advance for your support and participation!!!
60
 The following questions administered to Sidama micro finance
clients

Part one: Demographic characteristics of the respondents

1. Sex
a) Male
b) Female
2. Age category
a) 18-35
b) 36-45
c) >45
3. Marital status
a) Married
b) Unmarried
c) Divorced
d) Widowed
4. Family size
a) 1-4
b) 4-6
c) >6

Part two: Specific microfinance services and poverty reduction related questions

1. Have you used the loan for the intended purpose?

a) yes
b) no
2. Have you spent the loan on income generating activities?
a) yes
b) no
3. Activities for the loan was spent

61
 a) Small business
b) Manufacturing
c) Service
d) Agriculture
e) Other
4. Loan repayment situations
a) Early
b) According to the schedule
c) Lately/arrears
5. Saving situation before becoming clients of SMFI
a) Has a saving account in bank
b) Saved in eqqub women association or others
c) Didn’t have a saving account at all
6. Saving situation after becoming clients of SMFI
a) Has a saving account in bank
b) Saved in eqqub women association or others
c) Didn’t have a saving account at all
7. Change in income of clients
a) Increased income
b) Income remained the same
c) Income decreased
8. Did you have fixed property before being a member in SMFI?
a) yes
b) no
9. Do you have fixed (including House) and movable asset after being engaged in SMFI
program?
a) yes
b) no
10. What assets do you have after being engaged in SMFI program?
a) Owner of a house
b) Bought household furniture and house equipment’s
c) The saving has increased
62
 d) Own land
e) Bought livestock
11. Educational levels before the loan
a) Illiterate
b) Primary
c) Secondary
d) Diploma
e) Degree
f) Masters
12. Educational levels after the loan
a) Illiterate
b) Primary
c) Secondary
d) Diploma
e) Degree
f) Masters
13. Healthcare situations after becoming clients
a) Remain the same
b) Improved
14. Did you take trainings?
a) Yes
b) No
15. Type of training taken
a) About loan utilization
b) About marketing
c) About saving
d) General training
e) No answer
16. Number of training
a) Once
b) Twice
c) Three times
63
 d) More than three times
e) No answer
17. Was there any supervision on loan utilization and repayment?
a) Yes
b) No
18. Quality of supervision
a) Satisfactory
b) Not satisfactory
c) No answer
19. Number of supervision per one loan cycle
a) None
b) Once
c) Twice
d) Three times
e) More than 3 times
f) Conditionally
g) No answer
20. Satisfaction of the clients, please answer using “yes” or “no” answers to show your
satisfaction with the services of SMFI

Satisfaction Particulars Responses

Yes No
Appropriate time of loan disbursement
Appropriate time of loan repayment
Appropriate interest rate
Sufficient loan size
Appropriate loan length
Sufficient advice and supervision
Attitude to continue with the program

64
 Part 3:- Focus group discussion

1. What are factors affecting the well-functioning of the SMFI.

65
 ሀዋሳ ዩኒቨርስቲ
የቢዝነስ እና እኮኖምክስ ኮሌጅ
የማነጅምንት እና አካዉንትንግ ትምህርት ቤት
የማይክሮ ፋይናንስ ተቋም ድህነትን ለመቀነስ ያለዉን አስተዋፅዖ ለማጥናት ወይንም
ለመገምገም በአጥኝዉ የተመረጡ መላሾችን ለመጠየቅ የተዘጋጁ ጥያቀዎች፡፡

ዉድ አቶ/ወ/ሮ/ወ/ሪት፡-
የዚህ ጥያቄ ዋና አላማ የማይክሮ ፋይናንስ ተቋም ድህነትን ለመቀነስ ያለዉን አስተዋ ፅዖ ለማወቅ ነዉ፡፡ ይህ
የምሰራዉ ከሀዋሳ ዩኒቨርስቲ በአካዉንትንግና ፋይናንስ ማስተርስ ዲግሪ ለመያዝ ወይን ምለማግኘት ነዉ፡፡ ይህ
ጥያቄ ለሲዳማ ማይክሮ ፋይናንስ ተቋም ለዳሌ ቅርንጫፍ ደንበኞች ይሰራጫል፡፡ ከጥናቱ ዉጤት የምጠበቀዉ
የማይክሮ ፋይናንስ ተቋም ድህነትን ለመቀነስ ያለዉን አስተዋ ፅዖ ለማወቅ ነዉ፡፡ የጥናቱ ማጠቃለያ የምደረገዉ
የሁሉንም መላሾች መልስ በማጠቃለል ስሆን የግለሰብ መልስ ለቢቻ ተነጥሎ አይገለፅም፡፡ በተጨማሪም
የምመልሱት ምላሽ በምስጥር እንደምያዝ እና ለዚህ ጥናት ቢቻ የምሆን መሆኑን አረጋግጣለሁ፡፡

ለምታደርጉት ተሳትፎ በቅድምያ አመሰግናለሁ!!

በዛብህ በራሳ ደበቆ

አጥኚ
ስልክ +251 910 476 244
ኢሜይል bezabih.bd@gmail.com

66
 የሲዳማ ማይክሮ ፋይናንስ ተቋሚ ለዳሌ ቅርንጫፍ ላለፉት ሶሰት ተከታታይ ዓመታት ለቆዩ ደንበኞች የተዘጋጀ ጥያቄ
ነዉ፡፡
ከዚህ በታች በተዘጋጀዉ ክፍት ቦታ ላይ የእርማት ምልክት “√” በማድረግ ይመልሱ

ክፍል 1. አጭር ግለ ታርክ ገለፃ

1. ፆታ
1. ወንድ
1. ሴት
2. ዕድሜ

1. 18-35
2. 36-45
3. >45

3. የጋቢቻ ሁኔታ
2. ያገባ
3. ያላገባ
4. የፈታ
5. በሞት ያጣ /ያጣች
4. የቤተሰብ መጠን
1. 1-4
2. 4-6
3. >6

ክፍል 2 የተለዩ የማይክሮ ፋይናንስ አገልግሎት እና ድህነት ቅነሳ ጋር የተያያዙ ጥያቄዎች

1. ብድሩን የተጠቀሙት አቅደዉ ለተበደሩት ዓላማ ነበር?
1. አዎ
2. አይደለም
2. ብድሩን ያዋሉት ገቢ የምያስገኝ ስራ ላይ ነበር?
1. አዎ
2. አይደለም
3. የወሰዱት ብድር ከዚህ በታች ከተዘረዘሩት በየትኛዉ ላይ ነበር ያዋሉት?
67
 1. መለስተኛ ንግድ ላይ

2. ማኑፋክቸርንግ ላይ
3. አገልግሎት ላይ
4. ግብርና ላይ
5. በሌላ ዘርፍ ላይ

4. ብድር አመላለስ ሁኔታ

1. በጊዜ

2. በዉሉ መሰረት
3. ተወዝፎብኝ ዜግይቼ ነበር የከፈልኩት

5. የማይክሮ ፋይናንስ ደንበኛ ከመሆንዎ በፊት ያለዎት የቁጠባ ሁኔታ

1. በባንክ ቡክ በመክፈት

2. በዕቁብ እና በሌሎች ማህበር

3. ምንም የቁጠባ ሂሳብ የለኝም

6. የስዳማ ማይክሮ ፋይናንስ ደንበኛ ከሆኑ በኋላ ያለዉ የቁጠባ ሁኔታ

1. በባንክ ቡክ በመክፈት

2. በዕቁብ እና በሌሎች ማህበር

3. ምንም የቁጠባ ሂሳብ የለኝም

7. የስዳማ ማይከሮ ፋይናንስ ደንበኛ ከሆኑ በኋላ ያለዉ የገቢ ሁኔታ

1. ጨምረዋል

2. ለዉጥየለዉም
3. ቀንሰዋል

8. የስዳማ ማይክሮ ፋይናንስ ደንበኛ ከመሆንዎ በፊት ቋሚ ንብረት ነበርዎት?

0. አዎ

1. የለኝም

9. የስዳማ ማይክሮ ፋይናንስ ደንበኛ ከሆኑ በኋላ ቤትን ጨምረዉ ቋሚ እና ተንቀሳቃሽ ንብረት
አፍርተዋል?
68
 1. አዎ
2. ዓይደለም
10. የስዳማ ማይክሮ ፋይናንስ ደንበኛ ከሆኑ በኋላ የትኛዉን ንብረት አፍርተዋል?
1. የቤት ባለቤት ሆኛለሁ

2. የቤት ዉስጥ ዕቃዎችን ገዝቻለሁ

3. ቁጠባዬ ጨምረዋል
4. የመሬት ባለቤት ሆኛለሁ
5. ከብቶችን ገዝቻለሁ

11. ብድር ከማግኘትዎ በፊት የነበርዎት የትምህርት ደረጃ

1. ያልተማረ

2. መጀመርያደረጃያጠናቀቀ
3. ሁለተኛደራጃያጠናቀቀ
4. ድፕሎማ
5. ዲግሪ
6. ማስተሬት

12. ብድር ካገኙ በኋላ ያለዉ የትምህርት ሁኔታ

1. ያልተማረ
2. መጀመርያ ደረጃ ያጠናቀቀ
3. ሁለተኛ ደራጃ ያጠናቀቀ
4. ድፕሎማ
5. ዲግሪ
6. ማስተሬት
13. የስዳማ ማይክሮ ፋይናንስ ደንበኛ ከሆኑ በኋላ ያለዉ የጤና ሁኔታ ምን ይመስላል?

1. ለዉጥ የለዉም
3. ተሸሽለዋል

14. ስልጠና አግኝተዉ ያዉቃሉ?

0. አዎ

1. አግኝቼ አላዉቅም
69
15. መልስዎ አዎ ከሆኔ ምን ዓይነት ስልጠና ነበር ያገኙት?
1. ስለብድርአጠቃቀም

2. ስለገበያ
3. ስለቁጠባ
4. ጠቅላላ ስልጠና
5. መልስ የለም

16. ሰልጠናዉን ስንት ጊዜ ወስደዉ ያዉቃሉ?

1. አንዴ

2. ሁለቴ
3. ሶስተ
4. ከሶስት ጊዜ በላይ
5. መልስ የለም

17. የብድር አጠቃቀም እና አመላለስ ላይ ክትትል /ቁጥጥር/ ይደረግ ነበር?

1. አዎ
2. አይደረግም
18. የቁጥጥሩ /የክትትሉ/ ሁኔታ

1. በቂነበር

3. በቂ አይደለም
4. መልስ የለም
19. በአንድ ዙር ብድር ስንቴ ቁጥጥር ይደረግ ነበር?
1. ተደርገዉ አይታወቅም

2. አንዴ
3. ሁለቴ
4. ሶስቴ
5. ከሶስት ዙር በላይ
6. እንደየ ሁኔታዉ
7. መልስ የለም

70
20. ከሲዳማ ማይክሮ ፋይናንስ ያገኛቹትን አገልግሎት እርካታ ደረጃ ከዚህ በታች በተዘጋጀዉ ሰንጠረዥ
ዉስጥ መልስዎን አዎ ወይንም አይደለም በማለት ይመልሱ

የእርካታ መለኪያዎች ምላሽ

አዎ አይደለም
የብድሩ ስርጭት ጊዜዉን የጠበቄ ነዉ ?
የብድሩ አመላለስ ጊዜዉን የጠበቄነዉ?
ብድሩ ላይ የተጣለዉ ወለድ ተመጣጣኝ ነዉ ?
የምሰጠዉ ብድር ለዓላማዬ በቂነዉ ?
ለብድር አመላለስ የተሰጠዉ ጊዜ በቂ ነዉ?
በቂ ምክር እና ክትትል ተደርገዉለታል?
የማይክሮ ፋይናንስ ደንበኛ ሆነዉ ለመቀጠል
ይፈልጋሉ?

71
72