WOLLO UNIVERSITY

DEPARTMENT
OF

AGRICULTURAL-ECONOMICS

THE ROLE OF MICRO-FINANCE INSTITUTION OF IMPROVING

HOUSEHOLD FOOD SECURITY

A seminar paper

Submitted to the department of Agricultural economics, College of Agriculture, Wollo

University, in fulfillment of the Requirement of the course Senior Seminar

By

Ekram Seid

May, 2021

Dessie, Ethiopia

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 TABLE OF CONTENTS
TABLE OF CONTENTS.....................................................................................................................i
List of Abbreviations........................................................................................................................ii

1.INTRODUCTION............................................................................................................................1

1.1.Background..........................................................................................................................1

1.2.Statement of the problem…………………………………………………………….........3

1.2.Objectives.............................................................................................................................4

2.LITERATURE REVIEW................................................................................................................5

2.1.Theoretical Review..............................................................................................................5

2.1.1.Definitions and concepts...................................................................................................5

2.1.2.Micro-financing institution in Ethiopia.............................................................................6

2.1.3.Food security in Ethiopia………………………………………………………………..7

2.1.4.Food security indicators…………………………………………………………………8

2.2.Empirical Review...............................................................................................................9

3.Weakness , strength and suggestion of the paper…………………………………….…10

4.CONCLUSION AND RECOMMENDATIONS………………………………………..11

4.1.Conclusions………………………………………………………………………………11

4.2.Recommendations..............................................................................................................11

5.REFERENCE.................................................................................................................................12

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 ABBREVIATION AND ACRIMONY

FAO...................................................Food and Agricultural Organization.

GDP...................................................... Gross Domestic Product.

HH .............................................................Household.

MFI ............................................................................Micro-Finance Institution.

MDGs ...................................................................................Millennium Development Goal.

NGO.................................................................................... Non-Governmental organization.

UNDP........................................................................ United Nation Development Program

US $ ..............................................................................United State Dollar.

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 1. INTRODUCTION

1.1.Back ground of the Study

According to AdaneAtara (2010); we are living in the continent marked with

multidimensional underdevelopment such as economic, social and political. Social scientists
use poverty as a prime feature of a country with economic underdevelopment. On the other
hand, poverty has an inherent relationship with food insecurity. That is, the level of food
security/insecurity of a given

Nation, community, household, and/or individual is determined by the level of poverty

experienced. That is, poor people are usually the one who mostly suffer from food insecurity
problem.

Food security has become one of the major areas of interest for researchers and policy
makers. Some of the issues that have gained much attention and off course that have become
debatable in connection with food security include: what it is all about, what indicators to use
to measure it, whether the question of food security/insecurity has to be seen at the global
and/or national level or at household level (that is, whether a unit of study need to be a
country or a household), and what strategies should a nation pursue to pullout its people from
this problem.(Adane Atara,2010).

Though the world has attained the status of sufficiently producing enough food to feed every
individual on this planet just long ago, significant proportion of the world’s population still
lives under the situation of varying level of food insecurity. Of this, food insecure people,
23% live in Sub Saharan Africa. Ethiopia is among the countries in Sub Saharan Africa
whose name has been mentioned repeatedly in connection with this problem. The country has
experienced sever famines, whose causes are both natural calamities and human failures,
many times in its history (Degefa, 2015).

In both developed and less developed countries the human livelihood is characterized by a
sharp contrast of increasing disparity between the rich and the poor. Poverty alleviation is
thus becoming one of the most important challenges faced by the policy makers of many less
developed countries. The provision of financial services to low income households is

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believed to eradicate, (or at least reduce), poverty through the transformation of social and
economic infrastructures (Murdoch, 2000).

The Microfinance industry itself is becoming a global phenomenon. The proliferation of

microfinance programs, particularly microcredit, targeted to women is increasing from time
to time. The World Bank is engaged in reducing poverty through promoting best practice in
the microfinance industry and funding selected institutions to bring financial services to the
poor. The provision of microcredit has been recognized as instrumental tool for eradicating
and/or reducing poverty by many developing countries, including Ethiopia. From various
studies, Park and Ren (2001), summarize that microcredit programs have increased incomes
and had other positive effects such as gender empowerment, improved nutrition, higher
educational attainment, and reduced consumption variability.

Ethiopia is the second popular country in sub-saran Africa and the population of about 72
million people. Ethiopia is one of the poorest half dozen countries on earth. The latest (2009,
human development index(combining income, life expectance , adult literacy, and school 2
enrollment)ranks Ethiopia 171 out of 182countries.The latest worked ranking of GDP per
capital put Ethiopia172 and per head of only US $100 in 2009 ( World bank ,2009). It is
estimated that close to 30 million Ethiopian live in absolute poverty. Consuming below
recommended daily nutrition caloric requirement and failing to satisfy the basic requirement
on day-to-day basis .Especially rural sub- Saharan Africa the socio – economic situation of
the country is characterized by:

Low growth of income, inadequate social service, high population growth, economic
inefficiency and, high unemployment rate.

Because of these and other factors, many people agree that micro- finance could be one
among factors assumed to bring change in improving the living condition of the peer by
creating different terms of assets and something consumption. The main objective of the
micro- finance institute is delivery of financial service micro-finance institute, micro- loans,
micro saving. All of micro-finance in Ethiopia, half of the major of poverty alleviation
(Dabimoti, 20011). Moreover, the societies are marginalized and their food security situation
is further deteriorating by marginalized development, policy approaches and absence of
diversified livelihood strategies. To alleviate the current food insecurity and transform the
rural sector in the region, it requires strong rural financial inter mediation (kabbji,

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2013).Despite, the importance of micro finance to house hold food security, in these areas
there are no financial services, to house hold food security ,rather few NGOs are trying to fill
the gaps by providing some sort of piece meal micro- finance in the form of revolving funds
to women groups to support the house hold food security.(Abdi Ahmed;2010)

In Ethiopia, the poverty reduction strategy is becoming the operational framework to translate
the global MDGs targets in to national action (UNDP 2005). Micro finance service
intervention in Ethiopia have also be considered as one of the policy instrument of the
government and non-government organizations (NGOs) to enable rural and urban poor
increase output and productivity, induce technology adoption, improve input and
productivity, induce technology adoption, improve input supply, increase income, reduce
poverty and attain food security. The sustainability of micro finance institutions that reach a
large number of rural and urban poor who are not served by the conventional financial
institutions, such as the commercial banks, has been a prime component of the new
development strategy of Ethiopia (Wolday 2010)

1.2. Statement of the Problem

In many developing nations, poverty and misery are common and most popular problem. As
many studies revealed people living in less developed countries are under the line of poverty
for many decades. According to World Bank report poverty has many dimensions, the first
dimension of poverty is material deprivation caused by income and consumption shortages,
the second dimension for it are: low achievement in education and health (World Bank,
2000). Third the low achievements in education, health and material deprivation made the
society to be constant attached with situations of poverty, Ethiopia can be viewed as an
important example of it .poverty in Ethiopia is manifestation of complex factors, such as high
population growth, environmental degradation high unemployment high level of illiteracy
limited access to resource health and education services, etc. The poor in Ethiopia have low
income that leads to low investment, which in turn leads to low productivity, and income and
then food insecurity. In previous time access to institution credit that contributes to an
increase in investment is very limited in Ethiopia. The poor get access to financial service
through informal channel such as money lenders, iddir, friends, relative, and traders with
higher interest rate. But the financial services could not satisfy the potential demand of the
poor for microcredit is enormous, because, every person needs income to activate.

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1.3: Objective of the Study

 To review literatures on the objective of this study is to assess the role of

microfinance in improving food security of the households.

 To review literatures on identifying the characteristics of Microfinance institutions

in the country.
 To review literatures on examining the Food security and poverty alleviation in
Ethiopia.

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 2. LITERATURE REVIEW

2.1 Theoretical Reviews

2.1.1 Basic Concepts and Definitions
The definitions of microfinance institutions proposed by some scholars and organizations are
seemingly different from one another. However, the essence of the definitions is usually the
same.

Micro-Finance Institutions (MFIs) are often defined in terms of characteristics like

Targeting the poor (especially the poor women), promoting small businesses, building
capacity of the poor, extending small loans without collaterals, combining credit with Savings
and charging commercial interest rates. MFIs are often innovative and flexible in their design
and implementation (Alemayehu, 2012).

The term microfinance refers to small-scale financial services- primary credit and savings-
provided to people who operate small enterprises, provide services, fish farm or herd, and to
other individuals or groups at local level of developing countries both rural and urban areas
(Robinson, 2001:9). The providers of such services are commonly known as microfinance
institutions and mainly play the financial intermediation role. In addition to financial
intermediation, many microfinance institutions provide social intermediation services such as
group formation, development of self-confidence, and training in financial literacy and
management capabilities among members of a group. Thus the definition of microfinance
extends to include both financial intermediation and social intermediation. Furthermore,
microfinance is not simply banking; it is a development tool as well as such, its activities also
involve provision of small loans, typically for working capital; informal appraisal of
borrowers and their investments; collateral substitute, such as group collateral or compulsory
savings, and secured savings products(Ledgerwood1999: 2).

According to Linda (2001), Microfinance is the means by which poor people convert small
sums of money into large lump sums. Micro finance services may be seen in terms of four
main mechanisms:

• Loans: which allow a lump sum to be enjoyed now in exchange for a series of savings to be
made in the future in the form of repayment instilments.

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• Savings: which allow a lump sum to be enjoyed in future in exchange for a series of
savings made now.

• Insurance: which allows a lump sum to be received at some unspecified future time if
needed in exchange for a series of savings made both now and in the future. Insurance also
involves income pooling in order to spread risk between individuals on the assumption that
not all those who contribute will necessarily receive the equivalent of their contribution.

• pensions: which allow a lump sum to be enjoyed as a specified and generally distant date in
future in exchange for a series of savings made now.

2.1.2 Micro-financing institution in Ethiopia

Following the success story of the Grameen Bank Model developed in Bangladesh where
small scale lending was justified as a solution to the market failure in the credit market;
microfinance program has gained a considerable acceptance in many developing countries. In
Ethiopia the provision of microfinance services to income generating activities and micro
enterprises started in the late 1980s by non-governmental organizations (NGOs). The
organizations provide credit to promote income-generating activities of poor households.
However, formal microfinance, operating according to national financial institutions
regulation, started in 1994/5. In particular, the Licensing and Supervision of Microfinance
Institution Proclamation of the government encouraged the spread of Microfinance
Institutions (MFIs) in both rural and urban areas as it authorized them among other things, to
legally accept deposits from the general public (hence diversify sources of funds), to draw
and accept drafts, and to manage funds for the micro financing business (Getaneh, 2005).
According to Degefa D2009:3) in Ethiopia microfinance services were introduced after the
demise of the derg regime following the policy of economic liberalization. It is taken as a
shift from government and NGO subsidized credit programs to financial services run by
specialized financial institutions. With this shift some NGO and government micro credit
programs were transformed to microfinance institutions. Such shift was mainly promoted by
a regulatory framework that was put in place to license and supervise the institutions under
the country‘s central bank.

The regulatory framework was developed as a part of government‘s effort to liberalize the
financial sector and lay down an alternative institutional framework to provide financial

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services mainly to the rural poor to boost agricultural production, enable food self-
sufficiency, and reduce rural poverty. Currently, 22 licensed microfinance institutions are
operating in Ethiopia.(Degefa D. 2009:4) In fact since recently microfinance program has
been considered as the main instrument in alleviating poverty in the country.

For example, Wolday (2010) justifies objectives of microfinance activities in Ethiopia as a

policy instrument which enables rural and urban poor to increase output and productivity,
induced technology adoption, improved input supply, increase income, reduce poverty and
attain food security. Hence, microfinance is taken as a prime component of the new
development strategy of Ethiopia, which emphasizes on poverty alleviation and ensuring food
security. In the past few years microfinance industry has shown a remarkable growth in terms
of outreach and amount of loan provided. A study by Befikadu (2007:17&22) indicates a rise
of the outreach at the national level by 22.9 percent in the five years that cover year (2003-
2007).

Microfinance institutions of the country vary with regard to their source of funds and areas of
operations. Some of the microfinance institutions operating in Ethiopia are region based in
terms of lending activities and source of funds, while others depend on donors‘fund. Most of
them finance their lending and other operational activities through external donations. In
connection with this way of financing some writers raise a major concern concerning their
sustainability (Wolday, 2010).

2.1.3 Food security in Ethiopia

Food security is defined as the availability of food and one's access to it. A household is
considered food secure when its occupants do not live in hunger or fear of starvation. Stages
of food insecurity range from food secure situations to full-scale famine. (World Food
Summit, 1996)

Food security exists when all people, at all times, have physical and economic access to
sufficient, safe and nutritious food to meet their dietary needs and food preferences for an
active and healthy life. (FAO, 2002)

Ethiopia is a typical agrarian society in which more than 85% of the population stays attached
to farming life. Agriculture absorbs more than 80% the countries lab our force and constitutes

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about half of growth national product (GDP) pursuant to the dominance to the sector in the
country’s economy. Ethiopia is characterized by what is commonly known as subsistence
agrarian economy. Therefore, it ought to be recognized that the food productive and food
security assessment is presentation of atypical subsistence agrarian economy operating under
ecological degraded environment variables climate and poor production techniques. The idea
of national food security in Ethiopia was initiated by the famine of the 1970sand had two
objectives The first objectives was attainment of national food self-sufficiency which resulted
from distrust of the world market and the drive to promote self- reliant development The
second objective was more directed towards stabilizing domestic food supply through stock
piling food crops in the event sudden falls in national production (Geachew D, 2010)

2.1.4 Food security indicators

Food security indicators are summary measures of one or more of the dimensions of food
security used to demonstrate change or the result of a program activity for a target population.
In most analyses of food security conditions, multiple indicators are used to reflect the
various dimensions of the problem. Some of the most commonly used types of indicators in
the assessment of food security conditions include those related to: food production, income,
total expenditure, food expenditure, share of expenditure on food, calorie consumption, and
nutritional status (Riely, et.el.1999).Brehanu, (2013) lists such measures like food production,
nutritional intake and quality, income distribution, the per capita food and nutritional
availability and distribution, land use and per capita arable land, consumer price index
(reflecting changes in the cost to the average consumer of acquiring a fixed basket of goods
and services), food price index as relevant food security indicators. Maxwell and
Frankenberger (1992) classify the indicators into three groups as the food supply /
availability/ indicators, food access indicators and the outcome indicators. Accordingly, the
supply indicators include such as metrological data, market information, institutional and
market infrastructures, and conflicts. On the other hand, the access to food indicators
comprises such as land use practices, diversification of income sources, diversification of
assets, and access to credit services.

On the outcome category we find such indicators as change of household budget and
expenditure, change in the frequency of food consumption, subsistence potential, nutritional
status and the household’s perception of food insecurity. In assessing the role of
microfinance, this study too employed the combination of some of the access as well as

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availability indicators of food security. They include income, on food and non-food
expenditures, savings, and stock of food and the yearly harvest.

2.2 Empirical Literature

The role of microfinance on household’s food security has been widely documented.
Researches show positive role that access to financial services can have for improving
income generation, food consumption, nutritional status as well as school enrolment of
children: that will have a long term impact on household’s food security. For example, a
study conducted in calcuta (India) by Holt and Ribe (1995) indicated improvement of the
household’s income by 82% due to their participation in microfinance program. The same
positive linkage has been discovered between households’ income, which was believed to
place them in better position in terms of food security, and participation in microfinance in
the study conducted in Bangladesh. Webster and Fidler (1996) reported that study of
participants in the Grameen bank (in Bangladesh) loan programs had been successful in
increasing their household’s incomes, expenditures, employment opportunities and nutritional
intakes.

The study conducted by Nur Abdi (2014) in Somale regional state in Ethiopia has revealed
households participated in microfinance program are found better than the nonparticipants in
the area of the study on the food security indicators. The average income of the participant
households found better than non-participants. The participant households also performed
better than the non-participants on such variables like food and non-food expenditures,
number of school age children attending schools, and the average savings.

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3. Weakness,strength and suggeston of the paper

Strength

 This Paper to identify the major causes of food insecurity.

 To support especially women group.
 To identify the main objective of the micro- finance institute is delivery of financial
service micro-finance institute, micro- loans, micro saving.
 To improve social, finance and economical in rural and urban people. The provision
of microcredit has been recognized as instrumental tool for eradicating and/or
reducing poverty

Weakness

 In this paper cannot suggest or solve role of the financial services they
receive from the institution most of the users have voiced certain complaints
on institutions services like the interest rate, access to loan.
 Editing problem
 Use of document

Suggestion

 The interest rate will be decrease.

 The loan service is valid and fair.
 Users can choose the loan service.

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4. CONCLUSION AND RECOMMENDATION

4.1. Conclusion
Role of microfinance is one of the key important strategies to increase agricultural production
,food security , to identify the major causes of food insecurity and especially women group
who are strength to address the food security. Positive role that access to financial services
can have for improving food consumption, nutritional status as well as school enrolment of
children.

Microfinance program has helped them inimproving their income, overall asset, the yearly
farm harvest, savings ,business management skill , on-food expenditure and non-food
expenditure implying that the program is playing some positive role in their household level
food security ensuring efforts.

Microfinance institutions are operating in Ethiopia to provide financial services mainly to the
rural poor to boost agricultural production, enable food self-sufficiency, and reduce rural
poverty.

Microfinance activities in Ethiopia as a policy instrument which enables rural and urban poor
to increase output and productivity, induced technology adoption, improved input supply,
increase income and attain food security.

4.2 Recommendation

Based on the results of this study, the following recommendations are made:

 Review of the wide literature shows that food insecurity problem. One of the rural
finance that provides financial services such as credit and savings to enable the rural
households to improve their income and diversify their source of income that will
help them to minimize the probability that they will easily experience the food
insecurity.

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  Poverty in Ethiopia is manifestation of complex factors or challenges , such as high
population growth, environmental degradation high unemployment high level of
illiteracy limited access to resource health and education services, etc. In an effort to
address this factors microfinance institutions provide social intermediation services
such as group formation, development of self-confidence, and training in financial
literacy , management capabilities and encouraging the need to ensurefarmer
participation and consideration of market policy.

 Microfinance refers to small-scale financial services to use credit and savings-

provided to people who operate small enterprises and change the living standard.

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 5. REFERENCE
Alemayehu, Y. (2012). The performance of microfinance institutions in Ethiopia: A case of
six microfinance institutions. MSc thesis, University of Addis – Ababa, EthiopiaNorwegian
University of Life Science.

Bekele, A. D. and Dereje, G.R. (2013). Impact of microcredit on the livelihood of borrowers:
evicdence from Mekelle city, Ethiopia. Journal of research in economic and international
finance. Vol. 3(1) pp. 25 – 32, January 2014

CSA (2007), the 2007 population and housing census Of Ethiopia national statically
summary report, UNFPA, Addis Ababa

Canadian Center of Science and Education (2014).Conceptual Frame work. The Role of
Microfinance on the Wellbeing of Poor People Cases Studies from Malaysia and
Yemen.Asian Social Science; Vol. 10, No. 1; 2014.

DegefaTolossa. 2015. Rural Livelihoods, Poverty, and Food insecurity in Ethiopia: ACase
study at Erenssa and Garbi Communities in Oromia Zone, AmharaNational Regional State.
Doctorial Thesis for the degree of Philosofiae, Trondeim, May,2005.

Getahun Nana. 2011. Looking into sustainable sources of funding for microfinance
institutions in Ethiopia. AEMFI, Proceedings of the conference on microfinance development
in Ethiopia. Nazareth, Ethiopia.

Gebeyahu. (2013) Micro finance development in Ethiopia prospect, sustainability and

challenges in poverty reduction AEMFI,

Kabbaji, Omar, (2013). The Challenge of African Development, Oxford, Oxford University
Press.

.Ledgerwood, J. 1999. Microfinance handbook: An institutional and financial perspective:

World Bank. Washington D.C, USA.

n, S. 2010. The Micro Finance Revolution: Sustainable Finance for the Poor. The World
Bank, Washington D.C. USA

NurAbdi. (2014). The role of microfinance in strengthening Pastoral household food

security. A Thesis submitted to the department of RLDS, school of Graduate Studies, Addis
Ababa University.
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