WOLKITE UNIVERSITY

COLLEGE OF BUSINESS AND

ECONOMICS
DEPARTMENT OF MANAGEMENT
CHALLENGES AND PROSPECTS OF MICRO
FINANCE INSTITUTIONS IN GURAGE ZONE
ABESHIGE WOREDA

A RESEARCH PROPOSAL SUBMITTED TO

MANAGEMENT DEPARTMENT

PREPARED BY: TIGLU HAYLE

ADVISOR: ABEL DULA

MAY 2016
WOLKITE, ETHIOPIA
ACKNOWLEDGEMENT

First of all I would like to express my heart felt gratitude to my Advisor

Abel Dula for his professional guidance and valuable support for the
completion of this research proposal. I am also indebted to all those who
devoted their money and time for the success of this research proposal
specially staff member of Management Department.
ABSTRACT

The study under the title “Challenges and prospects of micro finance institutions in
Gurage Zone Abeshige Woreda” The general objective of this study is to assess the
challenges and prospects of microfinance institution in Abeshige Woreda. Both primary
and secondary data will be considered, primary data will be collected through
Questionnaire and Interview. While the secondary data will be collected from the
available literature on the subject and from published and unpublished materials. The
sampling used in this study will be stratified probability sampling. The data collected will
be analyzed by using both quantitative and qualitative data analysis particularly
descriptive types of analysis which are used in the study are percentage and tables.
Finally, based on the result of the finding, conclusion and recommendation will be
forwarded.

TABLE OF CONTENTS
ACKNOWLEDGEMENT..............................................................................................................2
ABSTRACT...................................................................................................................................3
CHAPTER ONE.............................................................................................................................5
1. INTRODUCTION..................................................................................................................5
1.1. Background of the study..........................................................................................................5
1.2. Statement of the problem..........................................................................................................7
1.3. Research Questions..................................................................................................................8
1.4. Objective of the study..............................................................................................................8
1.4.1. General objective............................................................................................................8
1.4.2. Specific objectives...........................................................................................................8
1.5. Significance of the study..........................................................................................................8
1.6. Scope of the study....................................................................................................................9
1.7. Limitation of the study.............................................................................................................9
1.8. Organization of the study.........................................................................................................9
CHAPTER TWO..........................................................................................................................10
2. REVIEW OF RELATED LITERATURE................................................................................10
2.1 Microfinance- an overview.....................................................................................................10
2.2. Definition of microfinance institution....................................................................................10
2.3. The development of MFIs......................................................................................................12
2.4. MFIs can help small businesses.............................................................................................13
2.5. Arguments against the micro-financial sector........................................................................15
2.6. Challenges of microfinance institutions as instrument in.......................................................17
Delivering services.......................................................................................................................17
2.6.1 Targeting the poor.........................................................................................................17
2.6.2 Interest rate....................................................................................................................18
2.6.3 Policy environment........................................................................................................18
2.6.4 Inadequate financial infrastructure.............................................................................19
2.6.5 Inadequate investment in agriculture and rural development...................................19
2.6.6. MFIs being urban based..............................................................................................19
2.6.7. Design of appropriate financial products for the poor..............................................20
2.6.8. Gender bias of microfinance intervention..................................................................22
2.6.9 Inadequate emphasis on financial viability..................................................................23
2.6.10. Limited retail level institutional capacity..................................................................23
CHAPTER THREE......................................................................................................................24
3. METHODOLOGY OF THE STUDY.......................................................................................24
3.1. Background of the Study Area...............................................................................................24
3.2. Research Design....................................................................................................................24
3.3. Type and Source of the Data..................................................................................................25
3.4. Sampling Technique and Size................................................................................................25
3.2. Method of data collection......................................................................................................25
3.3. Method of Data analysis........................................................................................................25
CHAPTER FOUR........................................................................................................................26
4. COST AND TIME PLAN........................................................................................................26
4.1 Time Schedule....................................................................................................................26
4.2. Financial Budget................................................................................................................26
BIBLIOGRAPHY........................................................................................................................27
APPENDIX..................................................................................................................................29
CHAPTER ONE

1. INTRODUCTION

1.1. Background of the study

It is argued that in the developing countries formal and informal financial
sectors have failed to serve the poor at required level. In the formal sector,
large loans and bureaucratic and long procedures for getting loans keep
away the poor from the financial institutions. Informal sector, on the other
hand, is also failed to serve the poor masses. Informal lender’s charges are
very high and keep the adult laborer as collateral. Exploitation of real
valuation of collaterals’ high interest rate and monopoly of lenders keep
away the majority of the clients from the informal financial sector of
providing finance to poor people, from income generating activities to
reduce poverty. These results can be verified from Bhaduri (1983); Rao
(1980) Bardhan (1980) Ghosh (1986); Sudan (2007); PGE (2009). Due to
limitation of financial sector in both formal and informal services,
particularly credit has evolved the micro-credit planning and programs.

The catalytic roles of micro and cottage businesses have been displayed in
many countries of the world such as Malaysia, Japan, South Korea, Zambia,
and India among other countries. They contribute substantially to the Gross
Domestic production (GDP), export earnings and employment opportunities
of these countries. Micro and small scale enterprises (MSEs) have been
widely acknowledged as the springboard for sustainable economic
development. Apart from the fact that it contributes to the increase in
per capital income and output, it also creates employment opportunities,
encourage the development of indigenous entrepreneurship, enhance
regional economic balance through industrial dispersal and generally
promote effective resource utilization that are considered to be critical in
the area of engineering economic development (Tolentino, 1996; Oboh,
2004; Odeh, 2005).
In Ethiopia the growth of interest in microfinance development during the
last two decades has led many funding and government agencies to support
micro finance institutions. It can be the critical emerging issue of developing
countries and are often seen by donors as manifestly effective means of
improving the position of the poor. Ethiopia has an estimated 73.9 million
population. Agriculture is the main stay of the economy and approximately
85% of the courtiers’ population lives in the rural areas. About 45% of the
population in Ethiopia is reported to live below the poverty line (CSA,
2007).
The major causes of low economic growth in Ethiopia include: lack of
income, asset, employment opportunities, skills, education, health and
infrastructure. To address all problems listed above the federal government
of Ethiopia has implemented development programs such as the new
extension program to increase agricultural production and productivity; the
federal and regional food security strategies, which is designed to increase
food and agricultural production. Intervention through the delivery of micro
finance services have been considered as one of the policy instrument of the
government and NGOs to enable rural and urban poor increase out put and
productivity, induce technology, improve input supply, increase income,
reduce poverty and attain food security. The establishment of sustainable
microfinance institution that reach a large number of rural and urban poor
who are not served by the formal financial institutions has been prime
component of the new development strategy of Ethiopia.
But in order to meet all those aims the microfinance institution are
challenged by many problems like lack of adequate infrastructure in rural
area to address the services , due to the lack of collateral to secure the loan to
be guaranteed, which hinder the microfinance institution to gave rapid
service to the clients, because of relevant limited human resources in the
country and etc, which is obstacle for the expansion of the microfinance
institution in the country and make them passive to make changes in the
society. This research paper concerns on these challenges and prospect out
the futurity of these institution in improving the income level of the society,
creating employment opportunity, increasing food and agricultural
production, and bring the country middle income countries .Finally, this
research paper concerns on the challenges and prospect of MFIs in Ethiopia
specially in Abeshige Woreda, and at the end, it gave some recommendation
concerning the problem stated in the paper.
 1.2. Statement of the problem
Weak MFIs in Ethiopia do have government support and all depend on
donor support has one of the major source of fund or loan. There is no
difference in terms of structure, process of control and the content of
governance between the NGO supported and government supported. The
actual difference between the two categories of MFIs lies in support, the
MFIs would obtain from the grass root level of government administration,
some MFIs have all rounded support to implement their mission and vision
from the grass root by the government administrative organization.

Some argue that this support from the government hardly observes and
conflicts of interest and use of the MFIs in meeting specific political agenda
,some other argue that the support from these government have assisted
these MFIs to have relatively higher repayment rate and lower transaction
cost. In some of the international NGOs supported MFIs, the parent NGO
influences the broad and also affect the activity of MFIs. This indicates that
the relationship between the parent NGO and the MFIs are not clear
(Wolday Ameha 2000).

The Ethiopian government has led down regulatory frame works for the
establishment of microfinance institution by in action proclamation number
40/1996,that provided for the licensing and supervision of MFIs .after this
proclamation has been issued ,22 MFIs have been licensed and started
operation .
Microfinance is one of the program that under taking many action in order to
help the poor, with major aim of providing financial and other related
services to the active poor. The rational of this paper is to assess the
challenges and prospects those microfinance institutions of Abeshige
Woreda faces.

1.3. Research Questions

 What are the factors that limited microfinance services?
 How the interest rate affect the profit and cover cost in
microfinance institution?
 What challenges will the institutions face in the near future?
 1.4. Objective of the study
1.4.1. General objective
The general objective of this study is to assess the challenges and prospects
of microfinance institution in Abeshige Woreda.
1.4.2. Specific objectives
The specific objectives of this study are:
 To assess the factor that limited microfinance services.
 To find out how the interest rate affect the profit and cover cost
in microfinance institution.
 To assess what the institution face in the near future.

1.5. Significance of the study

Like any other developing woredas, Abeshige Woreda is under taking
measures to eradicate social problems like poverty, unemployment, financial
and income gap of the society which is intensified in urban and rural areas.
Microfinance could be explained as good instrument to over come such
problems by financing the poor. So, study on this area is believed to have
prime importance and play significant role. Hence, the importance of this
study as microfinance institution, it provides both previous and current
suggestion through identifying the challenges and prospects of the institution
and this would help them in modification of the service provision by
eradicating the challenges pointed out, discussed and analyzed on this
research paper.
Furthermore, any concerned body can exploit the findings of this study as a
source of document or information and those who want to study on this area
used this paper as review of related literature. Finally this paper or finding is
used for MFIs as information in order to solve the problem and meet their
objective every sight of the country as well as this woredas.

1.6. Scope of the study

Alemayehu (2010), defined microfinance as a provision of financial services
to low income clients or solidarity lending groups including consumers and
the self-employed, who traditionally lack access to banking and related
services. According to Grameen’s foundation, Microfinance is sometimes
called the ‘banking for the poor’. ‘Microfinance is an amazingly simple
approach that has been proven to empower very poor people around the
world to pull themselves out of poverty. A key to microfinance is the
recycling of loans. As each loan is usually repaid within six months to a year
the money is recycled as another loan, thus multiplying the value of each
dollar in defeating global poverty, and changing lives of communities
(Grameen Trust, 1995).
The study will focus on the challenges and prospects of microfinance
institution by taking Gurage Zone, Abeshige Woreda for 2006 and 2007
fiscal year.
The type of the study is descriptive and it will use primary and secondary
data sources. Data gathering tools of this study will be questionnaire and
interview. Besides random and quota sampling techniques will be used.

1.7. Limitation of the study

Even though, as much as possible were made to collect reliable information
or data, there is a problem in study. Due to lack of finance and sufficient
time, unwillingness of respondents to give reliable information and others
may be the main problem that will face the researcher.

1.8. Organization of the study

This research paper consists of four chapters. The first chapter presented
back ground of the study, statement of the problem, objective of the study,
significance of the study, scope of the study, and limitation of the study.
Chapter two focuses on literature review related to the study. The third
chapter focuses on data analysis and interpretation.
Finally, the last chapter attempted to conclude the overall paper and gave
solution to the problem.
 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1 Microfinance- an overview

The emergency of global microfinance has a history of about three decades.
yet has gone through stages of historical development .the microfinance
industry is said to be in revolution, the service that was initiated in small
scale and small village of south east Asia “chintanga” Bangladesh now
turned to be international agenda and an issue addressing one of the main
problems i.e. poverty in developing countries of the world.

As commonly under stood, the term microfinance refers to the activity of

financial and social intermediation services directed to low income
population group. The financial intermediation refers to loans, saving,
insurance, transfer service and other financial products targeted at low
income population group. The social intermediation how ever refers to group
formation; development of self confidence, training in financial skills and
arrangement capabilities among the poor section of the society .this idea is
supported by (Robinson, 2001). That microfinance industry strives to
provide services that help low income poor reduce financial risk, improve
their management skill, increase their productivity and there fore their
income collect higher return on investment. Provide financial and emotional
security, and improve the over all quality of life for their families.

2.2. Definition of microfinance institution

Quite simply, a microfinance institution is an organization that offers
financial services to low income population’s .almost all of these offer micro
credit and only take back small amounts of savings from their own.

Borrowers, not from the general public, within the microfinance industry
,the term microfinance institution has come to refer to a wide ranges of
organizations dedicated to providing these services :NGOs, credit unions ,
cooperatives ,private commercial banks and non-bank financial institutions
(some that have transformed fro NGOs in to regulated institutions )and parts
of state owned banks .
The image most of us have when we refer MFIs is of a “financial NGO” , an
NGO that is fully and virtually exclusively dedicated to offering financial
services; in most case micro credit NGOs are not allowed to capture
savings , deposits from the general public .these group of a few hundred
NGOs have led the development of micro credit and subsequently
microfinance, the world over (CGPA , 2003). Most of these constitute a
group that is commonly referred to as “best practice “ organizations , ones
that employ the newest lending techniques to generate efficient outreach that
permit them to reach down far in to poor sectors of the economy on
sustainable basis.
A great many NGOs that offer micro credit, perhaps even a majority, do
much other non-financial development activity and would bristle at the
suggestion that they are essential financial institution. Yet from an industry
perspective, since they are engaged in supplying financial services to the
poor we call them microfinance institutions. The same sort of situation exists
with small number of commercial banks that offer microfinance services.
For our purposes we refer to them as MFIs even though only small portion
of their asset may actually be tied up in financial service for the poor (CGPA
2003 ). In both cases when people in the industry refer to MFIs, they are
referring only to that part of the institution that offers microfinance.
There are other institutions, however, that consider themselves to be in the
business of microfinance and that would certainly play a role in reshaped
and deep need financial sector. These are community based financial
intermediaries .Some are member ship based such as credit members and
cooperating housing society. Others are owned and managed by local
entrepreneurs or municipalities .These institutions tend to have broader
client base than the financial NGOs and already consider them selves to the
part of formal financial sector. It varies from country to country but many
poor people do have some aces to these types of institution, although they
tend not to reach down market as far as financial NGOs.

2.3. The development of MFIs

Creating a financial system capable of lending to micro-enterprises and low
income house holds is an integral part of the world banks strategy for
developing the endogenous private sector and alleviating poverty. Micro-
enterprises typically foster little productive employment growth, but they do
alleviate the severe un- employment institutions in their early stage of
development through credit enhancement mechanism or subsidies.

One way of expanding the successful operation of MFIs in the informal

sector is through strengthened linkages with their formal sector counter parts
.A mutually beneficial partnership should be based on comparative
strengthens of each sector. Informal sector microfinance institutions have
comparative advantage in terms of small transaction cost s achieved through
adaptability and flexibility of operations (Ghate et al. 1992). They are better
equipped to deal with credit assessment of the urban poor and hence it
absorbs the transaction cost associated with loan processing. On the other
hand, formal sector institutions have access to broader resource-base and
high leverage through deposit mobilization (Christen et al .1994).

There fore, formal sector finance institutions could form a joint venture
with informal sector institutions in which the former provide funds in the
form of equity and later extends saving and loan facilities to the urban poor
.another form of partnership can involve the formal sector institutions
refinancing loans made by the informal sector lenders . Under these
settings, the informal sector institutions are able to tap additional resources
as well as having an able to exercising greater financial discipline in their
management.

MFIs could also serve as intermediaries between borrowers and the formal
financial sector and non-lend funds backed by a public sector guarantee
(Phelps 1995). Business like NGOs can offer commercial banks ways of
funding micro entrepreneurs at low cost and risk, for example, through
leverage bank, NGO-client credit lines. Under this arrangement, banks make
one bulk loan to NGOs and the NGOs packages it into large number of small
loans at market rates and recover them (Women’s World Banking 1994).
There are many on-going researchers on this line but context specific
research s needed to identify the most appropriate model.

2.4. MFIs can help small businesses

Experience shows that microfinance can help the poor to increase their
income build variable business and reduce their vulnerability to external
shocks .It can also be powerful instrument for self empowerment by
enabling the poor especially women to became economic agents of change .

Poverty is multidimensional by providing access to financial services;

microfinance plays an important role in the fighting against the many aspects
of poverty. For instance, income generation from business helps not only
the business activity expands but also contributes to house hold income and
it is attendant benefit on food security, children’s education, etc. Moreover
for women who in many contexts are secluded from public space.
Transacting with formal institution can also be confidence and
empowerment.

Recent research has revised the extent to which individuals around the
poverty line vulnerable to shocks such as illness of a wage earner, whether
theft or other such events. This shocks produce a huge claim on the limited
financial resource of the family unit and absent effective financial service
can derive a family so much deeper in to poverty that it can take year to
recover.

MFIs differ from commercial banks in their social objective. Banda says
their aim at serving the low income earners and the poor people who do not
have access to mainstream banks .For example ,in Kenya 80% of adult do
not have access financial institution .The MFIs have different publication of
banking principals (Banda, may 2007). They lend small loans and have
small saving transactions .They do not ask for large deposit nor do they
require conventional collateral o secure a loan .Unlike the mainstream
banks, they take banking to the entrepreneurs .For instance, k-republic bank
has a marketing out let in the form of bank branches .This serve people in
the states and the rural areas. They are located where in the low income
groups of 20-30 people and divide up to sub-groups of six. They meet
regularly, recruit new entrants, apply few loans and guarantee each other
(Nusselder, 2003).

Many people who go to their offices, he says, do not borrow money to start
new business but sustain or expand already existing ones. They also give
large scale loans to credit unions, which constitute 215 of their clients .52%
is taken up by small scale loans and savings while conventional loans take
another 12 percent (Banda, May 2007).

“MFIs are able to lend small loans ranging from sh 1,000 to sh 40,000.
Repayment can be within a day, a week, a month, six month or even 12
month with minimum interest rate. He said that this makes it accessible to a
lot of people .Most vendors and hawkers are k-rep clients” says Banda.

“Most of the clients used to borrow small amounts but they have known
gone in to large scale businesses and take big loans .If all the rest take these
steps, we can see Kenya’s economy transform .There is no economy in the
world has grown without micro enterprises.” (Banda, 2007).

On the support they receive from the government .Banda says that they
refused any type of special treatment. “We wanted to fit legitimately in the
financial sector so as to be commercially viable in poverty
eradication.”Because of this, microfinance institutions have made a great
impact in the business world.

MFIs have been lobbying the government to allow them to take money from
the public as saving and money loan to them .They too can be regulated
through the banking act by the MFIs bill. This would give small
entrepreneurs an alternative to other informal means of borrowing and
saving.

2.5. Arguments against the micro-financial sector

Perhaps the most prevalent critique microfinance in today’s international
system is that it does not have the ability to reach “the poorest of the poor”.
Regardless of the argument about what microfinance should, it seems clear
that this critique is generally true. The United Nation consultative group to
assist the poor (CGPA) stated that “most microfinance clients today fall in a
band around the poverty line and the extremely poor are rarely reached by
microfinance” (CGPA, 2003). In addition, there is a lack of consensus as to
whether reaching the poorest should be the goal of MFIs.

First, it is much more expensive to the poorest, both for the institutions and
the clients them selves. If an individual access credit, but does not have the
financial capability to service that debt, access loan services and interest
become an additional burden. The poorest also request small individual
loans with flexible repayment schedule, services that are very expensive for
MFIs to provide. Second, where the poorest do have a demand for financial
services, perhaps their demand for necessary social services is more
important. It is often the case that the poorest lack access to food, shelter and
sanitation, all needs that cannot be fulfilled permanently with short term
loans. It is more likely that microfinance services would benefit these people
once their basic need are taken care of by either a government service or
international relief and development organizations.

As women often fail in to the category of the poorest it has been argued that
microfinance may not be beneficial to them. In most of the developing
countries, however, women are often the ones who are working to provide
for the rest of the family. The working poor, who often fall into the category
of the poorest, have great potential to benefit from microfinance services.
For example, access to credit for a woman struggling to provide for her
family by running small enterprises may enjoy great benefit through an
opportunity to enhance her business. Simple access to financial services,
however, cannot guaranty empowerment or poverty alleviation, especially
for women in an economy dominated by male policies (Women and finance,
1995).

In addition, there are also many conflicting opinions about the ability of
microfinance as development tool to reach poor women in most of
developing countries. Many are uncertain about its ability to create and
foster an environment of truly sustainable and holistic development. Some
of the loudest voices in this debate come from women’s group and
organizations that do not see a clearly causal relationship between financial
stability and women empowerment. Their argument centers around three
primary issues; the relationship between structural adjustment program and
the on set of microfinance, the physical limitation and failures of micro
financial programs and the inability of microfinance to create a culture of
holistic empowerment (women and world bank,2001).

These programs “intensify the trade off between women producers and non
producer roles, in stronger terms, that the “crisis of social disinvestment
(under adjustment) is financed from “a social fund” provided by the super
human effort of poor women”(Baden,1997, p 38). Thus in order to achieve
the goal of growth and economic efficiency intended for these programs,
women’s burdens are increased and their labor is exploited. Therefore,
women seeking credit from MFIs are not creating business out of a personal
desire to become entrepreneurs; they are forced to work that they and their
families can survive in the vicious economic cycle that has been created by
structural adjustment programs (SAPs).

Feminist critics of microfinance also argue that poverty alleviation models

have over emphasized the importance private funding and support. There has
been a shift from development as the responsibilities of nation state to
development as the responsibilities of global community, including
international market, financial institutions and private corporations and
organizations (Poster and Salime, 2002). The microfinance industry is an
example of how development into a business they prefers private lenders
over government sponsored funds .It is consistent with the leading model
(driven by structural adjustment) that encourages decentralizations. Self-
employment and individual entrepreneurship (McMichael, 2000), however,
critics of this type model argued that this type of neo-liberal economic
agenda relies on the strength of the individual women to help them selves,
rather than focusing structural changes in the economy (Kabeer, 1999). Thus
up to each woman to fight for her own individual right and better the lively
hood of her family. With this individual focus critics believe it is unlikely
that microfinance would have the ability to empower women to improve
their status in the home, the community and in the national economy.

2.6. Challenges of microfinance institutions as instrument in

Delivering services
Despite the above listed achievement of microfinance institution, the rent
developments in the microfinance sector raise a number of challenges to
microfinance as an instrument for poverty alleviation.

2.6.1 Targeting the poor

With the enactment of MDI ACT 2003 .MFIs have been compelled to re-
think their strategies from quasi social economic development and
humanitarian focus towards stricter commercial oriented and profit making.

The MFIs have embarked on strategies to improve and stabilize their

respective capital asset bases to enable them attain full financial
institutional self-sustainability ; towards attaining competitiveness and
market share within the industry .To be competitive and gain market
share ,MFIs are know more focused on the principle of profit making .The
MFIs definition of the economically active poor are those that have
business and the capacity to repay back the loans . From the poverty
spectrum, the economically active poor are the richest of the poor just close
to the poverty line .This has serious policy implication for the poor of the
poor.
The new focus on sustainability might have the effect of motivating
microfinance institutions moving more towards the non-poor clientele who
would have more capacity to repay the loans. Apart from the group
guaranteed ,most MFIs require the members to pledge some form of
collateral either in the form of house hold chattels land , of course the
collateral pledged by MFIs clients are not of the same quality as those
required by formal banks but is still of significance to the poor . The
increased collateralization is argued to give more incentive to the borrower
to repay. The challenge there fore is that if the microfinance services are not
accessible to the core poor, who would their welfare be improved. In
addition, given persuasive economic argument of having private sector led
provision of microfinance services and the distortions generated by grants
and subsidized government credit schemes, the core poor stand the risk of
being forgotten lot in the development process.

2.6.2 Interest rate

The other challenge related to the terms of credit to the poor especially
interest rates, profitability and sustainability is a key indicator of success that
is used to judge whether the MFIs would qualify to move tier three or not.

From the MFIs institutional side, the sustainability equation relates the
revenue side and expenditure side. The revenue side can improve by either
increasing interest rates and commissions or portfolio volumes.

It is probable that in efficient MFIs especially in tier four which are the
majority may try to improve their sustainability levels by raising the interest
rate and commissions. Though it is argued that demand for credit by the
poor is interest in elastic, it can be counter argued that high interest rate are
due to in efficiencies are counter productive to the poor.

2.6.3 Policy environment

Despite general improvement in the policy environment for financial sector
programes, the policy environment for microfinance in many countries
remains unfavorable for sustainable growth in microfinance operations. For
example, in countries such Vietnam and china, ceilings on interest rates limit
the ability of MFIs to expand and diversify. Government continue to
intervene in microfinance to address the perceived market failure through
channeling micro credit to target groups that are considered to have been
undeserved by the existing institutions
Further more government programmes with subsidized interest rates and
poor loan collection rates undermine sustainable development of
microfinance .As a result most countries are crowded with poorly
performing government microfinance programs that distort the market,
discourage private sector institutions from entering the industry, effects the
integration of microfinance in to the final sector.
 2.6.4 Inadequate financial infrastructure
Inadequate financial infrastructure (legal, information, and supervision and
regulation ) is another major problem .Most governments have focused on
creating institutions or special programs to disperse funds to the poor with
little attention to building financial infrastructure that support ,strengthens
and ensures their sustainability. Lack of a legal framework conducive for
the emergency and sustainable growth of small scale MFIs and
corresponding supervisory and regulatory systems have impeded the
expansion of market based microfinance services by limiting their access to
commercial source of funding.
2.6.5 Inadequate investment in agriculture and rural development
Agricultural growth, which underpins much of the growth in the rural non-
farm sub sector, significantly influences rural financial market development.
In adequate investment in the sector is a major constraint on the
development of sustainable microfinance services. The insufficient
investment in physical infrastructure (especially irrigation ,roads ,electricity,
and support services for marketing , business development and extension )
continues to increase the risk and cost of microfinance and particularly
discourage private investment in the provision of microfinance services
on a significant scale . In addition, in the absence of economic opportunity
created by growth-inducing process, microfinance can not be expected to
play significant role in poverty reduction.
2.6.6. MFIs being urban based
On the expenditure side, the MFIs can improve their financial sustainability
by minimizing their operational costs which is consistent with the
microfinance best practices. However this has implication on the location of
the MFIs offices and definition of the operational area which intern has
implication for access to microfinance services by the rural poor. As
observed by Wamatsembe (2001), MFIs that follow the microfinance best
practices prefer to operate only in urban and pre-urban areas (usually within
a radius of 5 kilometer for town centers). Clearly the motivation for this is to
minimize the heavy transaction cost that is associated with rural credit
operation, there by denying the rural poor with access.
 The policy implication is that big MFIs would definitely need some
incentive to increase their rural outreach. The policy incentive structure as
outlined by microfinance outreach plan (MOP) in their document entitled,
matching grant facility for capacity building (MCAP) design “is step in the
right direction. Basically the MCAP is a fund initiated by government and
supported by key donor and other stockholders in the microfinance sector
with the over all aim of providing a coordinated donor funding mechanism
for microfinance capacity building, based on agreed best practice principles
and cost sharing basis, in ways that would enhance impact, market
responsiveness and sustainability.

The proposed incentive structure is that good performing MFIs (thus those
abiding by microfinance best practices) that would be willing to expand their
out reach in to remote rural areas would have their operational loses of first
year for specific rural branch opened under this arrangement (and possible at
most second year losses) refunded. However existing rural branch losses
incurred before the signing of the memorandum of understanding (MOU)
between the microfinance and MCAP/MOP are not covered by their policy.
The additional incentive is that part of the new rural branch set up costs
would also be refunded from their fund, which amount depend on the extent
of remoteness of the branch. This proposed the incentive mechanism is
expected to rule the urban based MFIS to the rural areas, thus making
services more accessible to the rural poor.
2.6.7. Design of appropriate financial products for the poor
The poor are not homogenous lot of people, hence the challenge of
designing appropriate financial products that meet their diverse needs.
Currently the MFIs are mainly providing generic product with standardized
features. The current product features of most MFIs are characterized by
short loan periods (on average four to twelve months). No grace periods
weekly repayment and small loan amounts. This product feature may not be
suitable especially for agriculture related investments, from which the rural
poor mainly drives their lively hood. While MFPED (2000) under the plan
for modernization of agriculture (PMA) clearly identified the poor farmer’s
priorities as access to credit and financial services so as to improve
agricultural production, the MFIs financial products are not tailored to
agricultural production.

However, the MFIs argued that their product features are consistent with
microfinance best practices as the small loans which are progressively
increased over time provide dynamic incentives to the clients to repay the
loans in anticipation of getting bigger loans (Ocurt et al, op cit). The weekly
repayment schedules are also prefers by MFIs on account easing their cash
flow problems and also enhancing high repayment rate. The MFIs rational
that regular repayment keeps client on their toes rather weight up for longer
period to receive the installment. If the poor farmers took the MFIs loans to
purchase production input say like high yielding seeds the first weekly
installment repayment would be even before they plant their seeds or before
the seeds even germinate which raises the issue of sources of funds for loans
repayment. Such restrictive MFIs credit products would constraint the
uptake of new, more productive and high yielding technologies by poor
farmers which wood have profound impact on house hold income and
poverty alleviation.

Ahmed (1999) also argued that payment of small period installments may
not be a good method of collecting loans from poor people experiencing
persistent negative shocks. Despite being accepted has a best
practice.Ahmed (op cit) further argued that for MFIs to meet the needs of the
poor, they need to understand the vulnerabilities that the poor operate in and
design flexible products that chatter for the income vulnerabilities of the
poor.

Anecdotal evidence also suggests that these generic features of MFIs

products have made the client to develop the culture of multiple borrowing
from MFIs so as to get commensurate loan amounts and subsequently raised
their vulnerability to dept burden. However, an empirical investigation is
required to asses the extent to which this could be affecting poverty levels at
house hold level so as to appropriately inform policy.
 In addition credit from the informal sector was also utilized for health and
consumption purposes. The other consumption purposes are included
purchases of durable assets, ceremonies and etc.
2.6.8. Gender bias of microfinance intervention
The major challenge is that MFIs perceive gender receptiveness to be
focused on women. One MFIs executive when asked about how gender
responsive their policies were said the microfinance industry is the most
gender responsive in the whole world because it targets mainly the woman
clients and employees many woman as loan officer. These clearly
demonstrate a high degree of misunderstanding of gender issue which has
implications for microfinance as an instrument for poverty alleviation.

The MFIs need to know and understand the gender relations and issues,
appreciates how it impact on men and women so that their policies can be
gender responsive. Thus, enhancing the participation of both men and
women in microfinance activities. The critical gender issues relate to the
gender roles. The ownership and control of resource decision making.
Despite that the famous rhetoric that if you empower the women you
empower the whole house hold, it is critical that MFIs review their policies,
procedures and products to make them more gender responsive to enhance
the participation of both sexes in the microfinance programs for effective
poverty alleviation.
The MFIs also need to understand the practical and strategic genders needs
of their clients. Practical gender needs relates to survival like food, clothing,
shelter or health and strategic needs of their clients. Strategic needs aims at
changing the status of the community for example the means through which
poverty eradication can be achieved through by training, giving skills, and
supporting business. The MFIs need to design products that meet both
practical and strategic needs
.
2.6.9 Inadequate emphasis on financial viability
In adequate emphasis of financial viability is the most series problem of
MFIs. This prevails among many NGOs, government directed micro-credit
programs, and state owned banks and cooperative providing microfinance
services. As a result, only few MFIs are sustainable most are neither moving
towards sustainability nor reducing subsidy dependence. Viability is
important from an equity perspective because only viable institution can
leverage funds to market to serve significant number of clients.

2.6.10. Limited retail level institutional capacity

Most retail level institution does not have adequate capacity to expand the
scope and outreach of sustainable microfinance services. Many institutions
like the capacity to leverage funds, including public deposit, in commercial
market and are unable to provide arrange of products and services
compatible with clients characteristics. In the absence of in adequate
network and delivery mechanism many MFIs are unable to cost effectively
reach the poorest of the poor particularly those concentrated in resource poor
areas and areas with low population density.
CHAPTER THREE

3. METHODOLOGY OF THE STUDY

3.1. Background of the Study Area

Abeshige Woreda is one of the 13 woredas which found in Gurage Zone. It
is located between 81 ͦ 98. 66 to 84 ͦ 53’ 55'' latitude north and 37 ͦ 45’90 to 38
ͦ71’42 longitude east.

The woreda is bordered with Ameya woreda from north, with Cheha
Woreda from south, with Kebena Woreda from east and with Sokoru
Woreda from west.

Abeshige Woreda is organized by 26 rural Kebeles and 3 growing

municipalities. 90% of its weather is lowland and the remaining 10% is
highland. It has an annual rain fall ranged about 801 mm to 1400 mm. The
woreda has an average temperature of 17.50c.

Abeshige Woreda is found b/n 1001 to 2000m above sea level with an area
of 615.5 meter square. Its population by now is estimated to be 79,430.
Abeshige woreda has many micro finance institutions. Meklit. Metemamen,
Wisdom and Abeshige Microfinance are among them. Abeshige
microfinance office has 28 agent offices in each kebele.

3.2. Research Design

The study will use different methodology as a means of data collection,
analysis and report preparation. The research will use descriptive design
type. Since it will be conducted on the micro finance institutions challenges
and prospects based on concrete specification and data, descriptive study is
preferable.

3.3. Type and Source of the Data

There will be 2 types of data which is primary and secondary. The
researcher will collect the required information from primary and secondary
sources of data. Primary data will be gained from the information that will
be collected using questionnaire and interview. Whereas the secondary data
will be organized from books, internet, reports and so on sources.
The primary data source is needed since it is the direct source to make the
study valid. Which means that the result of the study will depend on the
primary data sources. On the other hand, the secondary source will help to
strengthen the back ground, review literature and the like parts of the study
with reference of books, journals, reports etc.

3.4. Sampling Technique and Size

Stratified and simple random sampling technique will be used in the study.
The stratified sampling technique will be used particularly, because of
division of clients of the woreda in two zones which is clients from the rural
and urban. Numbers of respondents will be selected by simple random
sampling. That was from 600 clients, 30 respondents will be selected by
using 5% level of significance for the clients and 15 respondents will be
selected from the organization by quota non random sampling technique.
Quota method is chosen because it is useful to address the stake holders in
the organization who have direct relationship with the subject matter to be
studied.

3.2. Method of data collection

The primary data will be collected through questionnaires and interview
with some clients of the microfinance institutions and workers of the
microfinance institutions. The secondary data will be collected from annual
report of the institution in Abeshige Woreda, library and other related
documents to the study.

3.3. Method of Data analysis

To make sure and analyze the data collected will be accurate and relevant;
the researcher will use mostly descriptive statistical method. To describe the
data that will be collected, the descriptive statistics like percentage is better
than the hypothetical statistical (inferential statistical) testing. In additions
tables will be used in generating the data and analyzing the result.
CHAPTER FOUR

4. COST AND TIME PLAN

4.1 Time Schedule

No Activity Oct. Nov. Dec. Jan. Feb. Mar. April May June
1 Topic Selection x x
2 Preparation of x x
proposal
3 Collection of x
useful material
4 Data Collection x x
5 Data Analysis x x x
and writing of
final research
6 Submission of x
research
7 Presentation of x
final research

4.2. Financial Budget

Item Quantity Per unit Total Cost
(Birr) (Birr)
stationaryEquipment and

Paper 1 100.00 100.00

Pens 6 3.00 18.00
Pencil 1 1.50 1.50
Binder 1 20.00 20.00
Total Cost - - 139.50

Transportation 2 trips 150.00 300.00

 Internet 200 hrs 0.25 50.00
Personal cost Typist 1 200.00 200.00
Total cost - - 550.00
Contingency - - 450.00
Overall total cost - - 1689.50

BIBLIOGRAPHY

Bardhan, P. K. 1980. Interlocking Factors Markets and Agrarian

Development: A Review of Issues. Oxford Economics Paper, 35.

Bhaduri, Amit. 1983. The Economics Structure of Backward agriculture.

India: Macmillan India Limited.

Claudio Gonzalez-Vega (1994). The challenges of growth for microfinance

organization: Bancosol.

Getaneh Gobezei (2009), sustainable rural finance: international NGO

Journal, Vol 4, NO. 2.

Ghosh, Dipak. 1986. Monetary Dualism in Developing Countries.

Economics ET. Societies.

Herani, Gobind M, et al 2008. The Nature of Poverty and Its Prospects:

Pakistan Evidence. Journal of Global Economy, 4(3):183-194. MPRA Paper
11654, University Library of Munich, Germany.

Joana Ledger Wood (1999), sustainable banking with the poor microfinance
hand books an institutional perspective, Washington D.C.

Joseph Obado (2008), achievements and challenges of microfinance in

poverty reduction in Uganda.

Michael Todaro (2009), economic development 10th edition.

Kombo, A. et al (2011). “An Evaluation of the Impact of Risk management
Strategies on Micro-Finance Institutions’ Financial Sustainability: A case of
Selected Micro finance institutions in Kisii Municipality, Kenya”.
Educational Research, Vol. 2 (5) pp.1149-1153.

Oboh, G.A. (2004) “Contemporary Approaches for Financing Micro, Small

and Medium Enterprises”. Conference on SME held at the International
Conference Centre, Abuja, Nigeria, July 19 – 22, pp. 2-15.

Odeh, O. (2005), “The Impact of Federal Government Reform Programme

on the Development of the SMEs Sector”. A paper presented at the National
Seminar on “Facilitating Easy Accessibility to the SMEEIS Funds by SME
operators. Lagos, 10 – 11, October.

Rao, J. Mohan. 1980. Interest Rates in Backward Agriculture: Notes and

Comments. Cambridge Journal of Economics, 4:159-167.

Sudan, Falendra K. 2007. Livelihood Diversificationand Women

Empowerment through SelfHelp Micro Credit.

Tolentino, A. (1996), “Guidelines for the Analysis of Policies and Programs

for Small and Medium Enterprise Development Enterprise and Management
Development”. ILO Working Paper.
APPENDIX
Wolkite University
College of Business and Ecconomics
Department of Management
Questionnaire to be filled by workers of MFIs in Abeshige Woreda
The objective of this questionnaire is to gather relevant information or
necessary data on the challenges and prospects of the organization. This is
because of the fact that your response in this regard helps a lot to undertake
the study smoothly. Therefore, you are kindly requested to give your
response frankly and without doubt all your responses are confidential.
Thank you in advance for giving your time and valuable ideas and for
your cooperation!
Part one
1. Name of MFIs …………………………..
2. Educational qualification………………………..
3. Age A.21-30 B.31-35 C.36-40
D.41-45 E.>45
4. Position in the organization A. manager B. loan officer
C. assistant branch manager D. employees E. Another
5. Sex A. male B. female

Part two
1. Does the institution face lack of cash flow. A. yes B. No

2. If yes, how does the institution deals with this cash flow constraint.
A. Inform of donation B. by borrowing from other
C. other, specify
3. Does the infrastructure level in the woreda is available for mobilizing
service to the client at the place where they are.
 A. Yes B. No
4. If no, what is the solution behind …………………………………..
5. Does the borrower have enough business awareness?
A. Yes B. No
6. If no, what does the organization face due to this lack of business
awareness by the society? Specify
them…………………………………………………………..
7. Does the client repay their loan at the given time period.
A. yes B. No
8. If no, what do you think the reason behind? State
them…………………………….
9. Does your institution ever have conducted training and orientation
programs to the clients? A. Yes B. No
10. Depending on the above question (q.9) ,from those who get training and
orientation and who do not get, which group of client are active in loan
repayment………………………………………………………………
11. Does your institution require material collateral and substitute when it
grants a loan? A. yes B. No
11. Do you believe that your institution have enough human resource?
A. Yes B. No
12. If No, state the problem that the institution faces due to this low human
resource...........................................................
13. Before its existence should be assured what are the major challenges in
current operation of this MFIs? State them
…………………………………………….
14. What do you suggest to solve the challenges?...........................................
15. What do you think the future prospective of microfinance for
society?..................................................................
Wolkite University
College of Business and Ecconomics
Department of Management
Questionnaire filled by the clients
The objective of this questionnaire is to gather relevant information or
necessary data on the challenges and prospects of the organization. This is
because of the fact that your response in this regard helps a lot to undertake
the study smoothly. Therefore, you are kindly requested to give your
response frankly and without doubt all your responses are confidential.
Thank you in advance for giving your time and valuable ideas and for
your cooperation!
General characteristics of the respondent
1. Age A. 18-25 B . 26-35 C. 36-45 D . >45
2. Sex A .Male B .female
3. Average monthly income A. <150 B. 150-300 C. 300-500 D. 500-
700 E. <700
4. Educational level A. 1-4 B 5-8 C. 9-12 D. Illiterate
5. Occupation A .Private Organizing employee B. Government employee
C. Daily laborer D. farmer E. others ………..
Questionnaire related to the study
6. When the institution grants a loan, does it provide consultancy or training
service?
A. Yes B. No
7. If yes, what type of training service it granted? State them
………………………..
8. How do you evaluate the line size? A. fair B. too small C. too
large
9. How do you evaluate the one year loan repayment period? A. it is
quite sufficient B. it is too short C. it is too long
10. For how many round you became beneficiary with the loan?
A. no round B. one round C. two round D.>2 round
11. If your answer is No round, what is the reason behind? State them
……………….
12. In your opinion what are the major challenges in the current operation of
microfinance institution in your local area? State them
……………………………….