2 35 1360402468 12.credit - Full

International Journal of Accounting and
Financial Management Research (IJAFMR)

ISSN 2249-6882
Vol. 3, Issue 1, Mar 2013, 157-176
© TJPRC Pvt. Ltd.
CREDIT PROVISION AND SAVINGS MOBILIZATION OF MICROFINANCE

INSTITUTIONS IN ETHIOPIA
A Study of Microfinance Institutions in South Nations, Nationalities, and Peoples Regional State
(SNNPRS)
K. RAMA MOHANA RAO1 & TAMRAT LUDEGO FITAMO2

1
Department of Commerce and Management Studies, Andhra University, Visakhapatnam, Andhra Pradesh. India
2
A Research Scholar in Andhra University, Department of Commerce and Management Studies,
Visakhapatnam, Andhra Pradesh. India
ABSTRACT
Microfinance is a strategy to address the financial needs of the poor and underprivileged sections of the society.
The need for microfinance is seriously felt in all the developing countries and more so in Ethiopia. This paper examines the
issues related to credit provision and savings mobilization by microfinance institutions in South Nations, Nationalities, and
Peoples regional state of Ethiopia. The objective of the study is to analyze the relationship between credit provided and
savings mobilized and their trend during 2007 – 2011. The study found out that the institutions have different backgrounds
with respect to the major outreach measures. The policies and programs in relation to credit provision as well as savings
mobilization among the three institutions are dissimilar. The findings of the study are useful to the respective institutions
and policy makers to promote microfinance objectively in the region and to strengthen the institutions.
KEYWORDS: Microfinance, Outreach, Sustainability, Credit Provision, Savings Mobilization
INTRODUCTION
Microfinance is a set of tools, approaches and strategies which have grown up around addressing the financial
needs of the poor people; people who don’t have ready access to mainstream financial services and who are thus
“financially excluded”; and people who are subjected to the often exploitive conditions of ‘fringe’ financial services such
as pawnbrokers, loan sharks, and payday lenders, (Burkett 2003). Microfinance covers the provision of a range of
financial services to low income households, including loans, savings, money transfers and insurance, (Honohan and Beck
2007). For reporting purposes, CGAP, the consortium of microfinance donors, counts loans as microfinance if their
average outstanding balance is not above US$5000 for Eastern Europe and NIS; $2000 for Latin America and the
Caribbean; $1500 for the Middle East, North Africa, global and other projects; and $1,000 for Sub-Saharan Africa, Asia,
and the Pacific. For savings services, an appropriate cut-off might be one third or one quarter of the loan.
In Ethiopia, microfinance came to inexistence in 1996 after currently ruling regime, Ethiopian People’s
Democratic Republic Front, took over the power from the military regime as a means to speed up economic development.
At its inception four microfinance institutions owned by government were established. The number has risen to thirty one
microfinance institutions with 433 branches and 598 sub branches by end of 2011. Studies estimate that this figure serves
between 10-25% of the total microfinance demand in the country. Most of them are owned by non – government
organizations (NGOs). According to MF Transparancy (2011) the institutions have extended total credit of 6.9 billion ETB
to 2,470,641 active borrowers. However, the coverage so far achieved is very insignificant relative to the existing demand
158 K. Rama Mohana Rao & Tamrat Ludego Fitamo
for such microfinance credit and related services. It is only 2% of the total population and 5% of the poor has been reached
by the institutions since their inception (MFTransparancy 2011).
REVIEW OF RELATED LITERATURE
The issue of microfinance institutions has been the subject of interest for many researchers. The studies basically
focused on credit provision, savings mobilization, sustainability, and outreach. In the context of microfinance institutions,
credit provision refers to lending (creating access to credit service) money to borrowers either in long - term or short –
term bases whereby the borrower is required to repay the principal and the interest, if any, to the lender as per their
agreement. Credit is a borrowed fund with specified term for repayment (Ledgerwood, 1999).The major issues raised in
connection to credit provision are: loan size, loan term, interest rate, and grace period. Loan size is one of indicator of the
depth and width of outreach in microfinance institutions. As loan size increases to the level that it attracts the well – to – do
(those with relatively better economic status), MFIs may not be able to reach the active poor. (Okumu 2007), states that an
alternative to directly targeting low- income clients is to use design features that promote self – exclusion of the better offs.
One such design feature is the use of small loans. Richer people are less likely to be interested in accessing small loans.
Loan term (credit term) is the duration for which the loan stays outstanding. The length of the duration and the
pattern of repayment are the other factors that should be considered by MFIs. Most MFIs’ clients business is seasonal
particularly those engaged in agricultural activities earn income in a particular periods of a year and need credit when their
agricultural activities is about to start to purchase farm inputs. Therefore, matching the period of credit extension with the
clients’ peak business periods and collection pattern during the clients earn income from their business is very essential
both for the clients and the institutions. According to (Ledgerwood 1999) loans should be based on the cash patterns of
borrowers and designed as much as possible to enable the client to repay the loan without undue hardship. This helps the
MFI avoid potential losses and encourages clients both to manage their funds prudently and to build up an asset base.
Tamrat F. (2012), states that provision of loans by MFIs should match with the schedule of revenue activities of
their clients. If loans are provided during the period when their client’s business activities are low, the loans could be used
for the purpose other than the specified business which might be unproductive and it would be difficult for the client to
repay it back. Not only the loan provision but also the loan collection schedule of MFIs should be in line with the period
when their clients could have profits from their business (not at start of their business or at the time when the profit is used
for other purposes.) Through with appropriate matching of the loan provision and collection schedules with the clients’
business activities and profit schedule, it is possible to reduce the default and delinquency risk of loans.
Interest rate is the price attached to the loans of MFIs. The major revenue source of MFIs comes from the interest
charged on the loans extended to clients. Interest rate has double edge effect. On one hand, if higher interest rate is
charged, it may create angry customers. That means, the demand for the institutions’ credit product may decline. On the
other hand, if lower interest is charged, the institutions become less profitable and will not be able to survive (sustainability
will be under question). According to (Ledgerwood 1999), a balance must be reached between what clients can afford and
what the lending organization needs to earn to cover all of its costs. The higher the interest rate that client cannot afford,
the greater is the risk of default and delinquency on the loan repayment. On the contrary, the lower the interest rate to cover
costs and expenses of the institution, the higher will be the risk of sustainability.
Savings mobilization is a systematic process of collecting and managing money (cash and noncash items) from
individuals, groups and organizations whereby the depositor can withdraw the amount of the savings together with the
interest, if any, as per the agreement between the depositor and the institution (the one who collects the savings). “Savings"
Credit Provision and Savings Mobilization of Microfinance Institutions in Ethiopia 159
A Study of Microfinance Institutions in South Nations, Nationalities, and Peoples Regional State (SNNPRS)
are cash or physical products set aside for future uses (Phil Bartle, 2007). According to (Brian B. and Janette K. 2012),
savings mobilization is demand driven activity aimed at clients who wish to save by using financial instruments. Savings
are the residual capital remaining after an entrepreneur has paid household living expenses and business operating
expenses. Because of the fungible nature of the household economic portfolio, savings can be easily shifted between the
household and enterprise (Stephen F. Gudz, 1999).
The allocation of disposable income is a portfolio decision with various alternative options. Voluntary savings can
take the form of cash, institutional or in-kind savings. Institutional savings include deposits in formal (e.g., banks), semi-
formal (e.g., cooperatives) and informal (e.g., Rotating Savings and Credit Associations/RoSCAs) financial institutions. In-
kind savings include savings in grain, animals, gold, land, raw material, finished goods and construction material. The line
between savings, investment and consumption is not always easy to draw. For example, construction material can either be
stored or sold when cash is required, or used as an investment in the family's housing. Another allocation for disposable
income is on-lending it to relatives or friends for either economic or non-economic returns (the latter referring to social
reciprocity), (Michael F. Alfred H. Sylvia W., 1999)
Studies indicate that savings were the “forgotten half” of rural finances (Robinson, 2001). Policy makers and
bankers in many parts of developing world have been taught to believe that the poor don’t save, cannot save, and do not
trust financial institutions, and prefer non-financial forms of savings. In the earlier period, micro finance programs were
not effective in mobilizing saving deposits and showed little interest in this regard. (Ledgerwood 1999), mentioned two
major reasons for these.
The first one is the mistaken belief that the poor cannot save, and the second one is due to regulatory constraint of
license to mobilize deposits. Recent microfinance experience shows that even poor households would deposit their surplus
in MFIs provided that they get attractive interest rate, convenience /location (priority and accessibility), security (the safety
of the saving option), and ease of withdrawal.
Okumu (2007) states that relative to commercial sources of financing, savings of microfinance institutions are
cheap sources of funds. This cheap source is lent at less lending interest rate to borrowers thus attracts demand for credit
which in other words means increased outreach and revenue. Increase in revenue eventually increases profitability of the
institutions, keeping operating expenses constant. Increased profitability leads in to increased sustainability. Therefore,
there is positive relationship between savings and both outreach and sustainability.
Nearly a period of fifteen years is over ever since the introduction of microfinance institutions in Ethiopia. There
has not been any study carried out on the institutions regarding outreach measures taking them all together except few
studies on individual MFIs. Therefore, it is necessary to evaluate in-depth the direction of movement of the microfinance
institutions with regard to credit provision and savings mobilization.
This paper brings the following research question to inquiry: (1) How well the institutions have been performing
with regard to the number of borrowers, amount of credit, and amount of savings? (2) Is there relationship between credit
provided and savings mobilized?
Hypotheses of the Study
• Ho = there is no relationship between credit provided and savings mobilized.
Ha = there is relationship between credit provided and savings mobilized.
• Ho = the trend of credit provision and savings mobilization is increasing.

Ha = the trend of credit provision and savings mobilization is not increasing.
Objectives of the Study are
• Study the relationship between credit provided and savings mobilize; and
• Analyze the trend of change both in terms of credit provision and savings mobilization.
METHODOLOGY
Quantitative Secondary data has been used for the study. The data was obtained from the financial statements of
the institutions, their web sites, and other related websites. Quantitative methods of analyses such as: measures of central
tendency and measures of dispersion have been used to evaluate the level of closeness and variability of the values of
credit provided and savings mobilized. Correlation analysis has been carried out to study the degree of relationship
between credit provided as an independent variable and savings mobilized as a dependent variable. Predictive models have
also been designed using simple regression analysis. The trend analysis has been done using Least Squares Method.
The Trend of Credit Provision and Savings Mobilization
The performance of the selected microfinance institutions in credit provision as well as savings mobilization is
analyzed based on the financial data during the period 2007 to 2011. The performance of credit provision is analyzed by
taking in to consideration the trend in credit provision and the number of active clients. Savings mobilization is studied by
analyzing the performance trend during the study period of the selected microfinance institutions.
Credit Provision in Monetary Terms
Omo Microfinance Institution: The trend of credit provision of the institution from 2007 – 2011 is depicted in
Table 1
Table 1: Credit Provided, Changes from Year to Year, and Percentage Change
Credit Provided Change from Percentage

Year
(In EBR) Year to Year Change
2007 164,309,359 - -
2008 408,941,281 244,631,922 149
2009 341,815,785 -67,125,496 -16.58
2010 463,823,009 122,007,224 35.70
2011 535,628,586 71,805,577 15.50
Total 1,914,518,020
Source: the institution’s financial records
As indicated in the table the total amount of credit provided by the institution over the last five years was
1,914,518,020EBR.
• The mean amount was = 1,914,518,020/5 = 382,903,604EBR.

• The variance (α2) = (164,309,359 -382,903,604)2 + (408,941,281-382,903,604)2 + (341,815,785 - 382,903,604)2 +
(
463,823,009 - 382,903,604)2 +(
535,628,586 -382,903,604)2
5
= 1.6004496744156180e+16 EBR = 1.600449674415618×1016
• The standard deviation (α) = = = 126,508,880
• Coefficient of variation = ×100=33%

• Average amount of credit provided per borrower =

the total credit provided = 1,914,518,020 = 6,733EBR
The total number of clients 284,340
Sidama Microfinance Institution: Table 2 shows the amount of credit provided by Sidama microfinance
institution, changes from year to year, and percentage change during the study period.
Credit Change from Percentage

Year
Provided Year to Year Change
2007 19,708,500 - -
2008 17,097,200 -2,611,300 -13.25
2009 23,754,900 6,657,700 38.94
2010 41,393,650 17,638,750 74.25
2011 62,536,900 21,143,250 51.10
Total 164,491,150
It can be inferred from the table that
• The mean amount of credit of the institution = 164,491,150/5 = 32,898,230EBR.

• The variance (α2) = (19,708,500 - 32,898,230)2 + (17,097,200 - 32,898,230)2 + (23,754,900 - 32,898,230)2 +
(41,393,650 - 32,898,230)2 + (62,536,900 - 32,898,230)2 = 2.91573E+14 = 2.91572973458064×1014 EBR
• Standard deviation (α) = = 17,075,508EBR

• Coefficient of variation = standard deviation×100 = 17,075,508 ×100= 52%
Mean 32,898,230

= the total credit provided = 164,491,150 = 5,622 EBR
Wisdom Microfinance Institution: Table 3 shows the credit provision trend of the institution during the period under
study.
Credit Change
Converted Percentage
Year Provided from Year
in to EBR Change
(in USD) to Year
2007 6,634,537 59,087,186 - -
2008 8,479,338 94,495,439 35,408,253 60
2009 7,567,759 95,667,069 1,171,630 1.24
2010 6,639,614 109,332,532 13,665,463 14.28
2011 6,735,330 115,815,346 6,482,814 5.93
Total 36,056,578 474,397,572
The data presented in the table indicates that:

• The total amount of loan provided by the institution during the last five year was 474,397,572EBR as indicated in
the above table.
• The mean amount = 474,397,572/5 =94,879,514EBR

• The variance (α2) =
(59,087,186-94,879,514)2 + (94,495,439- 94,879,514)2 + (95,667,069- 94,879,514)2 + (109,332,532-

94,879,514)2 + (115,815,346- 94,879,514)2 =3.85811E+14 = 3.85811×1014
5 Standard deviation (α) = = 19,642,084EBR
• Coefficient of variation = standard deviation×100 = 19,642,084×100= 21%
Mean 94,879,514
= the total credit provided = 474,397,572 =1,848EBR

Credit Provision in Terms of Number of Active Clients
This part presents the number of clients of the institutions in each year of the study period, changes from year to
year, and percentage change. Table 4, 5, and 6 represents the active clients of Omo, Sidama, and Wisdam MFIs
respectively
Table 4: Number of Active Clients, Changes from Year to Year, and Percentage Change
No. of Active Change from %

Year
Clients Year to Year Change
2007 40,975 - -
2008 55,599 14,624 35.7
2009 53,012 -2,587 -4.65
2010 62,302 9,290 17.5
2011 72,452 10,150 16.3
Total 284,340
No. of Active Change from %

Year
Borrowers Year to Year Change
2007 3,310 - -
2008 2,808 -502 -15.17
2009 3,757 949 25.26
2010 8,371 4614 122.81
2011 11,016 2645 24.00
Total 29,262
No. of Active Change from Percentage

Year
Borrowers Year to Year Change
2007 48,168 - -
2008 56,735 8,567 1.78
2009 56,302 -433 -0.76
2010 46,721 -9,581 -17
2011 48,738 2,017 4.31
Total 256,664
Source: www.mixmarket.org
DISCUSSIONS
The average credit provided over the study period by Omo MFI was 382,903,604 EBR. The total variance around
the mean was 1.600449674415618×1016EBR with standard deviation of 126,508,880EBR. On average the institution has
been providing 6,733EBR per borrower. The Performance from 2007 to 2009 was a bit fluctuating i.e. there was ups and
downs; however, from 2009 onwards the trend was almost linearly increasing. This may be due to the government’s
attention on the formation of small scale enterprise associations in the country which mainly depend on microfinance
institutions’ loans. As the coefficient of variation (33%) indicates that the trend of credit provision of Omo microfinance
institution is relatively stable (its variability is less) compared to Sidama microfinance institution with 52% coefficient of
variation but it is greater than Wisdom microfinance institution having coefficient of variation at 21%. High variability or
fluctuating trend of credit provision might not be recommendable; however, high variability due to rapid increase from
year to year (under manageable limit) is good.
Sidama MFI, on average, has been providing 32,898,230 EBR credit per year with standard deviation of
17,075,508 EBR and coefficient of variation of 52% during the study period. The average credit provided per borrower
during the study period was 5,622 EBR which is less than the average credit provided by Omo MFI that amounts
6,733EBR and greater than Wisdom MFI having 1,848EBR per borrower for the same period. This may indicate that
Sidama microfinance institution’s strategy is to reach as many borrowers as possible with small loan size relative to Omo
MFI but its outreach in terms of depth is limited compared to Wisdom MFI. In other words, the extent of Sidama MFI in
reaching the poor is less compared to Wisdom MFI. This is because; whenever the size of a loan goes smaller and smaller
its ability to attract the better – off (those with better economic status) become lesser and lesser. According to Mark
Schreiner (1999), the most common proxy for depth is loan size. Asad K. Ghalib (2011) referred two major studies
pertaining to Association for Social Advancement (ASA) and Grameen Bank that strongly suggest that microfinance works
better for the poorest than the less-poor. Both organisations established their own programmes to reach the hardcore poor.
Neither involves grain handouts, but they offer very small loans with flexible repayment schedules. There is no
internationally accepted standard of loan size for MFIs. According to the study carried out on MFIs in Africa by Anne-
Lucie, et.al (2006) the average loan size per borrower was $307 ($400 for Central Africa, $175 for Eastern Africa, $468 for
Indian Ocean, $427 for Southern Africa, $406 for West Africa)
The level of variability of credit provided by Wisdom MFI is the least one compared to the other two institutions
in the study as evidenced by the institution’s coefficient of variation, 21%. This is because; the rate of increase in the
credit provided from year to year during the study period is not significantly high enough relative to the other two
institutions. However, compared to the other two institutions, Wisdom MFI has demonstrated nearly continuous increase
from year to year. The average loan size per borrower, 1,848EBR, of Wisdom MFI is very small relative to the other two
institutions under study. The reason can either be due to less validity of the data source or the actual practice that the
institution is following. If the institution is actually providing such small loan size to its borrowers relative to its industry
competitors, it might be appreciable as it is doing well in covering as many poor borrowers as possible. However, the
institution’s cost per transaction would go up which in turn affects profitability and then sustainability. On top of that, the
institution might not match the loan size demand for borrowers’ business which in turn may push clients to competitors.
Besides, there might be high rate of default and delinquency if the loan does not match with the loan size requirement of
the client’s business. That is, the clients might not use their full business capacity which eventually leads to less
profitability and increased rate of default and delinquency.
The loan might also be diverted to purposes other than the intended use if it does not match to the clients’
business loan size demand. According to Fitamo L. Tamrat (2012) besides the loan term, MFIs should also give due
attention to the loan size they offer to their clients. It is better to design the loan products on the bases of the client’s
business scale, the type of business the clients are running and expected credit risk associated with the potential client’s or
group of clients’ (solidarity group) business nature. According to Ledgerwood (1999), the appropriate loan amount is
dependent on the purpose of the loan and the ability of the client to repay the loan (debt capacity.) While determining the
debt capacity of potential clients, it is necessary to consider their cash flow as well as the degree of risk associated with
cash flow and other claims that may come before repayment of a loan to MFI.
Savings Mobilization and Its Relation to Credit Provision: this section focuses on the trend of the savings
mobilization and its relation with credit provided over the last five years (2007 – 2011) by the institutions.
Savings Trend of Omo Microfinance Institution and Its Relationship with Credit Provision
Table 7 shows the yearly savings, changes in savings, and percentage change of Omo MFI for the last five
consecutive years (2007 - 2011).
Table 7: Savings, Changes in Savings, and Percentage Change
Changes in
Yearly Percentage
Year Savings from
Savings Change
Year to Year
2007 55,180,799 - -
2008 81,102,140 25,921,341 47
2009 125,596,486 44,494,346 55
2010 167,881,464 42,284,978 34
2011 309,726,106 141,844,642 84
Total 739,486,995
As it is indicated in the table, the total amount of savings of the institution over the last five years was
739,486,995 EBR
• The mean amount = 739,486,995/5 = 147,897,399ETB;

• The variance (α2) =
(55,180,799-147,897,399)2 + (81,102,140- 147,897,399)2 + (125,596,486- 147,897,399)2 + (167,881,464- 147,897,399)2 +

(309,726,106- 147,897,399)2 = 8.02864E+15 EBR = 8.02864 ×1015 EBR;
• Standard deviation (α) = = 89,602,677EBR;

• Coefficient of variation = standard deviation×100 = 89,602,677×100 = 61%
Mean 147,897,399
• The ratio of savings to credit of the institution =Total savings of the institution = 739,486,995
Total credit of the institution
1,914,518,020
= 38.63%
The correlation between credit provided and savings mobilized together with least squares method for trend
analysis is presented in table 8 and succeeding calculations.
Table 8: Correlation between Credit Provided (X) and Savings Mobilized (Y) N= 5
Tim
e
t2 X Xt X2 Y Yt Y2 XY
/yea
r (t)
1 1 164,309,359 164,309,359 2.69976E+16 55,180,799 55,180,799 3.04492E+15 9.06672E+15
2 4 408,941,281 817882562 1.67233E+17 81,102,140 162204280 6.57756E+15 3.3166E+16
3 9 341,815,785 1025447355 1.16838E+17 125,596,486 376789458 1.57745E+16 4.29309E+16
4 16 463,823,009 1855292036 2.15132E+17 167,881,464 671525856 2.81842E+16 7.78673E+16
5 25 535,628,586 2678142930 2.86898E+17 309,726,106 1548630530 9.59303E+16 1.65898E+17
∑X= ∑Xt=6,541,0 ∑X2 = ∑Y2 ∑XY
∑t= ∑Y= ∑Yt=2,814,3
1,914,518,02 74,242 8.13098E+17 =1.49511E+1 =3.28929E+1
15 739,486,995 30,923
0 7 7
Source: computed from the credit and savings tables above
Correlation coefficient(r) = N∑XY –(∑X)(∑Y)
= 5(3.28929E+17) – (1,914,518,020×739,486,995)
= 0.81
The Coefficient of Determination for the above correlation coefficient is the square of coefficient of correlation.
Coefficient of determination (r2) = 0.812 = 0.6561 =65.61%. This means that 65.61% of the variation in the
dependent variable (savings) is explained by the independent variable (credit provided). The rest 34.39% is due to others,
other than credit provided.
The Simple Regression Analysis of the above data for Credit Provided (X) and Savings collected (Y) where credit
provided is independent variable and savings collected (this holds true particularly with compulsory savings) is dependent
variable in the form of linear equation Y = a +bX is as follows:
The two normal equations
∑Y = Na +b∑X ……………………………………………………………... (i)
∑XY = a∑X +b∑X2 …………………………………………………………. (ii)
Where:
• N is number of pairs of values of the two variables

• ‘a’ is constant (y – intercept)
• ‘b’ is the slope of the equations
Substituting the values in the equations
739,486,995 =5a +1,914,518,020b …………………………………….… (i)
3.28929 ×1017 = 1,914,518,020a +8.13098 × 1017 b .……………………. (ii)
Multiplying equation (i) by 424696446, we will get
3.14057×1017 = 2123482230a +8.13098 ×1017b ………….……………… (iii)

3.28929 × 1017 = 1,914,518,020a + 8.13098 × 1017b ….…………….……(iv)
-1.4872 × 1016 = 208964210a
a = -71,170,082
Substituting the value of ‘a’ in equation (i) we get the value of ‘b’
739,486,995 = 5 ×-71,170,082 + 1,914,518,020b
739,486,995 = -355850410 + 1,914,518,020b
b =0.572.Thus, the required regression equation of Y on X is given by:
Y = -71,170,082 + 0.572X
Based on the data, the value of Y (savings) for different values of X (credit provided) can be predicted. For
example, the expected value of savings for 2013 will be 330,323,396.1EBR, if credit provided is estimated at
701,911,675EBR as per the above regression model. It is calculated hereunder.
Y = -71,170,082 +0.572 × 701,911,675= 330,323,396EBR
Trend Analysis Using Least Squares Method
This method gives a formula for getting the straight line that will best fit the data. Under this method a
mathematical relationship is established between the time factor‘t’ and the variable ‘X’ .The equation of a straight line is
expressed as:
X = a +bt
Where X – the calculated or estimated value of the trend of credit provided; a – the intercept of X; b – the amount
by which the slope of the trend line rises or falls; t- the number of units of time each given year lies away from the origin.
Using the following formula the trend equation for credit provision is:
a = (∑X)(∑t2) – (∑t)(∑Xt) = (1,914,518,020×55) – (15)( 6,541,074,242) = 143,647,549
n(∑t2) – (∑t) 5(55) – (15)2
b = n(∑Xt) –(∑t)(∑X) =5(6,541,074,242) – (15)( 1,914,518,020) = 79752018
n(∑t2) –(∑t)2 5(55) - 152
Therefore, the trend equation of credit provision of the institution is:
X=143,647,549+ 79752018t; it is rising or increasing trend at 79752018EBR per year. For instance, estimated v
alue of credit provided for period seven (2013) is = 143,647,549+ 79752018 (7) = 701,911,675EBR.
• In the same way as it is done above, the trend equation Using Least Squares Method for savings mobilization of
the institution in the form Y = a +bt is:
a = (∑Y)(∑t2) – (∑t)(∑Yt) = (739,486,995)(55) – (15)( 2,814,330,923) = -30,863,582
n(∑t2) – (∑t)2 5(55) - 152
b = n(∑Yt) –(∑t)(∑Y) = 5(2,814,330,923) –(15)( 739,486,995) = 59,586,994
n(∑t2) –(∑t)2 5(55) -152

Therefore, the trend equation of savings mobilization of the institutions is:
Y = -30,863,582 + 59,586,994t; it is rising or increasing trend at 59,586,994 EBR per year. For instance,
estimated value of savings mobilized for period seven (2013) is = -30,863,582+ 59,586,994 (7) = 386,245,376
Savings Trend and Its Relationship with Credit Provision of Sidama Microfinance Institution: the data
related to savings of Sidama MFI is presented in table 9.
Table 9: Amount of Savings, Changes in Savings, and Percentage Change
Changes in
Yearly Percentage
Year Savings from
Savings Change
Year to Year
2007 77,861 - -
2008 101,545 23,684 30.42
2009 1,535,730 1,434,185 1412.37
2010 12,864,624 11,328,894 737.69
2011 14,502,061 1,637,437 12.73
Total 29,081,821
From the table it is apparent that the total savings of the institution for the last five years (2007 -2011) was
29,081,821EBR;
• the mean savings was 29,081,821/5 = 5,816,364;

• the variance (α2) =
(77,861-5,816,364)2 + (101,545- 5,816,364)2 + (1,535,730- 5,816,364)2 + (12,864,624- 5,816,364)2 +

(14,502,061- 5,816,364)2 =4.18065E+13 EBR = 4.18065×1013
•
Standard deviation (α) = = 6,465,798EBR
• Coefficient of variation = standard deviation×100 = 6,465,798×100 = 111%
Mean 5,816,364
• The ratio of savings to credit of the institution =Total savings of the institution = = 29,081,821 = 17.68%
Total credit of the institution 164,491,150
Table 10: Correlation between Credit Provided (X) and Savings Collected (Y) N= 5
Time
/Year t2 X tX X2 Y tY Y2 XY
(t)
1 1 19708500 19708500 3.88425E+14 77,861 77,861 6062335321 1.53452E+12
2 4 17097200 34194440 2.92314E+14 101,545 203090 10311387025 1.73614E+12
3 9 23754900 71264700 5.64295E+14 1,535,730 4607190 2.35847E+12 3.64811E+13
4 16 41393650 165574600 1.71343E+15 12,864,624 51458496 1.65499E+14 5.32514E+14
5 25 62536900 312684500 3.91086E+15 14,502,061 72510305 2.1031E+14 9.06914E+14
∑t ∑X= ∑tY ∑Y2 ∑XY
∑t = 2 ∑tX = ∑X2 = ∑Y=
= 16449115 =128,856, =3.78183E+1 =1.47918E+
15 6.03 ×108 6.86933E+15 2,90,81,821
55 0 942 4 15
Correlation coefficient (r) = N∑XY –(∑X)(∑Y)
=5(1.47918E+15) – (164491150×29081821)
= 0 .95
2 2
Coefficient of Determination (r ) = 0.95 = 0.9025 = 90.25%. This means that 90.25%. of the variation in the
dependent variable (savings) is explained by the independent variable (credit provided). The rest 9.75% is due to others,
other than credit provided.
On the same way as above the Simple Regression Analysis of the above data for Credit Provided (X) and Savings
collected (Y) is:
29081821 =5a +164491150b ……..………………………………………… (i)
1.47918×1015 = 164491150a +6.86933×1015b …………………………….. (ii)
Multiplying equation (i) by 41761091, we get
1.21449×1015 = 208805455a +6.86933×1015 b ………….……….………… (iii)
1.47918×1015 = 164491150a + 6.86933×1015b ….….…………..….……… (iv)
-2.6469 ×1014= 44314305a
a = -5,973,014
Substituting the value of ‘a’ in equation (i) we get the value of ‘b’
29081821 =5a +164491150b
29081821 = -29865070 + 164491150b
b =0.358359. Thus, the required regression equation of Y on X is given by:
Y = -5,973,014+ 0.358359X
Now, we can predict the value of Y (savings) for different values of X (credit provided). For example, we can
predict the value of savings for 2013 if credit provided will be estimated at 76,708,850 EBR as follows:
Y = -5,973,014+0.358359× 76,708,850 = 21,516,293EBR
• In the same way as it is done above, using Least Squares Method the trend equation for credit provision of the
institution in the form X= a + bt is:
a = (∑x)(∑t2) – (∑t)(∑tx) = (164491150×55) – (15)(6.03×108) = 40,265EBR

n(∑t2) – (∑t) 5(55) – (15)2
b = n(∑tx) –(∑t)(∑x) =5(6.03×108) – (15)(164491150) = 10,952,655EBR
n(∑t2) –(∑t)2 5(55) - 152
Hence, the trend equation of credit provision of the institution is:
X= 40,265 + 10,952,655t; it is rising or increasing trend at 10, 952, 655EBR per year. For instance, estimated
value of credit provided for period seven (2013) is = 40,265 + 10,952,655(7) = 76,708,850 EBR.
• In the same way as it is done above, the trend equation using the Least Squares Method for savings mobilization
of the institution in the form Y= a + bt is:
a = (∑y)(∑t2) – (∑t)(∑ty) = (29081821)(55) – (15)(128856942) = -6,667,080
n(∑t2) – (∑t)2 5(55) - 152
b = n(∑ty) –(∑t)(∑y) = 5(128,856,942) –(15)( 2,90,81,821) = 4161148
n(∑t2) –(∑t)2 5(55) -152
Therefore, the trend equation of savings mobilization of the institutions is:
Y = -6,667,080 + 4161148t; it is rising or increasing trend at 4161148 EBR per year. For example, estimated
value of savings mobilized for period seven (2013) is = -6667080 + 4161148(7) = 22,460,956
Savings Trend and its Relationship with Credit Provision of Wisdom Microfinance Institution: the details
of year wise savings mobilized by Wisdom MFI are shown in table 11.
Table 11: Savings, Changes in Savings, and Percentage Change
Yearly Savings Yearly Savings Changes in Savings Percentage

Year
in USD in EBR from Year to Year Change
2007 40,848 363,792 - -
2008 59,153 659,213 295,421 81
2009 50,245 635,167 -24,046 -3.6
2010 49,031 807,364 172,197 27
2011 52,564 903,848 96,484 12
Total 251,841 3,369,384
Source: www.mixmarket.org
The data shown in the table indicates that:
• The total amount of savings of the institution for the last five years was 3,369,384EBR.
• the mean savings was 3,369,384/5 = 673,877 EBR.
• the variance (α2) = (363,792-673,877)2 + (659,213- 673,877)2 + (635,167- 673,877)2 + (807,364- 673,877)2 +
(903,848- 673,877)2 = 33,714,328,846 EBR.
• standard deviation (α) = = 183,615EBR

• coefficient of variation = standard deviation×100 = 183615×100 = 27%
Mean 673,877
• the ratio of savings to credit of the institution =Total savings of the institution =
Total credit of the institution
= 3,369,384 = 0.7%
474,397,572
Table 12: Correlation between Credit Provided (X) and Savings Collected (Y) N= 5
Time
/Year t2 X Xt X2 Y Yt Y2 XY
(t)
1 1 59,087,186 59,087,186 3.4913E+15 363,792 363,792 1.32345E+11 2.14954E+13
2 4 94,495,439 188990878 8.92939E+15 659,213 1318426 4.34562E+11 6.22926E+13
3 9 95,667,069 287001207 9.15219E+15 635,167 1905501 4.03437E+11 6.07646E+13
4 16 109,332,532 437330128 1.19536E+16 807,364 3229456 6.51837E+11 8.82712E+13
5 25 115,815,346 579076730 1.34132E+16 903,848 4519240 8.16941E+11 1.04679E+14
∑t2
∑t ∑X= ∑Xt= ∑X2 = ∑Y= ∑Yt ∑Y2 ∑XY =
=
=15 474,397,572 1,551,486,129 4.69397E+16 3,369,384 =11,336,415 =2.43912E+12 3.37503E+14
55
Correlation coefficient (r) = N∑XY –(∑X)(∑Y)
= 5(3.37503E+14)–(474,397,572×3,369,384)
=0.99
2 2
Coefficient of Determination (r ) = 0.99 = 0.9801= 98%. This means that 98% of the variation in the dependent
variable (savings) is explained by the independent variable (credit provided). The rest 2% is due to others, other than credit
provided
On the same way as above the Simple Regression Analysis of the above data for Credit Provided (X) and Savings
collected (Y) is:
3,369,384 =5a +474,397,572b ……..………………………………………… (i)
3.37503 × 1014 = 474,397,572a +4.69397 × 1016b ………………………….. (ii)
Multiplying equation (i) by 98945911, we get
3.33387E+14= 494729555a +4.69397 × 1016b …….………...…….………… (iii)
3.37503 × 1014 = 474,397,572a +4.69397 × 1016b ….…...…………..….…… (iv)
-4.116 × 1012 = 20331983a
a = -202,439
Substituting the value of ‘a’ in equation (ii) we get the value of ‘b’
3.37503 × 1014 = 474,397,572×-202,439 +4.69397 × 1016b
= 3.37503 × 1014 = -9.60366E+13 + 4.69397 × 1016b
= 4.34E+14 =4.69397 × 1016b
b = 0.0092361. Thus, the required regression equation of Y on X is given by:
Y = -202,439+0.0092361X
Now, we can predict the value of Y (savings) for different values of X (credit provided). For example, we can
predict the value of savings for 2013 if credit provided will be estimated at 146,196,878EBR as follows:
Y = -202,439+0.0092361×146,196,878 = 1,147,850EBR
• In the same way as it is done above, the trend equation using the Least Squares Method for credit provision in
the form X= a + bt is:
a = (∑x)(∑t2) – (∑t)(∑tx) = (474,397,572×55) – (15)( 1,551,486,129) = 56,391,491
n(∑t2) – (∑t) 5(55) – (15)2
b = n(∑tx) –(∑t)(∑x) = 5(1,551,486,129) – (15)( 474,397,572) = 12,829,341
n(∑t2) –(∑t)2 5(55) - 152
The trend equation of credit provision of the institution is therefore:
X= 56,391,491+ 12,829,341t; it is rising or increasing trend at 12,829,341EBR per year. For instance, estimated
value of credit provision for period seven (2013) is = 56,391,491+ 12,829,341 (7) = 146,196,878EBR.
• In the same way as it is done above, the trend equation using the Least Squares Method for savings mobilization
of the institution in the form Y = a + bt is:
a = (∑y)(∑t2) – (∑t)(∑ty) = (3,369,384)(55) – (15)( 11,336,415) = 305398
n(∑t2) – (∑t)2 5(55) - 152
b = n(∑ty) –(∑t)(∑y) = 5(11336415) –(15)(3,369,384) = 122826
n(∑t2) –(∑t)2 5(55) -152
The trend equation of savings mobilization of the institutions is therefore:
Y = 305398+ 122826t; it is rising or increasing trend at 122826 EBR per year. For instance, estimated value of
savings mobilization for period seven (2013) is = 305398+ 122826(7) = 1165180 EBR
DISCUSSIONS
The savings of Omo MFI has been steadily increasing from year to year in similar way as that of the credit
provision of the institution. This might be due to the aggressive promotion done by the government of Ethiopia to mobilize
savings during the period. Ethiopian government is carrying out awareness creation activities to enhance the savings habit
of the public. The peak in savings of 2011 could be the result of this effort. The ratio of savings to credit of Omo MFI is
38.63%, which shows that the institution’s effort to cover its credit provision by the savings collected is very high
compared to the other two institutions under this study.
This is one major factor for sustainability of the financial institutions particularly for microfinance institutions.
Moreover, as opposed to regular banks, clients of microfinance institutions do not have reliable collateral to secure credit;
therefore savings are considered as one of the major elements to secure microfinance institutions’ loans. From this point of
view, the institution is securing its credit in a better way compared to the other two institutions in the study.
The correlation coefficient, 0.81, shows that there is high degree of relationship between the two variables, credit
provided and savings collected. This can be due to compulsory savings that the institution collects during credit provision
from each borrower. The credit provided is independent variable whereas savings mobilized is dependent variable because
whenever there is credit extension, there is savings collected from the borrower. Therefore, there is high tie /link between
these two variables as it is demonstrated by the correlation coefficient.
It is apparent that Sidama MFI’s ability to cover its credit provision using savings collected is 17.68% which is
better than Wisdom microfinance institution having only 0.7% but still less than Omo microfinance institution with the
ratio of 38.63%. The coefficient of variation of savings of the institution (111%) is the greatest of the institutions under
this study.
This does not mean that the institution’s savings mobilization shows highest fluctuation from year to year rather it
is due to the rapid increase in the savings in the last two years of the study period. As per the correlation coefficient of the
institution (0. 95), it seems that there is strong relationship between the credit provided and savings mobilized. Compared
to the two other institutions in the study, Sidama MFI stands in the middle of the road with regard to connecting credit
provided and savings mobilised. That means, it is better than Omo MFI with 0.81 coefficient of correlation but worse than
Wisdom MFI having correlation coefficient of 0.99.
Savings of Wisdom MFI follows almost similar fashion with the credit provision of the institution. In general, the
variability of the savings mobilization of the institution as evidenced by its coefficient of variation of 27% is the least one
compared to the other two institutions in the study. This is because; the savings did not show high fluctuations within the
study period even though the amount of savings relative to the amount of credit provided is very small as evidenced by its
savings to credit provided ratio, 0.7%. This implies that the institution’s ability to cover its credit provided by the savings
collected is the least one compared to the other two institutions.
This might be a yellow flag from the point of view of securing the institution’s loan outstanding. The correlation
coefficient, 0.99, between credit provided and savings collected of the institution, shows that there is high degree (almost
perfect) relationship between the two variables.
The ratio of savings collected to credit provided of the institution as calculated above is very small compared to
the other two institutions under this study. This does not mean that there is no or less relationship between the variables as
correlation coefficient depends on the relationship between the variables not of their magnitude.
Hypotheses Testing
• Test of Hypothesis 1: “There is no relationship between credit provided and savings mobilized.” The correlation
coefficients do not support the null hypothesis. The relationship between credit provided and savings mobilized is
positive and highly significant for Wisdom and Sidama MFIs and significant for Omo MFI having 0.99, 0.95, and
0.81 coefficients of correlation respectively. According to Krishnaswamy O. and Reddy O. (2010), significant
relationship exists only when the coefficient of correlation is more than 0.7 (when coefficient of correlation is 0.9
or more the relationship between dependent and independent variables is highly significant.) Therefore, the null
(Ho) hypothesis is rejected and the alternative hypothesis with the above explanations is accepted.
• Test of Hypothesis 2: “The trend of credit provision and savings mobilization is increasing.” The trends of both
credit provided and savings mobilized are increasing as it is evidenced by the Least Squares method trend
calculation done in the analysis part above. Therefore, the null hypothesis is accepted as it is supported by
empirical findings.
CONCLUSIONS AND RECOMMENDATIONS
Omo microfinance institution has been growing steadily in all the outreach measures from 2008 onwards with
sharp increase in savings in the year 2011. The overall trend observed from the year 2008 onwards is almost organic
growth in all interrelated variables (credit, number of clients, and savings). The institution has been extending large loan
size compared to the other two institutions under this study as evidenced by its total loan to total borrowers’ ratio. This
shows that the institution is working more on width of outreach than depth compared to the other two institutions which
may attract the well- to- do individuals leading to disregard the poor. The average loan size of Omo microfinance
institution is the greatest relative to the other two institutions in the study. It may negatively affect the depth of outreach,
reaching the poor. As increase in loan size attracts the well - to – do, it may put away the poor from the service. Therefore,
care must be given from this point of view. Of course, increase in loan size decreases operating expenses which in turn
results in better profit. As the primary role of the institution might not be profit making rather poverty alleviation, a
tradeoff between depth and width of outreach would be better approach. The institution’s savings are growing rapidly;
however, it needs proper management attention in utilizing and controlling it.
Sidama microfinance institution has been demonstrating very sharp increase in both the credit provision and
savings mobilization in the last three years (2009 - 2011) of the study period. Relative to the last three years, its
performance in the preceding two years (2007 and 2008) can be considered as inadequate. It implies that the institution had
made certain strategic change in the last three years of the study period that enabled it to achieve such outstanding
performance particularly on savings. The link between the institution’s savings and its credit provided is also in the middle
of the road compared to the other two institutions as it is evidenced by its coefficient of correlation. In other words, credit
provided of the institution is leading the savings better than Omo MFI but less than Wisdom MFI. With regard to
variability of credit provided and savings mobilized by the institution within the study period, it has been observed that
there is highest variability as indicated by its coefficient of variation compared to the other two institutions. This can be
due to sharp increase particularly in the savings of the institution during the last two years of the study period. Sidama MFI
has been doing well during the last two years of the study period both in terms of credit provision and savings
mobilization. Therefore, it would be better for the institution to strength the current trend. The link between the credit
provided and savings mobilized is in the middle of the road as it is observed from the coefficient of correlation. This shows
that the institution has been relatively doing better than Omo MFI but less than Wisdom MFI in connecting the two
variables. In other words, compulsory savings which are collected during the credit provision has direct relationship with
level or amount of credit provided. If the link /coefficient of correlation of these two variables is weak, that shows there is
less effort to collect the compulsory savings. It may need attention from this angle.
Wisdom MFI is the best in targeting the poor or best in depth of outreach. The institution’s average loan size is
smallest of all compared to the other two institutions in the study that enables the institution to reach the poor as the loan
size does not attract the well to do. On top of that, there is less variability in the credit provided and savings mobilized; in
other words, there is less fluctuation in the two variables from year to year during the study period as it is evidenced by the
coefficient of variation in the analysis part. However, the ratio of savings to the credit extended is the least one compared
to the other two institutions in the study. This has certain negative implication in securing the institution’s loan outstanding
and having loanable fund. From the correlation coefficient calculated in the analysis part it is apparent that the institution’s
credit and savings are highly correlated even though the ratio of savings to credit extended is the least one compared to the
other two institutions. This is because; correlation coefficient shows the degree of relationship between the two variables
rather than their magnitude. Even though the institution is doing very well in reaching the poor, care must be given to
matching the loan size with clients’ business size. On top of that, lesser loan size may increase the operating expenses
which in turn affect profitability. Therefore, it needs working to arrive at a balance between profitability and reaching the
poor. The institution should give due attention to savings mobilization as its savings to credit ratio is the least one
compared to the other two institutions in the study. As clients of microfinance institutions have relatively inadequate base
to secure credit extended compared to regular banks, giving due attention to savings mobilization is essential.
REFERENCES
1. Akberet, H. (2007), Microfinance Delinquency and Default. Thesis, Maastricht School of Management (MsM)
2. Angela, A. (2007), Microfinance Loan Performance Evaluation in Uganda. Thesis, Maastricht School of
Management (MsM)
3. Anne-Lucie al.et (2006), Overview of the Outreach and Financial Performance of Microfinance Institutions in
Africa. Microbanking Bulletin,
4. http://www.griequity.com/resources/industryandissues/financeandmicrofinance/Africa_Data_Study.pdf date
visited 2 November 2012
5. Asad K. Ghalib (2011), Estimating the depth of microfinance programmes outreach: empirical findings from
rural Pakistan: Brooks world poverty institute, BWPI Working paper 154
6. Branch B. and Klaehn J (2012), Savings mobilization. World Council of Credit Union
http://www.woccu.org/financialinclusion/bestpractices/savings date visited 3 November 2012
7. Degefe Duressa, (2007) Microfinance in Ethiopia: Elixir or poison? PhD diss,
8. Grameen Bank (2009). ’Grameen Bank at a glance: beggars as members’. Available online from:http://grameen-
fo.org/index.php?option=com_content&task=view&id=26&Itemid=175 date visited 1 November 2012
9. Kothari C.R., (2010), Research Methodology, methods and techniques, 2nd ed. New Age International Publishers,
New Delhi, India
10. Krishnaswamyy O.R. and Reddy D. O (2010), Research Methodology and statistical Analysis, Text and Cases
Revised ed 2nd ed., Himalaya Publishing House, India
11. Ledgerwood, J. (1999) Microfinance Hand Book: Institutional and financial Perspective. Washington D.C. the
World Bank
12. Mark Schreiner (1999) Aspects of Outreach: A Framework for Discussion of the Social Benefits of Microfinance,
Journal of International Development June 19, 1999
13. Mfttransparency (2011), Promoting Transparent Pricing in the Microfinance Industry
http://www.mftransparency.org/ date visited 7 November 2012
14. Michael F. Alfred H. Sylvia W. (1999), savings in the context of microfinance – state of knowledge. Eschborn,
Consultative Group to Assist the Poorest (CGAP) Working Group on Savings Mobilization
15. Mixmarket http://www.mixmarket.org/ dates visited 1,2&5 November 2012 National Bank of Ethiopia (2012),
Market Daily Exchange Rate. http://www.nbe.gov.et/search/ date visited 10 November 2012
16. Okumu, (2007) the Microfinance Industry in Uganda: Sustainability, Outreach, and Regulation, PhD diss.,
Stellenbosch University
17. Omo Micro-Finance Institution http://www.bds-ethiopia.net/finance/omo-micro.html date visited 12 November

2012
18. Phil Bartle (2007), Savings Mobilization. http://cec.vcn.bc.ca/cmp/modules/bld-sav.htm date visited 15 November
2012
19. Robinson, M.S. (2001a), the Microfinance Revolution: Sustainable Finance for the Poor. The World Bank and
Open Society Institute: New York
20. Rhyne, Elizabeth (1998): The Yin and Yang of Microfinance: Reaching the Poor and Sustainability. In:
MicroBanking Bulletin, Issue 2, 1998.
21. Schreiner, M. (1997), ‘How to Measure the Subsidy Received By a Development Finance Institution’, manuscript
22. Stephen F. G (1999), The potential role of microfinance institutions in mobilizing savings:lessons from Kenya and
Uganda, Thesis, Cornell University
23. Tamrat L. F.(2007), Microfinance in Ethiopia: Credit Risk Management. Lambert Academic publishing, Germany
24. Yaron J. (1997) “What makes rural finance institutions successful?”The World Bank Research Observer. Vol.9,
No. 1

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International Journal of Accounting and

Financial Management Research (IJAFMR)

CREDIT PROVISION AND SAVINGS MOBILIZATION OF MICROFINANCE

K. RAMA MOHANA RAO1 & TAMRAT LUDEGO FITAMO2

KEYWORDS: Microfinance, Outreach, Sustainability, Credit Provision, Savings Mobilization

REVIEW OF RELATED LITERATURE

Hypotheses of the Study

• Ho = there is no relationship between credit provided and savings mobilized.

Ha = there is relationship between credit provided and savings mobilized.

• Ho = the trend of credit provision and savings mobilization is increasing.

Ha = the trend of credit provision and savings mobilization is not increasing.

Objectives of the Study are

The Trend of Credit Provision and Savings Mobilization

Credit Provision in Monetary Terms

Credit Provided Change from Percentage

• The mean amount was = 1,914,518,020/5 = 382,903,604EBR.

• The standard deviation (α) = = = 126,508,880

• Coefficient of variation = ×100=33%

• Average amount of credit provided per borrower =

Credit Change from Percentage

It can be inferred from the table that

• The mean amount of credit of the institution = 164,491,150/5 = 32,898,230EBR.

• Standard deviation (α) = = 17,075,508EBR

• Average amount of credit provided per borrower =

The data presented in the table indicates that:

• The mean amount = 474,397,572/5 =94,879,514EBR

(59,087,186-94,879,514)2 + (94,495,439- 94,879,514)2 + (95,667,069- 94,879,514)2 + (109,332,532-

5 Standard deviation (α) = = 19,642,084EBR

• Coefficient of variation = standard deviation×100 = 19,642,084×100= 21%

• Average amount of credit provided per borrower =

= the total credit provided = 474,397,572 =1,848EBR

No. of Active Change from %

No. of Active Change from %

No. of Active Change from Percentage

Table 7: Savings, Changes in Savings, and Percentage Change

• The mean amount = 739,486,995/5 = 147,897,399ETB;

(55,180,799-147,897,399)2 + (81,102,140- 147,897,399)2 + (125,596,486- 147,897,399)2 + (167,881,464- 147,897,399)2 +

• Standard deviation (α) = = 89,602,677EBR;

Total credit of the institution

The two normal equations

∑Y = Na +b∑X ……………………………………………………………... (i)

∑XY = a∑X +b∑X2 …………………………………………………………. (ii)

• N is number of pairs of values of the two variables

Substituting the values in the equations

739,486,995 =5a +1,914,518,020b …………………………………….… (i)

3.28929 ×1017 = 1,914,518,020a +8.13098 × 1017 b .……………………. (ii)

Multiplying equation (i) by 424696446, we will get

3.14057×1017 = 2123482230a +8.13098 ×1017b ………….……………… (iii)

3.28929 × 1017 = 1,914,518,020a + 8.13098 × 1017b ….…………….……(iv)

-1.4872 × 1016 = 208964210a

739,486,995 = 5 ×-71,170,082 + 1,914,518,020b

739,486,995 = -355850410 + 1,914,518,020b

b =0.572.Thus, the required regression equation of Y on X is given by:

Y = -71,170,082 +0.572 × 701,911,675= 330,323,396EBR

Trend Analysis Using Least Squares Method

a = (∑X)(∑t2) – (∑t)(∑Xt) = (1,914,518,020×55) – (15)( 6,541,074,242) = 143,647,549

n(∑t2) – (∑t) 5(55) – (15)2

b = n(∑Xt) –(∑t)(∑X) =5(6,541,074,242) – (15)( 1,914,518,020) = 79752018

n(∑t2) –(∑t)2 5(55) - 152

Therefore, the trend equation of credit provision of the institution is:

a = (∑Y)(∑t2) – (∑t)(∑Yt) = (739,486,995)(55) – (15)( 2,814,330,923) = -30,863,582

n(∑t2) – (∑t)2 5(55) - 152

b = n(∑Yt) –(∑t)(∑Y) = 5(2,814,330,923) –(15)( 739,486,995) = 59,586,994