CHAPTER ONE

1 Introduction

1.1. Back ground of the study

(Schreiner 2001 p339) define micro finance as the attempt improves to small
deposit and small loan for poor households negligible by bank. There for,
micro finance involves the provision of financial service such as savings, loan
insurance to poor people living in both rural and urban setting who are unable
to obtain such service form formal banks (bestey T 2000).

According to Hulme (1991) micro finance institution was first started in 1980
by professor Mohammed yenus in Bangladeshi. He led the way with pilot
group lending scheme for the land less people. Finally these become green
bank which is used as model for money countries in the world. When we
come to the Ethiopia the governments appreciate and support micro finance
institution. According to proclamation number 40/1996 of federal government
of Ethiopia, micro finance business means an activities that extending credit in
cash or in kind to peasant (Abinet 2007).

Similar to other sub-Saharan Africa countries the socio economic situation of

Ethiopia characterized by low growth of income some of the problems are
social service, high population growth, economic in efficient on high un
employment etc…

Micro finance relatively new industry which arose in the 1980 after the frailer
of the government delivery of subsidized credit to poor farmer. Micro finance
there come in as they beginning of seeking effective market oriented solution
to the provision of substantial and effective financial resource for poor groups
of people who do not have access to financial service from formal government
and private financial institution.

The number of micro finance institution that operates in the country has
reached 40 at the end of 2014. More than 80 % of this micro finance
institution in the country has been operating in the rural areas where access to
formal financial institution was nearly impossible.

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 BACKGROUND OF THE ORGANIZATION

1 Historical Background

Dire Dawa is one of the big urban centers in Ethiopia. Indeed, it is one of the
largest city in the country. Similar to Addis Ababa there is a high
concentration of both private and public banks in the City. From this, it would
not be wrong to think that proximity is not an issue for residents of Dire Dawa
to access financial services as there is huge private and public banks presence
in the city. Yet a large group of poor low income group and unemployed
segment of the community were not able to have access to the financial
services provided by these private and public banks, particularly the loan
services because of perceived risk and lack of collateral.

On the other hand, the surrounding rural people unlike city residents do not
have even proximity to the services offered by conventional banks as they live
in remote distant rural areas. Moreover, like poor, low income and
unemployed urban residents they lack material collateral required by the
banks to get loan services.

It is in recognition of this gap and its development objective that the Dire
Dawa City Council’s administration has commissioned a feasibility study in
2002 by an independent consultant. The consultant has produced and
submitted feasibility report in May 2002. Based on the recommendation of
this report the City’s Administrative Council have established Dire Micro-
finance Institution in May 02, 2003 as per the proclamation number 40/1996.
However, Dire Micro-finance Institution (DMFI) commenced its operation
few months later in March 2004 by pulling staff from different government
offices without specifically adhering to recommendations of feasibility study.

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2. DMFI’s Vision, Mission, Objectives & Values

Vision

The VISION of DMFI is to see the institute become competent microfinance

service provider at national level, in the year 2019.

MISSION

To provide need anchored and client focused credit and saving financial
services for low income households especially women who are engaged in or
wish to engage in micro and small earning business to enhance their economic
power.

OBJECTIVES

A. Provide micro-financial services as per proclamation No.

40/1996 to low income women, unemployed youth, farmers
and pastoralist.
B. Provide demand, saving and time deposit services
C. Provide local money transfer services
D. Provide counseling service to its client.
E. Promote saving culture in the administration.
VALUES

A. Treat clients with utmost respect

B. Provide quality credit services
C. Serve clients with honesty and loyalty
D. Provide fast and efficient saving services
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 E. We respect all good governance rules and regulations
F. Follow the culture of change to promote growth and
Transformation
G. We follow zero tolerance principle

3 DMFI’s Current Status

Dire Micro-finance Institution was incorporated as Share Company and was

issued license as per the proclamation No. 40/1996 by the National Bank of
Ethiopia in May 2003. DMFI currently provides loan and saving services at 9
urban kebeles and 3 Rural clusters. Its present active loan and saving cliental
base is 5,729 and 31,155 respectively, with an outstanding loan portfolio of
birr 80,523,232.41 as of Oct 31 2015. Current capital status of the institution
is Br. 49,375,825.21.

At present DMFI offers five loan products; group loans, individual business
loan, consumption loan, housing loan and cooperative loan. It charges 12%
annual declining interest rate on all its loan products. Loan size ranges
between br. 500 to first cycle group loan borrower to birr one million.

On top of credit services DMFI also provides saving service: both compulsory
and voluntary. Borrowers are required to save 20% up front saving on the
amount borrowed before the time of disbursement and 0.3 % monthly regular
savings during the term of the loan. The interest rate on deposit for all types of
saving is 5%.

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 1.2. Statement of the problem

Micro finance in Ethiopia has been established in accordance with the

proclamation number 40/1996 issued by the national bank of Ethiopia. Micro
finance is one of the financial institution that provides loan to client to help
them engage in production activities and to raise their small business. Most of
micro finance institutions approve loans for production purpose, because
income increment is positive indicator to which all development activities are
addressed (Daniel 2010).

Credit management is the most important activities in micro finance

institution. An attending credit management policies and procedure make it
sound of the time of managing credit risk and credit decisions; mulat(2003)
argues that if you not follow the credit management policies and procedure
one cannot think of managing credit risk and of the time credit decision will
become arbitrary subject to individual discrimination and judgment.

The development of micro finance institution has a direct relationship with the
improvement of living condition of poor people. There are some impacts on
livelihood of the poor people. Which micro finance improves are increase
employment, increase economic activities in poor communities, providing
business experience, knowledge of the market, increase self-esteem and other
non-quantifiable benefits but providing sufficient amount of credit to the poor
is not an easy task, one main reason for this is the conventional bank in
Ethiopia consider the poor as credit riskier(woldry 2002).

According to MUSTETA AWOL can conduct problems includes, lack of

awareness of customer about credit system, lack of skilled human power and
customer progress. However some problems that are related with credit
management like, lack of effective management system, high interest rate and
default payment of customer are still uncovered by the researcher on the
study. So this paper will try to identify and investigate on issues which are
still uncovered.

Therefore, based on this the researcher will try to answer the following basic
research questions:-

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  What are the activities practiced in credit management of dire
MFI?
 How dire MFI control activities as credit system?
 What policies and procedures the institutions follow up loan?
 How dire MFI deliver service, interest charge and amount of
service

1.3 Objective of the study

Micro finance institution can contribute to the enhancement of standard of
living and economic development as a whole. To improving the living
standard of rural illiterate and poor people by using the instrument called
micro finance institution

1.3.1 General objective

The general objective of the study is to assess the credit management problem
in micro finance institution of dire dawa credit and saving company.

1.3.2 Specific objective

 To assess the activities of factor in credit management of the
institution.
 To assess the effective of control activities of credit system of
dire micro finance institution.
 To assess the effectiveness of policies and procedure the
institutions follow in providing loans.
 To examine the delivery of service, interest charge and amount
of service.

1.4. Significance of the study

The researcher will be living the following statement as significance of the
study:

 It can help the institution to evaluate operation performance and adjust

some risk to the minimum.

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  It help the researcher to improve the skill and additional knowledge to
credit management in designing new credit management and
 It will help the other researcher as a reference.

1.5. Scope of the study

In fact, a credit management is very vast and important thing. Therefore, in
higher level it require money things like, time and much amount of cost.so for
this reason; the researcher paper would be specified for credit management in
dire micro finance institution.

Organization of the paper

This paper will consist of five chapter, the first chapter consist the
introductory part which include, back ground of the study, statement of the
problem, objective of the study, research questions, significance of the study,
the scope of the study, limitation of the study and organization of the paper.
The second chapter will be containing review of literatures. The third chapter
includes the term research design consist sources of data, data collection
techniques method of data analysis and presentation, target population
sampling methods. Chapter four of this research will include analysis of data
that gathered from respondent. The fifth and the last chapter of this research
will contain summary, conclusion and recommendation, questionaries’ and
reference that will be used to conduct the study.

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 CHAPTER TWO
LITERATURE REVIEW
2.1. Poverty in Ethiopia
Ethiopia is one of the poorest countries in the world with annual per/capital
income of $ 170. The United Nations development program’s human
development report for 2007- 2008 ranked Ethiopia as 169 th out of 177
countries on the Human development Index the average life expectancy after
birth is 48yers. Infant, mortality and malnutrition rate are among the highest in
the world while access to education has increased in recent years, the over all
adult literary rates is low compared to the sub- Saharan African standards
roughly 44% of the population lives below marked differences between rural
and urban areas. Most rural households live on a daily per capital income of
less then$ 0.50
Generally, rural households have less access to most essential assessment;
overall progress in reducing poverty since 1992 falls short of what is required
of meet 190G 1 by 2015 as result high variability in agricultural GDP and
rapid population growth. Most rural households are finding if increasingly
difficult to service without resource to seasonal or permanent urban
migrations search of wage employment (http;//www.rvral poverty portal.org).

2.2. Microfinance in Ethiopia

Formally in Ethiopia stated in 1994 -95, in particular, the licensing and
supervision of institution proclamation of the government encouraged the
spread of institution proclamation of the government encouraged the spread of
insinuation currently, there are 29 licensed micro finance institutions reaching

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about 2.2 million actives borrowers with are outstanding loan of a portfolio of
a approximately 4.6 billion concerned the potential demand, particularly in
rural areas, this satisfies only on insignificant proportion (WWW. aemfi-
Ethiopia. org)

2.2.1. Micro finance as Anti- Poverty strategy

The recent definition of poverty by the roared bank extended the conceptual
dimension beyond the conventionally held idea of permanent income/
consumption of lack of income) assets, sense of noiselessness and strategies
not only need to create income earning opportunities, but also must
empowerment of the poor in the sphere of state social in situations, and
security against variety of shockers. Micro finance is believed to be one
important entry point to addressing many of them. But services are limited in
some urban areas, neglecting the majority of the poor. In Ethiopia, for
example, the development bank the commercial bank of Ethiopians, having
their branches in urban and semi urban, provide virtually no access to the rural
population AISD, private banks, Through growing in number don’t engage
them selves in this raids. According to an earlier study. In rural Ethiopia as a
whole, less than 1% of the population has access to this source consequently,
accessing credit for small scale and informal operators continue to pose a
major constraint to growth of the sector. The alternative is the “informal”
financial sector, mainly the individual money lenders. In this case, borrowers
are required to provide guarantors and the interest rate is exit remedy high,
varying from 50% to 120% that the errata interest can 90 high as 400% in
some instances. And this exploitive interest rate of the informal sector
diminishes potential reform to factors of production, and is a constraint to
diversity economic activities of the rural sector. The feeder government of
Ethiopia has taken several economic reform measures to address poverty in its
every aspect. Thus, while trying to fulfill the basic needs of the population, it
also embarks up on economic reform measures conductive for free market

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competition and employment creation which includes the promotion of
policies that will encourage saving, private investment, increasing income
earning opportunities and promotion of small –scale in dustiest in the informal
sectors among others. The five-year development program document
emphasizes, among others, credit as a means to increase small holder
production (EPR DR, 1992E.C). fanatical markets are considered by the
regional governmental as a good entry point in achieving food security
objectives as the will allow rural households in both food secure and in secure
area to explore their “ comparative advantage” in the market place and to
create (AEMFI, 2000). Thus, in addition to promoting provision of credit
through government channels, the program encourages micro finance
institution to prone their services of credit provision and saving mobilization.
However, even of policies aimed at changing the regulatory environment were
expected to pave the way for increased fellows of resources to rural and
informal sectors, micro financial services are very in adequate still.
(http:// www.Ruralpovertyportal.org.web.gues)

2.2.2. The concept of micro financing and its objectives

Microfinance referred to as small scale financial services render to the rural

and urban poor, providing credit for self-employment, and small business, and
includes saving and technical assistance microfinance schemes have recently
aroused interest among policy makes sand researches as vehicles of poverty
mitigation. Pioneered by the German bank in Bangladesh, most micro finance
program required the poor to from groups and repay the loan in small and
periodic installments under micro finance service, concept of money. Lending
has been institutionalized, rationalized and reformed for the sustainability of
both borrowers and lender 5.2t may encompass the provision of financial and
other support services like savings, collateral free credit, insurance to the poor
and it addresses the issues relating to poverty; and unemployment; micro

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finance institution have been established in accordance with the proclamation
issued by the national bank of Ethiopia in 1996. There are about 30 micro-
finance institutions. All of them are share companies administered by their
respective board of directors. The central objective of this financial institution
is to provide credit and saving services to the poor. Micro financial with
gentilities whose cash requirements are small. The micro finance lending
program has many objectives. Among theses, some of the objectives are: to
provide credit facilities for those urban and rural poor people from paying
high interest rates to the informal money lender, improve the economic
capacity of women and the saving habit of the people, vitality and use the
local material effectively and enhance investment and income of the society
(Daniel, 2010)

2.3. Credit Policy in Ethiopia

The formal and information financial sectors and the principal sources of
finance for any investment or business that can be undertaken at micro. Small
– scale and large – scale levels in an economy. The major financial
institutions in the formal financial sector in Ethiopia are the Commercial Bank
of Ethiopia (CBE) and the Development Bank of Ethiopia (DBE). As Dejene
(1993) noted, because of the elaborate paper work, bureaucratic lending
procedures and stringent collateral requirements, the institutions do not deliver
credit as and when needed. Moreover they operate at high transaction costs.

During the imperial regime the banking sector was partly owned by foreigners
and the lending policy was mainly oriented to financing foreign enterprises
wealthy clients while domestic small borrowers were rationed out and forced
to seek credit from informal (Mauri, 1997)

More branch concentration was in few urban centers, with Addis Ababa alone,
for instance, accounting for 64 percent of branches in the country. Collateral
requirements were up to 200%.

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The agricultural sector was almost neglected because financial institutions
considered agricultural activity as risky investment (Itana, 1994)

During the Derg regime (1974 – 1991) all financial institutions were
nationalized and credit was mainly channeled to public enterprises, state farms
and cooperatives. The provision of credit was not based on economic
rationality but the discrimination against the private sector was not only in
credit access but entirely on government preference also in interest rate, which
was for instance 9% for private sectors as opposed to 6% for public industrial
enterprises since July 1986 (Itana, 1994). Abreham (2002) noted that with the
downfall of the Derge, the private sector got equal access to credit with other
sectors, banks were also given autonomy to decide by themselves based on
purely commercial criteria and establishment of private banks and insurance
companies was permitted. As a result loan disbursed to the private sector,
which was 49% in 1992/93 rose considerably and reached 87.7% in 2000/01.
In fact there is still unsatisfied demand for credit from this sector of the
economy due to inability to meet banks leading requirements.

As Solomon (1996) noted the banks serve big businessmen and disregard poor
households as bankable. Many small, creditworthy businessmen, with their
viable investment ventures, are denied access to institutional credit because
they couldn’t afford the required collateral. He also indicates that, “overall,
the prevailing operation of the formal financial institution in many low
income countries such as Ethiopia is inefficient in providing sustainable credit
facilities to the poor.

Regarding delivery of financial services access to institutional credit was very

limited in Ethiopia. Because of this limited access, the majority of the poor
get financial services through informal sources like money lenders, Iqub, Iddr,
merchants, friends and relatives, etc. The formal financial sources have not
been interested in delivering credit to the poor. Even if the banks in the

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country, which are part of the formal financial sources decide to give credit to
the poor. Even if the banks in the country, which are part of the formal
financial sources decide to give credit to the poor (as in the case some banks
have been forced to do so during the Derge regime) their outreach was also
very limited for long. Thus, delivering financial services to the poor requires
an innovative targeting deign and a mechanism of credit delivery that helps
identify and target only the poor who can take the initiative and sustain
productive use of loans.

In recent years the informal and Semi – formal lending institutions (such as
Iqub, Iddir, money lenders etc.) are becoming the dominant and important
sources of finance for poor households in Ethiopia. According to Dejene
(1993) account for 81% of the agricultural credit.

2.4. Development of Financial Institutions

It is noted that the formal financial markets in developing countries do not
provide credit and saving services to small scale farmers, micro –
entrepreneurs and woman. In other words, it is not accessible to the rural and
urban poor. Consequently, government started to fill this gap by establishing
development fiancé institutions since the 1930’s (Hulmle 1997 p.2)

The large and successful micro finance institutions reaching the poor in
developing countries have all relied on the support by donor and government
at least during their formation stage. Because of wide spread market
imperfection concerning financial service to the poor, institutional innovation
and expansion in micro finance is rarely market driven, but the process that
has been fostered by the public sector or altruistic leaders, private sectors have
contributed little to micro fiancé revolution that we have witnessed in the past
fifteen years (Zeller 2001 as cited by Wolday 2002)

The Grameen Bank: In Bangladesh, professor Mohammed Yunus, 1997 as

cited by Zeller 2001, addressed the banking problem faced by the poor
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through a program of action research with his graduates’ students in
chittogong university; he designed in 1976 an experimental credit program to
serve the poor. Though special relationship with rural Banks and the Sports of
Donors, the Grameen Bank was found 1983 and know serve more than 3
million of the poor.

The state owned micro Banks in Indonesia; another flagship of micro fiancé
movement is the village Banking units system of the Bank rank at Indonesia
(BRI) the largest micro fiancé institution in developing countries. This state
owned bank services about 22 million micro savers with autonomously
managed micro banks. The micro banks of BRI are the product of a
successful transformation by the state owned agriculture bank during the mid-
1980’s (AIO, 1973 as cited by Dejene 2000).

The earlier intervention of government in rural credit (i.e provision of credit

with cheap interest rate and limited saving and deposit facilities) was not
successful in financial terms (Hume 1997, p.2). According to a world bank
study (1975) over half of a sample of 44 development finance institutions
known to the world Bank had arrears rate of more than 50 percent. There was
also a problem of high transaction cost (ibid, 1997, p.22). In addition most of
the credit did not reach the intended beneficiaries (Khandker, 1998, p.1)

It seems that many countries in the developing world intervened in the rural
credit markets. It is emphasized that neither financial intermediation nor
higher interest rates will solve the problems of imperfect information and
imperfect enforcement that are endemic in developing countries (Hulme 1997,
p.3)

2.4.1. Development of Micro Finance Institutions in Ethiopia.

Micro finance involved in the 1980s as development approach that intends to
benefit the active poor, largely, in response to benefit the active poor. Largely

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in response to the failure of targeted subsidized cheap credit programs. In
such programs benefits went to those having connections and influence rather
than target groups. Large loan losses accumulated and frequent
recapitalization were required to continue operating, suggesting the need for a
new approach considers micro fiancé as an integral part of financial system,
emphasis as sustainable institutions operating on the market principles to
serve the poor (as opposed to subsidized loans to the target population) and
recognizes the importance of both credit and saving services (Samson, 2003).

In Ethiopia, though savings and credit program were operated for a number
years by NGOS, micro finance operation in regulated form is a relatively new
(about 10 years) phenomenon following proclamation 40/96 issued by
national bank of Ethiopia (NBE) the early formal micro finance activity is the
development Bank Ethiopia (DBE) pilot credit schemes for years their
program that emphasized both credit and saving emerged in 1990s. For
examples Relief society of Tigray (RST) to dedebit credit and saving
institution (DECSI). 1993, Oromo self-help organization (OSHO) to OCSSC
(Oromia credit and saving share company) 1996 etc.

After Proclamation No 40/96 was issued, NGO where prohibited from directly
involving themselves in credit and saving activities (Wolday, 2002) however,
currently NGOs are playing a very important role by initiation and supporting
their own micro financial institution, each improves the financial access to the
poor. The outreach of micro financial institution, each improves the financial
access to the poor. The outreach of micro financial institutions in Ethiopia is
estimated to about half a million active client. The objective of all most all –
micro financial institutions in Ethiopia is poverty alleviation (Bekele and
Wolday, 2002).

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2.5. The Ethiopian micro – Finance Experience
In Ethiopia Micor – financing experience providing credit to rural agricultural
households for purchase of agricultural inputs and tools have been practiced
by the country major state owned banks (including Development Bank of
Ethiopia (DBe) and commercial bank of Ethiopia) credit schemes targeted a
turban poor where non – existence until recent years who NGOs, starts
providing credit on poor households in some parts of the country. Befekadu
Degefe and Berhanu Nega, 1999/2000 Annual report on the Ethiopian
economy volume 1 p. 381 – 382)

And hence nongovernmental organizations have been active in the prevision

of micro fiancé services to the poor since the drought of 1984/85 and the
government of Ethiopia has been keen on putting in place a legal framework
under which micor – fiancé institutions (MFI’s) can be formed. Poverty
alleviation being MFI’s top development agenda, the current government has
created suitable policy environment for the formulation of MFIs. Since the
promulgation of proclamation no 40/1996, 19 MFIs have been legally
registered. Coreing over a population of more than 427,000 by March 2000,
all MFIs in Ethiopia, the majority of the poor are excluded from MFI services
due to a number of factors that are external and internal to MFIs. The other
argument is that mico finance service should not be limited to poverty
alleviation alone but should also be a tool for enhancing economics
development at the grass root levels. This implies the need for diversifying the
activities and the products of MFIs to teach those small entrepreneurs that tare
not reached by the formal financial services (Gebrehiwot, 2002 P. 31).

Since the issuance of proclamation No 40/1996, 19 MFIs have been registered

and licensed by the House of peoples. Representatives Even though the
development of MFIs started following the drought of 1984/85 recently the

16
industry has shown remarkable growth in terms of outreach among poor rural
households. With a network of about 500 branches and sub branches, the
MFIs have spread their operations in the regional (Tigray, Amhara, Oromia
and Southern nations and nationalities and peoples region0 where the
incidence poverty is the highest.

2.6. Credit management an over view

CM is one of the major functions, which financial institutions undertake for
proper mobilization of funds the credit management function includes loans
and advances it also involves a large number of activities ranging from credit
investigation to contract with borrowers, appraisal, review, and follow- up,
documentation nursing, recovery and write offs. Safety of a financial
institution loan or advance is advance is directly to the basis on which
decision to and is taken, the type and quantum of or credit to be provided and
the terms and condition on which the loan will be made available
consequently, a two pronged approach is required to be followed to ensure the
safety of each loan.
• Presentation appraisal to determine the acceptability of each loan
proposal and
• Post sanctions control to ensure proper documentation, follow-up
and supervision (Daniel, 2010).

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 CHAPTER THREE
METHODOLOGHY

1.6.1 Research design

The study would be focuses on assessment of credit management problems in
micro finance institution in case of dire micro finance. The researcher was
used a descriptive study design for this study. Because the researcher interest
is to give a clear image or view about credit management problem in micro
finance institution. The study was used both qualitative and quantitative
research approaches in order to achieve objective.

1.6.2 Methodology and source of data

In order to get sufficient and relevant information for the study. The
researcher was used both primary and secondary data. The primary data would
be collected from customers, employees of the institution and management of
current situation of the institution and performance of employee and
secondary data would be collected from past studies and written document
organizational record, manuals and report.

1.6.3 Sampling techniques and sample size

In order to complete the proposed study the researcher would be used
judgmental sampling method to collect data because this method avoids bias
and allow the researcher to get real information for each and every employee.
But for customer the researcher used convenient non probability sampling
method because there is no complete list of customers.

The total population of the organization is 90 and the target population of

employee is 40. So to make the study easy the researcher was used 30
employees out of 40 employees and 20 customers.

1.6.4 Method of data collection

In order to achieve this objective the researcher was used primary data would
be collected using questioners from customers and employee. In the questions,
the researcher was used both close-end and open-end questions in such a way
that they should generate important information on credit management system
of on dire micro finance.

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