2.3.

Role of Microfinance Institutions

 The role of microfinance is improving financial access to the poor

facilitate economic growth by easing liquidity constrains in
production.
 It helps the poor by providing capital to start up new productions
and as the result, the intervention of microfinance would have as
significant effect in reducing poverty at macro and micro levels.
 Microfinance can also play an important role in improving the poor
and provides them the confidence, self-esteem and financial means
to increase income and access to social service, moreover delivering
financial services to low income people have the role of promoting
equity and economic growth. 1
 Cont’d
 Individuals who focus on equity argue that providing financial
services to low-income people has the potential to reduce poverty,
mainly by smoothing income and by increasing income.
 On the other hand individual who focus on growth emphasize the
efficiency gain of extending financial services to low income
people.
 Thus the financial sector play a key role in the efficient allocations
of resources by shifting funds from surplus to deficit location and
from less profitable to more profitable activities.
 The immediate impact of having access to credit from a micro credit
program is an employment and income. 2
 Cont’d
 The induced income and employment effect may have impact on
other out comes such as consumption, nutrition, contraceptive use,
fertility, and educations.
 In additions, asset accumulations and hence house hold new worth
may increase if income generated from self-employed are sufficient
to cover the cost of participation.
 Microfinance service can contribute in many ways to the quality of
life client and members of their households (George P Gilligan,
1999).

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 2.4. Emerging of Microfinance

 Poor households pursuing micro enterprises are denied access to

intuitional credit due to the high collateral antiquated lending
practices of the formal banks.
 An alternative and innovative approach to provide credit to the poor
has been designed and successfully tried in many developing
countries.
 The new approach, the best example is the Grameen bank of
Bangladesh. It was established in 1983 in order to bridge the gap
between the formal and informal system.
 Grameen bank's lending program primarily relies on external funds,
despite significant increases in member savings funds over time. 4
 2.5. Microfinance and Poverty Reduction

 Ethiopia, with a predominantly poor population, should prioritize

poverty reduction to boost growth and improve living standards.
 The incidence of poverty in Ethiopia is very high.
 Poverty in Ethiopia is multi-dimensional problem and no single
guaranteed approach to its eradications.
 Alleviation of poverty requires many tools such as:
 Food and Shelter
 Employment financial services
 healthy and family planning service
 Educational infrastructure
 markets and communications. 5
 Cont’d

 Credit is a powerful tool when accessible to creditworthy individuals in a

partial cash economy, enabling them to use loans and repay them
effectively.
 Microfinance services, while not a standalone solution to poverty, can
serve as a valuable tool in poverty reduction efforts.
 The argument is that microfinance is not a solution to poverty and
development issues, but rather an insignificant tool in poverty eradication.
 Financial services are seen as a development tool to reduce poverty by
helping unemployed individuals become employed, increasing income and
consumption, and providing credit to poor urban households, enabling
immediate self-employment and income growth (Aaugen, Robert A, 1999).
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Next presenter will be
Darabe Fikadu

Thank you for the kind

attention!
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