Impact of Microfinance on Rural Household Poverty in Ethiopia: A Review

Abstract

Poverty is highly affecting the life’s of the population of Less Developed Countries (LDCs) in general and that of rural people in particular. High vulnerability, lack of education and medical services, less participation in different decision-making activities are some of the major problems the rural people faced. To overcome these and other related socio-economic problems, micro finance Institutions (MFIs) targeted the poor in general and the rural people in particular. The main objective of this review is to find out whether the provision of microfinance services has brought changes on the living standards of clients. It is expected that microfinance services create employment opportunities, increasing income, enhancing empowerment and in aggregate improve the livelihood of the poor. Even though the performance of microfinance increase from time to time there are many problems facing microfinance institutions in Ethiopia. These includes inaccessibility for a foreign capital which may foster their loan portfolio, failure to repay loan at all or partly or not paying on time which causes serious problems on sustainability of the institutions, lack of research to understand client needs and lack of follow up of the clients. Reviewing the impact of microfinance intervention is important to know its viability on poverty reduction. The impact assessment of microfinance is conducted both at household and institutional outreach and sustainability. The impact of the program is assessed at household level based on average income, which in turn affects access to education, access to medical facilities, nutritional status, savings, employment generation and empowerment, among others, which are indicators of poverty. If outreach has been expanded and institution is sustainable, then the program is judged to have a positive impact as it has widened the financial market. Loan repayment performance is affected by a number of socioeconomic, institutional and natural factors, some of which are believed to impact on repayment negatively while others have positive impact. Major socioeconomic variables that affect credit repayment include education, age of household head, family size, gender of household head, farm size, loan size, livestock ownership, annual farm revenue, loan diversion, frequency of contact with development agent, group effect and location of borrowers from lending institution. Keywords: Loan, Client, Impact, Poverty DOI : 10.7176/JESD/10-23-08 Publication date: December 31 st 2019