Managing growth of microfinance institutions (MFIs): Balancing sustainability and reaching large number of clients in Ethiopia

Abstract

The overriding objective of MFIs in Ethiopia is to provide a broad range of microfinance services to large numbers of poor households. This is realized by developing capable and sustainable MFIs. A large number of MFIs have achieved significant progress in terms of both outreach and sustainability. As of June 2005, the twenty six deposit taking MFIs had an active loan portfolio of about 1.5 billion Birr (173 million USD) delivered to 1,211,305 active clients. They mobilized about 501million Birr (58 million US dollars) in savings. The Ethiopian MFIs attained such a significant outreach in a brief period of time. Between 2001 and 2005, the number of clients, volume of loan portfolio and savings increased by 263%, 479%, and 206%, respectively. In 2004, 12 out of the 15 MFIs were operationally sustainable, while 5 were financially sustainable. The majority of the MFIs increased their efficiency and productivity indicators as a result of expansion or increase in outreach. Out of the 15 MFIs, eleven had less than 5% portfolio at risk, which was encouraging. Out of the 13 MFIs which registered significant growth in outreach, 9 showed a remarkable decline in their portfolio at risk. As a result of the increased outreach, many of the MFIs maintained and some improved their portfolio quality. A careful balancing of increasing outreach and sustainability; with a parallel focus on institutional capacity; reducing costs and risks; and improving efficiency, profitability and portfolio quality, is needed to address the financial demand millions of unbanked people in Ethiopia. The specific interventions to increase the growth and sustainability of MFIs include: (a) Improving the institutional capacity of the MFIs by the implementing an efficient organizational structure, (changes in organization culture, structure and systems, for instance, decentralized lending decisions) with appropriate staff incentive and reward system, improvement of the skill of human resource, good governance, introduction of innovative financial products, and the increase of geographic expansion; (b) creating an enabling legal, regulatory and policy environment; (c) improve access to capital; (d) selective government and donor support; and (e) improving the demand side of the equation. Ethiopian Journal of Economics Vol. 13 (2) 2004: pp. 61-101