by (1013654 to the state university of bergamo in partial ... existing clients of one microfinance...

MASTER in MICROFINANCE - 2009 · 2010

DEPOSIT MOBILIZATION PERFORMANCE OF ETHIOPIAN

MICROFINANCE INSTITUTIONS: CHALLENGES AND

PROSPECTS

By

Begashaw D. Woldemichael

(1013654)

Submitted

To

The State University of Bergamo in Partial Fulfillment of

The Requirements for the Degree of Master in Microfinance

Advisor: Professor Laura Vigano

October, 2010

2

Acknowledgements

Deep thanks to my advisor and Director of the program, Professor Laura Vigano. I would also

like to extend my best respect to Mr. Ake Olofsson, for his eloquent support. Many thanks, to all

the staff of the program for their dedication.

3

I. ABSTRACT

Microfinance has enabled the active poor to have access to financial services, which has never

been material for the orthodox financial system. However, due to controversial issues regarding

the capacity of the poor and the debate on the importance of local resource mobilization against

foreign capital, providing saving services for the pro poor in developing countries has been given

little emphasis in the microfinance arena.

The Ethiopian microfinance industry has a proven track record in achieving a larger outreach and

fast growth. Nevertheless, these performance and growth in terms of credit provision has not

been coupled with mobilizing deposit; despite the industry has been endorsed to mobilize deposit

from the public and many evidence showing the capacity of the poor as a saver.

This research paper sheds a light on the main challenges and opportunities of the Ethiopian

microfinance industry with respect to deposit mobilization performance. The paper also tries to

cite evidence from individual microfinance institutions for comparison. It analyzes the effect of

factors like ownership structure, source of fund structure and regulatory environment on deposit

mobilization performance of the industry.

In addition, the paper presents the findings on the patterns of saving and institutional preference

of existing clients of one microfinance institution namely Wassasa as evidence. It also expounds

some areas of deposit products for the poor taking in to account the findings of the survey and indigenous

saving and credit culture of the community.

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II. TABLE OF CONTENTS

Contents Acknowledgements ....................................................................................................................................... 2

Deep thanks to my advisor and Director of the program, Professor Laura Vigano. She is the reason that I am here. I would also like to extend my best respect to Mr. Ake Olofsson, for his eloquent support. Many thanks, to all the staff of the program for their dedication. ........................................................................... 2

I. ABSTRACT .............................................................................................................................................. 3

II. TABLE OF CONTENTS ............................................................................................................................. 4

III. LIST OF FIGURES AND TABLES ............................................................ Error! Bookmark not defined.

IV. LIST OF ACRONYMS ........................................................................................................................... 8

CHAPTER ONE: THEMES AND METHODS ...................................................................................................... 9

1.1 BACKGROUND OF THE RESEARCH .................................................................................................... 9

1.2 OBJECTIVES OF THE STUDY ............................................................................................................. 12

1.3 STRUCTURE OF THE PAPER ............................................................................................................. 13

1.4 EXPECTED OUTPUT ......................................................................................................................... 13

CHAPTER TWO: METHODOLOGY ................................................................................................................ 14

2. OVERVIEW OF THE STUDY AREA AND SAMPLING TECHNIQUES ........................................................ 14

2.1 LIMITATIONS ................................................................................................................................... 14

2.2 DATA COLLECTION .......................................................................................................................... 14

2.3 DATA PROCESSING AND ANALYSIS ................................................................................................. 15

CHAPTER THREE: LITERATURE REVIEW ON DEPOSIT MOBILIZATION ......................................................... 15

3 INTRODUCTION ................................................................................................................................... 15

3.1 COMMON NON-FORMAL SAVING MECHANISMS IN DEVELOPING COUNTRIES ............................ 17

3.2 ATTRIBUTES POOR SAVERS VALUE MOST ....................................................................................... 18

3.3 EXTERNAL ENVIRONMENT FOR SUCCESSFUL DEPOSIT MOBILIZATION ......................................... 19

3.4 INTERNAL ENVIRONMENT FOR SUCCESSFUL DEPOSIT MOBILIZATION .......................................... 20

3.5 COSTS OF MOBILIZING DEPOSIT ..................................................................................................... 22

3.6 SAVING MOBILIZATION Vs. OTHER SOURCES OF FUNDS................................................................ 23

3.7 COMPULSORY Vs. VOLUNTARY SAVING PRODUCTS ....................................................................... 23

CHAPTER FOUR: ANALYSIS OF DEPOSIT MOBILIZATION PERFORMANCE OF ETHIOPIAN MICROFINANCE

INDUSTRY .................................................................................................................................................... 24

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4 OVERVIEW OF SAVING SERVICES PROVIDERS IN THE INDUSTRY ....................................................... 25

4.1 THE MISSING DEPOSIT SERVICE PROVIDERS ................................................................................... 28

4.2 THE ROLE OF REGULATION ON DEPOSIT MOBILIZATION PERFROMANCE OF ETHIOPIAN MFIs .... 30

4.3 ROLE OF OWNERSHIP STRUCTURE OF ETHIOPIAN MFI’S ON DEPOSIT MOBILIZATION

PERFORMANCE ........................................................................................................................................... 32

4.4 SOURCE OF FUNDS STRUCTURE OF ETHIOPIAN MICROFINANCE INSTITUTION ............................. 34

4.5 INSTITUTIONAL CHALLENGES ON DEPOSIT MOBILIZATION PERFORMANCE OF ETHIOPIAN MFIS 37

CHAPTER FIVE: SURVEYED RESPONDENT RESULT, ANALYSIS AND DISCUSSION ........................................ 43

5. INTRODUCTION ................................................................................................................................... 43

5.1 SOCIO-ECONOMIC CHARACTERISTICS OF RESPONDENTS .............................................................. 43

5.2 ECONOMIC ACTIVITY OF RESPONDENTS ........................................................................................ 44

5.3 SAVING PREFERENCE OF RESPONDENTS DURING EXCESS INCOME ............................................... 45

5.4 LOAN INFORMATION OF THE RESPONDENTS ................................................................................. 46

5.5 SAVING INFORMATION OF THE RESPONDENTS.............................................................................. 47

5.6 SAVING ATTRIBUTES VALUED BY THE RESPONDENTS .................................................................... 48

5.7 KNOWLEDGE OF SAVING INTEREST RATE AMONG SAMPLE RESPONDENTS ................................. 49

5.8 PURPOSE OF SAVING AT THE MICROFINANCE INSTITUTION.......................................................... 50

5.9 INSTITUTIONAL PREFERENCES OF THE RESPONDENTS ................................................................... 51

5.10 REMITTANCE FLOW AND PATTERNS AMONG THE RESPONDENTS ................................................ 52

CHAPTER SIX: DERIVED DEPOSIT PRODUCT AREAS USING THE SURVEY FINDINGS ................................... 53

6. PROPOSAL FOR NEW SAVIGN PRODUCT AREAS ............................................................................. 53

6.1 FUND MANAGEMENT FOR IDDIR INTERMEDIARIES ....................................................................... 53

6.1.1 RATIONALE AND KEY FEATURES ................................................................................................. 53

6.1.2 WORKING MODALITIES ........................................................................................................... 54

6.1.3 BENEFITS TO THE CLIENTS....................................................................................................... 54

6.1.4 BENEFITS TO THE MFIs ............................................................................................................ 54

6.2 HOLIDAY SAVING SERVICE .............................................................................................................. 55

6.2.1 RATIONALE AND KEY FEATURES ............................................................................................. 55

6.2.2 WORKING MODALITIES ........................................................................................................... 55

6.2.3 BENEFITS TO THE CLIENTS....................................................................................................... 55

6.2.4 BENEFIT TO THE MFIs .............................................................................................................. 56

6.3 RELIGIOUS PILGRIMAGES SAVINGS ....................................................................................................... 56

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6.3.1 RATIONALE AND KEY FEATURES .................................................................................................... 56

6.3.2 WORKING MODALITIES .................................................................................................................. 57

6.3.3 BENEFIT TO THE CLIENT ................................................................................................................. 57

6.3.4 BENEFIT TO THE MFI’s .................................................................................................................... 57

CHAPTER SEVEN CONCLUSION AND RECOMMENDATION ......................................................................... 58

7. CONCLUSION ................................................................................................................................... 58

8. RECOMMENDATION ....................................................................................................................... 60

9. BIBLIOGRAPHY ............................................................................................................................... 62

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III. LIST OF FIGURES AND TABLES

Figure 1 Ownership structure and Saving mobilization performance of PEACE MFI .............................. 33

Figure 2 Source of fund structure of all Ethiopian Microfinance Institutions over the years. .................... 35

Figure 3 Source of fund structure of Wassasa microfinance institution as of December, 2008 ................. 36

Figure 4 Comparison between No. of active borrowers and No. of active depositors of selected Ethiopian MFIs ............................................................................................................................................................ 38

Figure 5 Comparison of deposit mobilization performance of Ethiopian microfinance institutions against regional and best practice averages. ............................................................................................................ 39

Figure 6 Comparison of Loans against saving mobilization performance of Wassasa microfinance institution. ................................................................................................................................................... 40

Figure 7 Staff composition of PEACE Microfinance Institution. ......................................................... 41

Figure 8 Respondents saving mechanism preference during excess income .............................................. 45

Figure 9 Respondents saving mechanism for loan repayment .................................................................... 46

Figure 10 knowledge of saving interest rate among respondents ............................................................... 49

Figure 11 Respondents reason of saving at Wassasa microfinance institutions ......................................... 50

Table 1 Distribution of respondents per branches of Wassasa MFI

Table 2 Distribution of respondents per gender and rural and urban composition

Table 3 Distribution of respondents based on economic activity

Table 4 Average respondent distance, time and cost to make deposit at Wassasa MFI

Table 5 Saving attributes favored by respondents

Table 6 Respondents membership in semi-informal and informal institutions

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IV. LIST OF ACRONYMS

ACSI: Amhara Credit and Saving Institution

AEMFI: Association of Ethiopian Microfinance Institutions

CGAP: Consultative Group to Assist the Poor

ETB: Ethiopian Birr

FAO: Food and Agricultural Organization of the United Nations

GNI: Gross National Income

IFAD: International Fun for Assistance and Development

MFI: Microfinance Institutions

NGO: Non-governmental Organizations

PEACE: Poverty Eradication and Community Empowerment, Ethiopia

RUFIP: Rural Financial Intermediation Program

USD: United States Dollar

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CHAPTER ONE: THEMES AND METHODS

1.1 BACKGROUND OF THE RESEARCH

During the last decades, microfinance scheme is proving itself as one of the leading tools for

development interventions towards alleviating poverty. Microfinance has enabled the active poor

to have access to financial services, which has never been material for the orthodox financial

system. However, more recently, most of the best practices and emphasis in the microfinance

arena spin around mostly on ways of delivering ‘credit; as a financial service; instead of

balancing and incorporating deposit services for the poor. Today this view is wide and perpetual.

First, it is due to the recent assumption and controversial debate that poor people are not able to

save. However, even before the wave of microfinance came in the picture, historically, the

importance of saving mobilization to the local and national development and access to deposit

service to the underserved rural and urban poor has been on the table and propagated by many

authors.

Adams (1978) argued in support of mobilizing voluntary saving from rural pro poor households

on various grounds. He recognized the potential of voluntary saving mobilization for overall

strengthening of the rural financial markets. Also he noted that voluntary saving mobilization

plays a significant role in strengthening local service organizations. Moreover, it has a favorable

impact on discouraging household consumption. Mauri (1985) recognized the potential of

domestic saving over the flow of foreign capital and argued in favor of increased substitution of

external finance with domestic saving.

Second, it is also due to the assumption by many development practitioners that cheap and

subsidized loanable fund will solve the problem of the developing countries, which actually

created a disincentive for most microfinance institutions from building the infrastructure to

mobilize deposit from households. In some cases, unsuitable economic and political

environment, regulations and supervision have also stood on the way of the growth and creativity

of deposit mobilization.

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Nevertheless, at any given time, someone either poor or rich always needs to save but might not

need to borrow. It is also the case that all active poor people are not entrepreneurs who need

credit service; rather the ultimate and greater outreach will be achieved if and only if the

intended financial services are provided tailored to the needs of the poor clients. Moreover, most

recent literature and case studies have revealed that poor households are using and have been

using various mechanisms to manage liquidity and save for investment and future needs. Though

of such practices are limited to the semi-formal and informal financial services due to lack of

affordability and access of the formal financial system.

“Without access to formal savings services, clients often save by keeping cash in the household

or investing in grain, livestock, gold, land, or other non-divisible assets which often considered

costly to convert to cash in time of need” (Ledgerwood, 1999).

However, access to deposit services in microfinance institutions mostly enables the poor to

efficiently manage their financial resources. It helps in consumption smoothing during economic

shocks and provide an opportunity to accumulate large sums of money for future investment and

household outlays. On the other hand, taking deposit from the public largely benefit the

microfinance institutions in achieving long term sustainability and wider client outreach.

In Ethiopia, for centuries, partly due to inaccessibility of commercial bank branches, absence of

postal saving services and lack of strong cooperative movement, deposit services to poor has

been largely dominated by widely accepted and practiced semi-formal and informal mechanisms

such as Iqub1, Iddir2, buying livestock and jewelry and hiding cash at home.

Mauri (1987) observed in his study of the role of financial intermediation in the mobilization and

allocation of household savings in Ethiopia that the performance of the formal financial system

in mobilizing and promoting household saving in Ethiopia is very low. However, he noted that

the semi-formal and the informal market has proved to be much more successful in this regard

and concluded that the semi-formal institutions and arrangements are very widespread and

1 Iqub is a local terminology for rotating saving and credit associations

2 Iddir is a local terminology for traditional funeral funds

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appreciated by the majority of the population and called for the formal financial institutions in

the country to learn from the success of the informal sector.

Even more interestingly, the above author went further and proposed a proper provision of

legislation to the informal sector and highly emphasized on the potential of careful cooperation

and linkage between the formal and informal financial actors for a successful deposit

mobilization.

During the late 90’s however, regulated microfinance institutions came into the picture after the

government enacted the first legislation in 1996 with the aim of providing financial service to the

poor by deposit taking microfinance institutions. The main objective of these institutions is to

deliver microfinance services to an active poor people in a sustainable way (AEMFI3, 2008).

However, while the banking sector were improving and doubled its deposit base in the past five

years, with an average yearly growth rate of 13.9%, after a decade, the microfinance industry is

far behind in terms of mobilizing deposit from the public. The industry mobilized deposits

amounting to US$1904 million, which is about 4% of the amount mobilized by the banking

sector US$4.9 billion (AEMFI, 2008).

The average amount of savings per client and per member is about US$95 per person. Ethiopian

Microfinance institutions mainly offer two types of saving products: voluntary and compulsory

(forced) savings. Lastly, saving as a source of fund covers only 36% of the loan portfolio of the

industry.

Therefore, one can comfortably deduce that, although the regulation allows deposit mobilization

from the public and there are certain conducive environments to do so, the industry still offers a

narrow deposit product range, its performance is unsatisfactory and it is far behind in mobilizing

deposit as a tool in deepening its client base and outreach; while using it as source of fund.

3 AEMFI stands for: Association of Ethiopian Microfinance Institutions

4 Currency exchange rate in June, 2009 quoted price of 13 ETB to 1 USD has been used.

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1.2 OBJECTIVES OF THE STUDY

In light of the above assumptions, this paper tries to assess the deposit mobilization performance

of Ethiopian microfinance institutions through industry analysis and establishing the saving

patterns of microfinance clients. It also tries to highlight potential deposit service intervention

points that are suitable for different categories of clients: rural and urban, men and women, age

and Family structure.

SPECIFICALLY, THE RESEARCH AIMS TO:

1. Assess the current Ethiopian microfinance industry performance in terms of deposit

mobilization;

2. Identify whether clients of the MFI’s save or not, if they do how and where do they save

3. Establish perception of clients towards existing saving products and institutional type and

investigate what attributes they value most and;

4. Propose potential deposit service intervention areas.

The research paper presents empirical evidence based on data collected from key institutions like

National Bank of Ethiopia, AEMFI and individual institutions of Wassasa 5and PEACE MFIs in

Ethiopia. These MFI’s are selected based on performance indicators like quality of loan portfolio

and low saving to loans ratio. These institutions have strong track record in achieving the quality

of loan portfolio along with fast growth, however, with regard to saving mobilization they lag

behind.

The researcher believes that the findings will be an addition to the future policy decision making

and debates regarding the importance of deposit mobilization to institutional growth and its

effect on micro clients towards a greater financial deepening.

5 Wassasa and PEACE microfinance institutions are deposit taking MFIs working in Ethiopia.

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1.3 STRUCTURE OF THE PAPER

This research paper is organized in five main chapters. The first chapter discusses about the main

research theme, objectives and background of the study. The second chapter presents the

methodology followed in conducting the research. Sample size and tools used in data collection

and analysis are described in this chapter. The third chapter presents a thorough literature review

on various views of deposit mobilization and its key characteristics and requirements.

Chapter four discusses the main research analysis on the performance of deposit mobilization in

Ethiopian microfinance industry with special reference to regulatory environment, ownership

and source fund structure of the industry. Based on primary data collected from the selected

institution, chapter five discusses on the finding on the survey result. The last chapter provides

conclusion and recommendations based on the findings.

1.4 EXPECTED OUTPUT

I. Detailed review of saving mobilization performance and strategies of the

microfinance industry.

II. Suggestions of potential new saving service intervention areas based on findings and

endogenous knowledge;

III. Analysis of existing institutional capacity and arrangements of selected microfinance

institutions and possible constructive recommendations towards greater deposit

mobilization.

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CHAPTER TWO: METHODOLOGY

2. OVERVIEW OF THE STUDY AREA AND SAMPLING TECHNIQUES

The study was conducted in Ethiopian Microfinance industry. Analysis of deposit mobilization

performance with relation to key determinants has been presented. Primary data has been

gathered during August and September, 2010, in three branches of Wassasa MFI.

Accordingly, the sample covered 217 active clients of the microfinance institution. Random

sample has been drawn using the number of active clients of each branches and a standard

representative sample size of 1.7% of the total active client of the branch. Out of the total

respondents, 65 % were from the rural areas and 66% percent of the respondents were women

clients.

2.1 LIMITATIONS

The main limitation of the study was shortage of time. The study has been carried out along with

a two month internship at FAO, Rome. Primary data has been planned to collect from two

Ethiopian microfinance institutions (PEACE and Wassasa). However, due to shortage of time

data has been collected from the larger of the two institutions, Wassasa MFI. Collecting data

from deep rural parts of the country has also been hindered by rainy season.

2.2 DATA COLLECTION

In order to meet the objective of the study, three types of data has been collected. The first type

is secondary data collected on financial and operational performance of Ethiopian microfinance

institutions with reference to deposit mobilization. The main source of such data was the

National Bank of Ethiopia, the Association of Ethiopian Microfinance Institutions and

Mixmarket website. Also financial and operational data from PEACE and Wassasa MFIs have

been collected.

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The second type of data collection was survey in which a questionnaire has been designed and

administered. It is used to identify the saving patterns of existing microfinance clients of the

selected institution. The third type of data collection is discussion with key informants and actors

of the industry including the general manger of PEACE MFI, operation and finance managers of

Wassasa MFI. Moreover, the researcher has conducted informal discussions with key personnel

of the central bank of Ethiopia.

2.3 DATA PROCESSING AND ANALYSIS

Quantitative and qualitative data analysis has been employed. Results have been presented in

descriptively in tables and figures. Descriptive analyses of the major variables on the pattern of

saving mechanisms of the respondents were presented.

Based on the findings, inferences and implications were drawn. Before presenting the results

obtained, review of detailed literature has been made and documented to understand the state of

practices of the industry regarding deposit mobilization. This helps to grasp the concepts,

definitions and best practices regarding deposit mobilization in the microfinance industry.

CHAPTER THREE: LITERATURE REVIEW ON DEPOSIT MOBILIZATION

3 INTRODUCTION

This chapter is dedicated to review of thoughts and opinions on local deposit mobilization in the

microfinance industry. It is an attempt to present the debates and opposing views about

importance of local resource mobilization and of the poor as a saver. The main pillars favored

by the supporters of the opposing view on local resource mobilization and the poor as savers

(according to Adams 2002) is lack of capacity to save among the poor, low interest rate on small

deposits, cost of mobilizing small deposits, and lack of appropriate saving product for the poor. .

16

However, recognizing the importance of domestic saving mobilization isn’t a recent fashionable

idea in the microfinance industry; it has been long believed that poor people in developing

countries will benefit from locally mobilized resources more than foreign subsidized capital.

Adams (2002)6firmly believes that more people could benefit from access to quality deposit

services than access to subsidized credits. Moreover, he understood and declared that

microfinance institution can mobilize large amounts of small deposit from poor people to cover

lending activities.

Mauri (1985) deduced that the traditional rural finance system has overlooked the saving

potential of peasant households in developing countries and therefore, concentrate on the needs

to supply farmers with public and foreign funds on a concessional basis through institutional

channels. According to him such underestimation is mainly pillared on the well known models

called vicious circle of poverty and statistical figure on per capita income of developing

countries.

On the other hand, the prevalence of the poor as a saver can be evident from the fact that the

existence of many informal and semi-formal institutions in developing countries. Rutherford

(2001) deduced that in one way or another poor people need large sum of money for many life

cycle needs; therefore, the reliable way of obtaining this fund is to save and financial services are

there to help realize it.

Mauri (1985) stressed on the role that the presence of efficient rural financial markets play on

discouraging rural household hoarding, increase saving rate and a long term increase in income

among household in developing countries.

For microfinance institutions, savings can be a key to growth and profitability. CGAP (1998)

expounded that mobilizing voluntary saving helps microfinance institutions to deepen their

outreach among the poor clients, though it is sometimes it also provides cheaper sources of funds

than the interbank market, and it promotes a strong demand-orientation and thriftiness among the

MFIs. Moreover, according to the paper it also increases the public confidence towards the MFIs

6 See Dale Adams (2002), filling the deposit gap in microfinance; (2002), Utah, USA

17

operation. “Savings can provide a stable, low cost means to finance the loan portfolio,

dramatically increase an institutions client base, and improve borrowers’ capacity to repay”

(Hirschland, et al, 2008)

The nature of the deposit service has also greater impact on the tendency of the poor to save in

the financial institutions. According to CGAP (2003), although the most desired products are

highly depends up on the context of the institution and the country, poor clients tend to prefer

individual voluntary product than packaged group and compulsory saving products.

3.1 COMMON NON-FORMAL SAVING MECHANISMS IN DEVELOPING

COUNTRIES

In accessibility of formal financial services and inefficiency of most locally present financial

institution has diverted the poor to an alternative saving mechanisms. Mauri (1985) identified

that financial institutions in developing countries have various shortcomings when it comes to

serving the pro poor in the developing countries. First, the commercial banks had generally

showed little interest in attracting savings accounts, especially in rural areas, they considered

them costly to manage. Second, the post office despite they collect deposit from the public at a

large scale, they usually lack certain element of the financial institutions like, invest collected

funds on government bonds, suffer from lack of skill and motivation of the staff, and they

seriously suffer from drainage of savings from rural areas to urban large customers. Lastly, he

identified the agricultural bank as the main providers of channeled concessionary loans, instead

of concentrating on deposit mobilization.

Therefore, rural households in developing countries depends on semi-formal and informal

mechanism for their deposit needs. “Despite their advantage and disadvantages, there are three

common informal saving mechanisms practiced by the underserved poor people: cash, animal

and gold, silver, jewelry, and other valuables” (Robinson, 2001).

Cash saving: hoarding cash in one’s house is the favorite form of saving for many people. It is

favored due to high liquidity and convenience. It is highly liquid in times of emergency and

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unexpected investment opportunities. Moreover, cash held at home is convenient to withdraw in

times of emergencies. However, this kind of method has a serious draw backs such as high

temptation to spend on unwanted and unplanned outlays, security concerns and being stolen or

lend out to relatives or friends during emergencies.

Animals: households living in rural areas tend to keep and herd animals as a saving mechanism.

Saving in animals has a strong advantage in terms of returns from propagation and the ability of

to be converted in to cash easily. Nevertheless, saving in animals has its own disadvantages. The

first of it is keeping the animals themselves like feeding, herding and sheltering. The other

disadvantages are problem of divisibility, disease and draught. Sometimes loss in market value

of the animal might happen.

Gold, silver, jewelry and other valuables: precious metals serve multifaceted purpose; besides

their ornamental value, they serve as saving mechanisms. They can be easily pawned, mostly

appreciate in value and they are fairly liquid. Precious metals usually used to hedge against

inflation and currency devaluation. However, the problem of security is the biggest disadvantage

of such kind of saving.

3.2 ATTRIBUTES POOR SAVERS VALUE MOST

Understanding common attributes of deposit services valued by poor clients help microfinance

institutions in designing an appropriate product. Scholars have identified basic saving attributes

poor savers value most; these are access, security, liquidity and return. In some cases, low

minimum balance is preferred among poor clients. Adams (1978) cited the reward paid on

savings as the key element of saving mobilization program. In addition, he noted that

convenience, liquidity, and security of the savings as a strong complement for the return on

savings. Also he suggested that wherever it is legal a lottery scheme should be attached to a

saving scheme to boost the interest of pro poor savers.

Access comprises of physical proximity of the service point, prompt service at sight and the time

taken to complete the transaction. On the other hand, the security of poor people deposit is

relative. Deposits are secured in formal financial institutions than in informal ones. “Savers most

19

frequently report that the key feature they seek is safety for their savings. They want to feel

confident that their deposits will be available when they need them” (Klaehn et al, 2002)

However, in some cases poor people still prefer informal saving mechanisms. Liquidity of

deposit accounts refers to the availability of the fund when urgently needed. It highly depends on

the degree of access of the service. However, liquidity might be contractual, the case of

contractual saving. Therefore, providing both kinds of service would be ideal.

However, according to Klaehn et al (2002) findings savers expect a real return on their saving

but if the formal financial institution’s return is below the inflation rate, they would definitely

switch to saving in kind or goods that can be resold later.

3.3 EXTERNAL ENVIRONMENT FOR SUCCESSFUL DEPOSIT

MOBILIZATION

“The ability of an institution to successfully mobilize saving is contingent first up on a

macroeconomic environment which allows the savings institution to operate at rates that are

viable and sustainable while providing a real positive return to protect the value of client

savings” (Klaehn et al, 2002).

There are certain external factors that are out of the control of the microfinance institutions. For

example, unstable macroeconomic and financial sector environment can divert pro poor savers

away from formal financial institutions. According to Adams (1978) it is necessary to institute

appropriate legal changes so that the pro poor institution can mobilize local deposit from the

public.

According to CGAP (1998) study, existence of political turmoil, high inflation rate, extensive

government interventions through interest rate controls and subsidized credit can highly hamper

the performance of saving mobilization among MFIs.

“To mobilize deposit effectively, an MFI needs to be operating in a country in which the

financial sector has been liberalized” (Ledgerwood, 1998).

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CGAP (1998) also emphasized that availability of tailored prudential regulatory and supervisory

framework for microfinance institutions avoids complications related to minimum capital, loan

collateral, liquidity and other risk exposure requirements of the conventional banking

regulations.

However, McKee (et al 1998) cite that government regulation and supervision is not a real

guarantee for the safety of poor people savings, in addition, it signals a false sense of security

unless it is backed by a capacitated and strong regulatory oversight.

Ledgerwood (1998) identifies a set of external environmental precondition that should be me

before operating in deposit mobilization. Some of them are licensing, reserve requirements, and

availability of deposit insurance.

To be licensed to accept deposits, an MFI must have the financial strength and institutional

capacity. However, determining the capacity of MFIs is the responsibility of the licensing body.

However, it is not a surefire against MFIs failure. Setting aside a certain percentage of deposit

either in liquid form or at the central bank is also recommended to boost the public confidence as

well as last resort in case of bankruptcy.

On the other hand, deposit insurance scheme is an after the incident benefit to the depositors in

case of default of the institutions. Such schemes do not guarantee the full safety of the

depositors. Usually deposit insurance is backed up by government with a nominal value for

depositors in case of failure of the deposit taking institution.

3.4 INTERNAL ENVIRONMENT FOR SUCCESSFUL DEPOSIT

MOBILIZATION

According to CGAP (1998) institutional governance, ownership and reputation of the

microfinance institutions is key factors for successful deposit mobilization.

Prior to offering voluntary deposit services, MFIs must ensure that they have the institutional

structures that allow them to mobilize savings legally.

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“Institutional capacity requires that adequate governance, management, staff and operational

structures are in place to provide savings services” (Ledgerwood, 1998)

Moreover, Klaehn (et al, 2002) expound that the vision, commitment and disposition of the pro

poor institutions are critical in successfully mobilizing deposit from the public. The study also

added that strong professionalism in how to manage savings among the management and staff of

the institutions is also a pillar for their success.

According to Mckee (et al, 1998) the capacity of the institution’s personnel is the most important

factor of “getting yes” on saving mobilization. She also stated “An appropriate governing body

or bodies should be in place to oversee the MFIs management. In effect, it should be the board

that makes the final judgment as to whether the other preconditions- client demand and

institutional capacity- have been met.” (McKee et al, 1998)

Moreover, organizational structure of the deposit taking microfinance institution is also critical.

CGAP (1999) cited that the closer the MFI gets to its clients, the larger the number of depositors

with access to the facilities.

Proximity to pro poor clients and depositors drastically reduces the transaction cost of the

institution. It also ensures building the trust and confidence.

Risk management framework of the microfinance institution is another dimension that should be

carefully dealt with while thinking of deposit mobilization. The risks can range from liquidity

risk; where the MFI cannot be able to meet the immediate withdrawal demands of the clients.

Such incidence will result in loss of confidence among pro poor clients.

According to Klaehn (et al, 2002), MFIs should implement strong policies and practices for

credit screening and risk analysis so that the loans financed by savings will return back.

CGAP (1998) cited that in order to manage the risk properly, deposit taking microfinance

institution should implement strict borrower screening, diversifying the loan portfolio,

monitoring borrowers and following sound provision policies.

Asset and liability management is the core of conventional banking business. The same is true

for microfinance institutions if they are taking deposit from the public. Brom (2009) expounds

22

that even the biggest microfinance institutions need to pay attention to their balance sheet to

manage financial risks. Sound asset and liability management is critical to help MFIs asses and

manage financial risk.

On the other hand, the importance of market research and strong management information

system has also been stressed in most scholarly articles on the performance of deposit

mobilization. In addition, security and internal control of the institution has to be strengthening

while going for voluntary deposit.

3.5 COSTS OF MOBILIZING DEPOSIT

CGAP (1998) has identified various mechanisms a deposit taking institution could implement in

order to minimize the cost of saving mobilization. Lowering administrative costs through

designing simple saving products, offering differentiated interest rate system with no interest

payment on low balance accounts, and maintaining lean field organizational structures are some

of them.

“The cost of savings mobilization depends not only on internal factors such as operational

efficiency, but also on external factors such as minimum reserve requirements, tax rates and

general market conditions. Determining both internal and external costs helps to establish what

rate to pay on different savings products” (Ledgerwood, 1998).

On the other hand, Klaehn et al (2002) has identified that numerous non-financial costs related to

designing, marketing and protecting saving deposits products are incurred while offering the

service and suggests a functional costing mechanism for accurately determine the financial and

non-financial costs associated with providing the service.

The other important aspect while considering costs associated with deposit is the interest paid to

depositors. Some accounts bear interest like fixed and contractual accounts, some do not like

current accounts. Therefore, determining the saving interest rate is highly depends on the nature

of the liquidity of the account and the length of time of the account.

23

3.6 SAVING MOBILIZATION Vs. OTHER SOURCES OF FUNDS

The source of fund for these financial institutions is also the main determinants for their

performance. An institution whose main source of fund is donation most likely behave in

different way from an institution whose main source of fund is raised from either deposit or

commercial source of funds.

Dauber (et al, 2004) has expounded that relying on saving mobilization as a source of fund will

guarantee independence from donors, increased feeling of ownership among clients, and

empower the institution in terms of powerful information about client payment and saving habits.

However, unless managed carefully mobilizing saving has its own repercussions on the deposit

taking microfinance institution. Dauber (2004) cited that when clients save frequently and in

small amounts, it is most likely that the institution incur high administrative cost.

Lastly, it has been argued that small amount deposits are not stable due to the frequency of

transaction and not good for financing medium and long term loans. However, Bald (2009) has

conducted a test on four microfinance institutions that deposit from poor client can form the

conventional theory of core deposit. The study has concluded that poor depositors saving exhibit

same behavior as the conventional deposit does in terms of stability.

3.7 COMPULSORY Vs. VOLUNTARY SAVING PRODUCTS

According to CGAP (1997) the requirement of compulsory savings and voluntary savings

implies opposing view on saving behavior of the poor. Commonly compulsory saving assumes

that either the poor should be taught to save or the institution uses it as collateral. On the other

hand, voluntary saving reflects that the poor actually saves and appropriate financial service

should be provided.

“The compulsory savings approach typically provides clients with little or no choice of savings

products (and often with no returns on their savings)” (Robinson, 2001)

24

Mostly compulsory savings are locked in until the client repays its loan. In some cases

compulsory saving is not accessible unless the client decides to drop out. Moreover, the only

time client can have a compulsory saving option is only when they borrow. Therefore, according

to Robinson (2001) compulsory saving raises client cost of loans and mostly it does not meet the

needs of client’s income.

CGAP (1997) has made it clear that institutions should start to separate savings and loans and the

institutions should not try to teach clients how to save. Instead they should teach their staff and

try to understand the saving patterns and behaviors of clients and develop appropriate product

accordingly.

25

CHAPTER FOUR: ANALYSIS OF DEPOSIT MOBILIZATION PERFORMANCE

OF ETHIOPIAN MICROFINANCE INDUSTRY

4 OVERVIEW OF SAVING SERVICES PROVIDERS IN THE INDUSTRY

The Ethiopian financial sector has almost a hundred years of history, dated back from 1905

where the first commercial bank was established. However, despite its long standing presence;

the sector has not able to provide a meaningful financial service to a significant portion of the

population; with 636 7bank branch through the country population per bank branch estimated to

be 126, 258 people, the country is still the least banked among sub-Saharan Africa.

Branch concentration in the capital city is also very high (56% of all bank branches found in

Addis Ababa); in addition, the industry is still dominated by few state owned banks, especially

the giant state owned commercial bank of Ethiopia alone accounts 36.5% of all bank branches of

the country.

Currently the financial sector comprises of mainly commercial banks (state and privately

owned), insurance (state and private), and microfinance institutions. The informal financial

services mainly dominated by financial saving and credit cooperatives, Iqub, Iddir, money

lenders, pawn brokers and the like.

Banks: Commercial banks are still the dominant institutions both in resource mobilization and

allocation, the industry accounts for about 94%8 of the total financial sector assets, with

remaining assets held by the insurance sector and MFIs with 3% each.

In terms of deposit mobilization, despite increasing inflation and cost of living, the banking

sector was flooded with deposit for the past five and six years. It has registered an average yearly

7 Source: National Bank of Ethiopia annual report 2008/09.

8 Source: paper on access to finance in Ethiopia, volume 2,( 2008)

26

growth rate of 14%9; leading the sector to double its deposit base. The pioneer in this regard was

a young and privately owned bank called United Bank.

Microfinance Institutions: it is a relatively young industry, with an average age of 810years

where the oldest is only 12 years. As of December 31, 2009, the sector has 30 state and privately

owned microfinance institutions whereby six of the state owned microfinance institutions

dominate the industry by constituting 93% of the total assets. The industry has pulled a total

asset of 7.2 billion Birr (55.1 million USD11), with 5.1 billion birr (38.9 million USD) in

outstanding loans and mobilized a total deposit of 2.4 billion birr (18.4 Million USD).

Cooperatives: Saving and credit co-operatives, and multipurpose cooperatives: the credit

union sector in Ethiopia is one of the key players in the deposit mobilization and saving services

for the poor. Due to strong support and structures in the industry the cooperatives sector is

increasing rapidly. In 2006 there were 19,14712 primary cooperative societies with a total

membership of about 4.62 million. Out of this total number 5,869 (28.8%) are housing

cooperatives followed by saving and credit cooperatives 5,437 (26.6%t) and multi-purpose

cooperatives 5,104 (25%).

Semi-Informal Institutions (Iqub and Iddir): the semi-informal financial services comprises

of institutions under no legal status but practiced traditionally. In Ethiopia, Iddir and Iqub are the

two most important semi-informal organizations based on the pre-established social ties.

Iddir: is a typical traditional organization that aims at providing assistance to its members at

times of death of relative or bread winner. It is based on contribution from members. The

contribution can be in cash or in kind, depending on the size and location of the Iddir. In some

9 Source: Figure calculated based on National Bank of Ethiopia various year data.

10 Source: Figure calculated on Association of Ethiopian Microfinance Institutions quarterly bulletin Vol. 3, 2009.

11 Source: Commercial banks currency exchange rate of 13 ETB to 1 USD has been used.

12 Source: a study by Association of Ethiopian Microfinance institutions.

27

areas Iddir also provides credit services over a short period for a seriously sick member of the

Iddir.

Iqub: it is traditional rotating saving and loans association, in which a group of people, usually

in same activities, contribute cash every fixed day and disburse the collected amount to a given

member on a round basis. Decision for who get the money when is based on either on the spot

lottery or already drawn rounds depending on the number of the members. Iqub can be

contributed mostly daily, weekly or monthly.

“Iqub is usually established by an active community member who can be voluntarily collecting

the money” (Emana, 2005).

Iqub is very popular both in the rural and urban areas. Globally, it is also practiced by literate or

illiterate, rich or poor, civil servants or among housewives in the country. It works with cash

being collected from a given members on every predetermined day and handed over to one of the

members based on the spot lottery drawn or predetermined order.

The main rationale joining such association is the commitment for saving large sum of money in

cash for future investment or large outlay such as school fee, house repair, buying furniture etc.

Side by side with guarantor or collateral, societal, business or working area ties are very

important to secure return of once taken shares.

“The maximum loan period for Iqub is a year, and the mean duration is 8 months. But, due to the

collateral requirement of Iqub, only few borrowers have the opportunity to receive loan from

them” (Bezabih et al, 2005).

In some part of Addis Ababa, the capital city of Ethiopia, Iqub collectors are becoming more

professional and organized that they computerized the tracking and registration of members, give

a passbook for daily, weekly or monthly contributions and deduct a certain percentage from each

drawn amount for their service. Mostly, they administer many iqubs of varying share amount

simultaneously. Such kind of iqub mostly exists in big open markets like ‘Mercato’ area or in a

down town where many business shops are clustered together.

28

4.1 THE MISSING DEPOSIT SERVICE PROVIDERS

In Ethiopia, unfortunately, there was neither strong cooperative movement nor a long history of

saving banks. Further, despite its long standing and deep outreach to the most rural part of

Ethiopia, the national postal service does not provide household deposit service.

In most part of Africa, especially west Africa, the significance of strong cooperative movements

during the last three and four decades enables the rural and urban community access to basic

financial service especially saving services. These cooperatives have also played a crucial role in

promoting a saving culture among the society. One of such example is the CamCCUL in

Cameroon. In Ethiopia there are recent development and increase in the cooperative sector, for

example, there are two commercial banks that are formed from cooperative associations namely:

Cooperative Bank of Oromia and Addis Cooperative Bank. However, the sector still has

limitations in its outreach and significance among the active poor in the country.

On the other hand, both in the well developed western societies and most emerging markets,

saving banks are very common. Their role in collecting resources from the household and

investing in profitable venture are visible and vibrant. Peachey (2006) noted that set up either by

public-minded philanthropists of local or national public finance bodies, savings banks are

explicitly designed to provide a safe and reliable home for the savings of the mass population as

well as some basic mechanisms for making payments.

Supported by the availability of well defined capital market; these institutions has promoted local

development and created a pull of depositors fund for investment, which would not be possible

without.

Finally, postal saving has been and is considered as one of the best means to provide financial

service to small depositors both in urban and rural part of most countries. According to the

World Bank (2006) the postal branch network with some 500, 000 branches in developing

countries and twice the number of branches of commercial banks has the potential to be a

powerful distribution platform, especially in rural and remote areas. However, building and

maintaining a network of this dimension is costly and has rarely proven to be profitable.

29

However, the experience of postal savings in many developing countries has been proved

unsatisfactory.

Mauri (1985) expounded post office savings banks as very conservative institutions that suffer

from limited range of financial instruments. He deduced that they are not attractive due to their

very low interest rate on deposit, mostly negative real rate and collected funds usually invested

on government securities or treasury accounts with the central bank due to statutory

requirements; causing drainage of rural farmers deposit instead of benefiting them.

However, despite some unclear issues regarding security and regulation of the service, and

potential partnership with commercial banks, it still remains one of the best options in achieving

local presence and addressing a large mass of population.

In Ethiopia, the national postal service has long standing history and extended branch network. It

was first started in 1894, and in 1908 Ethiopia became member of the universal postal union. It

has now 1065 permanent and departmental sub offices all over the country, almost doubling the

number of commercial bank branches (639) in the country.

However, with this extended local presence, the postal service could a possible option for many

small depositors and rural dwellers in getting a secure place to deposit their money. It could also

play a pivotal role in achieving greater outreach in terms of savings accounts and promoting

saving culture in the remote rural areas where people attaché a significance meaning to postal

service itself.

30

4.2 THE ROLE OF REGULATION ON DEPOSIT MOBILIZATION

PERFROMANCE OF ETHIOPIAN MFIs

The role of regulatory framework, sound and stabile financial system is a precondition for

successful deposit mobilization performance of microfinance institutions.

In Ethiopia, after the first proclamation No. 40/1996 that requires microfinance institutions to

register as business entity and gave the central bank a regulatory and supervisory authority,

microfinance joining the industry is licensed, regulated and supervised by the National Bank of

Ethiopia. And also registered as a commercial share company whereby, they obey to the laws

and conditions of the commercial code of the country.

The first advantage of the ratification was it enables the then credit only, donor supported

microcredit programs to become a full-fledged microfinance business institutions, under which

they are allowed to mobilize deposit from the public and raise private capital from the market,

where few MFIs are entitled to such privileges in other countries.

Proclamation No. 40/1996, section 3 states that the main purpose of a micro financing institution

shall be to collect deposits and extend credit to rural and urban framers and people engaged in

other similar activities as well as micro and small scale rural and urban entrepreneurs.

It clearly puts under section 3, subsection 2 that a microfinance institution can engage in

accepting both voluntary and compulsory savings as well as demand and time deposits;

providing micro-insurance business as prescribed by directive to be issued by the National Bank

of Ethiopia; also they can managing funds for micro and small scale businesses.

The second enabling environment is the regulation had also provided and created a favorable

environment for new entrant microfinance institutions through relaxing the requirement for

minimum capital to set up microfinance institutions.

31

Directive No MFI/01/96 states that MFI applying for a license shall have a minimum paid up

capital of 200,00013 birr (13,000 USD). This is in one way or another move by the government to

encourage new entrants and fast growth of the industry. It can be inferred that setting up a

microfinance institution and mobilizing saving from the public (for example ACSI mobilized 31,

021, 654 USD with a paid up capital of only 13, 000 USD) is much easier than setting up a

commercial bank for which minimum paid up capital is much higher (75 million ETB around

USD 5.8 million).

The third positive implication of the endorsement for mobilizing public deposit is the directive

issued by the central bank clearly sets a minimum saving interest rate14 that microfinance

institution client should get on their saving accounts, after visited and revisited it is now 4%

statutory minimum.

The fourth perceived advantage, however not widely used in favor, was the notion that the

depositors, at least those who know, feels secure knowing the microfinance institutions are being

licensed and supervised by the Central Bank of Ethiopia.

The last advantage of the regulatory environment is the central bank’s effort in conducting

supervision on individual microfinance institutions. With its microfinance supervision

department, it conducts regular off-site surveillances and on-site supervision on individual

microfinance institution.

Through quarterly reporting requirements from each MFIs the central bank keeps track of

financial and operational performance of the institutions and it also serve as a signal if something

goes wrong. Through on-site supervision, the bank plays an important role in disseminating

13

October 2010, commercial banks foreign exchange rate of 16 ETB to 1 USD has been used.

14 The advantage and disadvantage of setting minimum interest rate on saving is highly depends on the market

conditions. The First advantage is it protects depositors, especially rural farmers who don’t have bargaining power

and wider options. Second, MFIs lending interest rate won’t decline drastically during economic turndown due to a

minimum statutory in saving. However, intervention on setting savings rate has its own repercussions. One of such

is it mostly distorts the market power to set its own price if condition that the market is well developed and there

are rational decision making parties.

32

industry best practice and making sure of compliance for the directive and international record

and reporting standards and benchmarks.

4.3 ROLE OF OWNERSHIP STRUCTURE OF ETHIOPIAN MFI’S ON

DEPOSIT MOBILIZATION PERFORMANCE

Good governance in deposit taking microfinance institutions plays a critical role in sustainability

and profitability of the institution and its transparency and accountability to public depositors

and fund sources.

According to Amha (2008) addressing governance issue of Ethiopian microfinance institutions

should be given due importance for the following reasons. First Ethiopian MFIs are allowed to

take deposit from the public. Such depositors have to be protected from mismanagement of their

fund. Secondly, MFIs in Ethiopia has consulted commercial sources of funds from local banks

and rural financial intermediation program (RUFIP) to finance their outreach.

The common types of shareholders in the industry are Individuals, regional government and

Local NGO’s. Under normal circumstances these shareholders are supposed to be a real investors

who put their resources in the microfinancing business, however, with the exception of few

cases, most of the shareholders and owners of the microfinance institutions are nominal

shareholders who does not have any financial stake in the institution.

“Many of the MFIs; through their memorandum of association, have made it clear that

shareholders will not receive any dividend from the profits of MFIs” (Amha, 2008).

The following figure presents the ownership structure and comparative saving mobilization

performance of PEACE microfinance institution.

33

Figure 1 Ownership structure and Saving mobilization performance of PEACE MFI

Such ownership structures are the legacy of previous NGOs or Government development

agencies. During the transformation from credit only MFIs to full-fledged deposit taking MFIs,

the best the stakeholders could do was finding nominal shareholders and representatives and

continue operation till the industry become attractive to private investors. Another possible

argument is both the NGOs and the Government need these institutions under their own state of

influence. However, the role played by the central bank during the licensing process was limited.

Various real ownership structures were not consulted evidenced by the fact that most of the MFIs

in the industry have closely similar ownership structure that was copied from one another.

In one way or another, these ownership arrangements have created lack of interest and

commitment among the real decision makers (shareholders and Board of directors) in monitoring

and follow up of the institutions activities. Moreover, since most of the directors are staff

members and representatives of either the regional government (regional government owned

MFIs) or local non-governmental organizations (Previously NGO owned MFIs), balancing the

financial and social objectives of the institutions are more difficult. With their close ties, it is also

evident that the microfinance institutions it is easy to rely on financial and non-financial support

21% 23% 23% 25%22% 22% 24% 26%

77%

54%

62%

81%

74%

29% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Saving performance of PEACE MFI

Savings to Loans Ratio of PEACE MFI

Percentage growth of Saving

PEACE MFI has been founded in November, 1999 by a local non-governmental organization called agri-service Ethiopia. It is founded with a subscribed and paid up capita l of 400, 000 and 200, 000 ETB respectively. PEACE has a typical ownership strucutre of Ethiopian MFIs; it is owned by agri-service Ethiopia and 14 other Individuals with a share of 16% and 84% respectively. The shareholders have waived ownership rights to PEACE (they are nominal shareholders) and can only transfer shares to other local parties or individuals in similar goals. PEACE has the best track record in keeping loan portfolio clean. It has also high percentage growth of saving . However, its savings to loans ratio for over the years remains relatively the same. Source: Own survey based on PEACE MFI financial

and operational reports .

34

from their owner or founder; which creates a high dependence and unwillingness to explore the

opportunity to mobilize deposit and strive for self-sustainability.

Providing microfinance service demands a lot from the Boards, management and staff members,

however, engaging in deposit service for the public makes the administration and financial

management of the institution very complex. Therefore, the role of ownership structure on

deposit mobilization is crucial. Shareholders orientation towards business like microfinance

institution is highly influenced by their stake at the institution and their ability to balance the

business of microfinance with social mission. Taking this in to consideration, public and private

ownership of microfinance institution should be promoted in the microfinance industry of

Ethiopia.

4.4 SOURCE OF FUNDS STRUCTURE OF ETHIOPIAN

MICROFINANCE INSTITUTION

Source of fund for a financial institution is a critical and tricky issue; for microfinance

institutions it is even very challenging. First, the source of loanable fund affect largely the

behavior of the whole institution, the way the core service and expenditures are handled and the

way management and staff feel about the institution.

Donation, soft and subsidized loanable funds will not influence the accountability, responsibility

and professionalism of MFIs as does deposit or commercial source of funds. The later are very

hard to build. It is also under scrutiny of various stakeholders.

The source of fund structure of Ethiopian microfinance institutions is dynamic. Some might

argue that deposit is not the appropriate way of raising fund when MFIs are on a fast growth

track and achieving greater outreach. But diverting away from deposit mobilization has also its

repercussion on the MFIs.

It forces them to consult other costly source of funds. Moreover, it creates dependence on

subsidy which makes it difficult for the institutions to become self-sufficient in the later stages.

Ultimately, the higher the cost of fund is either the higher charge passed on to the MFI

themselves or it will be covered by other subsidy creating a vicious circle of subsidies.

It should also be taken in to consideration that all of the active poor people are not entrepreneurs

who need credit service; rather the ultimate and greater outreach will be achieved if and only if

the intended financial services (credit, deposit, insurance and oth

after identifying the needs of those poor clients.

The following graph shows the main source of fund structure of the Ethiopian microfinance

institutions.

Figure 2 Source of fund structure of all Eth

Source: Calculated from National B

On the above figure the main source of fund comprises of b

mainly loans from the rural financial intermediation program

term loan made available through IFAD for the support of Ethiopian microfinance institutions. It

is also on the concessionary interest rate basis and has 7 years grace period.

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2008 2007

Source of Fund structure of Ethiopian MFIs (In billions of ETB)

Ultimately, the higher the cost of fund is either the higher charge passed on to the MFI


in to consideration that all of the active poor people are not entrepreneurs


the intended financial services (credit, deposit, insurance and others) are mixed and

after identifying the needs of those poor clients.


Source of fund structure of all Ethiopian Microfinance Institutions over the years.

National Bank of Ethiopia Annual Reports (various years

On the above figure the main source of fund comprises of borrowing from other banks

financial intermediation program (RUFIP). It is a subsidized long


is also on the concessionary interest rate basis and has 7 years grace period.

2006 2005 2004


Savings

Other Deposits

Borrowing from other banks+

Borrowing from non banks

Other long term liabilities++

Paid up Capital(Share holders)

Donated Equity

Retained Earnings

35

Ultimately, the higher the cost of fund is either the higher charge passed on to the MFI client


in to consideration that all of the active poor people are not entrepreneurs


mixed and provided


iopian Microfinance Institutions over the years.

various years).

orrowing from other banks. It is

. It is a subsidized long



Other Deposits

Borrowing from other banks+

Borrowing from non banks

Other long term liabilities++

Paid up Capital(Share holders)

Donated Equity

Retained Earnings

Other long term liabilities section of Ethiopian microfinance institution source of fund is highly

dominated by subsidized fund that has been donated to the microfinance

revolving loanable fund. Over the five years, saving mobilization has been growin

the dominant source of fund for the industry

remained the same due to complex and nominal nature of the ownership structure of the industry.

Subsidized loans from commercial banks and RUFIP have a

The figure below presents source of fund composition of Wassasa microfinance institution for

individual comparison purpose.

Figure 3 Source of fund structure of Wassasa microfinance instituti

2008

In conclusion, the menu of the main source of fund of Ethiopian microfinance institutions is

dominated by subsidized funds from donors; bank loans guaranteed by either the regional

governments (also shareholders of their respective institutions) or interna

granted revolving funds. Deposit mobilization is still in its infant stage.

Wassasa MFI is successful in

mobilizing fund from commercial

sources of funds, especially loans

from commercial banks. It is also a

beneficiary of various loans and

grants from different support

organizations like RUFIP(rural

financial intermediation), Ethio-

Italian ABRDP, CORDID Ethiopia,

CIDR, OSRA, EDF, ICCO and the like.

Source: Based on Wassasa MFI

financial data, June 2010.

section of Ethiopian microfinance institution source of fund is highly

subsidized fund that has been donated to the microfinance

able fund. Over the five years, saving mobilization has been growin

the dominant source of fund for the industry. Shareholders capital as a source of fund


Subsidized loans from commercial banks and RUFIP have also been increasing over the years.

figure below presents source of fund composition of Wassasa microfinance institution for

Source of fund structure of Wassasa microfinance institution as of December,



governments (also shareholders of their respective institutions) or international NGOs and

granted revolving funds. Deposit mobilization is still in its infant stage.

10%

0%

18%

17%

Saving Bank Loans

NGO Loans(Revolving Fund) Paid Up Capital

Donated Capital Retained Earning

mobilizing fund from commercial

of funds, especially loans

from commercial banks. It is also a

beneficiary of various loans and

Italian ABRDP, CORDID Ethiopia,

CIDR, OSRA, EDF, ICCO and the like.

36

section of Ethiopian microfinance institution source of fund is highly

subsidized fund that has been donated to the microfinance institution as a

able fund. Over the five years, saving mobilization has been growing and became

as a source of fund has


lso been increasing over the years.

figure below presents source of fund composition of Wassasa microfinance institution for

on as of December,



tional NGOs and

27%

28%

Bank Loans

Paid Up Capital

Retained Earning

37

This partly due to the fact that fast growth of the industry requires easily available source of

funds and it is partly due to the availability of cheap and subsidized source funds.

Moreover, it’s also the case that the MFIs are too distracted from taking the commitment of

mobilizing deposit from the public. Deposit mobilization from the public needs long and careful

planning in building the right product and trust among the customers. It is proven on many

scholarly grounds that deposit is a stable, cheaper and manageable source of fund for

microfinance institutions.

4.5 INSTITUTIONAL CHALLENGES ON DEPOSIT MOBILIZATION

PERFORMANCE OF ETHIOPIAN MFIS

Mobilizing deposit from the public is neither an easy task nor does it is an escapable part of a

financial intermediation. Microfinance institutions who are allowed to mobilize deposit have to

do so but with preconditions and with the right step. There are different institutional and

environmental factors that have to be considered before going to public deposit mobilization.

According to (Robinson 2001), there are 20 specifically articulated steps (from learning best

practices from other successful microfinance institutions to developing an appropriate strategies

for investing excess liquidity15) that an MFI should follow while thinking of mobilizing deposit

from the public.

Commonly Ethiopian microfinance institutions provide deposit service along with the loan

product package. One of the indicators of such practice is the fact that mostly number of

borrowers is equal to number of depositors. It isn’t mostly the case that a client will approach the

MFIs demanding deposit service. Rather, most of their clients are loans clients and accordingly,

they deposit money either as part of the loans qualification or clients’ later decision to stay in the

program. The following figure expounds the comparison between the number of active

borrowers and active depositors for selected MFIs in Ethiopia for the year 2008.

15

See Robinson M 2001. Mobilizing deposit from the public: Basic principles and Practices. Speed-USAID, 18

Clement Hill Road, Kampala, Uganda.

38

Figure 4 Comparison between No. of active borrowers and No. of active depositors of selected

Ethiopian MFIs

Source: Calculated from Ethiopian MFIs Mixmarket data as of 2008.

Except two MFIs namely, ACSI and Addis microfinance institutions, nearly everyone of the

institution have either exactly the same or a meager difference between the number of active

borrowers and the number of active depositors. This can be generalized to the whole industry due

to the above number of microfinance institution is nearly half of the total industry MFIs. In

addition, the information has been calculated taking MFIs who has reported to Mixmarket data.

More interestingly the potential of saving mobilization as a tool of increasing outreach has been

advocated by many authors. In addition, international best practices show that the number of

depositors should be between 5 to 8 times the numbers of borrowers. However, from the above

figure we can deduce that outreach in terms of number of active depositors and small deposit

account holders of Ethiopian MFIs are very limited, in fact, it is limited to their own borrowers.

The following figure sheds light on the comparative balance between deposit mobilization

against total loans outstanding and total asset of two regional averages and two best practice

institutions as compared to Ethiopian Average. The data is calculated taking the MFIs who have

reported on Mix market.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000Number of active

borrowers

Number of depositors

Out of the total Ethiopian Micr

could at least be representative of the industry and results can be inferred.

Figure 5 Comparison of deposit mobilization performance of Ethiopian microfinance

institutions against regional and best practice averages.

Source: Calculated from Microfinance Mixmarket

As it can be inferred from the figure

MFI industry and 45% of the total outstanding loans, which, as compared to international best

practice and standards, is very low.

microfinance client in Ethiopia deposits an amount of 46 US dollar and maintains only 37

dollar in his/her account. On the

country stood at 11%.

Commonly, the institutions provide two types of saving products nam

in and voluntary saving products.

portfolio and saving mobilization efforts of Wassasa microfinance institution over the years.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Centenary bank BancoSol

126.5%

97.5%

76.9%

Deposit to Loan ratio

Out of the total Ethiopian Microfinance industry, 15 MFIs report of Mixmarket. The average

could at least be representative of the industry and results can be inferred.

Comparison of deposit mobilization performance of Ethiopian microfinance

institutions against regional and best practice averages.

om Microfinance Mixmarket data (2009).

As it can be inferred from the figure deposit has financed 32 % of the total asset of the

industry and 45% of the total outstanding loans, which, as compared to international best

practice and standards, is very low. According to Mixmarket report 2009, on the average a single

hiopia deposits an amount of 46 US dollar and maintains only 37

dollar in his/her account. On the average deposit balance per depositor per GNI per capita of the

Commonly, the institutions provide two types of saving products namely compulsory or locked

in and voluntary saving products. The following figure shows comparison of gross loans


BancoSol African Average Latin American

Average

Ethiopian

Average

97.5%108.3%

66.2%

45%

70.7%61.9%

52.4%

Deposit to Loan ratio Deposit to Asset Ratio

39

ofinance industry, 15 MFIs report of Mixmarket. The average

Comparison of deposit mobilization performance of Ethiopian microfinance

2 % of the total asset of the Ethiopian

industry and 45% of the total outstanding loans, which, as compared to international best

ccording to Mixmarket report 2009, on the average a single

hiopia deposits an amount of 46 US dollar and maintains only 37 US

average deposit balance per depositor per GNI per capita of the

ely compulsory or locked-

figure shows comparison of gross loans


Ethiopian

Average

32%

40

Figure 6 Comparison of Loans against saving mobilization performance of Wassasa

microfinance institution.

In Ethiopian MFIs, the portion of the loan that is financed by saving is low. In addition, the

growth of saving mobilized is also is highly dependent on the growth of loans amount. As can be

seen on the figure the pattern of saving mobilized directly follows the growth pattern of gross

loan portfolio. This is the case because, clients are required to deposit a certain percentage of the

loan they intend to take in a compulsory saving account and, sometimes, it is also the case that

client does not withdraw the whole amount of their compulsory saving until they withdraw from

the microfinance program.

From observation of many MFIs, the organization structure of most of the microfinance

institutions did not accommodate a dedicated department or staff for public deposit mobilization

or market research on the subject. Conducting market research on poor client saving patterns and

designing an appropriate product accordingly is at the center of most successful microfinance

institutions. However, to do so, the institution need to commit resources either in terms

permanent human resources like field saving officers, or hiring external consultants who possess

expertise in the area.

Unfortunately, most of the MFIs in Ethiopia, either due to low capacity or lack of attention to

deposit mobilization do not have a saving officer structure. Saving officers plays a significant

0

10000

20000

30000

40000

50000

60000

70000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Am

ou

nt

Year

Comparision of loans and saving (in thousends of birr)

Saving

Gross Loans

Outstanding

Wassasa MFI provides two types

of saving products: compulsory

and voluntary. The institution

pays saving interest rate of 4%

and 6% on compulsory and

voluntary accounts respectively.

It also compounds monthly on

the voluntary saving account

balance. The figure shows the

trend of loans outstanding and

saving balance of the institution

over the last 10 years.

Source: Wassasa MFI financial

report, June 2010.

41

role in promotion and collecting deposit from the public. A good and accepted saving officer can

trigger the saving culture of a whole community in an area through either word of mouth or door

to door teaching. He / She can also work as a vehicle for building trust. It should be noted that a

loan officer promotion and teaching about saving in the MFI will never brought as much good

result as a saving officer’s promotion. It is because for obvious reason that the former is a

creditor.

Figure 7 Staff composition of PEACE Microfinance Institution.

Staff Profile

Position category 2007 2008

Management 12 20

Loan Officers (Branch Head) 4 4

Auditor 1 2

Executive Secretary 1 1

Loan Officers 6 2

Accountant 16 15

Field Assistant 5 8

Cashier 13 22

Driver 2 3

Security Guard 32 25

Cleaner/Messenger 0 1

Total 92 103

Source: PEACE microfinance institution annual report, 2008.

As it can be inferred from the example above, the organization does not have saving officers.

One of the strategies to collect deposit from the public is to set up a dedicated staff and

department working on market research and promoting of saving from the public.

The third factor most MFIs face is lack of strong management information system. A timely,

efficient and prompt management information system plays a crucial role in microfinance

operations. It however, is very important when MFIs handle tiny deposits. Due to the volume of

transactions, mostly deposit and withdrawal of small amounts, manual management information

is not efficient, however, computerized MIS is costly. Hence, a commitment of resource to build

such a system based on cost benefit analysis is important.

42

Finally, mobilizing deposit does not always pays off without an appropriate liquidity

management strategy. All the deposit mobilized cannot be converted into loans, rather to meet

the withdrawal demand or regulatory requirements, an MFI should maintain port of its deposit

liquid. In addition, excess liquidity is a cost to the microfinance institutions. Therefore, there

should be an appropriate liquidity management tools that an MFI can play with during excess or

shortfall liquidity. Robinson (2001) has identified the common tools for managing excess

liquidity during deposit mobilization, some of them are investing in treasury bills, depositing

money on the interbank deposit market, fixed deposit at a bank, investing in other microfinance

institution or a combination of either or all of the above mechanisms.

MFIs in Ethiopia commonly uses deposit at a bank in current and fixed deposit account, inter-

branch transfer of money (from excess to shortfall and vice versa), and in some cases buying

Treasure Bills. However, lack of interbank deposit market and check clearing system affects the

liquidity management option of the institutions. Moreover, investing excess liquidity in another

profitable venture is difficult due to unavailability of secondary market in the country.

43

CHAPTER FIVE: SURVEYED RESPONDENT RESULT, ANALYSIS AND

DISCUSSION

5. INTRODUCTION

The survey has been conducted in Ethiopia on Wassasa microfinance institution to highlight on

the saving patterns and institutional preferences of its clients. Wassasa Microfinance institution

was founded by a local NGO called Oromo Self Reliance Association. It was licensed and started

operation on September 20, 2000.

In term of outreach, Wassasa is the second largest (Next to Wisdom) NGO supported

microfinance institutions in the country. Its head office is located in Addis Ababa; and it has 18

branches extended throughout and inclusively within Oromia Region; one of the largest region in

the country.

As at June 30, 2010, the institution serves 44, 830 active clients and extends 83.4 million ETB as

loan. Wassasa has been chosen mainly due to its outstanding performance in terms of loans

quality and operational self-sustainability but due to its inadequate performance on deposit

mobilization from the public.

The survey has been conducted during August and September, 2010, in three branches of

Wassasa MFI. The three branches of the institution have been selected based on their number of

clients, location (urban and rural composition) and convenience for data collection. Accordingly,

the sample covered 217 active clients of the microfinance institution. Random sample has been

drawn using the number of active clients of each branches and a standard representative sample

size of 1.7% of the total active client of the branch.

5.1 SOCIO-ECONOMIC CHARACTERISTICS OF RESPONDENTS

Survey of sample existing microfinance clients has been conducted to indentify the saving

patterns of clients. It was exclusively conducted on existing clients of Wassasa microfinance

institution. It is not an attempt to estimate the demand. The survey has been conducted on 3

44

branches offices. A mixture of both genders has been included in the sample survey and urban

and rural clients have also been identified for inference purpose.

Table 7 Distribution of respondents per branches of Wassasa MFI.

Name of the Branch Number %

Dukem 57 26%

Assela 86 40%

Boru Jawe 74 34%

Total 217 100%

The table below shows distribution of respondents based on gender and urban and rural dwelling.

Table 8 Distribution of respondents per gender and rural and urban composition

Item Number % Number %

Male 72 33.2%

Female 145 66.8%

Urban 75 34.6%

Rural 142 65.4%

Total 217 100 217 100

Source: sample survey of respondents, 2010

Gender distribution of the respondents shows that 66.8% is female clients, but this may be

influenced by the institution’s orientation towards social objectives; serving underserved women

borrowers. In addition, 60.4 % of the respondents are rural dwellers.

5.2 ECONOMIC ACTIVITY OF RESPONDENTS

It can be inferred from the table below that most of the respondents livelihood depends on

farming. But it is also the case that a majority of respondents mix economic activity according to

the seasons. That is why the distribution of respondents by economic activity exceeds the sample

size. In most part of Ethiopia it is common to engage in off-farming income generating activities

during the slack seasons. For example, most farmers would engage in animal fattening or

trading. Lastly, there was no one case that has reported remittance as the only source of

livelihood income.

Table 9 Distribution of respondents based on economic activity

Item

Farming Small Business Petty trader Salaried person Remittance

Source: sample survey of respondents, 2010

5.3 SAVING PREFERENCE OF R

Saving at financial institution constitutes the larger pie, it’s due to all of the respondents are

client of the microfinance institution; they maintain both voluntary and compulsory saving

account. On the other hand, preference to save at home also shared

that majority of the clients are female might affect the result; followed by deposit in financial

institutions, and live stock and more grain.

are very common in the rural community of Ethiopia. It is partly due to the speculation that price

will go up in the future; as mostly does due to inflation. However, respondents do

specific mechanism for saving preference; according to the

different saving mechanism simultaneously for different financing needs. .

Figure 8 Respondents saving mechanism preference during excess income

Source: own survey of respondents, 2010.

17%

39%

Respondents saving preference during excess income

Distribution of respondents based on economic activity

Number

141 47 48 27

9 e: sample survey of respondents, 2010

SAVING PREFERENCE OF RESPONDENTS DURING EXCESS INCOME



account. On the other hand, preference to save at home also shared a larger pie (27%), the fact


institutions, and live stock and more grain. Saving financial income on livestock and more grains

ommunity of Ethiopia. It is partly due to the speculation that price

will go up in the future; as mostly does due to inflation. However, respondents do

specific mechanism for saving preference; according to their responses, they tend to mix

erent saving mechanism simultaneously for different financing needs. .

mechanism preference during excess income

: own survey of respondents, 2010.

27%

17%

17%

Respondents saving preference during excess income

At home

On livestock

Household Material and More

grain

At Fianncial Institution

45

%

65.0% 21.7% 22.1% 12.4%

4.1%

ESPONDENTS DURING EXCESS INCOME



a larger pie (27%), the fact


Saving financial income on livestock and more grains

ommunity of Ethiopia. It is partly due to the speculation that price

will go up in the future; as mostly does due to inflation. However, respondents do not have a

responses, they tend to mix

Household Material and More

At Fianncial Institution

46

5.4 LOAN INFORMATION OF THE RESPONDENTS

All of the sample respondents are existing clients of the MFI, therefore, it is obvious that they

have some kind of loan from the given MFI; however, it would be interesting to know how they

save to make these loan repayments. So they were asked their saving preference for loans

repayment and keeping cash at home is still the preferred way of saving and joining iqub is the

second.

Most of the respondents pointed that for larger repayments they prefer joining Iqub in advance.

However, one should note that clients keep cash at home and join Iqub for loan repayment is

might be due to unavailability of attractive deposit product that client can linger on. It might also

be the way the institution position itself. If client thinks of Wassasa MFI for just its loans scheme

and use other semiformal and informal mechanism to save their money, it is how they understand

the services of the institution.

Figure 9 Respondents saving mechanism for loan repayment

Source: Own survey of respondents, 2010.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

At home Joining Iqub Relatives Deposit at other MFIs Bank

Saving method for loan repayment

47

5.5 SAVING INFORMATION OF THE RESPONDENTS

Physical and financial access to deposit service and the cost to maintain the account are decisive

attributes clients’ value. If the cost of maintaining a deposit account is higher than the benefit

they are getting, poor client might switch to a better services or remain in the informal or semi-

formal institutions that they accustomed to.

Therefore, it is interesting to know how much on the average in terms of time, distance and cost

of transportation that a given client of Wassasa MFI would in cure to maintain his/her deposit

account. Knowing these parameters will help the institution to design more accessible and

convenient service point. To address this issue, the sample respondents have been asked the

distance, time and cost of transportation to make each deposit visit to the microfinance

institution.

On the average a single client will spend 40 minute of his/her time to make deposit. He/she also

will travel an average distance of 3.9 kilometer from his/her home and spend average amount of

2 ETB for transportation. However, it is very difficult to generalize this information on the

overall clients of the institution. First the result is highly influenced by the composition of rural

and urban clients; where the former have to travel more than the later. Second, it depends on

what kind of transportation the client has employed; this is true because some of the clients have

reported they use horse and it is difficult to quantify the cost they incur on this mode of

transportation. Therefore, it is advisable that the institution analyze the above attributes among

rural and urban clients separately.

Table 10 Average respondent distance, time and cost to make deposit at Wassasa MFI

Item Number

Average Distance to make deposit( in Km) 3.9

Average Time to make deposit (in hrs) 40 minute

Average cost of Transportation to make deposit (in Eth. Birr)

2 birr

Source: survey of sample respondents, 2010.

48

5.6 SAVING ATTRIBUTES VALUED BY THE RESPONDENTS

Market research calls for identifying what the institution’s clients want and devise the service

accordingly. This is true because all the clients do not have the same needs; same business

activities and same saving behavior and pattern. Therefore the institution has to classify and

identify these needs and try to serve them according to their preferences. Moreover, such activity

should be continuous and timely.

To test this notion the sample respondents have been asked if they trust someone from the

institution to come and collect deposit at their premises and 65% of them favored such kind of

service. However, only 39% of the respondents are willing to pay a certain percentage of their

deposit for the service. Deposit collection service is very common in West Africa, especially the

Ghana SUSU collectors. Adapting such ideas and integrating it as a service package is one

product area that can be explored and developed by the institution. The figure below shows the

distribution of respondent on the above attributes.

Table 11 Saving attributes favored by respondents

Items Number (in

favor) %

Trust someone to collect deposit 141 65.0%

Willingness to pay for collection service 85 39.2%

Group member knowledge about personal saving 119 54.8%

Saving for religious pilgrimages 50 23.0%

Saving for holiday expenses 158 72.8% Source: survey of sample respondents, 2010

The other interesting case was if clients are comfortable if other group members know their

saving account balance and 54.8% of the respondents replied they are not comfortable. Most

financial service customers like to keep their account balances confidential and this is also true

for the microfinance client. Treating MFI clients based on individual needs and characteristics,

instead of group package will help the institution in understanding and retain clients. It should

also take into note that deposit clients are remotely different than loan clients. Loan clients save

mostly just because they took a loan. However, deposit clients use the microfinance service for

the sake of deposit; and most likely such clients would like to keep their balance confidential.

In order to determine two new

planned religious pilgrimages and expenses involving national holidays, 23% of the respondents

replied in favor of saving for relig

And 72.8% of the respondents reported that they keep some kind of cash, mostly at home for

expenses involving national holidays (note that there are at least 9

holidays celebrated in Ethiopia).

5.7 KNOWLEDGE OF SAVING INTEREST RATE AMONG SAMPLE

RESPONDENTS

Knowing interest rate and comparing prices in

return on one’s deposit. To determine the clients behavior in this regard, respondents has been

asked if they know deposit interest rate of the

percentage they are getting.

Figure 10 knowledge of saving interest rate among respondents

Source: own survey of respondents, 2010

It can be the case that most of the clients save at the MFI

that all of the clients are loan clients; which means they must keep a compulsory saving balance

to qualify for loan. And this will immediately leave them without the option to compare prices at

the market and deposit their money at the best payin

institution mixes pure depositors with loan clients the above picture would change

Knowledge of deposit interest rate among respondents

Yes I know I don't Know

n order to determine two new saving patterns, respondents have been asked if they save for


replied in favor of saving for religious pilgrimages, though mostly they keep the cash at home.


expenses involving national holidays (note that there are at least 9 official national and religious

days celebrated in Ethiopia).

KNOWLEDGE OF SAVING INTEREST RATE AMONG SAMPLE

rate and comparing prices in the market is the sign of looking for the best


nterest rate of the institution, and 59% of them know what

knowledge of saving interest rate among respondents

Source: own survey of respondents, 2010

of the clients save at the MFI without return concern or it is



the market and deposit their money at the best paying institution. However, if the

depositors with loan clients the above picture would change

59%

41%

Knowledge of deposit interest rate among respondents

49

been asked if they save for


ious pilgrimages, though mostly they keep the cash at home.


national and religious

KNOWLEDGE OF SAVING INTEREST RATE AMONG SAMPLE

the market is the sign of looking for the best


institution, and 59% of them know what

ithout return concern or it is the case



However, if the Microfinance

depositors with loan clients the above picture would change.

5.8 PURPOSE OF SAVING

Knowing why clients save at the microfinance institution is highly importa

appropriate deposit product that meets the needs of clients. Respondents has been asked why

they save at the Wassasa microfinance institution and investment and emergency purposes took

the lion share where as the least is for marriage purpo

do not mix their available fund for various needs.

Figure 11 Respondents reason of saving at Wassasa microfinance institutions

Source: own survey or respondents, 2010.

However, it is very difficult to

microfinance institution for the above described purposes. Because, first there is no deposit

product that is tailored specifically for such purpose, for example,

to school and second it might be also the

instead of for saving purposes. This is true because all of the respondents are loan clients and in

most cases, the number of active borrowers equals the number of active depositors i

MFIs. The same is true for Wassasa MFI,

supplement and as one package of loan product: as the case of compulsory saving.

the average saving balance per client of Wassasa MFI is only 537 ETB including both

Purpose of saving at the Microfinance Institutions

Emergency Investment

PURPOSE OF SAVING AT THE MICROFINANCE INSTITUTION

clients save at the microfinance institution is highly importa


microfinance institution and investment and emergency purposes took

ast is for marriage purpose. However, this does not mean that client

mix their available fund for various needs.

Respondents reason of saving at Wassasa microfinance institutions

Source: own survey or respondents, 2010.

However, it is very difficult to conclude that clients intentionally deposit money at Wassasa


product that is tailored specifically for such purpose, for example, investment or sending children

second it might be also the case that client save mostly just to qualify for loans,


active borrowers equals the number of active depositors i

ame is true for Wassasa MFI, meaning that saving products are provided as

supplement and as one package of loan product: as the case of compulsory saving.

age saving balance per client of Wassasa MFI is only 537 ETB including both

18%

25%

18%

5%

21%

13%

Purpose of saving at the Microfinance Institutions

Health Expenses Marriage Sending School Funeral Expenses

50

MICROFINANCE INSTITUTION

clients save at the microfinance institution is highly important to design an


microfinance institution and investment and emergency purposes took

this does not mean that client

Respondents reason of saving at Wassasa microfinance institutions

entionally deposit money at Wassasa


investment or sending children

just to qualify for loans,


active borrowers equals the number of active depositors in Ethiopian

meaning that saving products are provided as

supplement and as one package of loan product: as the case of compulsory saving. In addition,

age saving balance per client of Wassasa MFI is only 537 ETB including both

Funeral Expenses

51

compulsory and voluntary savings. Therefore, it is very difficult to deduce that already loans

clients purposely save for a reason at Wassasa microfinance institution.

5.9 INSTITUTIONAL PREFERENCES OF THE RESPONDENTS

Informal and semi-formal intermediaries are widely accepted and practiced saving and credit

service providers in most parts of Ethiopia. These institutions are part of the community, mostly

in the active ones. These institutions are also part of the culture intermingled and developed

along with the life style of the community for a long time.

The sampled respondent have been asked to identify what type of informal institutions they are a

member; it is intended to determine the degree of prevalence and how much amount of money is

in circulation. Most of the respondents are member of one or two institutions for different

purposes. For example, clients join iqub for financial needs such as investment and Iddir for

funeral expenses and insurance. These same clients employ Wassasa microfinance institution for

different purpose, mostly for getting a loan. The following table depicts the client membership in

various informal institutions.

Table 12 Respondents membership in semi-informal and informal institutions

Item Number %

Iqub 125 57.6% Iddir 197 90.8% Cooperatives 24 11.1% Mahiber 61 28.1%

Source: own survey of respondents, 2010.

Mahiber is a form of association either religious (mostly) or community development. It is based

on membership and contribution based on predetermined dates and contribution amount. Mostly,

part of the contribution will be spent on the cause that the Mahiber was organized.

Of the surveyed respondents, annual total money in circulation in Iqub and Iddir amounts to

269,640 ETB (16USD 20741) and 31,308 ETB (USD 2408.3) per year respectively. On the

16

October, 2010, an average currency exchange rate of 16 birr to one dollar has been used.

52

average, per annum, a single microfinance client will get an amount of 2157 ETB (USD 165) as

an Iqub payment which is approximately 4 times his/her average saving balance at Wassasa

microfinance institutions (537 ETB). In addition, this same client will pay 158 ETB (USD 12)

for Iddir as insurance payment constituting 30% of his/her average saving balance at Wassasa

MFI. Therefore, one can vividly realize the significance of these two intermediaries even among

the existing clients of Wassasa MFI. This is only for 217 active clients surveyed. This shows that

if one would calculate the amount in flow within Iqub and Iddir for the whole Wassasa

Microfinance institution clients, it would roughly estimated to be around 103.8 million (44, 830

active clients x ( 2157 in Iqub +158 in Iddir) ETB which is four times the total saving mobilized

by the institution.

In addition, more interestingly, it is very important to find out how important semi-informal and

informal institution to the clients and how they are managing side by side with being the client of

a microfinance institution.

5.10 REMITTANCE FLOW AND PATTERNS AMONG THE RESPONDENTS

Section of the questionnaire was devoted to determine the flow of remittances among the clients,

however, despite few cases of local remittance from relatives, remittances was not common in

the selected research areas or the respondents are not willing to disclose the information. The

amount might also is significant but the clients weren’t comfortable in disclosing it. However,

based on the existing finding from the respondents the amount reported is not material for

interventions at this point.

53

CHAPTER SIX: DERIVED DEPOSIT PRODUCT AREAS USING THE SURVEY

FINDINGS

6. PROPOSAL FOR NEW SAVIGN PRODUCT AREAS

Below there are suggested deposit product ideas that can be developed further. It is just an attempt to

indicate a concrete area of deposit products taking in to account the findings of the survey and indigenous

saving and credit culture of the pro poor community. The suggested areas are related to: fund

management for Iddir Associations, holiday savings and religious pilgrimage savings.

However, the outcome of the intervention will highly depends up on critical success factors both from the

MFIs and the poor side. Intensive market research on semi-formal and informal saving intermediaries is

highly recommended for developing a plausible and appropriate deposit product for poor clients. In

addition, it also depends on the level of innovativeness of the microfinance institution.

6.1 FUND MANAGEMENT FOR IDDIR INTERMEDIARIES

6.1.1 RATIONALE AND KEY FEATURES

The prevalence of Iddir association in Ethiopian community is very high; at least each family is a member

of either the male or female type of Iddir. Among the surveyed respondents 90% of them were members

of at least one Iddir association.

In each urban or rural city there could be a significant number of Iddir associations depending on the total

number of population. Moreover, the contribution per person per annum is material for the microfinance

institution to intervene.

On the average one person will pay 158 ETB (12 USD) per annum for contribution of one Iddir type.

There are cases where a family could have multiple of Iddir based on the purpose. If one assume for

simplicity taking the current total active clients of Wassasa MFI, it has 44, 830 active clients, when one

multiplies this number of clients with the average contribution of 158 ETB per person we will find 7.1

million ETB contribution per annum.

This figure is 30% of the total saving mobilized by Wassasa MFI as of June 30, 2010. More interestingly,

if these could be inferred for MFIs like ACSI who has above 750 thousand clients the result would be

54

impressive. Therefore, managing the fund for Iddir association can be handled by existing microfinance

institutions.

6.1.2 WORKING MODALITIES

The MFI collect each monthly contribution, keep records of the member’s balances and follow up with

late payments. Following the instruction of the committee of the Iddir association, the MFI can reimburse

benefit to the family who has lost a bread winner. Mostly Iddir members present themselves for monthly

payment either in church or specific compound in the traditional Iddir working conditions. The same

method can be adapted to the MFI; members will pay monthly payments at the MFI premises, cutting cost

drastically.

6.1.3 BENEFITS TO THE CLIENTS

In the traditional Iddir an ordinary member has limited power over the monitoring of the fund collected;

decisions related to who gets what and over the approval of loans from these institutions. Corruption of

committee members during procurement of Iddir furniture and fixtures are common. However, if MFIs

take over these tasks, monitoring would be very easy through professional record keeping, tracking of

members and constant reporting. Members can also have a payment option like bulk payment for the year

during high cash flow seasons; instead of contributing monthly.

Moreover, there will be a significant reduction of burden and transaction cost for the Iddir committee

members and cashier. Last but not least interest on the collected amount will also be gained from the

MFIs over the age of the fund.

6.1.4 BENEFITS TO THE MFIs

Taking over this operation should be considered as a huge opportunity for MFIs. First, the MFI will

benefit from a long term and cheap source of fund. More importantly, the MFI can benefit most from the

trust and image among the community built through linkage with this kind of intermediaries. It is their

chance to prove the community that they are worthy of their trust. Moreover, getting a bundle of customer

information regarding their payment history and database also contribute to the regular lending operation

of the MFI. It is also easy to attract more customers as savers than without.

55

The prevalence of Iqub associations in the country is also another significant area that can be

developed as MFI product. Iqub is one of the significant players of financial service in the semi-

informal sector of the country. At this stage, due to lack of sophisticated management

information system and tailor made software it would be difficult to design Iqub as one of MFIs

deposit product. However, it is possible.

6.2 HOLIDAY SAVING SERVICE


Holiday expenses are common source of financial crises in most pro poor families of Ethiopia.

This is mainly due to the frequency of these celebrations (note that there are at least 9 official

religious and national holidays in the country) and normative requirements and cultural

expectation towards heavy preparation in terms of foods and drinks. It might also be related to

the low saving culture of these poor families that after holiday shock result in disruption in the

household financial resources. Moreover, except a few of them the dates of occurrence of such

holidays mostly do not concurrently move with the high and low seasonal cash flow of poor

farmers. For example, the biggest New Year celebration falls on September 11 each year.

However, this date relates to the time just before the rural farmers harvest and brings in high cash

inflow. Therefore, the above deposit service area will highly contribute to smoothing household

consumption.


Contractual saving mechanism is one feasible area for such kind of saving. Moreover, clients can

also save at their own pace through one to one capacity related saving scheme. Designing various

saving mechanism is feasible for such kind of products.

6.2.3 BENEFITS TO THE CLIENTS

Attached purpose and commitment largely determines a person’s saving habits. Designing such

product will enable the poor household to make the required commitment in terms of saving for

56

specific purpose. Moreover, it also serves as a ground for developing the skills for financial

resource and outlays management at the household level. Return on saving for such purpose is

also another advantage. The other interesting benefit could be reduction of temptation to spend

the financial resources on other incidental and unnecessary causes; otherwise not possible if the

cash is saved in other informal mechanism.

6.2.4 BENEFIT TO THE MFIs

One of the advantages to the MFIs is availability of cheap loanable fund. With specific and known

maturity date, the MFI can be able to manage its cash flow for withdrawal needs. To avoid sudden

withdrawal needs from a large number of clients, this type of products should be mixed with other deposit

products.

It can also use the fund for short term lending operations. Moreover, getting a bundle of customer

information regarding their saving history and database also contribute to the regular lending operation of

the MFI.

6.3 RELIGIOUS PILGRIMAGES SAVINGS


Going on religious pilgrimages is a fantasy and honor for many individuals. Realizing dreams especially

religious ones can have a very big spiritual impact on an individual; whether poor or reach. However,

usually the rich can afford to make it happen but the poor can’t. Helping the financially deprived but

devoted religious poor people could be one areas of deposit product service. In Ethiopia both dominant

religions (Christianity and Islam) have a large proportion of the population, almost 50-50%. The Muslim

go to Mecca, Saudi Arabia and the Christians visit various historical Orthodox churches within the

country. Therefore, capitalizing on this significant opportunity the microfinance institution could design

purpose specific deposit product.

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High interest bearing, fixed term and limited withdrawal option saving scheme is one area that

can be explored. Depending on client individual cash flow tendency and capacity, saving options

can be devised. Including lottery options condition that participation secured after the client

reaches above a certain minimum saving balance can also be tested. In addition, to encourage

more saving, such scheme can be linked with loan options and mixed with other deposit services.

6.3.3 BENEFIT TO THE CLIENT

The belief that they can deposit tiny amount and realize their spiritual norm and personal dream would

result in positive emotional and spiritual impact on clients. The probability of winning lottery and getting

extra cash could influence the degree of clients’ commitment to save more. Moreover, interest return on

the saving balance is another advantage that client can envisage. It can also help them manage their

financial resource well.

6.3.4 BENEFIT TO THE MFI’s

Depending on the volume savers, and mixed with other deposit products; such scheme could potentially

raise availability of loanable fund for the institution. The fact that it includes different features like a

lottery scheme would help the institution build a good image among its clients as well as non-client

community members.

In conclusion, there are ample opportunities and product ideas for the MFIs depending on the

context of the region they are working and the cash flow cycle of their specific clients. To realize

such the MFI should take initiative to believe the poor can actually save and do intensive market

research on the poor people existing saving mechanism. However, care should be given when

developing such products in terms of clients needs. It is possible that a client who lives in the

Southern part of the country could have totally different deposit service needs than a client who

resides in the northern part.

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CHAPTER SEVEN CONCLUSION AND RECOMMENDATION

7. CONCLUSION

Local resource mobilization for stable and sustainable economic growth has long been argued in

most development finance experts. Importantly the role of efficient financial institutions in

mobilizing deposit in developing countries is multi-faceted. With limited access to financial

services and wide spread poverty in the population, these institutions can address greater

outreach and foster local development at a deeper scale.

MFIs are one of such institutions with great potential to achieve such objective. Through the

right combination of deposit products and understanding the ultimate needs of their poor clients,

MFIs can build up a stable, reliable and long term source of loanable fund; while meeting the

demands of underserved poor clients.

Microfinance in Ethiopia is relatively young but fast growing sector. Even though the industry is

legally allowed to mobilize deposit from the public, the growth in microcredit is not coupled

with the growth in deposit mobilization. As has been discussed in chapter four, there are many

reasons that hamper the development of this segment of microfinance service. First, the industry

is highly dominated by the notion that credit to every poor will solve poverty problem in the

country. Second, the nominal nature and complex arrangement of the ownership structure create

a disincentive among the shareholders in running the MFIs as financial institutions that mobilize

local and commercial resources and intermediate and allocate them to profitable venture while

maintaining the social mission.

Third, due to lack of saving mobilization the industry is highly dependent on cheap and

subsidized source of funds from both international NGOs and national Government; which put

the long term sustainability of the institutions in question. It is also the case that deposit products

are not tailored to the needs of the poor because they are designed as one package of microloans

(as the case of compulsory saving product and the fact that the number of savers mostly is

exactly same as the number of borrowers proving that clients save just to qualify for loans

instead of for the sake of saving).

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Fourth, unavailability of appropriate organizational structure for deposit mobilization has also

contributed for a low performance. Moreover, lack of strong management information system

and liquidity management opportunities worsen the situation.

On the other hand, evidence on patterns and demand for saving among pro poor people has been

identified through a survey administered on Wassasa microfinance institution. Among the survey

respondents 65% have been rural dwellers and 66% of them are female clients. The finding from

respondent’s shows that the preferred way of saving mechanism is keeping cash at home both

during excess income seasons and for loan repayments. Moreover, on the average a single client

will spend 40 minute, will travel 3.9 km and spend an amount of 2 ETB to make each deposit at

Wassasa microfinance institution.

The degree of prevalence of membership to semi-formal and informal institution among the

existing clients of the MFIs is also very high. It is also interesting to know how clients manage

side by side being member of informal institutions and being client of microfinance institution.

Among the respondents, more than 90 % of them are member of Iddir and around 60% of the

respondents are member of Iqub, two of the most famous semi-formal institutions in Ethiopia.

Moreover, the degree of money in circulation among this institution is also material for future

interventions.

Access to financial services deeply helps the pro poor to manage their financial resources; and

relieve them from abject poverty. However, providing financial service requires sound and

sustainable financial institution that understands the financial needs and service requirements of

the pro poor. One of these is deposit services. The significance of a right deposit service to the

poor is as important as loans services if they are given due attention and tailored to the saving

patterns of the poor.

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8. RECOMMENDATION

Based on the findings and observations, this section highlights and recommends improvement in

the industry for increased performance and quality of deposit mobilization services of Ethiopian

microfinance institutions.

MFIs in Ethiopia should take advantage of the regulatory framework in mobilizing deposit:

Getting the central bank approval to mobilize public deposit is the biggest challenge for many

MFIs in many countries. It is a ticket and big opportunity for MFIs in transforming their lending

activities to a full-fledged financial intermediation. MFIs in Ethiopia should take advantage of

the regulatory environment in mobilizing public deposit.

Dependence on soft loans and subsidies must be minimized and diversification to deposit

mobilization and commercial source of fund should be realized: Subsidized loans and donations

are short term prescriptions for MFIs lending activities. They are not reliable as well as create

sense of dependency on the later part. Long term growth and sustainability will be secured if the

MFIs are able to raise competitive commercial sources of funds from the market at any given

time. The source of fund market for Ethiopian microfinance industry is highly dominated by

concessionary loans like rural financial intermediation program, guaranteed loans from

commercial banks, and other intermittent donations. Such programs have their own life span,

mostly short-term. The industry goes indefinitely with or without such programs. Therefore,

building strong track record in public deposit mobilization is something they can rely on in the

future.

The ownership structure of Ethiopian MFIs should be revisited; private and public ownership

should be promoted: The current ownership structure of the industry has created a loophole in

the monitoring and leading ability of the owners. The nominal nature of the shareholders has

various implications in terms of the strategic decision making and on the future of the

institutions. The choice of source of fund (mostly subsidy and donations) and dependence on

mother NGOs or regional government is the direct result of the ownership structure of the

industry. Therefore, the current ownership should be revisited.

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Industry-wide discussions and debate on the best way of transformation to a real ownership

should be initiated through the central bank and association of Ethiopian microfinance

institutions. Attracting private ownership, commercial banks downscaling, converting to

cooperative type ownership, client share ownership, management and staff share ownerships are

some of the possibilities that should be tested.

Thorough market research on informal and semi-formal saving mechanism should be conducted

by individual MFIs; and findings should be converted into viable deposit products: Informal and

semi-formal saving mechanisms have been the main source of knowledge on poor clients’

preference and behavior towards deposit products and their financial activity. In Ethiopia such

institutions are widely accepted and practiced among the majority of active people. Even among

the existing clients of the MFIs themselves. Documented study of such institutions would be

highly valuable in designing an appealing and appropriate deposit product to the public. The

benefit is twofold. To the client it secures availability of attractive and appropriate product. To

the institutions it enables them to reach out a larger market segments, stable source of fund and

valuable customer information.

Legal framework for semi-formal institutions (Iqub and Iddir) should be developed. Linkages

with microfinance institutions should be considered: Legal framework for semi-formal

institutions (Iddir and Iqub) is important. Absence of such has been a tremendous bottleneck for

the growth of these institutions in the country. For smooth undertaking of contractual obligations

and settlement of legal issues, Iddir and Iqub associations should be given an entity status. Legal

framework assists the institutions to realize their efficiency and growth potential both in their

internal operation as well as with the linkages with other institutions for example, microfinance,

insurance companies and commercial banks.

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