Information
- Author Services
Initiatives
You are accessing a machine-readable page. In order to be human-readable, please install an RSS reader.
All articles published by MDPI are made immediately available worldwide under an open access license. No special permission is required to reuse all or part of the article published by MDPI, including figures and tables. For articles published under an open access Creative Common CC BY license, any part of the article may be reused without permission provided that the original article is clearly cited. For more information, please refer to https://www.mdpi.com/openaccess .
Feature papers represent the most advanced research with significant potential for high impact in the field. A Feature Paper should be a substantial original Article that involves several techniques or approaches, provides an outlook for future research directions and describes possible research applications.
Feature papers are submitted upon individual invitation or recommendation by the scientific editors and must receive positive feedback from the reviewers.
Editor’s Choice articles are based on recommendations by the scientific editors of MDPI journals from around the world. Editors select a small number of articles recently published in the journal that they believe will be particularly interesting to readers, or important in the respective research area. The aim is to provide a snapshot of some of the most exciting work published in the various research areas of the journal.
Original Submission Date Received: .
- Active Journals
- Find a Journal
- Proceedings Series
- For Authors
- For Reviewers
- For Editors
- For Librarians
- For Publishers
- For Societies
- For Conference Organizers
- Open Access Policy
- Institutional Open Access Program
- Special Issues Guidelines
- Editorial Process
- Research and Publication Ethics
- Article Processing Charges
- Testimonials
- Preprints.org
- SciProfiles
- Encyclopedia
Article Menu
- Subscribe SciFeed
- Recommended Articles
- Google Scholar
- on Google Scholar
- Table of Contents
Find support for a specific problem in the support section of our website.
Please let us know what you think of our products and services.
Visit our dedicated information section to learn more about MDPI.
JSmol Viewer
Performance of microfinance institutions in ethiopia: integrating financial and social metrics.
1. Introduction
2. data and estimation strategy, 2.1. the data, 2.2. estimation strategy, 3. results and discussion, 4. conclusions, author contributions, conflicts of interest.
Click here to enlarge figure
Variables | Definition and Measurement of Variables |
---|---|
Outcome indicators | |
Performance score (S ) | Indexes estimated from outcome indicators representing social performance(S ) and financial performance (S ). |
Number of borrowers | Number of active borrowers (thousands) |
Number of depositors | Number of active depositors (thousands) |
GLP | Total outstanding principal due for all client loans (million birr) |
FSS | = 1 if financially self-sufficient and 0 otherwise |
ROA | = [Net operating income, less Taxes/Average assets] × 100 |
ROE | = [Net operating income, less Taxes/Average equity] × 100 |
Average loan | An average loan per client divided by GNI per capita |
Women borrowers | Percentage of women borrowers |
Explanatory variables | |
Age | Firm age = 1 if new (1–4 years) |
Firm age = 2 if young (5–8 years) and | |
Firm age = 3 if matured (>8 years) | |
Asset | Total asset (millions of birr) |
Loan officer | The number of employees mainly managing client loans (thousands) |
Loan officer productivity | Total number of borrowers divided by loan officers (thousands) |
Personnel productivity | Total number of borrowers divided by total number of staff (thousands) |
Yield on gross portfolio | = [Financial revenue/average gross loan portfolio] × 100 (%) |
Portfolio to asset | = [Gross loan portfolio/total asset] × 100 (%) |
Components | Eigenvalue | Proportion Explained | Rotated Components | KMO | |
---|---|---|---|---|---|
Component 1 | Component 2 | ||||
Number of borrowers | 2.86 | 0.48 | 0.569 | 0.84 | |
Number of depositors | 2.26 | 0.38 | 0.577 | 0.74 | |
Gross loan portfolio | 0.48 | 0.08 | 0.585 | 0.69 | |
FSS | 0.18 | 0.03 | 0.592 | 0.64 | |
ROA | 0.14 | 0.02 | 0.607 | 0.61 | |
ROE | 0.07 | 0.01 | 0.529 | 0.84 | |
Rho | 0.85 | ||||
Overall KMO | 0.72 |
Country | Borrowers | GLP (million $) | Average Loan/GNI | Female Borrowers | OSS |
---|---|---|---|---|---|
Angola | 9798 | 7.40 | 27.74% | 56.76% | 113.40% |
Congo, Dem. Republic | 5980 | 13.59 | 57.61% | 47.86% | 89.36% |
Cote d’Ivoire | 4850 | 8.90 | 109.13% | 27.37% | 90.98% |
Ethiopia | 86,213 | 14.84 | 58.22% | 45.76% | 145.73% |
Ghana | 11,463 | 8.54 | 41.92% | 59.31% | 108.26% |
Kenya | 45,304 | 80.26 | 120.10% | 46.33% | 124.72% |
Nigeria | 47,844 | 47.83 | 15.00% | 75.00% | 132.94% |
South Africa | 96,472 | 127.00 | 5.47% | 36.76% | 116.33% |
Sudan | 8673 | 11.33 | 46.50% | 57.66% | 141.00% |
Tanzania | 20,523 | 54.73 | 80.67% | 62.25% | 122.38% |
Variables | VIF |
---|---|
Age | |
Young | 3.40 |
Matured | 5.36 |
Asset | 4.51 |
Loan officer | 4.37 |
Loan officer productivity | 1.39 |
Personnel productivity | 1.21 |
Yield on gross portfolio | 1.08 |
Portfolio to asset | 1.34 |
Fiscal year | 2.53 |
Total | 2.80 |
- Abate, Gashaw Tadesse, Carlo Borzaga, and Kindie Getnet. 2014. Cost-Efficiency and Outreach of Microfinance Institutions: Trade-Offs and the Role of Ownership. Journal of International Development 26: 923–32. [ Google Scholar ] [ CrossRef ]
- Ahlin, Christian, Jocelyn Lin, and Michael Maio. 2011. Where Does Microfinance Flourish? Microfinance Institution Performance in Macroeconomic Context. Journal of Development Economics 95: 105–20. [ Google Scholar ] [ CrossRef ]
- Assefa, Esubalew, Niels Hermes, and Aljar Meesters. 2013. Competition and the Performance of Microfinance Institutions. Applied Financial Economics 23: 767–82. [ Google Scholar ] [ CrossRef ]
- Barres, Isabelle, Tillman Bruett, Lynne Curran, Ana Escalona, Elena Nelson, Dan Norell, Beth Porter, Blaine Stephens, and Maria Stephens. 2005. Measuring the Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring . Edited by Tillman Bruett. The SEEP Network. Washington: The SEEP Network. [ Google Scholar ]
- Bibi, Uzma, Hatice Ozer Balli, Claire D. Matthews, and David W. L. Tripe. 2018. New Approaches to Measure the Social Performance of Microfinance Institutions (MFIs). International Review of Economics and Finance 53: 88–97. [ Google Scholar ] [ CrossRef ]
- Christen, Robert. 2001. Commercialization and Mission Drift: Transformation in Latin America . No. 5. Washington: CGAP (Consultative Group to Assist the Poor), p. 24. [ Google Scholar ]
- Coad, Alex, Agustí Segarra, and Mercedes Teruel. 2013. Like Milk or Wine: Does Firm Performance Improve with Age? Structural Change and Economic Dynamics 24: 173–89. [ Google Scholar ] [ CrossRef ]
- Cull, Robert, Asli Demirgüç-kunt, and Jonathan Morduch. 2007. Financial Performance and Outreach: A Global Analysis of Leading Microbanks. The Economic Journal 117: 107–33. [ Google Scholar ] [ CrossRef ]
- Cull, Robert, Asli Demirgüç-Kunt, and Jonathan Morduch. 2011. Does Regulatory Supervision Curtail Microfinance Profitability and Outreach? World Development 39: 949–65. [ Google Scholar ] [ CrossRef ]
- Daher, Lâma, and Erwan Le Saout. 2013. Microfinance and Financial Performance. Strategic Change 22: 31–45. [ Google Scholar ] [ CrossRef ]
- Daher, Lâma, and Erwan Le Saout. 2015. The Determinants of the Financial Performance of Microfinance Institutions: Impact of the Global Financial Crisis. Strategic Change 24: 131–48. [ Google Scholar ] [ CrossRef ]
- Demirguc-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution . Washington: The World Bank. [ Google Scholar ] [ CrossRef ]
- Green, H. William. 2008. Econometric Analysis , 6th ed. Upper Saddle River: Pearson Prentice Hall. [ Google Scholar ]
- Hermes, Niels, and Robert Lensink. 2007. The Empirics of Microfinance: What Do We Know? The Economic Journal 117: 1–10. [ Google Scholar ] [ CrossRef ]
- Hermes, Niels, Robert Lensink, and Aljar Meesters. 2011. Outreach and Efficiency of Microfinance Institutions. World Development 39: 938–48. [ Google Scholar ] [ CrossRef ]
- Kebede, Hundanol Atnafu, and Wassie Berhanu. 2012. How Efficient Are the Ethiopian Microfinance Institutions in Extending Financial Services to the Poor? A Comparison with the Commercial Banks. Journal of African Economies 22: 112–35. [ Google Scholar ] [ CrossRef ]
- Kereta, Befekadu B. 2007. Outreach and Financial Performance Analysis of Microfinance Institutions in Ethiopia. In African Economic Conference . Addis Ababa: United Nations Conference Center, pp. 1–30. [ Google Scholar ]
- Kipesha, Erasmus Fabian. 2013. Impact of Size and Age on Firm Performance: Evidences from Microfinance. Research Journal of Finance and Accounting 4: 105–17. [ Google Scholar ]
- Luzzi, Giovanni Ferro, and Sylvain Weber. 2006. Measuring the Performance of Microfinance Institutions . Geneva: CRAG—Centre de Recherche Appliquée En Gestion. [ Google Scholar ]
- Mersland, Roy, and Reidar Øystein Strøm. 2008. Performance and Trade-offs in Microfinance Organisations—Does Ownership Matter? Journal of International Development 20: 598–612. [ Google Scholar ] [ CrossRef ]
- Mersland, Roy, and R. Øystein Strøm. 2010. Microfinance Mission Drift? World Development 38: 28–36. [ Google Scholar ] [ CrossRef ] [ Green Version ]
- Pinz, Alexander, and Bernd Helmig. 2014. Success Factors of Microfinance Institutions: State of the Art and Research Agenda. Voluntas 26: 488–509. [ Google Scholar ] [ CrossRef ]
- Postelnicu, Luminita, and Niels Hermes. 2018. Microfinance Performance and Social Capital: A Cross-Country Analysis. Journal of Business Ethics 153: 427–45. [ Google Scholar ] [ CrossRef ]
- Rosenberg, Richard. 2009. Measuring Results of Microfinance Institutions Minimum Indicators That Donors and Investors Should Track . Washington: CGAP (Consultative Group to Assist the Poor). [ Google Scholar ] [ CrossRef ]
- Servin, Roselia, Robert Lensink, and Marrit van den Berg. 2012. Ownership and Technical Efficiency of Microfinance Institutions: Empirical Evidence from Latin America. Journal of Banking & Finance 36: 2136–44. [ Google Scholar ] [ CrossRef ]
- Shu, Cletus Ambe, and Bilge Oney. 2014. Outreach and Performance Analysis of Microfinance Institutions in Cameroon. Economic Research-Ekonomska Istrazivanja 27: 107–19. [ Google Scholar ] [ CrossRef ]
- Tsegaye, Anduanbessa. 2009. Statistical Analysis of the Performance of Microfinance Institutions: The Ethiopian Case. Saving and Development 33: 183–98. [ Google Scholar ]
- Vanroose, Annabel, and Bert D’Espallier. 2013. Do Microfinance Institutions Accomplish Their Mission? Evidence from the Relationship between Traditional Financial Sector Development and Microfinance Institutions’ Outreach and Performance. Applied Economics 45: 1965–82. [ Google Scholar ] [ CrossRef ]
- Wijesiri, Mahinda, Jacob Yaron, and Michele Meoli. 2017. Assessing the Financial and Outreach Efficiency of Microfinance Institutions: Do Age and Size Matter? Journal of Multinational Financial Management 40: 63–76. [ Google Scholar ] [ CrossRef ]
- Wolday, Amha. 2004. Managing Growth of Microfinance Institutions (MFIs): Balancing Sustainability and Reaching Large Number of Clients in Ethiopia. Ethiopian Journal of Economics 13: 62–101. [ Google Scholar ]
1 | ). In the context of this paper, the success of a firm is measured by its effort to attain its organizational goal—in this case, using social and financial metrics. |
2 | , while the data used in this paper is primarily from the Microfinance Information Exchange (MIX) database, the paper has benefited from the data collected by the Association of Ethiopian Microfinance Institute for treating missing values. |
3 | ). In this regard, this study suffers less from unobservable country-level factors, yet we acknowledge the associated shortcoming in terms of understanding the issue from a broader perspective. |
4 | . |
Variables | Obs. | Mean | Std. Dev | Minimum | Maximum | Median |
---|---|---|---|---|---|---|
Outcome indicators | ||||||
Number of borrowers | 153 | 86.3 | 159.6 | 0.27 | 775.4 | 22.3 |
Number of depositors | 153 | 88.5 | 238.0 | 0 | 2213.8 | 21.0 |
GLP (Gross Loan Portfolio) | 153 | 192.3 | 483.8 | 0.18 | 3646.5 | 32.2 |
FSS (Financial Self-Sufficiency) | 153 | 0.64 | 0.47 | 0 | 1 | 1 |
ROA (Returns on Asset) | 153 | 1.37 | 7.19 | −69.7 | 16.7 | 2.07 |
ROE (Returns on Equity) | 153 | 3.95 | 20.54 | −101.02 | 60.69 | 5.6 |
Average loan | 152 | 57.56 | 28.58 | 2.62 | 189.4 | 59.1 |
Women borrowers | 153 | 52.36 | 20.11 | 9.64 | 100 | 54.5 |
Explanatory variables | ||||||
Age | 153 | |||||
New | 0.147 | 0 | 1 | 0 | ||
Young | 0.337 | 0 | 1 | 0 | ||
Matured | 0.516 | 0 | 1 | 1 | ||
Asset | 153 | 270.3 | 709.9 | 0.68 | 5485.1 | 38.7 |
Loan officer | 149 | 0.207 | 0.39 | 0.002 | 2.32 | 0.06 |
Loan officer productivity | 144 | 0.496 | 0.74 | 0 | 9.06 | 0.37 |
Personnel productivity | 152 | 0.179 | 0.16 | 0 | 2.05 | 0.16 |
Yield on gross portfolio | 153 | 3.39 | 37.57 | 0 | 65.24 | 5.3 |
Portfolio to asset | 153 | 69.7 | 16.01 | 4.08 | 128.04 | 72.4 |
Country/Region | Number of Borrowers | GLP (million $) | Average Loan/GNI | % Female Borrower | OSS |
---|---|---|---|---|---|
Ethiopia | 86,213 | 14.84 | 58.22% | 45.76% | 145.73% |
Africa | 22,383 | 21.61 | 72.58% | 45.01% | 116.66% |
East Asia and Pacific | 84,489 | 103.56 | 55.26% | 43.65% | 109.22% |
Eastern Europe and Central Asia | 10,875 | 35.84 | 101.53% | 39.88% | 114.89% |
Middle East and North Africa | 40,025 | 20.85 | 18.50% | 57.63% | 119.87% |
South Asia | 217,941 | 45.15 | 16.86% | 78.18% | 120.58% |
World | 68,211 | 51.44 | 50.19% | 51.82% | 115.99% |
Variable | (1) SUR Estimation | (2) Social Performance (RE) | (3) Financial Performance (FE) | |
---|---|---|---|---|
Social Performance | Financial Performance | |||
Age (reference = New) | ||||
Young | −0.09 (0.09) | 0.42 (0.46) | −0.12 (0.09) | 0.93 (0.45) ** |
Matured | −0.03 (0.11) | −0.62 (0.55) | −0.11 (0.12) | 0.82 (0.64) |
Asset | 0.001 (0.00) *** | 0.0004 (0.0003) | 0.001 (0.00) *** | 0.0008 (0.0004) * |
Loan officer | 1.40 (0.11) *** | 0.07 (0.56) | 1.58 (0.17) *** | −1.55 (1.39) |
Loan officer productivity | 0.21 (0.07) *** | −0.56 (0.34) | 0.16 (0.08) ** | −0.17 (0.41) |
Personnel productivity | 0.36 (0.15) ** | −0.28 (0.74) | 0.32 (0.15) ** | 0.20 (0.65) |
Yield on gross portfolio | 0.002 (0.001) *** | 0.01 (0.003) *** | 0.002 (0.00) *** | 0.006 (0.003) * |
Portfolio to asset | 0.002 (0.002) | 0.01 (0.006) * | 0.02 (0.02) | 0.01 (0.01) |
Fiscal year | 0.002 (0.01) | −0.04 (0.05) | 0.12 (0.11) | −0.14 (0.06) ** |
Constant | −4.45 (19.74) | 79.97 (99.69) | −25.06 (23.32) | 284.0 (121.2) ** |
Observations | 140 | 140 | 140 | 140 |
Chi | 5379.7 *** | 35.61 *** | 3185.33 *** | 25.80 *** |
R-square | 0.91 | 0.21 | 0.95 | 0.16 |
Breusch–Pagan test of independence (Chi ) | 0.043 |
Variable | (1) Average Loan/GNI | (2) Percentage of Woman Borrowers | ||
---|---|---|---|---|
Coeff. | Std. Err | Coeff. | Std. Err | |
FSS | −8.22 | 10.36 | −19.44 ** | 8.28 |
Age (reference = New) | ||||
Young | 11.98 | 10.75 | −15.02 * | 8.50 |
Matured | 3.17 | 13.01 | −23.32 ** | 9.64 |
FSS # Age | ||||
FSS × Young | −1.36 | 12.07 | 11.40 | 9.68 |
FSS × Matured | 13.65 | 11.99 | 22.67 ** | 9.52 |
GLP (measure of size) | 0.02 ** | 0.01 | 0.01 | 0.01 |
FSS × GLP | −0.05 | 0.01 | −0.009 | 0.007 |
Portfolio to asset | 0.49 *** | 0.13 | −0.23 ** | 0.10 |
Fiscal year | −4.92 *** | 0.90 | 0.49 | 0.64 |
Constant | 9897.5 *** | 1820.3 | −889.9 | 1281.1 |
Observations | 153 | 154 | ||
Wald Chi | 7.35 *** | 21.10 ** | ||
Joint test of FSS = 0 (Chi ) | 0.08 | 1.73 |
Share and Cite
Wassie, S.B.; Kusakari, H.; Sumimoto, M. Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics. Soc. Sci. 2019 , 8 , 117. https://doi.org/10.3390/socsci8040117
Wassie SB, Kusakari H, Sumimoto M. Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics. Social Sciences . 2019; 8(4):117. https://doi.org/10.3390/socsci8040117
Wassie, Solomon Bizuayehu, Hitoshi Kusakari, and Masahiro Sumimoto. 2019. "Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics" Social Sciences 8, no. 4: 117. https://doi.org/10.3390/socsci8040117
Article Metrics
Article access statistics, further information, mdpi initiatives, follow mdpi.
Subscribe to receive issue release notifications and newsletters from MDPI journals
Journals By Subject
- Proceedings
Information
Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia
Mulugeta Abuye Ertiro
Department of Accounting and Finance, Wachemo University, Hossana, Ethiopia
Leyla Jemal Mohammed
Add to Mendeley
Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs operating in Ethiopia; the study selected 17 microfinance institutions which are operating in the period 2011 to 2018. The fixed effect model was used after running a Hausman test. ROA was used as a proxy for the financial performance measurement and the study used the internal and external factors. Based on the regression analysis, the internal variable like age of microfinance institutions was showed to be significant variables with positive relationship to ROA and other internal variables such as capital to asset ratio and debt to equity ratio were found to be statistically negatively significant. But operational efficiency, portfolio quality and size of microfinance institutions were found to have insignificant effect on ROA. On the other hand, the only external variable market concentration was insignificant factors of microfinance institution in the study period. Based on the regression outcome, the study concluded that the management of the microfinance institutions may develop sound mobilizing savings campaign strategy in order to collect adequate savings from depositors and mostly operate on membership contribution to enhance MFI’s capital for ensuring unexpected losses and also MFI managers should develop the efficiency of operations from year to year.
Published in | ( ) |
DOI | |
Page(s) | 64-77 |
Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License ( ), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
Copyright | Copyright © The Author(s), 2022. Published by Science Publishing Group |
Microfinance Institutions, Financial Performance, ROA
[1] | Basu, A. Blavey, R. and Yulk, M. (2004). Micrifinance in Ethiopia; Experience and Lessons from sellected African countries. International monetary Fund IMF Woking Paper No 04/174. |
[2] | Muriu, P. (2011). Microfinance Profitability: Does Financing Choice Matter? Birmingham, United Kingdom, 2-24. |
[3] | AEMFI. (2018). Request for Expression of Interest for the implementation of a Shared Core Banking Software (CBS). Addis Ababa: AEMFI. |
[4] | Basu, J. C., & Woller, G. (2004). Microfinance a comprehensive review of Existing of Literature:. Journal of Entrepreneurial, Finance and Business ventures., Vol. 9 (No. 1), pp. 1-26. |
[5] | Melkamu, T. (2012). Derteminants of Operation and Financial Self- Sufficiency: An Emprical Evidence of Ethiopian Microfinance Institutions.. MSc Thesis. |
[6] | Wellage, Nirosha, H. & Stuart, Z.. (2012). Ownership structure and Firm Financial Performance: Evidence From Panel Data in SriLanka. Journal of Business Systems, Governence and ethics Vol 7, No 1. |
[7] | Abebaw, Y. (2014). determinants of Financial Performance: MSc thesis on Selected Microfinance Institutions in Ethiopia. Jimama University, Ethiopia. |
[8] | Alemayehu, Y. (2008). The Performance of Microfinance Institutions in Ethiopia: Acase of Six Micrifinance Institutions MSc Thesis. Addis Ababa University, Ethiopia. |
[9] | Yonas, N. (2012). Determinants of Financial Sustainability of ethiopian Institutions. Addis Ababa University, Ethiopia. |
[10] | Sima, G. (2013). Determinants of Profitability: An Empirical Study on Ethiopian Microfinance institution, MSc thesis, Addis Ababa University, Addis Ababa Ethiopia. |
[11] | Sileshi, M. (2015). Determinants of Financial and Operational SustainabilitybofMFIs in Ethiopia. Addis Ababa, Ethiopia. |
[12] | Ramanaiah, M. venrata, & Mangala, C. Gowri. (2011). Areview of Ethiopian Micrifinance Institutions and their Role in Poverty Reduction. A case Study on Amahara credit and Sving Institution. |
[13] | Meyer, J. (2002). Track Record of Financial Institutions in Assessing the Poor in Asia”. ADB Research Institute Paper No. 49; Website Available: http:// www. Esocialscience. Com/ articles. |
[14] | AEMFI. (2016). Association of Ethiopian Microfinance Institutions Performance Analysis report. Addis Ababa, Ethiopia. |
[15] | Moses, A. O. & Zaguue, N. J. (2017). Financial Performance of Microfinance Institutions In cameroon. Case of CamccUL, Ltd; International Journal of Economics and Finance; Vol. 9, No. 4; 2017, 208-220. |
[16] | Cull, R. Demirguc- Kunt, A. & Mourduch, J.. (2007). Financial Performance and Outreach: aglobal Analysis of leading Microbank. Economics Journal, Vol. 117, PP 107-133. |
[17] | Dechasa, S. C. (2018). Factors Affecting Profitability of Microfinance Institutions. Astudy on SNNPR States. alaita Sodo University, Ethiopia. |
[18] | Abummar, A. (2019). Factors affecting financial performace of oromia credit and saving share company. The case of eastern hararghe branch. Catalog of Economics and Finance. |
[19] | Ashebir, A. (2017). Determinants of Profitabilty: A study on Selected Microfinance Institution in Ethiopia. |
[20] | Wooldridge, J. (2006). Introductory Econometrics: amodern approach, 3rd Edition. South-western cengage learning. |
[21] | Brooks, C. (2008). Introductory ecnometrics forfinance, 2nd edition. New york: United states of America Cambridge University. |
[22] | Jorgensen, A. (2012). " The Pofitability of Microfinance Institution and the Connection of Yield on Gross Portfolio". Emprical Ananlysisi, Copenhagen Business School, Copenhagen. |
[23] | Zergaw, F. (2015) Determinants of micro finance profitability: the case of selected micro finance institutions. Jimma University 90. Jimma: Jimma UNiversity. |
[24] | Dissanayake, D. (2012). The determinants of Return on Assets: Evidence From microfinance Institutions. Kelaniya University, SriLanaka. |
[25] | Algridas, K. (2016). On The Concept of Market Concentration, the Minimum Herfindahl-Herchman index, and its practical Aplication. Vol. 63, pp 525-540. |
[26] | Brihanu, T. (2012). Determinants of Commercial Banks Profitability: An Emprical evidence from the commercial banks of Ethiopia.. addis Ababa University, Ethiopia. |
Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. (2022). Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. Journal of Finance and Accounting , 10 (1), 64-77. https://doi.org/10.11648/j.jfa.20221001.17
Mulugeta Abuye Ertiro; Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J. Finance Account. 2022 , 10 (1), 64-77. doi: 10.11648/j.jfa.20221001.17
Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J Finance Account . 2022;10(1):64-77. doi: 10.11648/j.jfa.20221001.17
Cite This Article
- Author Information
Verification Code/
The captcha is required.
Captcha is not valid.
Verification Code
Science Publishing Group (SciencePG) is an Open Access publisher, with more than 300 online, peer-reviewed journals covering a wide range of academic disciplines.
Learn More About SciencePG
- Special Issues
- AcademicEvents
- ScholarProfiles
- For Authors
- For Reviewers
- For Editors
- For Conference Organizers
- For Librarians
- Article Processing Charges
- Special Issues Guidelines
- Editorial Process
- Peer Review at SciencePG
- Open Access
- Ethical Guidelines
Important Link
- Manuscript Submission
- Propose a Special Issue
- Join the Editorial Board
- Become a Reviewer
- Work & Careers
- Life & Arts
Economic reforms are tempting finance back to Ethiopia and Zambia
To read this article for free, register now.
Once registered, you can: • Read free articles • Get our Editor's Digest and other newsletters • Follow topics and set up personalised events • Access Alphaville: our popular markets and finance blog
Explore more offers.
Then $75 per month. Complete digital access to quality FT journalism. Cancel anytime during your trial.
FT Digital Edition
Today's FT newspaper for easy reading on any device. This does not include ft.com or FT App access.
- Global news & analysis
- Expert opinion
Standard Digital
Essential digital access to quality FT journalism on any device. Pay a year upfront and save 20%.
- FT App on Android & iOS
- FT Edit app
- FirstFT: the day's biggest stories
- 20+ curated newsletters
- Follow topics & set alerts with myFT
- FT Videos & Podcasts
Terms & Conditions apply
Explore our full range of subscriptions.
Why the ft.
See why over a million readers pay to read the Financial Times.
- Switch skin
Op-ed: Ethiopia’s unprecedented macroeconomic reform and future uncertainties
By Adunya Zerihun
Addis Abeba – On 29 July 2024, the National Bank of Ethiopia announced a reform of the Foreign Exchange Regime, introducing a floating exchange rate – a system where the value of a country’s currency is determined by market forces, which can be influenced by trade balance, inflation, interest rate, and above all by factors affecting security and stability. The exchange rate can fluctuate widely due to changes in supply and demand of hard currencies. Central bank can hardly intervene to determine the value of local currency (Birr). The transition from managed float regime (pegging Birr to other hard currencies with periodic adjustments) to free market (float) forex regime disempowers the national bank to protect the value of local currency and manage disorderly conditions that may need government interventions.
We all understand that it was the critical shortage of foreign currency earnings that coerced the government to surrender to the IMF conditions and requirements without having adequate preparation to put on the ground. The economic condition of the country, however, would not allow the government to benefit from this unprecedented policy change. Severe political conflicts and social unrest, weak and corrupt institutions of the government do not seem to effectively manage the huge and complex consequences of the policy change. Of course, the whole burden rests on the shoulders of the people, particularly the majority poor.
Following the government policy decision, the IMF approved a four-year arrangement, granting the country 2.55 billion in special drawing rights (SDR), roughly 3.4 billion dollars, under the extended Credit Facility (ECF). On July 30, 2024, the World Bank (WB) also approved USD 1.5 billion ($1 billion grant and $500 million concessional credit from the International Development Association (IDA)) to support the government’s Home-grown Reforms, and to help boost protections for poor and vulnerable households during periods of economic change. In addition, the WB has announced a total financial package of over $16.6 billion undisbursed and future commitments available over the next three years subject to the WB Board approval of new operations and availability of IDA resources.
The government insisted that the exchange rate reform is critically necessary to overcome the emergence of an unanchored parallel market exchange rate that has given rise to large-scale contraband exports and diverted the country’s foreign exchange earnings away from the formal banking system. The market-based exchange rate reform is, therefore, to address this market distortion and allow banks to exchange foreign currencies. This reform would help entrepreneurs expand exports, boost manufacturing, and lay the foundation for a stronger hard currency position of the country. The government ambition to attract foreign direct investment has also been noted in the reform.
The market-based exchange rate reform (floating rate) is the most ambitious and risky reform. It is ambitious because the market-based exchange rate is expected to restore macroeconomic stability, boost private sector activity, and ensure sustainable, broad-based, and inclusive growth. If it is to achieve these ambitious macroeconomic goals is to be seen.
The question is, can the objective reality on the ground allow these ambitions of unprecedented macroeconomic reform to happen? Prices of essential goods are already high; the unemployment rate is at its highest peak ever; and the country’s balance of payment is excessively negative and widening. More importantly, the industrial and agricultural productions in the country have severely been hampered by incessant internal conflicts, which limits the prospects of export promotion to adequately generate foreign exchanges in a sustainable manner. Obviously, if the banks cannot meet the demand for foreign exchange, the black market will remain significant – worsening the economic situation. Furthermore, even the government has admittedly acknowledged that several challenges will arise out of introducing the new floating exchange rate system.
The policy lacks adequate consultation with relevant professionals and other key stakeholders although the government has expressed its commitment to transparent communication and engagement with stakeholders throughout the implementation of these reforms. The sudden exchange rate reform to market-based (floating) garners attention of several people as it decisively impacts the economic future of the country.
As it stands now, inflow of hard currency is very limited compared to what the economy needs.
Undoubtedly, millions of Ethiopia will never benefit from the market-based exchange rate at least in the few years to come. The youth who are already vulnerable due to high unemployment rates (including graduates from tertiary level education) will suffer significantly as the reform is less likely to lead to the anticipated economic growth and job creation. Millions of unemployed youths will bear the burden of the exchange rate reform’s negative consequences. The new forex regime puts these vulnerable groups at significant risk without guaranteeing substantial improvements to the overall economic situation. The local currency value fell by 100% before reaching its two weeks (August 16, 2024). In just the first ten days after the reform the local currency (Birr) value dropped by more than 85%. The national bank concluded its first auction with a weighted average rate of Birr 107.90 per USD to banks on August 07, 2024. The 30% decline in Birr value on the first day of the reform was immediately followed by substantial price increase in essential goods.
The crisis has already begun to manifest itself. What we don’t know is where and how it ends. The Ethiopian markets are largely captured by speculators who would like to benefit from every emerging crisis. Government actions hardly help control the speedy inflation. As it stands now, inflow of hard currency is very limited compared to what the economy needs. We don’t anticipate any mechanism that helps us slow the speedy fall of the local currency (Birr). The black market is also further dropping the value of Birr by the day although the gap between the formal and parallel markets are getting closer. The parallel market exchange reached over Birr 130.00 per USD in the first week of the reform.
What is most worrying is the rate at which prices of goods are increasing. Some early observation has indicated that the rate of price increment of some goods is faster than the currency decline rate. For instance, the price of one kg of nails on August 1,2024 suddenly increased to Birr 300.00 from its price of Birr 200.00 before two-days. The 50% price increment of nails is going beyond the 30% local currency drop of the day. The price of edible oil increased by 40% in the first two days. Not only price increases, but shops are also hiding imported edible oils in the anticipation that the price will go higher despite the government’s announcement of subsidies.
Ethiopia had already been in a difficult economic position when the reform was announced. The price of basic consumer goods was already skyrocketing. Dropping the value of Birr is like adding fuel to the worsening living conditions. Price of consumer goods began to rise immediately following the announcement. Speculators have started to withdraw saleable goods from the market to create artificial shortages and unnecessarily raise prices beyond the impact of the exchange rate reform. The case at point was that the Addis Ababa city administration announced taking actions on 71 business organisations on August 1, 2024, for the unnecessary price increment on commodities allegedly sabotaging the macroeconomic reform. One week later (on August 8, 2024), the Ministry of Trade and Regional Integration announced taking various legal actions on over 7,600 business organisations including deregistration and imprisonment. However, such government legal actions are temporary and unsustainable. It only shows the unpreparedness of the government to address the inevitable challenges.
The government should have done the policy change gradually and progressively. This sudden shift to a market-based forex regime is dangerous. Several reasons can be noted. The fast-dropping value of Birr in the first week of the policy reform was an indication that the amount of hard currency available in the market was very limited. Banks were competing over this limited supply of hard currency. Balancing foreign currency demand with its supply is a very difficult economic impediment in years to come. Ethiopia experienced a current account deficit of over 12 billion USD before the policy reform. Ethiopia’s export earnings of about 3.5 billion USD cannot suddenly rise to the level required for obvious reasons. For instance, growing coffee, our major export commodity, requires four to five years. That means, while the costs of imports will be rampant because of excessive dependency on imports, the gains from export will be contained at a low level -widening the gap of the balance of payment.
We know that increase in local revenue through increased taxation and reduction of government expenditure are normal requirements for the IMF and the WB both having detrimental effects on the ordinary people.
The inflationary impact affects not only the people (consumers) but also it extends to government spending as more than a third of the budget requires foreign currency. The recent government announcement to increase the budget by about Birr 550 billion for the 2024/25 budget year was the immediate effect of the local currency value drop. It was not a net gain. The budget is meant to address the shortfalls of the previously endorsed budget due to change in the exchange rate regime. This budget increment is largely used to finance subsidies (salaries, Fuel, edible oils, medicines, and fertilisers), which the government calls ‘comprehensive preparations’ to ensure an orderly transition to the new exchange rate system.
Above all, timing is of a great essence in this reform agenda. Peace and security are prerequisites to realise growth and development. The macroeconomic policy reform has taken place at a time when the Oromo Liberation Army (OLA) and the Amhara wing movement called “Fano” are at war with the government. Development activities were already constrained by the on-going conflicts between the government and the ‘freedom seeking groups’ in the most productive areas of Oromia and Amhara National Regional States. Attempts made so far to resolve the conflicts through political means have failed to deliver results. The economy is seriously weakened due to these conflicts. Addressing these conflicts should have been the priority agenda before indulging in this unprecedented macroeconomic policy reform. At the same time, the country suffered from the already prevailing high by the time this new exchange rate reform took place.
The current government policy to increase tax collection will further infuriate the injuries caused by inflation. We know that increase in local revenue through increased taxation and reduction of government expenditure are normal requirements for the IMF and the WB both having detrimental effects on the ordinary people. Since the economy is already weakened, both tax increment and expenditure reduction hardly attain their goals without hurting people. This may insist the government to print more currency to offset the burden which will further mount the present high inflation.
The poor have almost exhausted resorting to competitive consumer goods and almost reached the threshold of having no better choice. Hopelessness is in its highest peak for many of the unemployed youth.
Floating exchange rates theoretically raise exports and foreign direct investment and enhance the country’s foreign exchange reserves thereby accelerating economic growth. As mentioned above, this cannot be practical due to the prevailing civil war, conflict and political unrest.
Life is increasingly difficult for most of the poor. Some civil servants are spending lunchtimes in churches because of their inability to afford the cost (as reported by members of the parliament this year). The poor have almost exhausted resorting to competitive consumer goods and almost reached the threshold of having no better choice. Hopelessness is in its highest peak for many of the unemployed youth. These conditions are too abnormal to go for such a radical and unprecedented macroeconomic policy reform. The government plan (subsidies) to address the negative impact of the policy reform seems like an attempt to treat the symptoms, not the root challenges of the economy.
The government has sufficiently met the rigid IMF and WB requirements to extend loans to Ethiopia. Once the deal is done and the packages of the reform are implemented, IMF has already forecasted that the Ethiopia’s economy will sustain annual growth of near 8 percent, reduce inflation to 10 percent, raise fiscal revenue to 11% of GDP, reduce debt to 35% of GDP, increase goods and services exports to $20bn, boost FDI to $6bn, and enable foreign exchange reserves to reach $10bn (equivalent to 3.5 months of import cover) in the next four-year period. However, this forecast does not seem to happen.
The government recently announced a salary increment for civil servants earning less than Birr 25,000.00 civil servants. It is still doubtful if the salary increment can offset the burden of increased inflation. Civil servants constitute a small portion of the people in need of support. The government does not have the capacity to address the majority of the poor whose lives are disastrously affected except some civil servants and beneficiaries of the Productive Safety Net program (PSNP). If subsidies made to these groups of people can offset the burden to be brought about by the policy reform remains a concern. Majority of the population are left unattended by any form of support program.
Allowing exporters and commercial banks to retain foreign exchange earnings and removing some import barriers may seem to enhance foreign exchange supplies to the private sector and create a more competitive economic environment. But, its actual impact may not always be positive.
Many professionals in the field argue that the reform brings no significant gains except perhaps attracting contrabandist exporters to the mainstream market. In fact, foreign currency shortage is one of the key challenges of the Ethiopian economy, but not the only one as the government would like to persuade us. Given the previous policy, there were other key issues of concern that the business community wanted the government to address before indulging in radical policy reform. These include addressing insecurity caused by the on-going internal conflicts, bad governance, corruption, malfunctioning institutions, and lengthy bureaucratic process to import goods, among others. These impediments cannot be solved by the policy shift to a market-based exchange rate. Rather, these problems will crowd out benefits gained (if any) from the market-based exchange rate regime and constrain to ensure equitable distribution of benefits regardless of individual connections to the system.
The weak institutional capacity of the country is a significant concern. Effective reform implementation requires robust institutions capable of monitoring, regulating, and managing the forex market. However, the existing institutional framework may need to be adequately prepared to handle the complexities and challenges of a market-based exchange rate system. The market-based exchange rate demands strong institutions, among others, to manage proper financial flow, prevent business related risks, collect government revenues, and provide independent legal services. The prevailing weak institutions further exacerbate on-going challenges and problems rather than solving them. The government did not take proper actions to strengthen its institutions as part of the preparedness to combat the challenges coming with the introduction of this unprecedented policy reform.
Allowing exporters and commercial banks to retain foreign exchange earnings and removing some import barriers may seem to enhance foreign exchange supplies to the private sector and create a more competitive economic environment. But, its actual impact may not always be positive. Removing import restrictions could lead to price increases for essential goods, as market-based foreign exchange rates are much higher than the previously controlled rates. The poorer segments of society are likely to suffer as this price increase erodes their income and further exacerbates poverty and inequality. The government temporary subsidies for essential import goods may not be adequate to offset the overall consumer cost increase.
Despite the government claims that it has begun to export wheat production, agricultural production has been on decline primarily due to ongoing conflicts. Supply of fertilisers was obstructed by the widespread conflicts in the last few years. The price of fertilisers and other imported agricultural inputs will significantly increase due to the newly introduced forex exchange rate regime. The government commitment to subsidise fertilisers will unlikely offset the total price increment brought about by the new policy reform. The market-based exchange rate will only be disincentive to the farming community. The already impoverished smallholders are pressed to carry the additional burden of the policy change.
In conclusion, the unprecedented macroeconomic policy is likely to result in more problems and challenges than benefits and opportunities to the majority population. The government decision was majorly driven by the dire shortage of foreign currency and limited debt service. Peace and security, and robust and adequate institutional and economic preparedness to face the adverse consequences of the forex exchange reform should have preceded the reform agenda. The floating exchange rate may result in Stagflation – the combination of slow economic growth, high unemployment, and a sky-rocketing prices of goods and services for some years to come. This dangerous and risky policy reform may trigger popular revolt against the ruling regime with unpredictable consequences to this economically weak and politically fragile country. AS
Adunya Zerihun, is an economist with extensive background in civil society as a development practitioner.
Strategic Sanctions: A Necessary Evil for Peacemaking in Ethiopia
Navigating complex geopolitics of the horn: the ethiopia-somaliland mou and regional dynamics, misplaced priorities: infrastructure gains amid political, humanitarian challenges, echoes of mekelle: tplf factions and the quest for legitimacy after tigray war, lt. gen. tadesse vows to prevent political disputes from threatening security in tigray, rejects external interference, deadly assault in segen district of konso zone claims at least 13 lives, inflicts heavy damage on gov’t properties and public infrastructure, related articles.
IMAGES
COMMENTS
2. Literature review. Researchers grouped all endogenous and exogenous factors affecting financial development in to five groups. These are the interference of the government, legal tradition, institutions, openness policy and political economy factors (Voghouei et al., Citation 2011).By comparing the level of price and quantities, particularly the interest rate spread and stock-flow, one can ...
2.2. Financial inclusion in Ethiopia. Financial inclusion is relatively low in Ethiopia. Only 35% of the adult population has accounts at banks or other formal financial institutions, and below 5% of the adult population has a mobile bank account (Kappeler et al., Citation 2018).Seventy per cent of micro-enterprises and 40% of medium enterprises are financially constrained (European Investment ...
Generally, public banks dominate the financial industry in Ethiopia. The Commercial Bank of Ethiopia (CBE), the largest bank in the industry, accounts 38.8% of the branch networks, over 53.3% of the outstanding loans and mobilizes about 66.4% of the deposits of the commercial banks (NBE, 2014). However, the progress observed by the private ...
of a financial sector modernization roadmap to meet the overall government reform plans. The report provides an insight on operations and challenges in Ethiopia's financial sector and proposes a framework to help open and transform the current system to meet the country's future market-oriented growth plan.
This review paper aimed to assess financial dis-tress situation of financial sectors in Ethiopia. Financial distress describes a condition where individuals or firms are unable to pay their obli-gations or suffering with financial problems. Usually, workers of a distressed firm have lower morale and less productive.
The Current State of Ethiopian Financial Sector and Its Regulation: What is New after a Decade and Half Strategy of Gradualism in Reform, 2001-2017 February 2017 DOI: 10.13140/RG.2.2.13411.35369
The main reason why financial institutions in Ethiopia do not have a bank account is the lack of funds and the fact that financial institutions are too far away, while religious reasons and lack of trust in financial institutions are the least. ... and Laurent Weill. 2016. The determinants of financial inclusion in Africa. Review of Development ...
The financial sector and its role in the process of economic development ha ve attracted notable attention since. the early 1990s. Long-term sustainable econo mic growth depends on the ability to ...
This brief summarizes the ESS Financial Inclusion survey report, emphasizing on key findings on account ownership, gender gap, financial behavior and knowledge of financial institutions and products.1 1 This brief is a summary of the Ethiopia Socioeconomic Survey- Financial Inclusion report. Ethiopia - Socioeconomic Survey 2018-2019 (worldbank.org)
DOI: 10.7176/RJFA/10-5-01. Publication date:March 31st 2019. 1.1. INTRODUCTION. This article provides an overview of the Financial Sector Development and Economic Growth of the country and begins ...
Overview. This brief — Assessing Progress and Priorities: Ethiopia's Financial Inclusion Journey, 2011-2022 — analyses the themes of access, usage and financial health using the latest edition of the World Bank Global Findex Database (2022) alongside other large datasets and resources such as those from the GSMA, the OECD, ILO, as well as the National Bank of Ethiopia, Ethiotelecom, and ...
Since their inception in the 1970s, microfinance institutions (MFIs) have received increasing attention both from policymakers and academic circles. Using unbalanced panel data (2000-2017) from Ethiopia, in this paper, we investigated the performance of MFIs and its determinants on the one hand and whether or not mission drift exists on the other hand. To this end, we employed seemingly ...
The official inflation records were 2.5% up to 2004 and 15.1% thereafter. While it was envisaged for 11.1% economic growth, the performance achieved was 10.9%. The inflation rate for consumer prices in Ethiopia moved over the past 55 years between -9.8% and 44.4%. For 2021, an inflation rate of 26.8% was calculated.
Financial sector development has played a key role in Ethiopia's economic development, particularly since the launching of the first Five-year Growth and Transformation Plan in 2010. The gradualist approach that Ethiopia followed in reforming its financial sector seems to have borne fruit as no single commercial bank has gone bust so far ...
Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs ...
Ethiopia extensively as consultants in the financial sector (Ageba and Blenen, 2008) After 1994, when private banks were allowed to be established a number of private financial institutions was established. Currently, the Ethiopian financial system consists financial institutions such as the
Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent ...
Abstract: The objective of this study is to examine the structure of the financial system in Ethiopia by reviewing the institutional framework related to the financial affairs of the country. The findings of the study indicate that the design of the financial system of Ethiopia is bank based, comprises a set of formal, semi-formal and informal ...
The general objective of this paper is to review performance of formal rural financial Institutions in Ethiopia. The specific objectives are: To review performance of formal rural financial Institutions in terms of outreach, financial sustainability and welfare impact To review challenges faced by these Institutions.
Discussion Paper No. 2001/55. Ethiopia's New Financial Sector. and Its Regulation. Tony Addison 1and Alemayehu Geda2. August 2001. Abstract. Ethiopia is one of a number of SSA economies that ...
At the same time, 41 percent of Ethiopians borrowed money from various sources, but only 11 percent borrowed from financial institutions. According to Ethiopia Financial Sector Development (Citation 2019), there is no macro-prudential oversight function in Ethiopia. Macro-prudential supervision emerged as a lesson from the 2008 global financial ...
Financial inclusion in Ethiopia. Financial inclusion is relatively low in Ethiopia. Only 35% of the adult population has accounts at banks or other formal financial institutions, and below 5% of the adult population has a mobile bank account (Kappeler et al., 2018).
Among the latter, financial markets are most familiar with South Africa, Kenya and Nigeria. In each, reform of the real economy is under way but has hit the constraints of patronage politics.
Financial institutions' corporate governance differs from that of non-financial institutions, due to the larger risk that financial enterprises provide to the economy. ... Ethiopia. Financial markets, corporate finance governance, business strategy, entrepreneurship, small business developments and accounting information system are his areas ...
The local currency value fell by 100% two weeks into the forex regime reform (Illustration: Addis Standard) By Adunya Zerihun. Addis Abeba - On 29 July 2024, the National Bank of Ethiopia announced a reform of the Foreign Exchange Regime, introducing a floating exchange rate - a system where the value of a country's currency is determined by market forces, which can be influenced by ...