PERFORMANCE ANALYSIS OF MICROFINANCE INSTITUTION

AND ITS SUSTAINABILITY AND OUTREACH (CASE STUDY IN

SHASHEMENE TOWN)

SUBMITTED BY:
FEYISA BEDANE
ID NO 02287/01

ADVISOR: DR WODAJO W/GIORGIS (PHD)

A RESEARCH PAPER SUBMITTED FOR PARTIAL FULFILLMENT OF

RESEARCH PROJECT REQUIREMENT FOR BA DEGREE IN ECONOMICS
COLLEGE OF BUSINESS AND ECONOMICS DEPARTMENT OF ECONOMICS

MAY, 2011
JIMMA, ETHIOPIA

0
 Abstract
The prevalence of poverty has been a common phenomenon in Ethiopia. The prevailing
operation of the conventional financial institutions in Ethiopia is in efficient in providing
financial services to the poor. The challenge Ethiopia is facing to day is to reduce poverty
and achieve sustained economic growth for healthy national development. One of the
economic policies of the country is introduction of MFIS in the country. Currently micro
financing is being practiced in the country as a tool to deliver financial services to the poor
with the objective of attacking poverty.

The objective of this study, therefore, is to find out whether the delivery of financial services
of the MFIS has made changes on living standard of the clients. Secondary data was gathered
from MFIS reports and literatures.
This data was both quantitative and qualitative in nature and descriptive type of data analysis
was applied in the study.

The performance was analyzed based on two approaches first the sustainability of the
institution with income, which in turn has effects on nutritional status, employment
generation, savings and empowerment among others. Second the performance was also
evaluated based on MFIS outreach having the conceptual frame work that if both outreach
and sustainability have been enhanced then the program intervention is judged to have a
positive performance as it has created the financial market to the poor.

I
 Acknowledgement

First of all I would like to praise Allah the almighty who helped me in every direction while I
am preparing this research paper.
Secondly I would like to express my deepest gratitude to Dr. Wodajo W/Giorgis (PhD) for
his great advice and insightful comment and offering me useful hints through this research
preparation.

Lastly, but not least my heart thanks goes to W/ro Firenesh Kumsa who helped me by typing
this paper.

II
Acronyms
CBE- Commercial Bank of Ethiopia
BDE- Development Bank of Ethiopia
MFIS- Micro finance Institutions
OCSSCO-= Oromia credit and saving share company
RUFRP- Rural financial Report paper
ORS- Oromia Regional State
NGOs- NON –Governmental organizations

III
List of Tables
Table 4.1. Demographic characterizes of respondent ……………………………..11
Table 4.1.1. Marital status of the respondents...……………………………………12
Table 4.1.2. education level of respondents ……………………………………….12
Table 4:1:3 Business characteristics of the respondents ………………………...... 13
Table 4.2. income improvement of the operators …………………….……………14
Table 4.2.1 operation place of microfinance respondents ………………………….15
Table 4.2.2 Reasons for the lack of appropriate market………………………….....16
Table 4.2.3 Source of credit for micro finance institutions …………….…………..18
Table 4.3 form of working activity of MFIS …………………………………..……19
Table 4.3.1 Number of borrowers (depths) ………………………………………….20
Table 4.3.2 number of clients (breadth) ……………………………………………..21

List of Figures
Fig 4.3 Monthly income category of respondents………………………………….14
Fig. 4.2.1 Initial capital Category of the respondents………………………………17
Fig 4.2.1 Reasons for lack of credit facilities ………………………………………19

IV
 Table of Contents
Abstract......................................................................................................................................I
Acknowledgement....................................................................................................................II
Acronyms.................................................................................................................................III
List of Tables...........................................................................................................................IV
List of Figures..........................................................................................................................IV
Table of Contents......................................................................................................................V
Chapter One...............................................................................................................................1
1. Introduction............................................................................................................................1
1.1 Back ground of the study.................................................................................................1
1.2 Description of the study area...........................................................................................2
Population..............................................................................................................................3
1.3 Statement of the problem.................................................................................................3
1.4 Objective of the study......................................................................................................4
1.5 Significance of the study.................................................................................................4
1.6 Scope of the study............................................................................................................5
1.7 Limitation of the study.....................................................................................................5
1.8 Organization of the Study................................................................................................5
Chapter Two..............................................................................................................................6
2. Literature Review..................................................................................................................6
2.1 Definition and conceptual frame work............................................................................6
2.1.1. Definition.................................................................................................................6
2.1.2 Conceptual Framework.............................................................................................6
2.2 The Emergence /development/of MFIS...........................................................................8
2.3 Sustainability...................................................................................................................8
2.3.1. Out reach..................................................................................................................9
2.3.2 Empirical Evidence...................................................................................................9
Chapter 3..................................................................................................................................10
3. METHODOLOGY..............................................................................................................10
3.1 Method of sampling.......................................................................................................10
3.2 Method of Data analysis................................................................................................10
CHAPTER FOUR...................................................................................................................11
4. Data Analysis and presentation...........................................................................................11
4.1. Overview of credit and saving share company (DCSSCO)..........................................11
4.1.1 Objectives and strategy...........................................................................................11
4.1.2 Demographic characteristics of the respondents....................................................12
4.1.3. Characteristics of the business...............................................................................14

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 4.2 Income Generation.........................................................................................................14
4.2.1 Accessibility of Training problems........................................................................16
4.2.2. Market and production place problems.................................................................16
4.2.3 Market Related Problem.........................................................................................17
4.3. Capital related problems...............................................................................................18
4.3.2 Problem related to-co-operative activities..............................................................20
4.3.3 Financial sustainability...........................................................................................21
4.4 Institutional Sustainability.............................................................................................21
4.4.1 Outreach..................................................................................................................21
4.4.2 Gender Gap.............................................................................................................23
4.4.3 The contribution of Oromia credit and saving Share Company (ocssco)...............23
4.4.4 The major challenges that affect ocssco and its program.......................................24
Chapter Five.............................................................................................................................26
5. Conclusion and Recommendation.......................................................................................26
5.1 Conclusion.....................................................................................................................26
5.2 Recommendation...........................................................................................................27
References................................................................................................................................28

VI
 Chapter One
1. Introduction
1.1 Back ground of the study
Poverty is a common problem of almost all developing countries. As a result their main and
immediate objective is to strive to break the vicious cycle of poverty and to reduce the
magnitude and extent of poverty. In this regard, the microfinance institutions recently gain
more and more acceptance. Currently, these institutions play a very vital role in global
poverty reduction debates microfinance could be a powerful strategy or instrument among
several others for alleviating poverty in Ethiopia.

Ethiopia is one of the poorest countries in the world characterized by low per capita income
and highest population pressure. The prevalence of poverty has been a common phenomenon
in the Ethiopian society. Although the agricultural sector which is the mainstay of Ethiopian
economy, is inadequate to feed the growing population. The 1997 world development report
of the world Bank put Ethiopia second from the last comparing it with 133 countries of the
world based on per capita income which is %100. Nearly 47% the rural populations are
living below the poverty line compare to 33% in the urban areas (RUFRP, 2001).

Consequently few recent ideas have generated as much hope for alleviating poverty in low
income countries as the idea of microfinance. Microfinance promised both combating
poverty and developing the institutional capacity of financial systems through finding ways
to cost effectively lending money to poor households and it exploits new contractual
structures organizational forms. This reduces the riskiness and costs of making small
uncollateralized loans also demonstrated that even poor households can save in substantial
qualities (Morduch, 2000).
Therefore microfinance is chosen as one of the most efficient instrument to promote
economic development and to fight poverty in poor countries. Numerous micro finance
institutions (MFIS) all over the world have proven that financial services can be offered on
sustainable cases with high outreach. Around the world microfinance institutions are
increasing seen as the new jobs creator (41-Bagdacti and Bruntrup, 2005).

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Similarly by considering the importance of MFIS, the government of Ethiopia recognized
and supported money innovative microfinance operation. Then new microfinance
technologies have been developing in Ethiopia since past decade that has lowered the cost of
lending to entrepreneur and households with limited means to alleviate the deep-rooted
poverty. This improved income and consumption level of the majority.

The microfinance institution share company currently operated in Shashamenne town was
investigated in this study.

1.2 Description of the study area

Historical Aspect of shahemane town
Shashemane town was founded in 1903. The town obtained this name after the women called
“Shashe” who used to sell traditional drinking alcohol called “Teff” and “Farso” Currently, it
is a capital city of Western Arsi Administration Zone. What makes the town different from
others is that she has five door routs in which thousands of vehicles and twenty five to door
rotes in which thousands of vehicles and twenty five to fifty thousands of merchants are enter
daily. These five door routes are:
 From shashemane to Addis Ababa 250km
 From shashemene to Bale Robe 175km
 >> >> to Moyale 525km
 >> >> to Arbaminch 250km
 >> >> to wondogenet 18km
Now the town is important for administrative, commercial, cultural and religious center and
noted for the skills of its many craftsmen (Bulletin)
Location of the town.
She shashemane town is located in the east riftvalley of Ethiopia in western Arsi zone with
the area of 3714.96 hectare and its absolute location is 7 0-130 latitude in north and 380-370 of
longitude in the eastern. Its average elevation is about 1940 above sea level.
Climates
According to the bureau of planning and economic development 2001/2 annual statistical
bulletin, the town has sub tropical or locally wenadega and has 15c 0 -23c0 of annual
temperature and 1500-2000 ml rain fall.

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Infrastructure
Shashamane is served as a center of telecommunication power of southern Ethiopian branch.
It has 24 hours of electric power services and good network of internal roads. Recently the
city is served for 6453 peoples in automatically phone, for 4186 people mobile cell phone for
1149 people internet facility and has plant to expand wireless network phone and more
expansion of the asphalt road coverage rehabilitation and construct bridge and water services.

Population
The shashamene town with the leading population has population of 150.000 for the year
2000 E.C CSA and total number of male 7900 and 7600 female in the total 12 kebele of
town. According to the data obtained form CSA, the current growth rate of the population is
3.1%.
Economic activaties of sheshemane town.
In shashemane town various economic activities are under taken like the other parts of the
country can be done. These activities can be broadly categorized in to formal and informal
sector. As data indicate, the informal sectors are mainly of traditional and old form of
“injera” and traditional drinking alcohol like “tejj” and related activities.
Besides to these, industries, handcrafts, tourism services and trade are considered to be the
main formal sector.
These formal sectors have wide economic scope, wide employment opportunity, contribution
to economic and social development of the town.

1.3 Statement of the problem

In many of developing countries microfinance institutions are accepted rightfully as the most
important means in alleviating poverty and improving the standard of the poor.
Recognizing this, the government of Ethiopia encourages these institutions by giving legal
entities and facilitating a conducive environment to ensure their sustainability and outreach
performance continuously. Despite their contributions in addressing the problem of the poor
and implementing their activities, they may face difficulties, which may hinder their
performance so it may hinder the poverty alleviating activities of the poor.
This study was attempt to deal with that whether the specific problems done by previous
study on Ethiopia case are really the problem in shashamenne town.
To what extent the problem is faced and also to assess other factors that haven’t taken
consideration in the past the study such as production and market places problem cooperative
problem was assessed.

3
The question is therefore, how to promote the MFI in Shashamenne town identifying their
key constraints that have been and are bottle necks to the development of the sector and what
should be done to address these constraints and put the sector in the rapid growth path, is the
facial point of this paper.

1.4 Objective of the study

The study has it shown general and specific objective general objective of the study. The
general objective of the study is to analyze the performance of microfinance institution by
considering the sustainability and outreach of the institution in economic activities in
shashamenne town to improve the living standard of the people. Also the study is designed to
have the following specific objectives.
 To look at the microfinance institution’s sustainability and outreach to the poor
people.
 To analyze the contributions of microfinance in poverty alleviation and to know the
beneficiary from microfinance.
 To identify challenges faced by microfinance institutions not to operate efficiently.
 Finally to recommendation and suggest what should be done to solve the problem of
the sector.

1.5 Significance of the study

The result of this study is important for microfinance institutions and for concerned
governmental bodies in
- identifying the different problems that face microfinance institutions in
shashamenne town and propose the problem to the concerned governmental
bodies to search solutions for the problem.
- After studying the share of the sector in improving the income level of the
poor people and reducing unemployment in the town propose such benefits of
the sector to the concerned governmental bodies to give considerable attention
to the expansion of the sector.
- It will have a great value for those who want to undertake further study on
related topic
- Give suggestions and recommendations for those who engaged in the activity
how they can solve some minor problems by themselves.

4
1.6 Scope of the study
The research was limited the performance of microfinance institution with respect to
sustainability and outreach in shashamenne town. This is because microfinance is chosen
us one of the most efficient instrument to promote economic development and to fight
poverty in poor society.

1.7 Limitation of the study

One of the limitations of the study was lack of well organized data in side of the respective
office is the main challenge confronted by the researcher. Due to financial constraints it is too
large and out of the research to include all the branches in the region. In short the limitations
of the study were:
- Lack of organized data
- Shortage of materials and
- Financial constraints

1.8 Organization of the Study

The paper is organized as follows.

Chapter One reviews introduction of the study.
Chapter Two reviews literature on MFIS
Chapter Three reviews methodology of the study
Chapter four reviews data analysis and presentation
Chapter Five conclusion and recommendation

5
 Chapter Two
2. Literature Review
In this part attempt is made to review global findings as well as the research work in the
content of Ethiopia pertaining to MFIS

2.1 Definition and conceptual frame work

2.1.1. Definition
Microfinance institutions are among the formal financial institutions targeting the poor both
in urban and rural areas and providing microfinance service (kebede et al. 2002).
Microfinance is referred to as “a small scale financial service rendered to the rural and urban
poor, provides credit for self-employment and small business and includes saving and
technical assistance” (shete.1999).

2.1.2 Conceptual Framework

Poverty is the major problem in most developing economies. In these economies it is argued
that among others, absence of access to credit is presumed to be the cause for the failure of
the poor to come out of poverty. Meeting the gap between demand and supply of credit in the
formal financial institutions frontier has been challenging (Vonpischke, 1991).

In fact, the gap is not aroused merely because shortage of loan able fund to the poor, rather it
arises because it is for the formal financial institutions to lend to the poor. Lending to the
poor involves high transaction cost and risks associated with in formation asymmetries and
moral hazards (Stiglitz and Weiss, 1981).

Nevertheless, in several developing economies governments have intervened through

introduction micro-finance institutions to minimize the gap and then allow the poor to access
credits. There are different arguments concerning how to evaluate the performance of micro-
finance institutions. Meyer (2002), citing from zeller indicated that there is what is called
“critical micro finance triangle” that we need to look at to evaluate micro finance institutions
based on their objective. Here the concerns of the triangle represents out reach to poor
financial sustainability and well fare impact (IBID).

6
Out reach at glance means the number of clients served, but Meyer (2002) noted that out
reach is multidimensional concept. In order to measure out reach we need to look in to
different dimensions. The first is simply the number of persons now served that were
previously denied access to formal financial services usually these persons will be the poor
because they con not provide the collateral required for accessing formal loans are perceived
as being too risky to serve and impose high transaction costs on financial instructions
because of the small size of their financial activities and transaction women often face greater
problems than men in accessing financial services. So number of women served is measured
as another criterion. Although difficult to measure depth of poverty is concern because the
poorest of the poor face the greates access problem. Some measure of depth of out reach is
need to evaluate how well MFIS reach the very poor (IBID).

Finally the variety of financial services provided is the criterion because it has been shown
that the poor demand and their welfare will be improved if efficient and secure savings,
insurance remittance transfer and other services are provided in addition to the loans that the
predominant concern of policy makers (Navajas et al; 2000).

Rural income fluctuates form season to season in response to whether shocks and related
agricultural activities. Due to the risk affecting income level and consumption poor rural
households in developing countries demand access to financial services to help stabilize
income and consumption.(zeller.etal.1997).
Since from house earn income from different sources. It is important to aggregate from the
different sources and include the different factors responsible for income generation. The
major sources of income are crops and live stock production which are affected by
environmental factors such as soil, rainfall and temperature (kebede et.al 200).
Also wage income which is affected by institutional factors such as labor market, labor
mobility, wage policy etc is another source of income. Institutional factors play key roles in
terms of finance, markets and research and extensions services, which affect innovation and
technologies both introduction and business sector with ultimate impact on the utilization of
credit received from microfinance institutions. (IBID)
Another key factor determining the house hold income is micro business or small scale
enterprise which provide alternative of complementary job opportunities for both women and
men in rural and urban areas. The role of microfinance institutions is considerable in creating

7
access to financial services to enable income generation activities by engaging in small scale
enterprises and use of production technologies to increases house hold income (IBID)

2.2 The Emergence /development/of MFIS

The majority of poor in developing countries are experienced with the vicious circle of
poverty and unable to accumulate substantial savings. This in fact calls for the need of
external finance to break away the circle. Hyunhal (1993) described that the predominance of
informal finance which is exploitative calls for rescuing small scale borrowers from the
power of rapacious under in the informal sector by providing formal finance at reasonable
rates and charges(HYunhal,1993)
Hence macro-credit and saving programs have been emerged us antipoverty instrument in
many low income countries. Making credit available and provision of saving services helps
the poor to accumulate capital and essential to alleviate poverty and promote economic
development.
This helps borrowers to smooth their consumption if they incur income losses due to
production failure (Sinha,1996. Khandker et al, 1995).

Banks in developing countries can serve only 20% of the population (Emerta, 2003). In
addition in the rural areas the interest rate charged by the informal lenders are high in
habiting the growth of small producers (khandker, 1995).
As a result microfinance is introduced as a powerful development tool (Emerta, 2003).

2.3 Sustainability
Refers to “the ability of a program to continually carry out activities and services in pursuit
of its objectives” (khandker et.al, 1995). As cited by different contributors, sustainability is a
signal both to program beneficiaries.
There are always gaps between the areas of formal sector financial institutions and the
traditional or informal forms of financing. As a result, many economically active poor are
marginalized. It is micro finance that usually fills the gaps. For instance a lot of unemployed
labor get job when they are provided with credit for income generation activities. It also
creates entrepreneurial culture among the community which is a big implication for income
generation (Binyam, 2002).

8
2.3.1. Out reach
The other means of evaluating the performance of micro finance institutions is outreach.
Outreach concerns with the quality of services provided that is the extent to which services
meet the needs of the target group (Lemlem, 2006).
Yoron and Jacob suggested that micro financing institutions seek to broaden their client base
down words to the extreme poor or simply outwards with their clients will have to look more
closely at their clients behavior and delivered new products and services that respond to the
differing need new products that respond to the differing needs of the various clients.
Microfinance credit institutions which target the poor, may have to operate in risky agro
climate areas in order to reach their target population.
The need to do some may reduce the financial viability of these institutions. It is possible to
deepen outreach by reducing the denomination of financial services and serving even poorer
clients. Effective outreach is in habited by factors which are specific to agricultural and to
rural economy (Robison 2000).

2.3.2 Empirical Evidence

Different studies in different disciplines used different approaches to assess impact of MFIS
(Berhanu, 1999). From his study of micro finance credit and poverty alleviation in Ethiopia
identified that more than 70% of the respondents under his study reported the positive
contribution to wards employment creation income generation improved access to health and
educational facilities as well as house hold nutrition
Tsehoy and Mengistu (2002) conclude that the credit and saving institutions intervention
among poor women in Ethiopia has made some positive effects that made a difference on the
socio-economic empowerment of women clients (Tsehay and Mengistu, 2002)
RUFRP (2001), show that the sustainability and loan recovery depends on weather
conditions, which in turn affect the level of the income of the borrower

9
 Chapter 3

3. METHODOLOGY
The data used for this study were gathered from two sources of information. It is both from
primary and secondary sources.
Primary sources: - These include the cultural information received from individuals directly
concerning the problems for the study that is from the operators engaged in MFIS. The
primary data was collected through schedule interviews questionnaire carefully us designed
for the purpose of the study. In addition it creates direct communication between researcher
and the respondents and make the information gathered more reliable and accurate.

The interviews method was conducted by the researcher to the concerned governmental
bodies. The researcher used unstructured personal interview method. The aim of this
interview is in order to get full information about the microfinance institution in shashemene
town and also to know how much the concerned governmental bodies are aware of the
problems of micro and small enterprises and actions they are taking to solve the problems.

Secondary sources:- these include all types of published and unpublished materials about
micro finance institutions. The sources were gathered from reports, business plans. Annual
planning’s, books and the cities MFIS development strategy. The sources also gathered from
different previous research on related topics. The use of these secondary sources is in order to
strengthen the information required and propose necessary suggestions for the problems.

3.1 Method of sampling

The datas were collected from those who engaged in micro finance instituitions. The
sampling technique which the research used to collect the primary data was simple random
sampling.

3.2 Method of Data analysis

After the collection of data was fulfilled and checked for the availability of necessary information
both from primary and secondary data secondary data was carried on. The researcher used descriptive
method of data analysis. First the collected data categorized, next tabulation of the data was followed
and then the data interpreted using both quantitative and qualitative means of analysis. The qualitative
analysis are organizing, describing and systematically interpreting the collected data while
quantitative analysis used in this research is that of using statistical analysis, such as organizing the
collected datas in tabular forms interms of frequency and percentage.

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 CHAPTER FOUR
4. Data Analysis and presentation
4.1. Overview of credit and saving share company (DCSSCO).
This part of the study deals with the presentation and inter presentation of the data collected
from the study area breakthrough simple random sample to seek appropriate answer to the
problem of micro finance institution in the town.
Analysis and presentation was made by using data collected from fourty hose holds.

In many developing nations the rural poor are typically attached with poverty do not have
accessibility to formal financial institutions. In Ethiopia, due to high collateral requirements
by formal banks, the majority of poor farmers have been denied access to financial services.
Even though there is no bank branch in many woreda’s to tackle this problem, rural
development is mainly the essential tool. Since one of the major problems of the poor is lack
of access to credit and saving services, the Oromia rural credit and savings scheme
development project was initiated to fill this gap under the Oromia self help organization
(OSHO) which was established to deliver credit and mobilize savings in rural Oromia in
1996.

According to proclamation No 40/1996, National bank of Ethiopia (NBE) issued for

licensing and supervision of microfinance activaties, the NBE registered OCSSCO in August
1997, since hen OCSSCO as an independent microfinance institution has been operating in
providing credit and mobilizing savings from members, non-members associations and
institutions.

4.1.1 Objectives and strategy.

The general objective of the company is to alleviate poverty and promote economic
development through the provision of credit and saving services.
The specific objectives of ocssco include:
 To improve the socio-economic condition of the low income people through
providing working finance at affordable interest rate and encouraging the saving habit
of he people. This in turn contribute its part for the accomplishment of government
policies and strategies that mainly aimed at poverty alleviation
 To achieve house hold level of food security in Oromia

11
OCSSCO is currently operating largely in rural areas to complement the agriculture lead and
rural centered development effect of the federal Government of Ethiopia in general and
Oromia regional state (ORS) in particular. It is currently depreciable only in 76 woreda of
Oromia.yet the entire oromia region has 194 districts. This indicates that the OCSSCO is at
its infant stage to meet the needs of the poor.

The share holders of the company are regional government associations and NGO’S and
individuals. The microfinance institution gives access to credit to the poor farmers by lending
to a group of poor rborrowers who guarantee each other’s loan and whose security is only
peer pressure. The intervention of OCSSCO in a given Keble starts by consultation and
discussions with the present association administrations, identifying local elders and
convincing them in such a way that they should honestly identify poor and rich based on their
wealth.

4.1.2 Demographic characteristics of the respondents

Description of the characteristics of target population gives some basic information about the
sample population involved in the study.
Table 4.1. Demographic characterizes of respondent.
No Characteristics Nan of Respondent Total %
Male 1 Female
1 Sex No % age No % age No % age

2 Age <20 24 60 16 40 40 100

20-30 3 7.5 4 10 7 17.5

31-60 17 42.5 5 12.5 22 55

> 60 4 10 5 12.5 9 22.5

2 5 0 0 2 5

Source: questionnaires of 2011

According to the personal a details shown in the above table the female respondent consisted
of 24(60%) of the respondents and 16 (40%) are female. The next largest group of
respondents is found in the range of 31 and 60 years old. Generally speaking, the majority of
the respondents are within the range of productive age group. This labor force will bring
about change in economic productivity provided if they are well educated.

12
 Table 4.1.1 Marital status of the respondents
No Marital status No of respondent Percentage
Male Female Total
No % No % No %
1 Married 9 22.5 5 12.5 14 35
2 Single 13 32.5 6 15 19 47.5
3 Divorced 3 7.5 1 2.5 4 10
4 Widowed 0 3 3 7.5
Source: survey of 2010/11

As shown in the above table 4.1.3 14, (35%) of the clients are married out of these 9 (22.5%)
and 5(12.5%) are male and female respectively out of 19 (47.5%) of Unmarried (singe)
clients, 13(32.5%) and 6 (15% are male and female respectively. About 3 (7.5%) male and 1
(2.5%) female are divorced units and only 3 (7.5%) of the clients are widowed female.

Level of education.
Education is an investment component in that it requires present sacrifies to enhance future
productive in life time
It is also one of the most important factors which affect the level of income received by
individual. Now let us consider the following table
Table 4.1.2. education level of respondents
No level of education No of respondent Total
Female Male
No % No % No %
1 Illiterate 2 5 2 5 4 10
2 Literate Primary 6 15 4 10 10 25
Secondary 3 7.5 5 12.5 8 20
Technique 6 15 8 20 14 35
College 1 2.5 3 7.5 4 10
Source: questionnaires of 2011
As we can observe from the above table a large proportion of the respondents 14 (35%) have
technical schooling and out of them 8 (20%) are male while the rest 6(15%) are female. The
next group that shares the second large proportion of education is primary schooling

13
 respondents. This group consists about 4 (10%) male and 6 (15%) female. And the rest 4
(10%), 8 (20%) and 4(10%) are shared by illiterate, secondary schooling and college
graduate of male and female respondents respectively.

Generally speaking the above table indicates that the majority of the respondents have high
level of education. But, when we compare the educational status of male and female
respondents, female have lower skill, low job opportunity to apply modern technique in the
creation of new job which will deteriorate their productivity and their income earning

4.1.3. Characteristics of the business

Description of the characteristics of the target business gives some basic information about
the respondents business institution. Thus the following table gives some information about
the respondents’ business.

Table 4:1:3 Business characteristics of the respondents

No of respondent Total
Characterizes
No Male Female
No % No % No %
1 Metal and wood work 6 15 2 5 8 20
2 Food processing 3 75 9 22.5 12 30
3 Merchandise activity 11 27.5 4 10 15 37,5
4 Others 3 7.5 2 5 5 12.5

Source: survey of 2010/11 or questionnaires 2011

According to the personal details shown in the above table, majority of the respondents15
(37.5%) are engaged in the merchandize activity. Among these, male account 11 (10%). The
second largest activity that the respondents take part in is food processing in which the
female account 9 (22.5%) and male account only 3 (7.5%). The other business activities like
metal and wood work and others are performed by the rest of the respondents.

4.2 Income Generation

One of the rules of microfinance institutions is means of income generation. In shashemene
town, most of the respondents either have no any means of getting income or have minimum
income before they engaged in to this sector. But after they engaged in to this microfinance

14
sector 90% of the operators responded that they have got in come improvement and only
10% of the operators have responded negatively as indicated in the following table.

Table 4.2. income improvement of the operators.

Income improvement No Percentage

Yes 36 90

No 4 10

Total 40 100

Source: questionnaires of 2011.

Reading their monthly income, most of the respondents are earn income which lies between
500-1000 (about 60%). And also 20% of them responded that their monthly income is equal
to 500 (And some of them earn income which was between 1000-1500 (15%). And only 5%
of the rest respondents earn income which lies between 1500-2000. No one responded that
their monthly income is greater than 2000. From this we can observe that even though there
is an income improvement after they engaged in to this business sector, the monthly income
they have got from the business is limited the flowing figure shows the monthly income of
respondents in the sample.
Fig 4.3 Monthly income category of respondents

Source: Questionnaires of 2011

Also the respondents are asked wither the income hey have got from the business is sufficient
to fulfill their families basic necessity majority of them (85%) are responded that it is not

15
enough to fulfill their family basic needs. Only 15% of the responds responded that the
income they have got from the sector is sufficient to fulfill their family’s basic necessities.

4.2.1 Accessibility of Training problems

Training applies to any transfer of knowledge skills or attitude which is organized to prepare
people for more productive activities or to change their working environment the training can
given either through formal or non formula educational programs. The training is mainly
concentrated on skill training marketing and financial management entrepreneurship or how
to use technologies in their enterprises. So the skill of micro finance institution operators is
an important determinant of productivity of the sector. But in Ethiopia in general and in the
study area in particular, the skill development of microfinance institution operators is so
poor. In the study area, out of total number of business operators in the sample size 62.5% of
them haven’t got any skill development training of microfinance that enhances the
productivity of the sector. This is due to lack of training centers in the shashemene town.
From the samples size only 37.5% of them got skill development

4.2.2. Market and production place problems.

Lack of suitable market and production areas inhibit the expansion of projects by existing
firms and can also act as barrier to entry of new enterprises. Lack of suitable market and
production places is one of the main problems of micro finance institutions in shashemene
town. From the respondents of the questionnaire, 85% of them face either production place
problem or marketing problem or both. Most of the respondents that face these problems are
now operating their activities in rented place, their home in the street and in any other places
as much as possible as shown in the following table.

Table 4.2.1 operation place of microfinance respondents

Places of operation No Percentage
In their home 20 50
In the rented places 8 20
On the street 9 22.5
Others 3 7.5
Total 40 100
Source: questionnaires of 2011

16
The above table indicates that out of respondents that have production and marketing place
problems 50% of them are operating in their home, 20% of them in the rented places, 22.5%
of them are on the street and 7.5% are in the others places.
So this problem impeded the smooth running of the sector and affects the efficiency and
productivity of the sector and there by reduces income, profit and also impeds the growth of
the sector.

4.2.3 Market Related Problem

In Ethiopia in general and study area in particular micro-finance institutions have serious
problems in marketing for their products. According to Wolday Amha and Gebrehiwot
Ageba (2004), in Ethiopia 69% MFIs have no sufficient market for their products at current
level of production despite the fact that they products at current level of production despite
the fact that they reported low rate of capacity utilization. In the seshemene town, marketing
is one of the major stumbling blocks that faces on the development of microfinance
institutions. Among the respondents in the sample size, 80% of them are faced serious
market problem. Most of the respondents stated that they do not sell their products
immediately as they want . Sometimes forced to sell at lesser prices. This makes them not
to get enough profit from their sector and unable to cover their cost.
Table 4.2.2 Reasons for lacking appropriate market
Reasons for the lack of market No Percentage
Less quality of product 14 3.5
Increased number of competitors 13 32.5
Limited consumer awareness about the produce 12 30
Others 1 2.5
Total 40 100
Source: questionnaires of 2011
As stated in the above table the major reason for the lack of the market for the cities micro-
finance institution respondents is less quality of their product (35%) which is related to the
lack of skill development training on how to improve their products and lack of business
ideal such as marketing, information and knowledge that would help them to develop new
marketing outlets as well as review diversifying of their products and services and thereby
increasing market shares and revenues. The other reasons stated for the lack of market in the
town is increased number of competitors (32.5%).

17
4.3. Capital related problems
Micro-finance institution in the town does not have sufficient funds for their own fixed
capital investment nor can they obtain the necessary resources from institutional agencies.
So shortage of capital is found to be among the major constraints facing micro-finance in the
study area

The majority of MFIs in the town have started from scratch, with small start-up capital by
their operators. The study’s sample survey indicates that 32.5% of the operator’ s initial
capital is less than 5000 birr, 35% of their initial capital lies between 5000-10,000birr. 15%
lies between 10.000 -15,000 birr, 12.5% lies between 15000- 20,000 and only 5% of their
initial capital lies above 20,000

This study shows that, most of the operators stated their business with minimum initial
capital. The following figure summarizes the initial capital of the respondents.
Fig. 4.2.1 Initial capital category of the respondents.

Source: questionnaires of 2011

Asked to state the source of their initial capital, most of the respondents responded that they
have got from their own source such as family’s saving, borrowing from friends and some of
them from microfinance’s.
Lack of working capital is another problem that the micro finance operation faced. The
sample data indicates that 82.5% of the respondents are faced the problem of sufficient
working capital to run their business effectively. Though one of the methods through which
working capital problem is any sourced is through facilitating credit services for the micro

18
finance institutions in the town. The majority of the respondents haven’t such facilities. The
study’s sample data shows that 62.5% of them face the problem of credit facilities while
37.5% of them are access to credit facilities.

From those who have the access to credit facilities 57.5% of them have got credits services
from micro finance institution 17.5% of them have got it from saving and credit association
and the rest 15%, 7.5% and 2.5% of the respondent have got credit services from Banks.
Government projects and nongovernmental organization respectively. These can be indicated
in the following table.
Table 4.2.3 Source of credit for micro finance institutions.
Source of credit No Percentage
Banks 6 15
Government projects 3 7.5
Non-government organizations 1 2.5
Saving and credit associations 7 17.5
Microfinance 23 57.5
Others - -
Total 40 100
Source: questioner of 2011.

The respondents stated that micro-finance institutions (MFs) and saving and credit
associations are a good institution that helps micro and small business enterprises in the
town.
For those who couldn’t have access to credit facilities, they reasoned that lack of collateral
and limited number of credit sources as the main problem (cause) for them not to get enough
credit facilities. Of those respondents, 42.5% of them face inadequate collateral to get credit
from banks. The rest 22.5%, 15%, 12.5% and 7.5% of the respondents face too difficult for
process lack of creditor, fear of inability to pay and others respectively. These can be
summarized in the following figure.

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Fig 4.2.1 Reasons for lack of credit facilities.

Source: questioner of 2011.

Infrastructure is one of the basic factors to enhance the development in any nation. But the
infrastructural facilities such as water supply apply in the study are not much satisfactory that
it affects the development of MFIs sector.
Due to this, the MFIS do not access to the sophisticated technology. Though it is not as such
severe problems stated by the respondents 41.5% of them are subjected to lack of
infrastructural facility.
According to respondents, most of the time they are subjected to high telephone charge in
order to get information about market, to contact their customers and concerned
governmental bodies for purposes. And also those who are operating in wood and metal work
are claimed that they are subjected to pay high electrical charge, others also stated that
transportation charge and water affects their business activity.

4.3.2 Problem related to-co-operative activities

The culture of doing business independently is a major weakness of the operators in the study
area. Though one of the main characteristics of MFIS is that of being operated and managed
by individual person. Doing the business in co-operative way has so many advantages like
increasing capital, development of their skill from each other, division of labor, activate their
works and to others. So the lack of co-operation among the operators forced them to have
limited skills, limited capital accumulation which is the main handicap of the development of
the sector.

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Table 4.3 form of working activity of MFIS
Form of activity Number Percentage
Individually 28 70
Co-operated way 12 30
Total 40 100
Source questionnaire of 2001

As the above table indicated, out of the respondents answered the questionnaire, 70% of them
is working individually while 30% 0f then are working co-operatively. So this causes the
respondents to face lack of sufficient capital and less development of skill in relative those
who are operating co-operatively.

4.3.3 Financial sustainability

It is the ability to pursue the objective of the institution in a permanent fashion by covering
all financial cases from financial incomes. Sustainability requires profit and profits protect
permanency. A financially self sufficient MFI has so much profit that when donors have it
will not sharing in real terms nor it will reduce the size or scope of its service to the poor.
Permanency matters since access to support strength and weakened with the sudden change
of the donors. AMFI without profit will shrink and die.

4.4 Institutional Sustainability

The structure and management of institution are important considerations for moving savings
and credit scheme towards an independent future. Thus the incremental activity of the
branches and management of the institution indicates its sustainability.

4.4.1 Outreach
The outreach of banks in Ethiopia is limited according to Demeke (1998) cited on wolday
(2002). CBE and DBE have 351 and 33 branches respectively in the country and the total
branches of the six private banks amount to 90. In addition, most of the branches of
commercial banks are operating in urban area only 25% of the woredas (districts) in the
country have bank branches. However, now a day the number of private banks and their
respective branches are increasing. Inspire of this still it cannot reach the majority of the
districts and even if it is increasing the poor are not get served due to lack of collaterals
which formal banks are operating. Consequently MFIS have been inventing and their
branches are increasing from time to time targeting at the rural poor population and in

21
increasing the participation of women. Here in addition to the number of branches, the
outreach of there schemes were measured or evaluated by the increment of the number of
clients and borrowers that are depth and breadth of the scheme. That means depth proxy for
loan size and breadth is proxy for number clients.

Table 4.3.1 Number of borrowers (depths)

Year
Items 2006 2007 2008 2009 2010
No of active clients 708 1060 1475 2102 1298
Male 430 735 929 1355 901
Female 278 525 546 747 397
Gender gap 552 410 383 608 504
Source: Ocssco shashemene branch 2011
Based on the above table, in all the given years the depth of the institution should remarkable
performance. The number of active clients has been increased each year just from its start of
operation to the current. This indicates the number of targeted group increased from time to
time

Table 4.3.2 number of clients (breadth)

Year
Items 2006 2007 2008 2009 2010
No of active clients 965 1472 1934 2360 1234
Male 356 789 985 1341 586
Female 609 683 949 1019 648
Gender gap 253 106 36 322 62
Source: ocssco sheshemene branch 2011
According to the above table, the number of active clients has been increased through time.
Even though the process of credit and saving of 2011 is not clearly stated, the number of
clients is increasing rapidly this implies that the demand of people for this institution is
increasing from time to time. The implication is that the institution has done much on
targeting the active poor people which is one of the features of the scheme.

22
4.4.2 Gender Gap
Just focusing on the above two tables, the gender gap was widened except the first year of
operation. Both inactive clients and active borrowers cases the gap has been fluctuating and
increasing respectively. But in the first year (2006) in active clients case, the gender gap was
negative which indicates the majority of female participation compared to male. Other than
this year the male participation were over whelming. However among many. One of the basic
features of MFIS is enhancing female participation than male to reduce the gender in equality
persisted in poor nations hence their role in economic development which is opposite to the
one in ocssco’s experience. This implies that as ocssco failed to achieve its target in this case
causes under empowerment of female.

4.4.3 The contribution of Oromia credit and saving Share Company

(ocssco).
Micro finance institution in poverty reduction
The majority of the poor community have been denied to access financial services from
conventional financial institutions like commercial banks, some of the reasons for the devisal
of access to formal financial loans are:- high collateral requirement, in transit banking
procedures and bank’s desire to work with rich. Commercial banks have one provided
financial services to clients with little or no cash income.
Microfinance institution like Oromia credit and saving share company has been established
to serve poor and fill the gap to access financial service from commercial banks. MFIS are
delivering the service to the poor as one of their product using group guarantee mechanisms
(peer pressure) that do not require material collateral and collateral related loan. /delivering
loan to poor through peer pressure requires good character in addition to other criteria
required by the programmed micro finance is the reform not simply filling the gap of
commercial banking service but is serve as a development tool. The activities usually
involve:-
- Provision of small loans-typically for petty trade
- Purchase of agricultural inputs and small scale businesses in general
- Mostly requires no collateral only group guarantee and compulsory savings.
- Access to repeat and obtain larger loans, based on repayment performance
- Managing loans with problems
- Loan disbursement and monitoring
- Secure savings products.

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Possible impacts of MFI (OCSSCO) services include:- increasing an income and ensuring
house hold food security, promoting saving culture alleviating poverty and restoring self
reliance and improving social status of poor.
The main services of ocssco include
- Credit-usually small size loan
- Saving and other deposits instruments
- Insurance and money transfers.
After the establishment of ocssco, those people who are being poor are using it and their
income/revenue are becoming more and also their life has been changed. The target of ocssco
is to give loan to the poor people who have the interest or desire to posses it and guarantee
income mainly to alleviate a wide rooted poverty.

4.4.4 The major challenges that affect ocssco and its program
ocssco is currently operational in 72 out of 194 districts in the region. This indicates that
ocssco is at its infant stage requiring expansion of its activities to reach its poor people.
Ocssco like other MFIS in Ethiopia faces the challenges of expanding its operation in order
to assure financial services to large number of poor.
It has been encountered with the following major problems.
A. Lack of sufficient loan able fund: ocssco lacks financial services resources and urges
the attention of donors and other financial sources.
B. Lack of investment capital: This is a problem related with building capacity. This
include lack of funds to build offices at branch levels, lack of staff training, lack of built
in computerized management information system and lack of means of transport.
C. Poor infrastructure: Ocssco is focusing on the delivery of financial services to the poor
households and areas where there hardly exists means of transportation
telecommunication and formal banks. Very poor road network and transport facilities
have limited the markets.
D. Drought and natural disasters: the frequent drought in the region affects loan
repayment. Actually, the registered arrears of ocssco are mainly the result of the
drought. Although the ocssco has the objective to teach the rural poor, the regulatory
frame work and limited research affect financial product development in various ways.
The major problems are described as follows.

24
1. Lending methodology: is group based and peer pressure. The group based criteria
affect the development of new financial products, which need individual install of
group collateral.
2. In sufficient loan size: The average loan size of 1000 birr loan ceiling handily the
development of financial products with loan size needed above ceiling.
3. Loan term: The loan term as per the regulation is a maximum of one year. This
affects the business activities, which need more than one year.
4. Absence of market research and weak diversification: The absence of market
research and skill for financial product development has under mind the role of
marketing. Weak diversification of loan is also considered as one problem in
diversifying business activities.

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 Chapter Five
5. Conclusion and Recommendation
5.1 Conclusion
In Ethiopia, small business has been one of the country’s hidden productive assets and a
power catalyst in the transaction from a more primitive age to the dawning era of a deeply
interlinked global economy driven by technologies. The role of small business has been the
dominant of the long period of the county’s economic transaction since time is immaterial.
The most source of finance for small business is micro finance institutions because of the
formal financial institutions regular some collateral which the small business owners and
poor people cannot afford.

The apparent goal of microfinance is to improve the welfare of the poor how holds through
better access of small loans. Often public funds for micro finance organizations carry a
mandate to save the poor. These services solve the problems of the poor when it is
continuous. Hence sustainability and outreach activities of MFIS are the mandate for this
continuity and solve the problem of the poor from its grass root.

This paper presents sustainability and outreach measures of MFIS. Sustainability includes
both institution and financial sustainability the structure and management of the institution
are considerations for moving savings and credit scheme towards on independent future.
Thus the incremental activity of the branches and management of the institution indicates its
sustainability. While financial sustainability is the ability to pursue the objective of the
institution in permanent fashion by covering all financial costs from financial incomes.
Finally ocssco practiced different activities for its positive performance such as avoiding
conflict of interests delivery of consistent, transparent and direct information and data to
attract donors, ensuring staff homogeneity, encouraging commitment and sacrifice of the
board staff and clients. In addition to this ocssco give different services such as giving
insurance and saving services to reduce the poverty.

26
5.2 Recommendation
The implication of the study is forward and clear that ocssco is contributing to improve
the living standard of the poor. In order to sustain and improve the microfinance services
to solve the problems of the poor continuously; based on the finding of the study.
 Ocssco has strong outlook that make significant contribution for its financial
sustainability. The researcher recommends that both government and donors have to
give technical and financial assistance.
 The research recommendations that MFIs have to study and design policies or
strategies which ensure its self sustainability or self sufficiency.
 The instruments used to analyze the sustainability of the MFIs were more of financial
(accounting) than economical opportunity cost analysis. So it is an advisable to include
instruments which are used to measure the social benefit analysis.
 In the case of outreach issue the institution was not performing well especially with
respect to gender gap. Thus ocssco has to do more to insure the gender equality by
increasing female participation.
 Comparing to the increasing number of the country’s poor population, the number of
MFIs are immaterial, since MFIS have been accepted as one of the remedy for saving
the problem of the poor, there is policy implication for increasing more number of the
instituting and branches of MFIs.
 The services of the program are found to be encouraging with the needs of the poor. It
is expected to have positive contribution to clients in relation to income nutrition,
employment generation savings and resource empowerment. Therefore, strengthening
existing company in the region would be appropriate economic policy.
 The ocssco has to work hard to reach large number of poor people both rural and semi-
urban areas.
 Constructing different common clusters or industrial zones where the operators produce
and to solve market place problems.
 Motivating large business sectors to systematically expand its links with micro and
small enterprises.
 Providing infrastructural facilities for existing micro faineance institutions.
 The government also needs to improve legal regulatory and institutional frame works
especially improving taxation and making them to pay according to their ability.

27
References
 Adams D.W.(1988) “The conundrum of successful credit projects in floundering
rural financial markets.”
 Al-Baqdaetiand Bruntr up (2002). “New jobs creator”.
 Berhanu Degifie and Thomas Yeuholau work (2000) “MFIS in Ethiopia”.
 Berhanu lakew (1999) micro enterprise credit and poverty alleviation in Ethiopia.
 Binyam. (2002). Implication for income generation.
 Dhaba Moti “The impact of micro financing on poverty reduction” Addis Ababa
University Ethiopia, 2003.
 Emerta, (2003) “Powerfull development tool”.
 Hyunhal. (1993).Providing formal Finance at Reasonable rates.
 Kebede et.al (2002). Providing microfinance service.
 Khandker. s. r et al “Grameen Bank: performance and sustain ability”
 Lemlem. (2006) target group.
 Meyer D.W (2002). Critical Micro-finance triangle.
 Morduch (2000). “Substaintial qualities.”
 Navajas et al. (2000). Predominant concern of policy makers.
 Robinson (2000). “Agricultural and rural economy”
 Stiglitz and Weiss (1981). Costs and risks Associated with information asymmetries
and moral hazards.
 Shete(1999) “Saving and technical assistance”.
 Tesfaye Aregawi. FBBE: “Microfinance issues of impact assessment and rural
finance intermediation in Ethiopia”. June 26, 2000.
 Zever.etal (1997). Income and consumption.

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 Jimma University
College of Business and Economics Department of Economics
Appendix

The following are questions that people in sample size will be asked to
Attain the objective of the study
A. Demographic characteristics
1. Sex:
A. Male B. Female
2. Age: less than 20 Years ______ 31______60
20-30 _________ >60 years _______
3. Educational status
Illiterate _________ Technique school ________
Primary school ______ Secondary school _________
College graduate _______
4. Marital status
Married ___________ Divorced _______
Un married ________ Widowed _______
If married how many children do you have?
B: Characteristics of the business
1. In which type of business you are engaged.

a. Metal and wood work ______

b. Food processing _________
c. Merchandise Activity ________
d. Others ________
2. What is the reason for you to get in to this business?
3. In which category your capital belongs when you started your business
0-5000 15,000-20,000
5000-10,000 >20,000
10,000-15,000
C. Factors affecting the business
4. Have you got any skill development about micro finance since you have started your
business?
Yes _____________ No _______________
5. If No, pause reason out more than one answer may be possible.
- Lack of training centers in the town
- You don’t need such training

29
 - Lack of professional persons who train you
10.Have you faced production and marketing problem?
Yes No
11.If yes where are you doing your business now
- In your home in tented place
- on the street others (state)
12.Have you faced market problem?
Yes No
13.If yes why?
- Limited consumer awareness for your product
- Less quality of your product
- Increased in the no of competitors
- Other (state)
14.Are you working individually or in cooperative way?
Individually _________ in cooperative way ____
15.If you are working individually please state the reason.
16.Do you have sufficient capital to run your business?
Yes No
17.If yes, from which sector do you get credit?
Yes No
18.If yes from which sector do you pet credit?
- From banks
- Governmental project
- Non-governmental project
- Saving and credit association
- Micro finance
19.If No, for question no 18 what are the reasons for not using the credit facilities

30
 - Inadequate collateral
- Lack of creditor
- Do not want to incur dept
- Too diffult for process
- Others (states)
20. Do you have sufficient infrastructure to run your business?

Yes No

21. If no what is the reason for un fulfillment of the infrastructure?

22. In which categories your monthly in come categorized?

0-500 1000-1500 2000-3000
500-1000 1500-2000 >3000

23. If you compare your income before you started the business have you got any income
improvement?
Yes No
24. Is the income you get from the business sufficient to fulfill your’s and your family’s basic
necessity?
Yes No
25. Do you have job before start the business?
Yes No
26. Number of employers in your business
Please mention some suggestions how some constraints of your business solved.

31