Strengthening Regulation and Supervision of Microfinance Sector for Development in Ethiopia.

• Author: Fite, Megersa Dugasa

Abbreviations

ACSI: Amhara Credit and Savings Institutions

AEMFI: The Association of Ethiopian Micro Finance Institutions

DCs: Developing Countries

DECSI: Dedebit Credit and Savings Institutions

ETB: Ethiopian Birr

FDRE: Federal Democratic Republic of Ethiopia

GDP: Gross Domestic Product

GTP: Growth and Transformation Plan

ICT: Information and Communication Technology

MDGs: Millennium Development Goals

MFIs: Microfinance Institutions

MIS: Management Information Systems

NBE: National Bank of Ethiopia

NGOs: Non Governmental Organizations

OCSSCO: Oromia Credit and Savings Institutions

PASDEP: Plan for Accelerated and Sustainable Development Programme

PRSP: Poverty Reduction Strategy Paper

R&D: Research and Development

SMEs: Small and Micro Enterprises

1. Introduction

   1.1. Microfinance and Development: From Directed Credit towards Inclusive Finance

   'Indeed, microfinance is rapidly shifting from a niche product to a globally recognised form of finance. Yet as microfinance offerings become more sophisticated and diverse, regulatory and market gaps keep the industry from operating as well as it should. This increases the need for a systematic way of tracking and evaluating conditions for microfinance'. (1)

   Many policy interventions, including better nourishment to enhance levels of productivity and wages; control of population growth to free resources for human capital investment; education for women to fight inequalities and bring empowerment; and stronger property rights to direct markets have been suggested to deal with deep-rooted development problems, or at least to perceptibly alleviate poverty. (2) To create a sustainable development structure against the background of increasing globalisation, there is presently, on the whole, a proposition for critical globalism and/or interdisciplinarity which refers to theorising the entire field of forces in a way that takes into account not just market forces but also interstate relations, international agencies and civil society in its domestic as well as transnational manifestations. (3) In particular, considering that the state has been internationalised in the framework of globalisation thinking, there is a credible argument of a better and a changed responsibility of the state concerning development. (4) There is accordingly a range of policy reactions to the situation.

   Whilst much optimism has recently been placed on the effectiveness of expanding access to financial services, commercial banks hitherto have had observable difficulty providing such access helpfully. The unbanked and/or under-banked tend to be deprived and regularly not have worthy assets to submit as pledge for credits that can, in principle, bring gains in both efficiency and equity. (5) Besides, many of the unbanked have the incentive to make transactions at too small a size to be a focus for profit-seeking institutions. (6) The microfinance has thus had to argue from the context of these motivation problems along with more usual challenges imposed by transactions costs. Also, an extensive list of other issues related with poverty including low education levels, poor health, discrimination, and weak labour markets are more critical. (7)

   At the outset, much of the interest on financial access centred on programs for microcredit delivery. With the start of experimental programs aimed to provide very small credits to groups of poor people, particularly women, to engage in self-employment projects and transform economic and social structures, the model microcredit was invented in Bangladesh. (8) The best known campaigner has been Muhammad Yunus, the co-winner of the 2006 Nobel Peace Prize together with Grameen Bank founded to serve the poor of Bangladesh. (9) Over the years however, caused mainly by urban-biased credit allocation, higher transaction costs, interest rate restrictions, high default rates and corrupt practices, government rural credit programs to reach low-income households are collapsed overall. (10) Since the 1980 thus, as a substitute to the observed failures of capital transfer and government-directed credit (11) as well as to the formal financial system to supply financial services to poor, the emphasis in development policy has shifted towards expanded expression microfinance selected to be inclusive of other financial services for the poor, including savings and insurance. (12)

   Today, microfinance is entering an innovative and more dynamic stage. Microfinance sector primarily plays a significant role in the fight against poverty by allowing poor households to raise their income and assets. (13) Microfinance delivers expanded financial services such as deposits, loans, payment services, money transfers and insurance to the poorer and low income segments of the population and their micro-projects. (14) Provided that they do not borrow excessively, such basic financial services contribute to the potency of domestic economic life of the many poor and under-served people of the developing countries (DCs) through increasing capitals and helping production, exchange and consumption. (15) Microfinance hence is a system that potentially serves the poor with comprehensive financial services in a most supportive and dynamic way primarily.

   Additionally, the microfinance movement, through its constructive social impact, such as female empowerment and education, noticeably has assisted to ease gender concerns. Country specific researches where microfinance services are prevalent prove the realisation of higher literacy rates, higher levels of contraceptive use, and lower fertility rates for women. (16) Critics conversely reject this assertion such as even if a woman gets a credit, she submits it to her husband for his personal dealing thus simply manipulated let alone to be empowered. (17) While this may actually be the case, the microfinance sector has provided an unprecedented employment chances for women with limited skills in customary life. (18) This among others gives women an income, which allows them the opportunity of supporting themselves and their families. The conclusion of 20 years of analysis on microfinance in Bangladesh confirms that, overall, the relevant outcomes have been positive in this regard. (19)

   Microfinance finally has praised for enhancing equity in the global financial structure. It sensibly has assisted in 'democratising global financial markets through new contacts, organisations and technology'. (20) In Kenya for instance, people by now get cheap cash transfer service through a message-based technology called M-PESA which allow them to transfer cash electronically to other mobile users. (21) Additional examples can be the ever-increasing participation of commercial banks (22) and the improved foreign investment, both debt and equity, which has quadrupled to reach USD13 billion during the 2007-11 period, into the sector. (23)

   In general, a single sector or technological innovation cannot indeed address poverty and other development concerns. Complex and multidimensional reasons contribute to financial exclusion also and hence require an all-inclusive variety of providers, products, and technologies that work in and are a manifestation of the socio-economic, political, cultural, and geographic conditions of each country. So, countries are in the best position to appraise their domestic institutional, socio-economic, financial and political circumstances and practise the approach that best fits to them. As there is no distinct prearranged models for improving financial access, DCs are thus focusing on a set of solutions best appropriate to their national environments. (24) For example, El Salvador is investigating how publicly owned banks can play a more important role; Jordan is using macroeconomic measures and the promotion of the inter-bank and bond markets; Brazil and Egypt are focused on supporting channels for delivering new products; and others like Peru and Indonesia concentrate their efforts on empowering people so they can make improved use of already existing services. (25)

   Absolutely therefore, microfinance is not a panacea. But, generally, as it enables expanded financial access for those ordinarily ignored by formal banks because of their lack of collateral and credit scores, there is an unequivocal contributory links between ensuring accesses to microfinance services, solving the poverty problem and, accordingly, stimulating development. (26) Countries hence need to maintain the sector's competent operation. In DCs particularly, capacitating poor people to access basic financial services and combating poverty sustainably imply the necessity to take the microfinance field into consideration.

   Precisely put, the respective governments of such nations should efficiently regulate and supervise the microfinance sector as a tool for expanding financial access to the nearly ninety percent of population who are excluded from the commercial banking sector. (27) The paper on this ground emphasises the same notion and, then, asserts that microfinance sector involves an effective and adaptable potential for development.

   1.2. The Overview of Regulatory Requirements for Successful Microfinance

   Microfinance involves a wide range of organisations known as microfinance institutions (MFIs) which initially has been established in DCs with the narrow purpose of credit delivery and limited concept such as group lending contracts, character based lending, short-term repeat loans and incentives for loan repayments. (28) Today however, there are considerable rising in the scope of financial intermediations (including deposit taking) provided by these institutions as well as in the number of the institutions and their customers. These new trends have contributed to an ever-increasing credit and financial and operating risks that concern the microfinance sector. (29) So, revising regulation to control these perils becomes essential.

   Given the above phenomenon in...