JBAS Vol.6 No.

1 June 2014 1

Assessment of Factors Affecting the Performance of Microfinance

Institutions: The Case of Hawassa City

Muluken Alemayehu (MPM) 1, Mesfin Lemma (PhD) 2

Abstrac

The role of MFIs in the development process is noteworthy. The major objective of
this study is to assess the factors which affect the performance of microfinance
institutions in Hawassa city. The research is descriptive in type and both
probability and non probability sampling techniques were employed for this study.
Employees and clients of MFIs were the major target groups of the study. From the
total of 116 targeted employees, 74 employees were included in the sample. On the
other hand, from the total of 8590 targeted clients, 199 were taken as a sample.
Primary and secondary data were collected through well organized questionnaire
for this study. In addition to this, the researchers conducted interview with
managers of the institutions. Accordingly the researchers assessed different factors
which affect the performance of microfinance institutions. The identified factors
related to clients includes: problems related to the repayment, diversion of loan
into non income generating activities, business condition of the borrowers and so
on. On the other hand, institutional factors such as shortage of human resource,
lack of cost effective technologies, shortage of loan capital and some others are
identified. Political factors which are related to MFIs performance are also
recognized in this study. Based on the analysis and the finding of the study, the
researchers suggested some recommendations to improve the performance MFIs in
Hawassa city. Implementation of different methods to improve women's
participation in micro credit and saving services, usage of cost effective
technologies to minimize operational cost, hiring an adequate number of
employees in the institution are some of the recommendations suggested by the
researchers to improve the performance of the institutions.

Key words: Clientele Factors, Economic Factors, Institutional Factors,

Political Factors and Performance.

1Senior expert in MFIs Promotion, Finance Bureau, SNNPR

2Associate Professor at International Leadership Institute, Ethiopia
2 Muluken Alemayehu and Mesfin Lemma

1. Introduction

1.1 Background of the Study

Microfinance institutions are found among the institutions which provide

different financial service for the poor who are out of the conventional
banking system particularly in developing countries. Microfinance
Institutions (MFIs) provide financial services to poor clients who in most
cases have no access to formal financial institutions. During the last three
decades, microfinance has captured the interest of both academics and
policy makers. This is, among other things, due to the success of the
industry (Assefa et al., 2013).

Since the first Proclamation of 1996 that gave the legal background for the
operation of the micro-financing business, the industry has witnessed a
major boom. Today, there are 31 MFIs registered with the National Bank of
Ethiopia serving clients. The Ethiopian microfinance market is dominated
by a few large MFIs, all of which are linked to regional state government
ownership. The three largest institutions account for 65% of the market
share in terms of borrowing clients, and 74% by loan provision. These are
Amhara (ACSI), Dedebit (DECSI) and Oromia (OCSSCO) Credit and
Savings Institutions (Ebisa et al., 2013).

According to the Federal Micro and Small Enterprise Development Agency

(FeMESDA), a total of 70,455.00 new micro and small scale enterprises
were established in 2011/12 employing 806,322.00 people. The total
employment has grown by 23.8 percent, compared to a year ago. The total
amount of loan received from micro finance institutions was more than Birr
1.088 Billion under the review period, 9.5 percent higher than last fiscal
year. This shows that the role of microfinance institution is significant in
JBAS Vol.6 No. 1 June 2014 3

many aspects. The loan given by MFIs for micro and small enterprises
contributes for the acceleration of the development process of the country.
Based on the proclamation on microfinance business, micro finance
institutions can be engaged in accepting both voluntary and compulsory
savings as well as demand and time deposits. In addition to this micro
finance business are allowed to participate in extending credit to rural and
urban farmers and people engaged in other similar activities as well as micro
and small-scale rural and urban entrepreneurs.

The proclamation gives the right to MFIs for drawing and accepting drafts
payable within Ethiopia, to participate in micro-insurance business as
prescribed by directive to be issued by the National Bank, purchasing
income-generating financial instruments such as treasury bills and other
short term instruments as the National Bank may determine as appropriate,
acquiring, maintaining and transferring any movable and immovable
property including premises for carrying out its business.

1.2 Problem Statement

Micro finance institutions play a great role in supporting the economic

activities of the rural and urban poor in developing countries. Studies show
that African MFIs are important actors in the financial sector, and they are
well positioned to grow and reach the millions of potential clients who
currently do not have access to mainstream financial services (Lafourcade et
al., 2005).

Ebisa et al. (2013) found that microfinance institutions are decisive way outs
from the vicious circle of poverty particularly for the rural and urban poor,
particularly in a country like Ethiopia where many people live barely below
the absolute poverty line. The micro financing industry of Ethiopia is
4 Muluken Alemayehu and Mesfin Lemma

escalating in the face of the growing deep concerns for inflation and low
interest rate in the microfinance industry affecting the financial health and
viability of MFIs.

Many studies which are conducted on microfinance institutions also indicate

that, the contribution of these institutions for poverty alleviation is
significant. But the institutions face many challenges that inhibit their
contribution for the development of the country. Hurissa (2012) identified
the challenges of microfinance institutions by conducting research on the
selected MFIs in Addis Ababa city. But the conclusion of her research is
limited to the selected MFIs in Addis Ababa. The situation can vary from
one MFI to another. So it is difficult to use her conclusions for all
microfinance institutions.

Though the strengths of the Micro Financing Industry outweigh its

weaknesses, there are still big challenges facing the microfinance
institutions (Ebisa et al., 2013). This study also concludes that the
importance of MFIs is unquestionable. They contribute a lot to support the
Ethiopian poor who are out of the formal banking system. The challenges of
the Ethiopian microfinance institution were identified at a country level in
this research. The conclusions are also more general and do not show the
case of MFIs in Hawassa city separately.

According to Amha and Narayana (2000), the Ethiopian MFIs have many
problems related with the regulatory framework in the microfinance
industry, limited support to micro and small enterprise development, the
activities of NGOs on providing credit as a grant, absence of solid linkages
between MFIs and Commercial Banks, lack of fund for loans and an
institution to establish microfinance fund and access to soft loans from
JBAS Vol.6 No. 1 June 2014 5

NGOs, very limited research and innovation in the microfinance industry

and other problems also identified on his research findings. The finding of
this research was more general and the case of MFIs in Hawassa city was
not indicated specifically in this research. In addition to this, the findings are
outdated. Within these twelve year period, there may be many policy
changes and the situation might be changed.

By considering the gaps of different researches conducted on microfinance

institutions, this study focused on filling this research gap by focusing on
assessment of the factors which affect the performance of selected micro
finance institutions in the study area, namely Omo, vision fund and Sidama
micro finances, which are working in the capital city of SNNPR Hawassa
with the help of the following guiding basic research questions:
1. What are the major factors which affect the performance of MFIs?
2. Do all MFIs face similar problems which affect their performance?
3. What are the rationales behind the success and failure of MFIs?
4. What factors are related to clients of MFIs?

2. Review of Literature

2.1 What is Microfinance?

Microfinance is the supply of loans, savings, money transfers, insurance,

and other financial services to low-income people. Microfinance institutions
(MFIs) —which encompass a wide range of providers that vary in legal
structure, mission, and methodology offer these financial services to clients
who do not have access to mainstream banks or other formal financial
service providers (Lafourcade et al., 2005). Similarly, Parker et al., (2000)
defines microfinance as provision of small loans (called “micro-credit”) or
savings services for people excluded from the formal banking system.
6 Muluken Alemayehu and Mesfin Lemma

Microfinance is a type of banking service which provides access to financial

and non financial services to low income or unemployed people.
Microfinance is a powerful tool to self empower the poor people especially
women at world level and especially in developing countries (Noreen,
2011). While Steel and Addah (2004) describe micro finance as small
financial transactions with low income household and micro enterprises,
using non standard methodologies such as character-based lending, group
guarantees and short term loans.

The definitions of microfinance given by different scholars contain some

similar pointes. They describe microfinance as provision of a small amount
of loan for the poor, specifically the rural poor living in developing country.
Some microfinance institutions provide non financial services for their
clients. But in our case, most of the micro finances are known by the
provision of a small amount of credit and saving services.

2.2 History of Microfinance

Bornstein (1996) cited in (Zeller and Meyer, 2002) stated that Professor
Mohammad Yunus, a Bangladesh, addressed the banking problem faced by
poor villagers in southern Bangladesh through a program of action research.
With his graduate students at Chittagong University, he designed an
experimental credit program to serve the villagers. The program spread
rapidly to hundred of villages. Through a special experimental relationship
with local commercial banks, he disbursed and recovered thousands of
loans, but the bankers refused to take over the project at the end of the pilot
phase. They feared it was too expensive and risky in spite of its success
(Zeller and Meyer, 2002). When we see the condition of most microfinance
clients, giving loans for them seems risky. Because getting the money back
JBAS Vol.6 No. 1 June 2014 7

from the borrower needs special follow up and also the absence of collateral
for lending aggravate the fear.

2.3 Microfinance Institutions in Ethiopia

The development of microfinance institutions in Ethiopia is a recent

phenomenon. The proclamation, which provides for the establishment of
microfinance institutions, was issued in July 1996. Since then, various
microfinance institutions have legally been registered and started delivering
microfinance services (Wolday, 2000). The number of micro finance
institutions as well as the number of clients is increasing from time to time.
The existing political and economical condition of the country contributes a
lot for the development of the microfinance industry. According to Getaneh
(2005) the Licensing and Supervision of Microfinance Institution
Proclamation of the government encouraged the spread of Microfinance
Institutions (MFIs) in both rural and urban areas as it authorized them,
among other things, to legally accept deposits from the general public
(hence diversify sources of funds), to draw and accept drafts, and to manage
funds for the micro financing business.

In this case some MFIs have strong capacity to serve a large number of
clients by using their financial and geographical advantage. These three
institutions take more than 50% of the market share. This means they are
reaching and serving many poor in their areas.

2.4 The Need for Microfinance

Microfinance institutions play many roles in the development process. The

need for microfinance is also increasing in many countries. According to
(Parker et al., 2000), in the right environments, microfinance can
8 Muluken Alemayehu and Mesfin Lemma

accomplish many roles such as financer people’s economic choices,

diversifying household income, making household less vulnerable to
downturn in the economy or personal, smoothening income flows of the
household, improve quality of life throughout the year and strengthen the
economic position of women so that they can take greater control of
decisions and events in their lives. In addition to this MF contributes in the
process of household asset building. It also provides savings service,
allowing poor households to accumulate safe, but flexible cash accounts to
draw on when needed.

Microfinance services lead to women empowerment by positively

influencing women’s decision making power at household level and their
overall socioeconomic status. By the end of 2000, microfinance services had
reached over 79 million of the poorest of the world. As such microfinance
has the potential to make a significant contribution to gender equality and
promote sustainable livelihood and better working condition for women
(Noreen, 2011).

According to United Nations Millennium Development Goal (MDGs)

microfinance is a strategy to change the life of the poor people in terms of
generating revenue to cover the necessary cost and institutions meet the
demand (United Nation, 2011). Micro finances support the process of
development by changing the situation of the poor through facilitating
different services which are necessary for poor.

2.5 Performance Measurement of MFIs

According to Basu and Woller (2004) cited in (Wale, 2009), two different
perspective on which the MF performance is to be measured has created two
opposing but having the same goals school of thought about the MF
JBAS Vol.6 No. 1 June 2014 9

industry. The first one are called welfarists and the second one institutionist.
Welfarists argue that MFIs can achieve sustainability without achieving
financial sustainability. They contend that donations serve as a form of
equity and as such donors can be viewed as social investors. Unlike private
investors who purchase equity in publicly traded firm, social investors don’t
expect to earn monetary returns. Instead, these donor investors realize a
social (intrinsic) return. Welfarists tend to emphasize poverty alleviation,
place relatively greater weight on depth of outreach relative to the breadth of
outreach and gauge institutional success according to social metrics. This is
not to say that neither breadth of outreach nor financial metrics matter.
Welfarists feel these issues are important, but they are less willing than
institutionist to sacrifice depth of outreach to achieve them. On the contrary,
institutionists argue that unless we build sustainable MFI that are capable of
running independent of subsidies the promise of MFI of eradicating world
poverty will not be met. They argue that sustainable MFI helps to expand
outreach and reach more poor people.

Hence, even if the two schools of thought seem contradictory, they are
actually not. Their goal is eradicating poverty. Their difference lies on how
to go about it. Welfarists say we have to target the very poor and
profitability shall be secondary. They prefer to charge subsidized and low
interest rates by relying on donor funds. Institutionist argues donor funds are
unreliable and MFIs must by themselves generate enough revenues to reach
more poor people in the future. They favor marginally poor custome. They
charge higher interest rates and focus on efficiency of MFIs to generate
profit and reach more poor. The debate between the two schools of thought
is endless and today many players in the MF industry use both the welfarists
10 Muluken Alemayehu and Mesfin Lemma

and instututionist perspective to assess the performance of MFIs (Wale,

2009).

2.6 Challenges of Microfinance Institutions

Most microfinance programs are small and vulnerable to resource

constraints. Most operate in a few locations and serve specific clusters of
clients, so they are exposed to the systematic risks of undiversified loan
portfolios. Most mobilize few savings and not financially self sufficient,
so they are dependent on the whims of donors and government for their
future existence (MEYER, 2002). Microfinance institutions may face
financial problems which affect their performance. When the customer
of the institutions increases the required money for loan disbursement
also increase. On the other hand, when the operational areas of the
institutions is limited (less outreach), it is difficult to be profitable.

2.7 Factors Affecting the Performance of MFIs

Huang (2005) cited in (Vanroose, 2008) distinguishes three groups of

factors: policy, geographical and institutional factors.

Policy Factors: There are different macro-economic factors related to

MFIs. The first factor is the income level. Westley (2005) cited in
(Vanroose, 2008) states that regions with higher levels of income have
less developed microfinance sectors. He provides two reasons. Firstly,
micro-entrepreneurs with higher incomes have more opportunities to
self-finance through savings. Secondly, they may benefit more easily
from informal finance through family and friends, as well as from
formal finance.
JBAS Vol.6 No. 1 June 2014 11

Similarly, Schreiner and Colombet (2001) argue that one of the reasons why
microfinance in Argentina has not developed is due to the higher wages
people earn. Traditionally, microfinance also focuses on the poor excluded
clients, so microfinance should be reaching more clients in regions that are
poor. The other factor is economic instability of the country. Microfinance
is more developed in countries that have relatively in stable economies. The
international donor community has historically played an important role in
subsidizing the emergence and further development of microfinance
programs.

Imboden (2005) cited in (Vanroose, 2008) stated that, as most institutions

started as non-governmental organizations, external financial intervention
was needed.

Geographic Variables: Stieglitz and Weiss (1981) cited in (Vanroose,

2008) stated that transaction and information costs influence financial
development. In some cases, they lead to market failures. Good
interconnectivity between regions, the availability of electricity,
communications and sanitation networks lower these costs. A high
population density also helps. According to Sriram and Kumar (2005) cited
in (Vanroose, 2008) two contradictory arguments could be made. The first is
that formal financial institutions may be more developed in regions with
higher population density and good regional interconnectivity. Thus the
need for specific MFIs may not be present. The second is that, if the
development of the two sectors is complementary, these factors could
eventually also stimulate the development of the microfinance sector.
Hulme and Moore (2006) cited in (Vanroose, 2008) also support the
hypothesis that microfinance tends to develop much faster in densely
populated areas.
12 Muluken Alemayehu and Mesfin Lemma

Institutional Variables: Institutions play an important role in the

development process of a country. One institution that is often mentioned in
the microfinance literature is the educational system. The role of human
capital in financial sector development is widely recognized (Vanroose,
2008). Paulson (2002) cited in (Vanroose, 2008) finds that regions with
higher levels of education have more developed financial systems. Guiso et
al (2004) cited in (Vanroose, 2008) also find positive effects of social
capital in financial sectors.

2.8 Empirical Literature Review

Many studies were conducted on the issue related to microfinance

institutions performance, challenges their impact on the economic and social
condition of the rural poor. The study conducted by Ebisa et al., (2012),
shows that the mean amount of loans extended by 30 microfinance
institutions in the country is 2.2938, whereas the mean borrowing customers
equal an amount of 8.2434. As it is indicated in this study the R square
value is 0.913 implying that 91.3% of the variations in the amount of loans
extended by 30 microfinance institutions in the country are explained by the
number of borrowing clients. On the other hand, the Pearson correlation
indicates strong positive linear relationships between number of borrowing
clients and amount of loans extended. The total number of active borrowing
clients of the microfinance institutions in Ethiopia reached over 2.4 million
customers in 2011 whereas the total credit extended by all microfinance
institutions amounted to Birr 6.9 billion. Of the total credit granted, the
share of the three largest Microfinance institutions is Birr 5.1 billion. The
market shares based on the number of borrowing clients are 28.1, 16.1 and
20.4% for Amhara Credit and Saving Inst (ACSI), Dedebit Credit and
JBAS Vol.6 No. 1 June 2014 13

Savings Inst (DECSI) and Oromia Credit and Savings (OCSSCO),

respectively.

Lack of skilled personnel is the common problem in Ethiopian Microfinance

Institutions. This situation is more exacerbated by high turnover of
experienced personnel either for the need for better jobs or hate to work in
rural areas with minimal facilities provided as compared to urban areas
which offer better living conditions. There is also a problem of using
modern core finance technologies for many of MFIs specially those
microfinance institutions operating in remote rural areas having poor
infrastructure development. As a result, there are problems of non
standardized reporting and performance monitoring system. On the other
hand, MFIs face challenges of obtaining loans in the existing financial
market, particularly from banks, which hampers strive for addressing
various needs of clients. There is an illegal way of doing the micro financing
business from the side of the government, NGOs and other agencies which
continue to provide uncollectible loans by violating the proclamations
ratified by the House of People’s Representatives. Apart from this, there are
deep concerns within the microfinance sector about the growing issue of
inflation on the profitability of MFIs, and the ability to maintain low interest
rates (Ebisa et al., 2013).

A Contrast of Grameen Bank to a Traditional Bank

The Grameen bank differs from that of traditional banks in so many ways.
According to Hassan (2002) the Grameen diverges from traditional banking
in the selection of the clientele that it has chosen to serve, in the methods it
employs to serve this clientele and in the products that it offers to this
clientele. Accordingly Grameen has chosen to serve the ‘‘poorest of the
14 Muluken Alemayehu and Mesfin Lemma

poor’ ’ in rural Bangladesh and has targeted women, believing that they are
the most needy of the poor. Through its lending and social policies,
Grameen intends to permanently elevate these poor to an acceptable level
within their society. Women are among the most vulnerable group of the
society in Ethiopia. Most of the clients of MFIs are women. This shows the
idea of Grameen bank is shared by many micro finance institutions.

In addition to this, Grameen differs from traditional banks in the value of the
principal amounts and types of the loans it offers, the terms of its loans, the
repayment conditions of its loans, its lending procedures and in the overall
social consciousness and guidance that it incorporates in its loan policies.
Grameen is attempting to reach a very large population of uneducated, rural
poor. Much of this population rarely, if ever, dealt with the Bangladesh
Taka currency, but lived in a barter society. Grameen could not expect these
people to come to the bank, as traditional banks expect, but was required to
deliver the bank to the people (Hassan, 2002).

2.9 Conceptual Framework

The performance of Microfinance Institutions can be affected by different

internal and external factors. Studies indicated the success or failure of the
institutions is directly or indirectly related to different factors. Institutional,
social, economical as well as environmental factors play a great role on the
performance of the institutions. Institutional factors related to the financial
capacity, the capacity of the institutions to serve their clients, the use of
different cost effective and efficient technologies in the institution and other
related issues. Social factors on the other hand are related to the conditions
of the clients. Social factors include the tradition, saving habit of the people,
the existence of other means for borrowing in the community and so on. In
addition to this, Environmental factors such as geographical location of the
JBAS Vol.6 No. 1 June 2014 15

clients, availability of infrastructure, and others contribute for the

performance of the MFIs. Economical factors also have a significant effect
on the performance of Microfinance Institutions. For instance, the economic
level of the country in which MFIs are operating is directly related to the
outreach of the institutions and their sustainability. The following diagram
shows the relationship between the factors and performance of MFIs.

Institutional
factors

Clientele
factors Performance of
Success
Microfinance
of MFIs
Institutions

Political
factors

Figure 1. Conceptual framework of the study

3. Research Design and Method

3.1 Research Design

This study employed descriptive and exploratory type of research design to

show the opinion of the managers in Microfinance Institutions, the
16 Muluken Alemayehu and Mesfin Lemma

employees and their clients to assess the factors that affect the performance
of Microfinance Institutions. To this end, the researchers used both
qualitative and quantitative approaches. Research in such a situation is a
function of researchers’ insights and impressions. Furthermore, in this study
qualitative research approach is used to assess the opinion of the
respondents towards the factors, their assumptions and the problems they
faced. Quantitative approach was used to indicate the frequency and
percentage of the responses and to present different secondary data in
organized way.

3.2 Sampling Frame and Sampling Size

The sampling frame is the list of all elements from which the sample is
drawn. For this research, the sampling frame is list of Microfinance
Institutions operating in Hawassa city, the list of employees working in
these institutions obtained from each institution and list of clients of the
institutions. The set of sampling unit considered for this study include
Microfinance Institutions which are found in Hawassa city, their clients and
the workers of the institutions.

In Hawassa city, the number of Microfinance Institutions is only three. In

order to compare different factors found in different institutions, all the
institutions are included in the sample. The researchers employed formula to
calculate the minimum size out of 116 targeted workers in the institution.
Israel (2009) found the following formula to determine the sample size
which is trustworthy when the population size is known. By considering the
homogeneity of the respondents and to reduce the sample size the
researchers applied 7% precision level in the formula.
JBAS Vol.6 No. 1 June 2014 17

Where n = sample size

N
n =----------- — e = margin of
error (7%) 1 + N (e )

N= Population
size
n= 116/1+116 (0.072)
= 116/1+116(0.0049) =116/1.5684 74

Thus, the employees included in the survey questionnaire are 74. The
number of respondents taken from each institution is determined by
considering the total number of employees in the institutions. Besides, 3
individuals (managers) are selected for interview purposively to support
the purpose of this research.

Similarly, in order to decide the number of clients to be included in the

sample, the researchers employed formula method. As a result, from Omo
Microfinance branches, Menehariya subcity, Mehal subcity, Addis ketema
subcity and Hayik Dar subcity are selected. The number of clients in these
sub branches is 2092, 958, 827 and 1320, respectively. From Sidama
Microfinance Institution, Hawassa branch is included in the sample. There
are 3090 clients in this institution. Vision fund is the other institution with
the total client size of 303. Totally, 8590 clients are taken as a total
population from the selected institutions.

N n= 8590/1+8590 (0.072)
n = -------- 2
1 + N (e )
8590/1+8590 (0.0049) =8590/43.091 = 199

As a result of the calculation above, 199 clients are included in the sample.
As the case of employees, precision level 7% is taken to determine the
sample size of the clients. The researchers assumed homogeneity of the
clients and the existing resources to determine the sample size by changing
18 Muluken Alemayehu and Mesfin Lemma

the precision level. The number of clients taken from each institution is
determined by considering the total number of clients each institution has.

3.3 Sampling Techniques

For the purpose of this study, the researchers used both probability and non­
probability sampling techniques. There are three MFIs in Hawassa city,
namely Omo Microfinance, Sidama Microfinance and Vision Fund MFI,
which were included in the sample. Researchers have decided to take 50%
of the branches to get adequate data. As a result, in the case of Omo
Microfinance, it has 8 sub-branches in Hawassa with the distribution of one
branch in each sub-city. Because of their homogeneity in many aspects, the
researchers took only 4 of the sub branches by using the simple random
technique. This means from Omo Microfinance, the Head Offices are
selected purposively, and 4 sub-branches are selected randomly. In the case
of Sidama Microfinance Institution, there are three branches in Hawassa
city. Two of the branches are selected by using the simple random method.
Vision Fund Microfinance Hawassa branch does not have a sub branch in
Hawassa. So Hawassa branch Office is taken and included in the sample.

There are about 198 employees in the selected three institutions, including
the branch and sub branch workers. Out off these employees, 116 are
operational workers who have direct linkage with the day-to-day activities
of the institutions. Simple random sampling method is employed to select
the sample from this population. The researchers used purposive sampling
(expert sampling) to include all managers in the sample because it is
believed managers of the institutions are the main sources of required
information. Regarding the clients, there are about 8590 clients in the
selected institutions. Due to availability of list of the clients from each
JBAS Vol.6 No. 1 June 2014 19

institution, the researchers employed systematic sampling technique to

select 199 clients. Consequently, 111 from Omo MFI, 66 from Sidama MFI
and 11 clients from Vision Fund were selected.

3.4 Methods of Data Collection

For the purpose of this study, questionnaire and semi-structured interview

data collection tools are used. To gather information from the respondents
of the selected sample, the researchers developed a questionnaire which
containing open and closed-ended questions. The questionnaires are
distributed and filled with the support of enumerators. The questionnaires
were prepared in English language and translated into Amharic to make the
questionnaire simple for the respondents. To check the clarity of the
questionnaire, reliability and validity tests have been conducted before
distribution of the questionnaires. After the test, some modifications were
made.

Three types of questionnaires were distributed in May 2014 for three target
groups of the research. Two of the questionnaires are used to collect data
from clients of MFIs and employees of the institutions. The third
questionnaire is filled out by operation managers of the institutions. All 276
distributed questionnaires were filled and collected properly. In addition, the
researchers conducted interview with managers of the Microfinance
Institutions to seek in-depth information about the factors and challenges
which affect the performance of MFIs.
20 Muluken Alemayehu and Mesfin Lemma

4. Results and Discussion

4.1 Purpose of Borrowing

As table 3 portrays, the highest percent of the respondents (40%) borrowed

the money for the expansion of the existing micro business and 64 (32.2%)
of the clients borrowed to start a new business, while 20% of the borrowers
invest the money for future income generating activities such as to build
houses to rent. Generally, over 92% of the borrowers used the loan for
business related activities which is similar to that of Grameen bank,
according to Morduch (1999) the reasons for common loan include for rice
processing, livestock raising, and traditional crafts. These all are income
generating businesses.
Table 3. Purpose of the clients for borrowing
Reasons to borrow from MFIs Frequency Percent%
To start a new business 64 32.2
To upgrade the existing business 80 40.2
For medical cases 5 2.5
To build houses to rent 40 20.1
For other purpose 10 5.0
Total 199 100.0

4.2 The Amount of Money Invested

Most of MFIs provide loans for income generating activities. The clients of
these institutions are expected to fulfill the borrower’s requirements. The
first criterion to get the loan is having licensed micro business in the
operational areas of the institutions. The institutions also expect to invest the
money for income generating activities. Koveos and Randhawa (2004)
stated that microloans enable clients to break out of the ‘poverty trap’ by
JBAS Vol.6 No. 1 June 2014 21

facilitating growth in household income, providing channels for mobilizing

savings and through group as well as individual loans help to build up the
village’s asset base. In order to improve the income of the house hold (HH)
and to become economically strong, it is better to invest the money for
income generating activities, especially for the poor.

Table 4 depicts that 47.2% respondents invested 100% of the loan for
income generating activities. On the other hand, 57 (28.6%) of the clients
invested only. But 50-75% of the loan for their business. 11.6% of the
respondents diverted the loan into non income generating areas. If they
spend the money on non-income generating activities, they may face a
challenge to repay their loan from their lower HH income. They may go to
other source of money lenders to repay their loan. So it becomes difficult to
free the poor from poverty. Even though in some of the institutions, the
borrowers submitted the business plan and business license, only 47% of the
borrowers invest 100% of the loan for the business.

Table 4. Amount of money invested on income generating activities

Amount invested Frequency Percent%

100% 94 47.2
50-75% 57 28.6
25-50% 22 11.1
below 25% 23 11.6
Total 199 100.0

The interview result with the managers of the institution is also supported
that, investing the loan on non business areas weaken the loan repayment
capacity of the borrowers. In addition, some borrowers propose a fake
22 Muluken Alemayehu and Mesfin Lemma

license and the others use the license of friends or relatives to borrow the
money. Bartik (2009); CGAP (2011); Karlan & Zinman (2012) cited in
Chakrabarty and Bass (2013), identified that less than half of microfinance
loans are used for non business activities. Thus, these loans are more likely
to be used to stabilize consumption, pay education fees and medical
expenses, or for life events including weddings and funerals. As a result, the
only expectation of the transaction between the MFI and the borrower is that
the loan can be repaid and costs incurred from monitoring the repayment of
this loan will be moderate. Though the amount invested on non income
generating activities is low, the institutions may face challenges to collect
the loan from the poor according to the repayment schedule.

4.3 Availability and Types of Training

Providing training to the clients helps to aware the clients on many issues
such as in the proposed business, on the area of entrepreneurship, on the
issue of saving and on other related issues to support and strengthen the
capacity of the borrower both on the repayment of their loan and in their
life. Table 5 below shows that, only 48 (24.1%) of the borrowers have got
training on different issues. The majority of the clients are out of any
training. From the clients who have taken training, 48% them attended
training on the issue of saving. Only 52% of the respondents have taken
training on the proposed business.
 JBAS Vol.6 No. 1 June 2014 23

Table 5. Clients who have taken training and get support

Items Alternatives Frequency Percent %

Yes 48 24.1
Have you taken training? No 146 73.4
Total 197 99.0
Training related with the new
15 31
business
Which types of training did you Training related with
10 21
get so far? entrepreneurship
Training related with saving 23 48
Total 48 100%
Did you get monitoring and Yes 112 56.3
support from MFI No 87 43.7
Total 199 100.0

According to Chakrabarty and Bass (2013), MFIs can adopt two strategies
regarding their services. One in which the MFI follows its basic mission of
solely providing financial services, and the other in which MFIs provide
supplementary knowledge services in addition to financial services to
borrowers. The first MFI strategy specifically focused on the past and
present financial status of the borrower. That is, the purpose of the
transaction between the MFI and borrowers is to provide borrowers who are
determined creditworthy, with loans. These loans might be used to start
microenterprises. The second strategy, which encourages entrepreneurship
by additionally providing knowledge resources for borrowers, focuses not
just on the past and present financial status of the borrower but also in the
borrower’s future entrepreneurial plans. MFIs that choose to provide
impoverished borrowers with knowledge services in addition to financial
services do so to equip these borrowers with the tools necessary to take the
risks needed to create and grow microenterprises. In principle most of MFIs
24 Muluken Alemayehu and Mesfin Lemma

agree with the second strategy, to give different types of training for their
clients. But only 24% of the clients have received this service.

4.4 Monitoring and Support System

Monitoring the business condition of the clients is one of the regular tasks of
the institutions. There are employees responsible for monitoring and
providing assistance for the clients. In one of the institutions, there are
agents at kebele level, which are responsible to mobilize saving and collect
payments from the borrowers. As table 5 above shows, only 56.6% of the
respondents have got different support and the institution’s follow up, while
43% of the clients did not get similar service. The institutions check their
business when the clients fail to repay their loan. If the institutions have no
information about their client’s business condition, it becomes difficult to be
confident about the repayment. Knowing the condition of the clients helps
the institutions to take different corrective actions.

4.5 Loan Repayment Related Issues

Improving the repayment rate could also help to reduce the dependence on
subsidies and help the MFI reach a better sustainability level. It is also
argued that high repayment rates reflect the adequacy of MFI's services to
clients’ needs and restrict the cross subvention of the borrowers. Repayment
performance also acts as an important positive signal when the MFI has to
raise new funds. For all these reasons, higher repayment rates are largely
associated with benefits both for the MFI and the borrower (Godquin,
2002). The clients’ failure to repay their loans related to different factors.
Table 6 below shows that 65.8% of clients are paying according to the
repayment schedule, whereas the other 34.2% of the clients fail at least one
time from paying the loan timely. On the other hand, 27.6% of the
JBAS Vol.6 No. 1 June 2014 25

respondents have a fear of paying their loans, according to the institution's

program in the future because of different reasons. The rest (71.9%) of the
clients are confident enough to repay the money until they finish the entire
loan.

The reasons for those of the clients who failed to repay vary from client to
client. The reason of 47% of unsuccessful clients is a personal problem like
illness and different family cases. About 21.8% of them fail to repay the
loan because of market condition of their business. The other 16% of the
respondents connect their failure with the institutions. Lack of follow up
from the institutions becomes the reason for the failure of 16% of the
clients.

Table 6. Loan repayment according to the repayment schedule

Item s Alternatives Frequency Percent%

Have you you’re your Yes 131 65.8

loan according to No 68 34.2
repayment schedule? Total 199 100.0
The business faced lose 7 12.7
The business is not working properly 12 21.8
What type of challenges Because of personal reason 26 47
have you faced to repay Because the institution do not follow the
9 16
the loan? repayment
Because of other reason 1 1.8
Total 55 100
Can you pay your loan Yes 143 71.9
according to the schedule No 55 27.6
in the future? Total 199 100.0

Delay and failure of repayment is related with the performance of the

institutions. The data above indicate the seriousness of the case. Though
high percentages of the clients are paying back the loan, a significant
percent of clients have failed from repayment due to different reasons.
Godquin (2002) found out social ties among the group had a negative
26 Muluken Alemayehu and Mesfin Lemma

impact on the repayment; the age of the borrowing group had a significant
negative impact on repayment rate; group homogeneity proved to have no
significant impact on repayment performance in the whole sample. On the
other hand, group homogeneity in terms of sex showed a positive impact,
whereas homogeneity in terms of education showed a negative effect.
Homogeneity in terms of age also showed both a negative and positive
effect on the repayment performance. His study mainly focused on loan
repayment of group borrowers.

4.6 Performance Evaluation by Clients of MFIs

The clients measure the performance by considering the institution's

capacity by using simple measurements when they get the service, by
considering the time taken to get the service, by observing the physical set
up of the offices, by comparing the interest rate of their institution with
other institutions and so on.

4.6.1 Experience of Voluntary Saving

One of the options for promoting household welfare is the development of

facilities for safe but liquid savings deposits. Early microfinance programs
were not effective in mobilizing savings and showed little interest in doing
so. Partly, it was thought that poor HH were too poor to save (Morduch,
1999). Robinson (1995) cited in (Morduch, 1999) stated that, from an
institutional viewpoint, in cooperating savings mobilization in microfinance
programs makes sense for a variety of reasons. First, it can provide a
relatively inexpensive source of capital for relending. Second, today’s
depositors may be tomorrow’s borrowers, so a savings program creates a
natural client pool. Third, building up savings may offer important
advantages to low income households directly: households can build up
JBAS Vol.6 No. 1 June 2014 27

assets to use as collateral, they can build up a reserve to reduce consumption

volatility over time, and they may be able to self-finance investments rather
than always turning to creditors. By considering these advantages of saving,
some of MFIs in Hawassa highly encourage saving.

Table 7. Experience of voluntary saving

Do you have voluntary saving? Frequency Percent%
Yes, I have voluntary saving 99 49.7

No, I don’t have voluntary saving 100 50.3

Total 199 100.0

Table 7 shows that 49.7% of the respondents have voluntary saving account
in the institutions, whereas 51.3% do not have voluntary saving account. In
the case of Omo Microfinance Institutions, one of the requirements to get
loan is that, saving 20% of the loan requested. This approach has two basic
advantages. First, it encourages saving habit of the borrowers for the future.
Secondly, it helps to solve the problem of loan capital shortage. But the data
in the table above designate the majority of the respondents are not
voluntary depositors. If it is so the institutions are losing the advantages that
support to improve the performance of the institutions in this aspect.

4.6.2 The Respondent’s Business Condition

The business condition of the borrowers is the other factor related to clients.
It is related to many issues of the institution such as timely repayment,
saving loan capital, loan size and many others. The majority of the
respondents (53%) business is profitable and they are getting profit from
their business. On the other hand, 23.6% clients’ businesses are not
profitable. The smaller amount of the borrower's business is under risky
conditions. We can connect monitoring and support system and training
28 Muluken Alemayehu and Mesfin Lemma

with the business condition of the borrowers. If there is an organized system

of monitoring and support, the institutions can have the chance to know the
borrower's capacity of repayment earlier and can minimize the amount of
loan at risk. On the other hand, provision of training helps the borrowers
invest the money in profitable business and to be an entrepreneur. So the
business condition of the clients plays a great role on many areas of the
institution.

4.6.3 Level Of Agreement and Disagreement of Clients on

Different Issues

MFIs are one way to fill the financial need of the rural poor because; the
poor do not have a tangible asset that serves as collateral to borrow from
traditional banks. So serving the poor is the primary objective of MFIs. The
respondents were asked about whether the institutions are serving the poor
properly or not. As table 8 below shows 69.3% of the clients indicated their
agreement while 14.1% show their disagreement.

According to Fernando (2006), MFI's main objective is to provide poor and

low income households with an affordable source of financial services.
Interest charged on loans is the main source of income for these institutions
and, because they incur huge costs, the rates are correspondingly high. Four
key factors determine these rates: the cost of funds, the MFI's operating
expenses, loan losses, and profits needed to expand their capital base and
fund expected future growth. In order to have these advantages, the selected
microfinance institutions also charged high interest rates from their clients.

The interest rate varies from institution to institutions. Some of the

institutions charge more than 20% interest. The others charged between 10
to 20 percent interest. The interest rate also differs with the purpose of
 JBAS Vol.6 No. 1 June 2014 29

borrowing. Table 8 illustrates that concerning the interest rate, the majority
(52.3%) of the borrowers were disagreed on the fairness of the interest rate
to the poor. 47.9% of the respondents agree that the interest rate of MFIs is
fair to the poor. But from the total respondents who agreed on the fairness of
the interest rate, 37 (18.6%) of the clients agreed in some extent. As stated
earlier some of the respondents shifted from microfinance to microfinance
to get loan with lower interest rate. This implies that higher interest rate can
cause shifting of clients into other institutions. In addition to this higher
interest rate also affect the borrower’s repayment capacity because the
borrowers are expected to pay both the principal and the higher interest at a
time so they may fail to pay according to the schedule.

Table 8. Level of agreement and disagreement of clients on different issues

No Item Agree Som ehow agree Disagree
No % No % No %
1 MFIs are serving the poor properly 130 69.3 33 16.6 28 14.1
2 Interest rate of MFIs are fair to the 58 29.3 37 18.6 104 52.3
poor
3 The repayment schedule is 118 59.3 42 21.1 37 18.6
comfortable to the clients
4 The institutions have easy process to 110 55.3 46 23.1 43 21.6
get service
5 The institution is near to my home 169 84.9 16 8 14 7
6 The amount of the loan given by 66 33.1 55 27.6 78 39.2
MFIs enough
7 It is better to borrow from MFIs than 116 58.3 50 25.6 33 16.6
other source
8 There is improvement in my life after 69 34.7 18 9 109 56.3
getting the loan

Repayment schedule of the institutions is the other issue related to clients of

MFIs. Most microfinance arranged the repayment schedule starting from a
month after the disbursement of the loan. The duration of the loan varies
from institution to institution. One-two year duration is common in the
selected MFIs. The repayment has taken place monthly until the borrower
finish the loan. As table 8 exhibits 160 (80%) of the respondents agree that,
30 Muluken Alemayehu and Mesfin Lemma

the repayment schedule of the institution is comfortable for them. But a

smaller portion of the clients (19%) disagreed on the repayment schedule of
the institutions. Some of the respondents disagreed on the repayment
schedule because of their work condition. For instance, if the borrowers
want the money for animal fattening it is difficult to start the repayment
immediately after a month. So if there is no comfortable repayment
schedule, it becomes difficult for the borrowers to repay according to the
schedule.

There are different requirements to get different services specially to get a

loan. Lending to the poor has many risks. In order to minimize these risks,
all the borrowers are expected to pass many steps. But the steps vary from
institution to institution. Some of the institutions use long processes before
disbursement of the loan. The others use relatively short processes. In this
regard, table 8 shows that 78.4% of the respondents were agreed that the
process to get the service is easy and comfortable. The other 21% of the
respondents expressed their disagreement. In relation to this the need for
collateral is another annoyance for the poor to get a loan. Because the other
requirement, that make the individual eligible for a loan is the availability of
collateral in different type. Especially individual borrowers are expected to
have collateral or guarantee to make the loan secure.

Stieglitz and Weiss (1981) cited in (Vanroose, 2008) stated that transaction
and information costs influence financial development. In some cases, they
lead to market failures. Good interconnectivity between regions, the
availability of electricity, communications and sanitation networks lower
these costs. We can connect this point with the physical distance of the
institution from the borrowers. If the institutions and the clients are found in
a distant area, the different costs of the institutions will increase at least in
JBAS Vol.6 No. 1 June 2014 31

some amount. Monitoring cost and communication costs are the examples
of these costs. So, if the clients are living in a nearby area of the institution,
the institution can reduce some costs. Regarding distance of the institutions,
from the total of the selected 199 respondents, 92.9% agreed that the
institution is near to them.

The main objective of microfinance institutions is to provide microcredit

and saving service to the poor. The loan size of microfinance institutions is
known by its small size. The amount of the loan matters both the borrowers
and the lender institutions. Today the value of money has declined and
situations to start a new business as well as to improve the existing business
need high amount of money. The poor are out of the normal banking
service. So microfinance institutions are the best option to get loan for micro
businesses. As table 8 above discloses 58.3% of the respondents agreed and
25.6% somehow agree that it is better to borrow from microfinance
institutions, even though the interest rate is high. Concerning the loan size
of MFIs, 61% of the respondents agreed on the reasonable amount of the
loan (with 33.1% agreed and 27.6% somehow agree). Among the agreed
respondents, around 28% of them agreed to some extent. On the other hand
significant percent of respondents (39%) disagreed on the loan size of MFIs.
This implies that, though the loan size of the institutions satisfied the
majority of the clients, there are also high percent of clients who are not
satisfied with the loan size. Their dissatisfaction is related to their inability
to expand their business and today’s money value.

Most researchers indicate that microfinance institutions are serving the poor
and the poor is coming out of extreme poverty by using MFIs as a means.
Littlefield et al 2003 and Dunford 2006, cited in Hermes and Lensink
(2007) stated that, the advocates of microcredit argue that microcredit can
32 Muluken Alemayehu and Mesfin Lemma

help to substantially reduce poverty. In addition, microcredit can contribute

to an improvement of the social and economic situation of women. Finally,
microfinance may have positive spillover effects such that its impact
surpasses the economic and social improvement of the borrower. The result
of this study shows deviated from the above assumptions. Table 8 above
displays only 43.7% of the respondents agreed that there is improvement in
their life after getting the loan. But the highest percentage of clients 56.3 %
disagreed on the issue. That means the contribution of the loan in their life is
insignificant and the service given by the institutions are not satisfying the
need of the majority of clients.

4.7 Factors that Affect Loan Repayment from the Employee’s Point of View

Successful repayment of the loan has a positive impact on the performance

of MFIs. Clients of microfinance institutions sometimes fail from paying the
loan accordingly. There can be different reasons for their failure. The
employees of MFIs are expected to be near to their clients in different ways.
They communicate with their clients at the beginning of the loan process,
during repayment time and at the time of supervision. By considering this
the researchers asked some questions related with loan repayment and
clients' reasons. The table below indicates the percentage of responses of the
employees on this regard.

Table 9. Factors affecting repayment as per employees’ perception

Factors Frequency Percent
Low financial capacity of clients 22 29.7
Weak loan collection system 4 5.4
Weak client selection system 20 27.0
Lack of willingness from clients to pay their
28 37.8
loan
Total 74 100.0
JBAS Vol.6 No. 1 June 2014 33

Concerning the major factors which affect loan repayment, table 9 shows
that 37.8% of the respondents have chosen Lack of willingness from clients
to pay their loan is the major factor which affects loan repayment. 29.7 % of
the employees agreed that, low financial capacity of clients is foremost
factor for low repayment rate. Whereas 27% of the respondents blame client
selection process for the weakness of loan repayment. Only the minor
number of respondents selected weak loan collection system as a major
factor.

4.8 Loan Repayment Rate and Lending Method

On the other hand, regarding business loan and non-business loan

repayment, table 10 portrays 48.6% of the respondents agreed that the
repayment rate on non-business loan is smaller compared to business loan
and 48.6% of the respondents believe that group lending is more effective
than individual lending in terms of loan repayment. 51.4% of the employees
believe that lending for individuals is more successful than that of group
lending. In relation to repayment Godquin (2002) stated that, improving the
repayment rate could help to reduce the dependence on subsidies and help
the MFI reach a better sustainability level. It is also argued that high
repayment rates reflect the adequacy of MFI's services to clients’ needs and
restrict the cross subvention1 of the borrowers. Repayment performance
also acts as an important positive signal when the MFI has to raise new
funds. For all these reasons, higher repayment rates are largely associated
with benefits both for the MFI and the borrower. The MFI will thus firstly
tends to reach the first best level of a 100% on the time repayment rate and,
if such a level of repayment performance cannot be reached, it will try to
allocate higher loans to borrowers with lower probability of default and
reduce the delay in repayment.
34 Muluken Alemayehu and Mesfin Lemma

Table 10. Loan repayment rate and lending methods

Items Alternatives Frequency Percent
How do you It is similar to business loan 20 27.0
evaluate loan The loan repayment is smaller 36 48.6
repayment rate? The loan repayment is higher 18 24.3
Total 74 100.0
Which method of Group lending 36 48.6
lending is effective? Individual lending 38 51.4
Total 74 100.0

4.9 How to Organize and Store Different Documents

One way of reducing operational cost of microfinance institutions is the

application of different technologies during the service provision system.
Many researchers also support the use of innovative technologies in the
institutions. Fernando (2006) concluded that MFIs must find innovative
ways to improve their productivity and efficiency, and reduce operating
costs. Essential to this process is cost-reducing innovations. Governments in
the region can help to facilitate innovation in the microfinance industry by
recognizing and rewarding innovators, thereby encouraging further
innovation. Similarly, governments can help ensure that information on
more efficient MFIs is disseminated widely.

Some of the selected institutions use different software applications by

reducing more of paper works. Those institutions who are using financial
software have updated information in their everyday tasks. They are
networked with all branches so that they can transfer different data with
minimum cost and time. Figure 2 demonstrates that from the total of 74
respondents only 10.8% of the employees are using different software while
the majority (80.2%) is using the paper work (manual work) to document
and transfer different information within the branch and from branches to
head offices.
JBAS Vol.6 No. 1 June 2014 35

Figure 2. Percentages of software users

During the interview with one of the institutions, the manager supported that
the application of software was raised and he responded that, the institution
is not using software, the main reason for this is, the price it costs to install
the software. But all the institutions agreed on the advantage of software
application. As mentioned above the majority of the employees are degree
holders. But the majority of the institutions are not using technologies. Ebisa
et al. (2013) also identified that, there is a problem of using modern core
finance technologies for many of MFIs specially those microfinance
institutions operating in remote rural areas having poor infrastructure
development. As a result, there are problems of non standardized reporting
and performance monitoring system. In the case of MFIs in Hawassa city,
the researchers also observed that, most of the branch offices have only one
computer and most of the works are done manually.
36 Muluken Alemayehu and Mesfin Lemma

4.10 Level of Agreement of Employees on Different Issues

The researchers asked respondents different questions to know their level of

agreement and disagreement on different issues. The issues include the
client usage of the loaned money, existence of cost effective methods in the
institutions, legal issues in the country, profitability of the institutions and
loan size given by the institutions. As a result, as table 11 below indicates
58.1% of the employees agreed that most of the borrowers invest the money
on income generating activities. From this percent of respondents, around
23% of them agreed in some extent. The other 41.9% of the respondents
agreed that, the borrowers use the money they borrowed on non-income
generating activities. The employees connected this issue with repayment
capacity of respondents. Those borrowers who used the money for business
activities have better capacity on loan repayment than their counterpart.

Use of cost effective methods in the institutions helps to minimize different

costs. MFIs must find innovative ways to improve their productivity and
efficiency, and reduce operating costs. Essential to this process is cost-
reducing innovations (Fernando, 2006). In this regard table 11 shows that
24.3% agreed that their institution is using different cost effective methods
to minimize costs. 54% percent of the respondents agreed to some extent.
The other 21.6 % disagreed on the issue that their institutions are using cost
effective methods. In regard to technology, 74.3% of the employees
disagreed on the issue of application of modern technologies in the
institutions. In conclusion, the application of cost effective methods in the
institutions is not strong.
 JBAS Vol.6 No. 1 June 2014 37

Table 11. Level of agreement and disagreement of employees of MFIs

on different issues
Somehow
No Item Agree Disagree
agree
No % No % No %
Clients use the money for income
1 26 35.1 20 23 31 41.9
generating activities
Cost effective methods used by the
2 18 24.3 40 54 16 21.6
institution
3 Application of different technologies 4 5.4 15 20.3 55 74.3
Legal issues of the country to support
4 34 45.9 38 51.4 2 2.7
MFIs
5 Precondition to serve the poor 34 45.9 12 16.2 28 37.8
The amount of the loan given by the
6 22 30.2 32 43.2 20 27
institution
Number of employees relative to the
7 20 27.1 14 18.9 40 54.1
service given
8 Loan collection system in the institution 30 40.5 12 16.2 32 43.2
Pre and Post monitoring and evaluation
9 31 41.9 16 21.6 27 36.5
of clients

The legal condition of microfinance institutions matters the performance

and profitability of microfinance institutions. According to Ethiopian Micro­
Financing Business Proclamation No. 626/2009, micro finance institutions
have got the legal coverage. But the implementation of such proclamation
might face different challenges. Concerning the legal support of MFIs
97.3% of the employees agreed positively. From the total percent of the
agreed employees 51.4 of them agreed to some extent. This indicates that
there is comfortable legal structure in the county for microfinance
institutions.

The amount of the loan given by MFIs varies with institution to institution
and the level of creditworthiness of clients. In this regard, as table 11 above
shows, 39.2% of the clients were disagreed on the amount of loan given by
MFIs. From the employees’ side, 73% of the respondents agreed that the
38 Muluken Alemayehu and Mesfin Lemma

loan size given by MFIs is enough to the clients. 27% of the respondents
disagreed. Both the majority of borrowers and employees agreed that the
loan size is sufficient to the poor borrowers. But there is a considerable
amount of clients and employees disagreed on the loan size. As mentioned
earlier the loan size affects both the institution and the client’s performance.
It is known that money value has been declined today. In order to get high
amount of loan from conventional banks, in most cases the poor is not
eligible due to lack of collateral.

In order to get the loan from microfinance institutions, the borrowers are
expected to pass some steps. The steps vary with the institutions. The
preconditions of most of the institutions to be eligible for the loan include
having business license, preparing business plan, offer clearance of a loan
from other institution, submit a certificate that shows the marital status of
the borrower, and have a collateral or salary guaranty proportional to the
loan size, fill application form and some other processes. The duration to get
the loan is also different from institution to institution. Concerning the
preconditions of the institutions, table 11 depicts that 62.1% of the
respondents agreed that the precondition to get the loan is easy and short.
On the other hand, around 38 % of the employees disagreed on duration and
the requirements needed before the loan disbursement. This indicates that,
for a significant number of clients, the requirement of microfinance
institutions is not comfortable. Some of the necessities are also not
affordable to the poor. Such requirements can affect two important things.
First, the shift of clients from one institution to another and second it can
make the clients to be reserved from getting such service from MFIs. These
problems affect the outreach and the breadth of the institutions in different
ways.
JBAS Vol.6 No. 1 June 2014 39

When the number of clients increase it is clear that the workload of the
employees in MFIs is also will increase. Having enough number of
employees is necessary to perform in a proper manner. On the issue of the
number of employees and the work load of the institution, as table 11
portrays, the highest portion of the employees (54.1%) disagreed on
proportionality of employees and the work load. Around 46% the employees
agreed that their institution has enough number of workers relative to the
work load. The researchers interview and observation result indicated that,
in some of the institutions' branches the structure allows to have 15
employees, but only 6 or 7 employees are working in the office. The work
environments of some offices are not comfortable for work. On the other
hand, those branches with full employee, according to the structure, have
another problem. There are too many workers with one small room.

In the area of monitoring and evaluation of borrowers, 63.5% of the

employees agreed that their institutions established strong monitoring
system of borrowers. 21% of the agreed employees indicated that their
agreement is to some extent while 36.6% of the respondents disagreed that
their institution has strong monitoring system for clients. Koveos and
Randhawa (2004) stated that limited resources and the sheer numbers of
borrowers preclude assessment of individual loan applications. To create a
sustainable self-funding, growing MFI, the challenge then is to design a
system which will lower monitoring costs, create a committed and
creditworthy client base, and help poverty alleviation. Their loan portfolios
are likely to be more volatile, the potential for a loss of capital significant.
There is a need for close and continuous monitoring, and for the
establishment of mechanisms to assess, continuously monitor credit
worthiness, and for early detection of problem loans. Even though the
40 Muluken Alemayehu and Mesfin Lemma

finding shows that the majority of the employees agreed on the existence of
the monitoring system, a significant number of employees disagreed on the
issue. This implies that, there is a gap in terms of monitoring and evaluation
of client’s condition. The interview result also indicated that due to lack of
sufficient number of employees in the institutions it is difficult to monitor
clients in a continuous manner.

5. Conclusion and Recommendation

5.1 Conclusion

1. The performance of Microfinance institutions in Hawassa city varies

from institution to institution. Different institutions faced different
problems which affect the performance their institution. Clientele factors
like diverting the loan to non business activities, borrowing experience of
clients, amount of money invested in income generating activities, factors
related to loan repayment, absence of voluntary saving experience,
business condition of the borrowers are the major factors which affect the
performance of the MFI. Some of this clientele factors affect the
institutions severely the others to some extent.

2. On the other hand, institutional factors such as absence of training for

borrowers, weak monitoring and support system, interest rate of micro
finance institutions, uncomfortable loan repayment schedule, loan size,
loan capital shortage, training provision to employees and clients, lack of
use of technology and cost effective methods, human resource problem,
loan capital problem, lack of strong loan collection system in the
institutions affect the performance of the institutions in different degree.

3. In addition, the political environments of the country, such as the legal

framework for MFI and economic level of the country also have effects
JBAS Vol.6 No. 1 June 2014 41

on the MFI's performance. The proclamation on MFIs for instance,

issued how MFIs perform their activities and the areas in which MFIs
participate. If the existing rule in the country is not comfortable for the
institutions it may affect their performance. In this regard the researchers
conclude that the existing political environment and economic level of
the country is comfortable for MFIs.

4. Many of the factors are interrelated and interdependent. That means the
existence of one factor affect the other factor both positively or
negatively. For instance failure of clients on repayment is linked with the
failure of their business and weak loan collection system. If the
repayment rate is low, it affects the loan capital of the institutions. The
problem of loan capital can affect the loan size and the number of clients
served. Many of the factors show similar relationship. As a result, the
interdependence of most of the factors leads the institutions into success
or failure. If they are positively interrelated, the factors may lead the
institutions into success and if they are negatively interrelated they will
affect the institution's success adversely.

5.3 Recommendations

Based on the findings and conclusion of the study, the researchers suggested
the following recommendations to improve the performance of microfinance
institutions in Hawassa city.
42 Muluken Alemayehu and Mesfin Lemma

5.3.1 Recommendation for the Institutions

• Women are the most vulnerable group of the society. They are the
first target of microfinance institutions. But in the selected MFIs,
participation of women is very limited. In order to achieve MFIs’
objectives, it is expected to create different systems that encourage
the involvement of women in microcredit and saving services.
Arrangement of different types of loan for women with lower
interest rates, with minimum collateral and other requirements can
improve the participation of women in microfinance services. In
addition to this supporting the loan with different trainings can
strengthen the capacity of women to be active clients and to repay
their loan according to the institutions repayment schedule.

• In order to solve problems related to clients like diverting the loan to

non business activities, amount of money invested in income
generating activities, factors related to loan repayment, absence of
voluntary saving experience, business condition of the clients, it is
better to have continuous monitoring system for clients to support
the borrowers by working with different concerned bodies. For
instance, micro and small enterprise office facilitate different
trainings for micro businesses and arrange market for them. So
through working with different concerning bodies, the institutions
can solve many problems with minimum cost.

• Insufficient amount of human resource is the other major problem in

the selected MFIs. By considering the number of clients it is better
for the institutions hire an adequate number of employees to use
them as a means to facilitate monitoring, to mobilize saving, to give
training and so on.
JBAS Vol.6 No. 1 June 2014 43

• The interest rate of MFIs higher specially, in some of the

institutions. Some of the institutions also use the outdated financial
system that is not cost effective. In order to reduce operational cost
of microfinance institutions as well as to reduce the interest rate, the
researchers suggest application of cost effective and modern
technologies which support the institutions to reduce different costs.
Different software and databases to handle financial data and to
communicate with branches and to register all transactions in a well-
organized way, MFIs should use technologies.

• Loan capital shortage, loan size and loan repayment schedule are
considered as the main problem seen from institutions point of view.
In order to solve such problems the first option is to accelerate
repayment by encouraging the clients by providing different
incentives for them to pay according to the schedule and arranging
special repayment schedule for special business. It will reduce loan
losses or loan at risk.

5.3.2 Recommendation for the Government

At the national level, by considering the role of microfinance institutions for

poverty alleviation, the researchers recommend the government to provide
sufficient amount of loan with lower interest rate for those MFIs with the
problem of loan capital. This helps the institutions to increase their loan size
and to increase the number of poor served by the institutions.
44 Muluken Alemayehu and Mesfin Lemma

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