LEADSTAR COLLEGE OF MANAGEMENT AND

LEADERSHIP
Department of Masters of Business
Administration

Research Proposal on the title of “Assessment on the

role of Micro-finance on poverty reduction the case of
Addis Credit and Saving Institution Kirkos sub-city”.

Prepared by: Hanna Desta ID: MBA15B091 Section B

Submitted To Dr. Kibret (Ph.D.)

July, 2024
Declaration
I hereby declare that this thesis, entitled "Assessment on the Role of Micro-finance on Poverty
Reduction the Case of Addis Credit and Saving Institution Kirkos Sub-city" is the result of my
research and work. I confirm that: This work has not been submitted previously for a degree or
Masters at any institution and all sources of information used in this thesis have been
acknowledged and referenced appropriately. The content presented is an original work and any
collaborative contributions have been clearly stated and attributed.

Hanna Desta_________________________

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Abstract
Poverty is a critical problem for all countries in the world regardless of their level of
development. The whole purpose of development and Development Studies is to fight against
poverty and reduce both urban and rural poverty in the world to the possible minimum level
through different interventions. Microfinance is considered one of the major interventions in
poverty alleviation all over the world. Therefore, it is vital to evaluate the role microfinance
programs play in urban poverty alleviation.

The prevailing operation of the conventional financial institutions in Ethiopia is inefficient in

providing financial services to the poor. The challenge that is facing today is to reduce poverty.
Microfinance is being practiced in the country as a tool to deliver financial services for reducing
poverty. To investigate the fundamental premise, this study examined empirical evidence in
Addis credit and saving institutions to know its contribution to poverty reduction.

Therefore, the objective of this study is to find out whether the delivery of financial services of
the MFI to the urban poor contributes to poverty alleviation. Primary data were collected through
a questionnaire administered to clients of AdCSI using a systematic random sampling technique.
Secondary data were gathered from different literature and MFIS reports. The research is both
quantitative and qualitative in nature. Descriptive analysis was applied in the study. The
contribution of microfinance is analyzed based mainly on income which in turn has effects on
nutritional status, education fee, medical facilities, employment generation, and empowerment
among others. The finding indicates that AdCSI scheme has made positive contribution to the
clients in relation with observed variables. Though the result also implies that AdCSI gives
priority to women clients on the provision of financial services; loan disbursement of men is
higher than loan disbursement of women. Besides, significant number of borrowers cannot afford
expenses on education, clothing they have no income generating mechanism before joining in the
institution among others. Therefore, strengthening the existing operation with other support
means of income generating mechanism would be appropriate to address the problem of urban
poor.

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Acknowledgments
First of all, "Glory to be the Almighty God", gave me the strength to complete the course up to
my final year.

I would like to express my sincere gratitude to DR. Kibret, my supervisor, for his unreserved
comments, advice, suggestions, and guidance from the inception to the completion of this study.
His smooth assistance all the time allowed me to convert my worry into strength

I am very much indebted to Wondosen Desta for his unlimited support in providing materials
and giving me advice from the very inception of this study.

I am grateful to all my respondents of AdCSI in Kirkos sub-city clients and the head office as
well as sub-branch managers who provided me with information that was paramount for this
research work. All the secondary sources I have referred to in this thesis deserve my thanks.

Finally, I would like to give my sincere thanks to my mother, my father, my brothers, my sisters,
my Fiancé, and all my relatives and friends for their constant encouragement to pursue higher
studies.

Hanna Desta -----------------------------------------

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Table of Contents
Declaration ..................................................................................................................................................... i
Abstract ......................................................................................................................................................... ii
Acknowledgments........................................................................................................................................ iii
Acronyms ................................................................................................................................................ vii
List of Table ........................................................................................................................................... viii
List of Figure............................................................................................................................................ ix
Chapter One .................................................................................................................................................. 1
1. Background of the Study .......................................................................................................................... 1
1.2. Statement of the Problem ....................................................................................................................... 4
1.3 Objective of the Study ............................................................................................................................ 5
1.4. Research Questions ................................................................................................................................ 5
1.5. Significance of the Study ....................................................................................................................... 6
1.6. Scope and Limitation of the Study ......................................................................................................... 6
1.7. Organization of the paper....................................................................................................................... 7
Chapter Two.................................................................................................................................................. 8
2. Conceptual and Definition of Poverty ...................................................................................................... 8
2.1. Concepts of Poverty ....................................................................................................................... 8
2.2. Measures of poverty ....................................................................................................................... 9
2.3 Concept of Microfinance and Its Development in Ethiopia .......................................................... 10
2.4. The Evolution of Microfinance .................................................................................................... 12
2.5. Poor People's Assets and Capabilities .......................................................................................... 13
2.6. Microfinance Approaches ............................................................................................................ 13
2.7. Microfinance and Poverty Alleviation ......................................................................................... 15
2.8. Institutional Design for the poor .................................................................................................. 16
2.8.1 Lending Methodologies ............................................................................................................. 17
2.8.2 Subsidized Credit Vs Market Interest Rates Model ................................................................... 18
2.8.3 Progressive Lending Vs Frequent Repayment Model ............................................................... 18
2.8.4 Consumption Smoothing Vs Productive use Model .................................................................. 19
2.8.5 Products and Services ................................................................................................................ 19
2.8.6 Targeting the Poor...................................................................................................................... 19

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 2.8.7 Mobilizing of Savings ................................................................................................................ 21
2.9 Outreach and Financial Performance ................................................................................................ 22
2.9.1 Outreach ..................................................................................................................................... 22
2.9.2 Financial Performance ............................................................................................................... 23
2.10. Impact of Microfinance .............................................................................................................. 23
2.11. Challenge in Serving the Poorest ............................................................................................... 25
2.12. International Experiences on Micro-Finance ............................................................................. 26
2.13. An Over View of Addis Credit and Saving Institution in Ethiopia (ADCSI, 2001:1-8) ........... 28
Objective, Mission and Vision of the Intuitionist ................................................................................... 29
Operational Lending Models .................................................................................................................. 29
Type of Loan Products ............................................................................................................................ 29
Loan Size, Interest Rate and Service Charge .......................................................................................... 30
Chapter Three.............................................................................................................................................. 32
3. Research Methodology and Study Design .......................................................................................... 32
3.1 Study Area .................................................................................................................................... 32
3.2 Study Design and Method ............................................................................................................. 32
3.3 Sampling Methods ........................................................................................................................ 32
3.4 Data Gathering Tools and Procedures........................................................................................... 33
3.5. Data Analysis Technique ............................................................................................................. 34
Chapter Four ............................................................................................................................................... 35
4. Data Presentation and Analysis............................................................................................................... 35
4.1 Introduction ................................................................................................................................... 35
4.2 Characteristics of Respondents ..................................................................................................... 35
4.3 Targeting the Poor......................................................................................................................... 38
4.3.1. Income Generation .................................................................................................................... 40
4.3.2 Impact of Microfinance on Education........................................................................................ 43
4.3.3. Microfinance Impact on Health ................................................................................................ 44
4.3.4. Employment Opportunity ......................................................................................................... 46
4.3.5. Value of Assets ......................................................................................................................... 49
4.4. Micro-finance Products and Services........................................................................................... 51
4.4.1. Loan/Credit Service .................................................................................................................. 51
4.4.2. Saving Mobilization .................................................................................................................. 54

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 4.3.3. Interest Rate and Service Charge .............................................................................................. 55
4.4.4 Training and Supervision ........................................................................................................... 56
4.6 Challenges in Financial Service of the Poor ................................................................................. 58
Chapter Five .......................................................................................................................................... 62
5. Summary of Findings, Conclusion and Recommendation ...................................................................... 62
5.1 Summary of Findings .................................................................................................................... 62
5.2 Conclusions ....................................................................................................................................... 64
5.3 Recommendations ............................................................................................................................. 64
Bibliography ........................................................................................................................................... 67
Appendix 1 .............................................................................................................................................. 72
Appendix 2 .............................................................................................................................................. 77

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Acronyms
ADCSI= Addis Credit and Saving Institution

CBOS = Community Based Organization

CSA Central Statistics Agency

E.C Ethiopian Calendar

HDI = Human Development Index

HPI Human Poverty Index

LCDs Least Developing Countries

MFI= Micro Finance Institution

MOFED Ministry of Finance and Economic Development

NBE National Bank of Ethiopia

NGO Non-Government Organization

PASDSP= Plan for Accelerated and Sustainable Development Program

PRSP Poverty Reduction Strategy Paper

SDPRP= Sustainable Development and Poverty Reduction Program

UNCHS United Nations Center for Human Settlement UNDP-United Nation of

Development Program

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List of Table
Table 4. 1 Respondents by Sex and Age ..................................................................................................... 36
Table 4. 2 status and family size ................................................................................................................. 36
Table 4. 3 Sample respondents by level of education ................................................................................ 37
Table 4.4 Respondents according to Their Lending system ....................................................................... 38
Table 4.5 Distribution of Respondents According to Credit Criteria ......................................................... 39
Table 4. 6 Distribution of respondents according to their group formation ................................................ 40
Table 4.1 7 Respondents according to their source of income before and after joining MFI ..................... 42
Table 4. 8 Respondents' Change in Education before and after Joining the Credit Program ..................... 43
Table 4. 9 Medical Responsiveness of the Respondents............................................................................. 45
Table 4. 10 Respondents according to their ability to buy cloth ................................................................. 46
Table 4.11 Respondents According to their Employment Opportunities ................................................... 47
Table 4. 12 Respondents reply about number of employees ...................................................................... 48
Table 4.13 Distribution of respondents according to their assets ............................................................... 49
Table 4.14 Respondents according to loan size .......................................................................................... 52
Table 4.15 Respondents according to the reason loan plus the first loan used ........................................... 53
Table 4. 16 Respondents according to their response on interest rate ........................................................ 55
Table 4. 17 Respondents according to training and supervision ................................................................. 57
Table 4. 18 Respondents according to the reason loan plus the first loan used .......................................... 58
Table 4. 19 . Respondents according to their constraints/challenges .......................................................... 58

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List of Figure

Figure 1 The average income of respondents ............................................................................................ 41

Figure 2 The Average Expenditure of respondents ................................................................................... 41
Figure 3 Trend of Loan Disbursement......................................................................................................... 51
Figure 4Average Saving in Months ............................................................................................................. 54
Figure 5 opening about the interest rate ................................................................................................... 56
Figure 6 Number of Clients in Terms of sex (AdCSI) ................................................................................... 60
Figure 7 Loan Disbursed in Terms of sex in AdCSI ...................................................................................... 61

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Chapter One

1. Background of the Study

Ethiopia is one of the poorest and most heavily indebted countries in the world with a population
of about 129,179,719 as of, 2024.Based on Worldometer elaboration of the latest United Nations
data.Of which rural accounts for 100,515,704 and urban 29,204,015. It is a fairly large but
landlocked country with a total area of about 1.1 million square kilometers. The agricultural
sector, which accounts foran average of 65 % and 25% of GDP, is the source of livelihood for
about 85 percent of the country's population, that is, the country is extensively dependent on
agriculture, which provides about 85 percent of the employment. Ethiopia is one of the poorest
African nation-states. Poverty in Ethiopia is a pervasive and persistent phenomenon due to the
interaction of several persistent poverty traps like population pressure, low investment in human
capital, low levels of infrastructure, the agrarian nature of the economy, and other related factors.

With a population of over 80 million, Ethiopia is the second most populous country in sub-
Saharan Africa (SSA). Though Ethiopia’s economy has been growing at an average rate of 7% in
recent years, the country remains one of the world’s poorest. With a low human development
index of 0.383, Ethiopia is ranked 174 out of 187 countries in the UNDP’s Human Development
report of 2011. The average Gross National Income (GNI) per capita is only US$971, which is
far below the average value for sub-Saharan African countries of $1,966.3 The purchasing power
of rural households remains weak with almost 40% of the rural population living in poverty and
about 29% of the population living in extreme poverty with an income of less than one dollar per
capita per day.

The Human Development Index (HDI) of Ethiopia for 2008, which takes life expectancy, adult
literacy, primary schooling, and per capita income, gives the country a rank of 169th out of 177
countries.

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On the other side, from the Gender-Related Development Index point of view (GDI) Ethiopia
Ranks 74th among 156 developing countries for which the index has been calculated (gender
gap-index, 2023). These explanations show that poverty is a multifaceted multidimensional and
deep-rooted challenge in Ethiopia.

According to Amha (2000:1), the major causes of the high prevalence of poverty in Ethiopia
include lack of assets, employment opportunities, income, skill, education, health, etc. and this is
aggravated by soil degradation, deforestation, drought, civil war, and lacunae inappropriate
government policies. The microfinance institutions are playing significant roles in expanding
financial services to low-income group entrepreneurs and traders, who are not usually reached by
conventional banks. Improvements have been witnessed not only in terms of clients of number
but also in operational efficiency.

Following the downfall of the government of Emperor Haile Selassie I in 1974, Ethiopia spent
the next 17 years under a heavy-handed Marxist. (Commonly known as the "Derg"). Under
Dreg's rule, the national economy suffered tremendously, due mainly to a rather large number of
ill-conceived policy measures designed to steer and control the courses of social, economic, and
political development in theCountry. Above all, the nationalization of urban and rural land, rental
housing, banks, insurance companies, leading business firms, and agricultural enterprises did a
great deal of harm to national development. In Ethiopia, microfinance services were introduced
after the collapse of Dirge regime following the policy of economic liberalization. Microfinance
is taken as a shift from government and NGOS- and NGOS-subsidized credit programs to
financial services run by specialized financial institutions. With this shift, Some NGO and
government microcredit programs were transformed to microfinance institutions. Microfinance
in Ethiopia has legal grounds.

According to Peck and W/Yohannes (2009:7) Much of the passion behind microfinance is driven
by its potential to help poor people better manage their financial resources, take on new
economic opportunities, mitigate everyday risks, reduce vulnerability, and improve their living
conditions. Lack of access to financial services is a major constraint limiting the accumulation of
assets by the poor and the development of indigenous enterprises.

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The issue of the regulatory framework has come to the forefront because Micro Financial
Institutions were providing financial services to the poor, outside the conventional banking
system (Ahmed, 2002:10). The regulatory framework was put in place to licenses supervise the
institution and government-issued its first microfinance legislation (Proclamation No.40/1996)
under the country of central Bank. In the Proclamation the purposes and duties of Micro Finance
Institutions (MFIs) are stipulated. It provides the framework to create, expand, and develop
microfinance and credit programs.

The potential demand for financial services, particularly microfinance, in Ethiopia is enormous.
However, the existing supply of financial services to the poor is very limited. The major sources
of financial services in Ethiopia are commercial banks, MFIs, and semi-financial services like
"Iquibs", "Idders" and "Mahabers" and informal sources like Money lender trader suppliers of
credit. Now the Ethiopia micro financial institutions have shown remarkable program progress in
terms of outreach and performance. However, it should be noted that the twenty-seven MFIs
meet only less than 20 percent of the demand for financial services of the poor. The proclamation
framework was put in place as part of the government's effort to liberalize the financial sector
and lay down an alternative institutional framework to provide financial services to the rural and
urban poor to produce food self-sufficiency and reduce unemployment for urban areas i.e. the
aggregate effect is to alleviate rural and urban poverty. Most importantly experts observing
unsound financial practices of NGOs and government agencies recommended the regulatory
framework to promote more systematic financial service provision and bringing microfinance in
the country within the existing financial system. Improving access to financial services is an
important development tool because it helps in increase their income and consumption, which
would in the final analysis reduce poverty. Lack of financial services, the absence of loan
products, micro-insurance products, convenience saving instruments, and various other financial
instruments are a major constraint limiting the accumulation of assets by the poor and the
development of indigenous enterprises. So, Addis Credit and Savings Institution (AdCSI) is one
of the major MFIs of the country operating to address the problem of the poor in Addis Ababa.
Since its establishment in 2000, it has attracted several clients in its branches in all the ten sub-
critics of Addis Ababa. Each sub-city is again equipped with kebele branches. Addis Ababa City
Government is the major owner of the company and provides many supports to realize its vision

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and mission. AdCSI is highly subsidized and gets financial resources 97 percent from the Addis
Ababa City Government.

The mission of Addis Credit and Savings Institution is to become an exemplary MFI in Ethiopia
by making contributions to poverty alleviation, employment creation, and women's
empowerment. Moreover, the major objectives of the institution include: developing the saving
culture of the community beneficiary of the service and enlarging the community to develop self-
confidence with particular attention to women's providing sustainable and reasonable loan
service. Hence in this study, the researcher focuses on an assessment of the role of Addis credit
and saving institutions towards poverty alleviation.

1.2. Statement of the Problem

The Ethiopian government has become very concerned in micro-finance and has given emphasis
to microfinance sector because it is designed to meet the poor peoples’ needs and to alleviate
poverty. Consequently, almost all MFIs including AdCSI are working based on poverty
alleviation mission of the country as poverty has continued to be the declared core objective in
the government’s (SDPRP). This has given an adequate emphasis to the problems of urban
dwellers. Addis Ababa is the capital of the country, the seat of OAU and ECA that constitutes
about 26 percent of the total urban population of the country. Yet, it is one of the least developed
cities in Africa facing a major challenge of urban poverty and slum proliferation (Haregewoin,
2007:4). Addis Ababa is presently suffering from a host of social and economic problems
including widening income disparity, deepening poverty, rising unemployment, severe housing
shortage, poorly developed physical and social infrastructure and the proliferation of slum and
squatter settlements (UN-HABITAT, 2007:1). According to Mills and Perenia cited in UNCHS
(2000:4) urbanization is an integral process of development. It allows people to enjoy better
service, education, health etc. Though urbanization provides opportunities, it is also the cause for
deprivation, lack of access to essential needs of human beings, in-adequate income, etc. which
are all manifestations of urban poverty, are quite common in urban areas. With the higher
concentration of facilities per population than other urban centers in the country, Addis Ababa
enjoys a privileged position. However, the city is not able to accommodate the increasing
population being attracted by the attracting facilities and employment opportunity. Therefore, in
Addis Ababa, just like other urban areas of the nation, poverty is rampant and widespread.

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Hence, microfinance institution is a device for supporting the economy and social conditions of
the poor by facilitating access to health and education facilities and enhancing the living
standards of poor. It has been recognized by the government as one of an effective tool to reduce
poverty in the city by providing credit and saving facility to start small business and to create
employment opportunities to those who do not have access to the commercial banks. 4 What so
ever the policy on the program is acceptable and supported by the government and believed to be
effective in poverty alleviation and empowerment, the impact of program implementation should
be assessed and examined to learn lessons and there by improve efficiency. If so scares resources
such as money, time and human resource will not be wasted. However, in practice many
microfinance programs particularly those in Kirkos sub city have never been evaluated. In view
of these felt need, this research is focused on assessing the role of Addis Credit and Saving
Microfinance Institution in poverty alleviation and women’s empowerment and the
implementation challenges faced by clients in accessing and utilization of microfinance program
in Kirkos Sub-city of Addis Ababa by taking AdCSI and its clients as a unit of analysis and by
addressing the following basic research questions.

1.3 Objective of the Study

The general objective of the study is to assess the role of MFIs towards poverty alleviation and to
identify the constraints that may be facing in the effort of the poor. The specific objectives are:

1. To assess the impact of Micro-finance service of AdCSI on poverty alleviation of its

client in Kirkos Sub-city of Addis Ababa
2. To identify the kinds of services and products provided by the microfinance institution
program to the poor and its result.
3. To find out what clients of ADCSI in Kirkos Sub-city are facing in getting of credit.
4. To conclude the applicability of Microfinance in alleviating poverty.

1.4. Research Questions

1. What are the impact or outcomes of AdCSI in poverty alleviation? Especially on its
customers?

2. To what extent do AdCSI schemes help beneficiaries to create employment opportunities, to

generate income, own assets and meet their basic needs?

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3. What are the services/products provided and what results have been achieved?

4. What constraints/challenges do clients of AdCSI in Kirkos sub-city face in getting and

utilization of credit?

1.5. Significance of the Study

Microfinance has been viewed as one way of dealing with poverty by expanding services to the
poor. With relation to this poverty, it is a fundamental problem in Addis Ababa Sub Cities and
Kirkos sub city is one of them. Though the government emphasizes poverty alleviation in rural
areas by considering micro-credit and saving institutions among others as instruments, currently,
attention is given to reducing the deep-rooted problems of urban dwellers.

Nowadays, MFIs are working all over the country to provide credit and saving services to urban
and rural poor who do not have access to financial services from conventional /formal banks.
Therefore, it is important to assess the role of Addis Credit and Saving Institution to the
beneficiary or the poor that is, the study would be helpful for AdCSI to evaluate its contribution
towards urban poverty alleviation.

1.6. Scope and Limitation of the Study

There are many MFIs in Addis Abeba City Administration but the scope of the study is limited
only to AdCI and their clients. Microfinance covers a wide area of issues and the above
theoretical framework encompasses urban poverty in terms of social, economic, political, and
cultural perspectives. However, the focal area of this paper has been more on the economy and
social point of view. Since different factors affect the situation of the clients, this paper didn't
control those factors. The rest variables have been addressed to a certain extent. Therefore, the
researcher deals with this perspective or dimensions.

Most of the people undertaking the micro and small level business are mostly illiterate and
therefore the questionnaire might be a difficult tool to gather data. To avoid such inconveniences
and to enhance the return rate of the questionnaires the researcher used data collectors who know
the research questionnaire. Moreover, Addis Credit and Saving Institution in Kirkos sub-city has
ten sub-branches. However, the researcher included 45 percent of the entire population, that is,

6
five Kebeles were included in research focus areas because of limited time and also because all
sub-branches provide the same kind of service to the clients.

1.7. Organization of the paper

The thesis has four chapters. The first chapter deals with the introduction which includes: the
background of the study, problem statement, research question and objective significance of the
study, research Methodology, and scope and limitation of the paper as well as organization of the
study. In the second chapter conceptual and analytical frameworks of the research are presented
through reviewing related literature. The third chapter discussed about introduction, research
design, target population, sample design, data collection instruments, data collection procedure,
and data analysis and presentation.

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 Chapter Two

2. Conceptual and Definition of Poverty

2.1. Concepts of Poverty

Before assessing the impact of microfinance institutions on poverty, it is necessary to understand
the concept of poverty and its relative definitions. Poverty is a broad, multifaceted and
multidimensional concept that involves the economic, social, political and environmental well-
being of the people (WB, 2002). There is no clear agreement among experts and policymakers
on how to define, measure and eradicate poverty (Meehan, 1999). Consequently, there is no
absolute and standardized definition of poverty rather than defining it in relative terms. Different
people view and define it in different manners. The Canadian International Development Agency
(CIDA, 2002) defines microfinance as, “the provision of a broad range of financial services to
the poor, low-income households and micro-enterprises usually lacking access to formal
financial institutions”. The broad and widely used definition of poverty was developed by the
World Bank, which includes the economic, social, political and environmental situations of the
people. The broader definition of poverty as a multidimensional phenomenon leads to a clearer
understanding of its causes and to formulate a more comprehensive policy aimed at poverty
reduction. According to the World Bank Development Report (1990); poverty is an inability to
attain a minimum standard of living, poverty means a shortage of having enough to eat, a low
life expectancy, a higher rate of infant mortality, low educational standard, enrollment and
opportunities, poor drinking water, inadequate health care, unfit housing conditions and lack of
active participation in decision-making process. Therefore, poverty is not only material
deprivation, as living with low income and low consumption is characterized by poor nutrition
and poor living conditions. It is also associated 10 with the low health and educational levels that
are either the cause or the result of low income which is said to be human poverty. Different
researchers define poverty based on income level instead of using its broader definition, which
includes well-being. However, Hulme and Mosley, 1996 consider the definition as inadequate
and incomplete. The dimensions of poverty are classified by Word Bank report as at least in four
dimensions. These are lack of income, low level of achievement in education and health,
vulnerability to risks and some sort of insecurity and voicelessness. At the World Summit on

8
Social Development in Copenhagen in 1995, the international community adopted and endorsed
a multidimensional definition of “absolute” poverty that is unacceptable and should be eradicated
as “Absolute poverty is a condition characterized by severe deprivation of basic human needs,
including food, safe drinking water, sanitation facilities, health, shelter, education and
information. It depends not only on income but also on access to social services.” According to
Joseph Rowntree Foundation research (2008) low income is just one indicator of poverty. A
fuller picture looks at all resources, not simply income. This can include access to decent
housing, community amenities and social networks, and assets, i.e. what people own. Somebody
who lacks these resources can be said to be in poverty in a wider sense.

2.2. Measures of poverty

Conventionally, the income or expenditure level that can sustain a minimum standard of living
measures poverty. Poverty can be commonly measured by constructing a line called the poverty
line. The cross-cutting level which is constructed from monetary estimates of minimum needs is
said to be the poverty line (Getahun, 1999). The poverty line is also defined as a threshold level
of per capita income or consumption level below which an individual is 11 labeled to be poor
(WB, 1991). The poverty line represents a minimum level of economic participation in a given
society at a given point in time. People below this threshold are said to be poor. The poverty line
can be estimated in two different approaches. These approaches are absolute poverty and relative
poverty. Absolute poverty is the lack of one or more basic needs over a period long enough that
it imperils our life or can cause harm. It covers vital and biological needs such as food, water,
clothing, basic housing (or anything that looks like a decent roof over your head), and a
minimum of sanitation. It refers to a set standard which is the same in all countries and which
does not change over time. Living in absolute poverty is harmful and can endanger our lives. It
tends to identify those who are starving without any comparison made with others. To allow for
international comparison the World Bank established an international poverty line of 1US dollar
a day per person in 1985 purchasing power parity (PPP) prices which is equivalent to 1.08 dollar
a day per person in 1993 PPP prices. According to this measure, the portion of extremely poor
people in the world’s population (people living on less than 1 dollar a day) decreased between
1990 and 1999 from 29 percent to 23 percent respectively. Developing countries have the highest
percentages of the population living below the poverty line. The highest incidence of poverty is
observed in sub-Saharan Africa, with almost half of its population living below the poverty line

9
(1 dollar). Relative poverty implies that one has less than what others have. It tends to identify
with a comparison of the circumstances in one group of people or an entire economy with
another one. It refers to a relative income differential of distribution. It may not be a 12 situation
of an entanglement between life and death as of the case of absolute poverty. It exists when the
subjects under consideration are “poor” with others (Todaro, 1997). Microfinance is theoretically
assumed to be a new field of the financial sector to provide financial services to low-income
clients who traditionally lack access to banking. Microfinance, when extended to people,
especially women, in rural areas coupled with supporting activities like training, raw material
supply, and marketing of products leads to investment in micro-enterprises, women may become
entrepreneurs and reduce poverty (Akinsanmi,2005). Some scholars argued that the cause of
poverty in developing economies among other things is that the poor do not have access to credit
to work capital as well as investment for small businesses (Pitt and Khandker, 2003; Jean-Luc,
2006). In Ethiopia microfinance has been considered as an important tool for agricultural and
food security under the Agricultural Development Led Industrialization Strategy (Belay, 2001;
FDRE, 2002). The Strategy also emphasizes, among others, credit as a means to increase
smallholder production and saving (Jean-Luc, 2006).

2.3 Concept of Microfinance and Its Development in Ethiopia

Microfinance Institutions (MFI) are defined as institutions whose major business is the provision
of microfinance services (Oyunjargal and Nyamaa, 2002). It is the provision of a broad range of
financial services such as deposits (savings), loans, payment services, money transfers and
insurance to poor and low-income households and their micro enterprises (Putzeys, 2002).
Microfinance has undergone several transformations in terms of concept, service type and
approaches/modes of provision. Indeed, microfinance is said to be a new and emerging 13 field
in which there is still a lot to learn (Dunford, 2000). Others, however, argue that since it is rather
not easy in practice to consistently serve clients who are living below the poverty line, micro-
financing is meant for those who are presumed to be able to repay loans (Meagher, 2002). These
contributions to income-generating activities encompass a wide range of areas, such as small
business promotion, cooperatives, job creation schemes, sewing circles, and credit and savings
groups. Albee (1994) opined that economic empowerment projects usually focused on income-
generating activities, which allow women to independently acquire their income. Sarangi (2007)
evaluated the impact of microfinance programs on rural poor households in some backward

10
regions of Madhya Pradesh in India. The findings suggested that on the one hand, many of the
very poor households were excluded from the program, and on the other, the gains from
participation of the program were mostly observed for the better-off section of households,
particularly those with high capital income or large land holders. Sharma (2007) examined the
impact of participation in microfinance programs on women’s autonomy and gender relations
within the household. The study of Krishnaraj and Kay (2002) concluded that credit to serve as a
sole instrument of poverty alleviation did not seem to be plausible without other collaborative
mechanisms that help in increasing the potential of credit used by the poor or the small farmer. It
was also found that microfinance institutions had reached only a tiny fraction of the population
and the challenge was to multiply the existing services. However, most of the literature are
oriented towards the importance of microfinance services and multiplying the existing services
rather than identifying its determinants (Wolday, 2007). Moreover, studies that critically assess
the determinants of women’s economic empowerment through microfinance services are so far
14 limited in the country (Padma and Getachew, 2004). This is perhaps because both micro-
finance development and priority attention to women’s empowerment are new and are currently
recognized as important strategies. Identifying the determinants of women’s empowerment
through microfinance services helps to understand the real problems at the gross root level
(Seifu, 2002). Hence, microfinance institutions need to be demand-driven rather than supply-
responsive. Although the development of microfinance institutions in Ethiopia started very
recently, the industry has shown remarkable growth in terms of outreach, particularly in a
number of clients (Wolday, 2000). The importance of the micro and small enterprises sector in
Ethiopia, particularly for the low-income, poor and women groups, is evident from their
relatively large presence, share of employment and small capital requirement. The burden is
worse in rural Ethiopia where peasant women have no alternative to generate their income and to
be self-reliant (Haimanot, 2007) These are sufficient reasons for governments and other
stakeholders in development to be interested in micro and small enterprises (Gebrehiwot and
Wolday, 2001). In line with the development of micro-finance institutions, the Government of
Ethiopia set up participatory rules and policies that gave space for women’s productivity which
constitutes 50% of the population. Padma and Swamy (2003) noted that the government has
formulated and issued the Ethiopian women’s policy to speed up the economic and social
advancement of women. This policy gives special emphasis to women by ‘facilitating the

11
necessary conditions whereby they can have access to basic services and to ways and means of
lightening their workload (Haimanot, 2007). 15

2.4. The Evolution of Microfinance

The microfinance revolution has changed attitudes towards helping the poor in many countries
and some have provided substantial flows of credit, often to very low-income groups or
households, who would normally be excluded by conventional financial institutions (John Weiss,
2005:247)

As Robinson describes, the microfinance revolution developed in the

As Robinson describes, the microfinance revolution developed in the 1980s, that is, before it has
a name and came of age in the 1990s. It occurred when the many advances of previous decades
in market knowledge, lending methods, and savings mobilization were combined with a
commercial approach to financial intermediations for low-income people. In addition to these, it
accelerated growth in the number of microfinance institutions created and an increased emphasis
on reaching scale. Internationally, a microfinance industry began to develop (Robison, 2001:54).

Microfinance has been as accepted idea with a longer run than most in the realm of third world
poverty reduction. If one counts the time from the advent of micro credit, it has been around for
about half the six- decade-long lifespan of official development assistance. Suddenly,
microfinance was a subject of discussion where it had never been before. Micro credit evolved
slowly. From the 1950s through to the carly 1970s the development endeavor focused much on
economic development and still toyed with the notion of industrial development, a kind of
catching up with the west by replication and imitation. As development thinking focused more
on the intractable nature of poverty in the early 1970s, the low poor and their immediate needs
paramount (Dichter and Harper, 2007:1-2).

According to Honohan and Back (2007:141) microfinance can service the financial needs of the
poor. Its revolution has given MFIs the confidence to provide deposit and lending services to
poor people.

12
2.5. Poor People's Assets and Capabilities

Poor women and men need a range of assets and capabilities to increase their wellbeing and
security as well as their self-confidence. So, they can negotiate with those more powerful.
Because poverty is multidimensional, so are these assets and capabilities. "Assets" refer to
material assets, both physical and financial. Such assets-including land, housing, livestock,
saving, and jewelry-enable People to with stand shocks and expand their horizon of choices.
Asset can be individual or collectives. The extreme limitation of poor
People to with stand shocks and expand their horizon of choices. Asset can be individual or
collectives. The extreme limitation of poor people's physical and financial assets severely
constrains their capacity fair deals for themselves and increases their vulnerability. Capabilities
are inherent in people and enable them to use their assets in different ways to increase their
wellbeing. Human capabilities include good health, education, and production or other life
enhancing skill (World Bank, 2002:15).

2.6. Microfinance Approaches

There are different approaches to microfinance service provision to the poor. It can be
categorized poverty lending vs. financial system approach, minimalist vs. integrated approach
and business vs. developmental approach. Let us discuss as follows.

Poverty Lending Vs Financial System Approach

Government organization and donors agree that MFIs can contribute to poverty reduction.
However, there is less consensus about the degree to which, how and when poverty can be
reduced through microfinance. According to Robison (2001:7), it divides that the financial
system and the poverty lending approaches. Both approaches share the goals of making financial
services available to poor people across the world.

However, the poverty lending approach focuses on poverty reduction through credit and other
services provided by institutions that are funded by donor and government subsidies and other

13
concession founds. The priority goals are to reach the poor at lower, especially the poorest of the
poor, with credit. Except for mandatory savings to microfinance, many institutions using the
poverty lending approach provide micro credit to poor borrowers sustainable, due to their interest
rates on loans are very low for full cost recovery. Moreover, they do not meet the demand among
the poor for voluntary saving interest (Robinson, 2001:7). On the contrary, the financial service
approach focuses on commercial financial intermediation among poor borrowers and severs; it
his on institutional self-sufficiency. With worldwide unmet demand for micro credit estimated in
the hundreds of millions of people and characterized by requests for credit worthy borrowers for
continuing access to loans of gradually size, government and donor funds cannot possibly
finance micro credit on a global scale. Commercial microfinance is not appropriate, however, for
extremely poor people who are badly malnourished, ill and without skills employment
opportunities. Starving borrowers will use their loans to buy food for themselves or their,
children. Such people do not need debt rather they need food, shelter, medicines, skill training
and employment for which government and donor subsidizer and charitable contributions are
able to work. From the above discussion, poverty lending approach seems to be more appropriate
towards the poorest of poor in addressing their problems (Robinson, 2001; 8).

Minimalist Vs Comprehensive Approach

Poverty reduction-focused microfinance service providers are divided into two approaches in
terms of their view on microfinance products service; minimalist and integrated. According to
Sabharwal, minimalist approach emphasizes often executively on credit access which it sees as
the ‘missing piece’ for poverty reduction (Sabharwal, 2000:15). Advocates of this approach
restrict their service only to the provision of credit and saving facilitates making the credit
responsible to make the best out of the loan delivered.

In contrast, integrated approach refers to the provision of non-financial services such as training
in health, literacy social action and environmental awareness besides financial service
(Hickson,2001:64).the supporters of this approach acknowledges that credit alone may not be
enough to ensure stable employment and productivities for the reason that the causes of poverty
at the grass roots level are multidimensional ranging From economic and social problems to lack
of marketable skills and resource management skills and resource management know how

14
(amha,2003:8). This research attempted the integrated approach to see how the cases integrate
their financial with other non-financial services in Ethiopian.

Business Vs Development Approach

The first objective of MFIIS is the provision of basic financial services to the poor .however, the
service provision depends on their approaches: business approach and development approach.
According to van manen (2004:53), business approach primarily focused on organizational
achievements such as repayment, cost recovery and profitability. Hence, their concern is how to
develop the industry’ rather than how to develop the community. On the other side, development
approach emphasis more on break even, impact on Credit and on how the client is doing rather
than profitability. Supporters of this Approach argue that the clients should participate in
awareness and capacity Building programs before talking there loans looking these different
approaches, there before, the development approach gives emphasis not only to Building
institutions for sustainable provision of services, but also Empowering the poor people to get the
most out of the services Delivered, this research paper adopts the development approach of
Analyze the functioning of AdCSI, financial products, services and on the contrary, the financial
service approach focuses on commercial financial intermediation among poor borrowers and
severs: it their integration with non-financial services are given an indication as well as poverty
lending approach is so much as related with the provision of product or service to the poor,

2.7. Microfinance and Poverty Alleviation

Poverty has become the primary concern of less developed countries and poverty alleviation has
become the most important challenge faced by policymakers and practitioners who have been
trying to improve the lives of the poor. Although poverty alleviation has been featured as a
priority developmental goal of governments of LDCs, the outcome has not largely been as
expected. Experience shows that government handouts and aid to poor communities and
households had insignificant or no contribution to poverty alleviation in the shortest possible
time (Zaid Negash, 2002:19). According to Weiss (2005: 250), in recent years there has been a
significant shift in both thinking and practice in the micro-finance sector with MFIs coming to be
seen as providing a range of financial services to the poor, including savings facilities, not just
microcredit. In terms of understanding poverty a simple distinction can be drawn within the poor
group between the long-term or chronic poor and those who temporarily fall into poverty as a

15
result of adverse shocks, the transitory poor. On the other hand, one can distinguish between
those who are either so physically or socially disadvantaged without welfare support and the
larger group who are poor because of their lack of assets and opportunities. Moreover, within the
non-destitute category one may distinguish by the depth of poverty i.e. how far households are
below the poverty line, with those significantly below it representing the core poor sometimes
categorized by the irregularity of their income (Weiss 2005). In principle, microfinance can
relate to the chronic (destitute) poor and to the transitory poor in different ways. The condition of
poverty has been interpreted conventionally as one of lack of access by poor households to the
assets necessary for as higher standard of income, 16 whether assets are thought of as human
(access to education), natural (asses to land), physical (access to infrastructure), social (access to
networks of obligations) or financial i.e. access to credit (World Bank cited in Weiss 2005: 251).
Microfinance institutions try to overcome barriers through innovative measures such as group
lending and regular saving schemes as well as the establishment of close links between poor
clients and staff of the institutions concerned (World Bank cited in Weiss 2005: 252). Weiss
points out that the case for microfinance as a mechanism for poverty reduction is simple. If
access to credit is improved it is argued that the poor can finance activities that will allow
income growth, provided there are no other binding constraints (Weiss, 2005:251). This is a
route out of poverty for the non-destitute chronic poor. Fisher and Sriram (2002) stress that
access to microfinance services protects the poor against the often severe consequences of
fluctuating incomes, ill health, death, and other emergency expenditures. Despite the vast claims
that microfinance credit works best for poor people, Johnson and Rogaly (1997) argue that the
poorest borrowers become worse off as a result of credit and that it makes them vulnerable and
exposes them to high risks. Therefore, this study needs to assess the microfinance contribution to
alleviating poverty.

2.8. Institutional Design for the poor

Appropriate institutional design will lead to achievements in outreach but may or may not
necessarily lead to profitability, efficiency and sustainability because the more the program
targets the poorest, the less the cost recovery and profit margin expected. Moreover, reasonable
achievements of the program will have positive impact on the poor clients and positive impact
on the poor will lead to poverty reduction (Johnson and Rogaly, 1997: 3-4 ) Recent microfinance

16
interventions have use of a range of design features (Johnson and Rogaly, 1997:3) Ato hoguh
there are different designing features, this research focuses on some of them.

2.8.1 Lending Methodologies

MFIs are using different models to provide financial services to the poor. Robert Cull et, in their
global analysis of lending micro banks, found three main categories: Group, Individuals, and
village Banking Models (Cull et al 2007). On the other hand, according to Ledger wood
(1999:82), MFIs approaches or models are: individual lending, German Bank solidarity lending,
Latin America solidarity lending, Village banking and self- reliant village banks models.
According to Johnso and Rolgaly, the rational of group lending is that if a member is having
difficulty with repayments, other in the group will put pressure on the member to repay.
Moreover, that if this pressure fails and the member defaults on the loan, the whole group will
repay the loan on behalf of the members’ (Johnson and Rogaly, 1997:328) while many schemes
use groups, Hulme and Mostly (1996) concluded that group formation may exclude some poor
people, especially when the group is formed based on religion, ethnicity, sex, Etc (Vigenina and
Kritikos, 2004), As a result clients may prefer other models like individual and village banking.

The solidarity group lending model makes loans to individual members in groups of four to
seven. The members cross guarantee each other’s loans to replace traditional collateral. Clients
are commonly female market vendors who receive very small, short –term working capital loans.
Payments are made weekly at the program office. The model also incorporates minimal technical
assistance to the borrowers normally receive equal loan amounts, with some flexibility provide
for subsequent loans ( Ledgorwood, 1999:84) saving are usually required but are deducted from
the loan amount at the time of disbursement rather than requiring the clients to save prior to
receiving a loan. Saving serve primarily as a compensating balance, guaranteeing a portion of
the loan amount (Ibid).

Individual lending is defined as the provision of credit to individuals who are not members of a
group that is jointly with individual to provide credit products tailored to the specific needs of the
business. Individual lading is successful for larger; urban based, production oriented businesses
and for clients who have some form of collateral or a willing consigner (Ledger wood, 1999;83)..

17
Village banking was designed in the early 1980s in Latin America by John Hatch and his
associates at the Foundation for International Community Association (FICA) to provide asset
building loans to poor women in Bolivia. Membership in village bank usually ranges from 30 to
50 people, most of whom are women. Membership is based on self- selection, the bank is
financed by international mobilization of members founds as well as loans provided by the MFI
(Ibid).
Village banking 3 group is a support group usually women- who meet weekly or biweekly to
provide themselves with business; an incentive to save and mean of accumulating savings and a
community based system that provides mutual support and encourages personnel empowerment.

2.8.2 Subsidized Credit Vs Market Interest Rates Model

In addition of the above model, according to (Holt, 1994; Robison, 2001:72) under subsidized
credit model, credit was subsidized because poor people have no capacity to pay high interest
rate Government and donors subsidize microfinance programs with the objective of contributing
to poverty alleviation strategies. The critique to this credit model is that credit was seen as a
means to impoverishment in a sense that it makes the poor in more debt that they are not able to
repay and the program often does not reach low income groups. On the other hand, market
interest rate model refers to the rate that arises from interplay of supply and demand in some
defined range of transactions, Market rate is used to refer to the rate at which commercial banks
and their conventional customers conduct deposit and loan transactions. Loan interest rates are
called subsidized unsubsidized depending on whether they cover the full cost of providing the
loan, Delivering microfinance services at many small, scattered locations is considerably more
expansive than providing clients with services for large loans and deposits in centrally locate
scattered locations is considerably more expansive than providing clients with services for large
loans and deposits in centrally located urban banks (Robinon, 2001:30).!

2.8.3 Progressive Lending Vs Frequent Repayment Model

Progressive lending refers to the system by which borrowers obtain increasingly larger loans if
repayment is made promptly. As long as the system is credible and alternative sources of finance
are less attractive, this (type of incentive can enhance repayments (Murdoch, 1999) Frequent

18
repayment schedules are also seen to act as an added mechanism to secure repayment, As most
MFIs collect repayments before investments bear fruit, they are in fact lending the borrower's
steady income stream and hence, securing part of the loan repayment even if projects fail
(Nissanke, 2002: 5).

2.8.4 Consumption Smoothing Vs Productive use Model

Credit is an important instrument that can be used effectively and productively when it is given
to the loans and the willingness to repay them. The term economically active poor is used in a
general sense to refer to those among the poor who have some form of employment and. who are
not severely food deficit or destitute (Robinson, 2001). When loans are provided to the poorest
people, the borrowers may use the Joan for consumption smoothing and may not be able to use
the loan effectively for productive purpose (Hulme and Mosley, 1996),

2.8.5 Products and Services

According to Ledgerwood (1999:64), providing microfinance services to marginal clients is a
complex process that requires many different Kinds of skills and functions. There are four broad
categories of products/services that may be provided to microfinance clients: namely (a)
financial intermediation or the provision of financial products and services such as savings,
credit, insurance, credit cards "this detinition is for FINCAS website and payment services, (b)
social intermediation or the process of building the human and social capital required by
sustainable financial intermediation for the poor, (c) enterprise development services, non-
financial services that assist micro entrepreneurs include business training, marketing and
technology services, skills development and sub sector analysis; (d) social services or non-
financial services that focus on improving the wellbeing of micro entrepreneurs include health,
nutrition, education and literacy training. Social services are likely to require ongoing subsidies,
which are often provided by the state or through donors. However, the degree to which MFI
provides each of these services depends on whether it takes a minimalist or integrated approach.

2.8.6 Targeting the Poor

According to Ledger wood, targeting the poor clients depends on the objectives of the
microfinance service provider and the perceived demand for financial services. These objectives

19
include: to reduce poverty, to empower women or other disadvantaged population groups, to
create employment, to help existing business grown or diversity their activities, to encourage the
development of new businesses etc. (Ledgrwood, 1999:34).

Direct targeting refers to the allocation of a specific amount of found to provide credit to a
particular sector of the economy or population. It is founded on the belief that because certain
groups (the poor, specific castes) or sectors are unable to access credit (or to access it at
affordable prices), credit must be made accessible through a governmental or donor mandate.
These allocations of specific amount of funds are to provide poorest of the poor women, the
indigenous population or the economically active poor. Direct targeting leads to credit diversion
and low repayment. Furthermore, potential clients who have profitable but unfinanced or under
financed businesses may be excluded because they do not fit the profit. Alternatively, people
who do match the qualifications and receive credit may not people who do match the
qualifications and receive credit may not have entrepreneurial skilled or a profitable venture in
need of financing (Ibid).
Indirect targeting refers that products and services are designed for and aimed at people who are
people beyond the formal finance, instead of mandating specific funds to particular groups. MFI
that seeks to provide the very poor with credit should design its loan products so that the
relatively high interest rates and weekly attendance at group meeting. More affluent clients
usually see this as an inconvenience, which makes the credit attractive only to poorer clients.

The primary difference between direct and indirect targeting lies in the means that the MFI uses
rather than in the target group. Both direct and indirect targeting may reach the same population
groups or economic sectors, but direct targeting imposes eligibility criteria, while indirect
targeting deigns appropriate products and services (Ledgerwood, 1999:35).

Dunford and Denman (2000) argued that the small loan size, high interest rate, short loan
duration, the frequent repayments, and dependence on group guarantees and weekly attendance
at group meetings are all factors assumed to make the program unattractive to people who have
other sources of credit as an indirect method. However, when easier finance options are not
available to the not-so- poor, the demand for credit may be so high that even they are willing to

20
tolerate the unattractive features of group-based poverty leading. According to Armendariz and
Morduch (2005:138-139) the Grameen Bank has bound microfinance to creating opportunities
for poor women. The bank lent originally to large numbers of men, in addition to women,
keeping both groups and centers segregated by sex, when the focus shifted in the early 1980s, the
move was mainly a response to growing repayment problems in male centers, and by the end of
that decade well over go percent of clients were women.

The facts of women in cultural barriers that often restrict them to the home making: it difficult
for them to access financial services. Women have more traditional roles in the economy and
may be less able to operate a business outside of their homes. Moreover, women often have
disproportionably larger household obligations. Commercial banks are unwilling to lend to
women or mobilize deposits from them. Women's access to property is limited and their legal
standing can be precarious, women have fewer sources of collateral. They have lower literacy
rates, which makes it more difficult for them to deal with financial systems that depend on
written contracts. Women have demonstrated higher repayment and savings rates than male
clients (Ibid).

Johnson and Rogaly argued that microfinance interventions may lead to empowerment for
women by increasing their incomes and their control over that income, enhancing their
knowledge and skills in production and trade and increasing their participation in household
decision making. As a result social attitudes and perception may change and women's status in
the household and community may be decision making. As a result social attitudes and
perception may change and women's status in the household and community may be enhanced
(Johnson and Rogaly, 1997:38). Moreover advocates argue that microfinance can increase
women's bargaining power within the household. Women will become "empowered" and enjoy
greater control over household decisions and resources.

2.8.7 Mobilizing of Savings

According to Ledgerwood and White (2006: 3-6) underlying the performance of successful
microfinance intermediaries are some basic tenets including saving mobilization. These
principles are especially important for microfinance institutions transforming to regulated

21
financial intermediaries because such institutions tend to have little prior experience with either
public savings or financial intermediation. Developing countries show considerable similarity in
the ways poor people save in the informal sector in the reasons, they save and in the way they
match the types of savings with the particular purposes for which they save. Evidence shows that
a wide range of countries, cultures and economics show that economically active poor saver
want for their financial institution. Low income saver wants security, convenience, liquidation,
confidentially, a choice of products, appropriate for their needs, helpful, and friendly service, and
potential access to loans. Then the MFI can develop products and services that meet the needs of
poor people better than they can do by likely to draw large numbers of saver. Therefore, the
research attempts to analysis the saving of money as accumulation of assets. Term deposits are
savings accounts that in a specified amount of time. They provide the lowest liquidation and the
highest returns. MFI pay the higher rate of return to the saver and the term of deposits range
from one-month term to several years; they allow the MFI to fund loans for a period of time just
of the deposit time. According to Weiss (2005:252) most microfinance schemes charge close to
market clearing interest rate (although these will often not be enough to ensure full cost recovery
given the high cost per lost per loan of small-scale lending).If the core poor cannot afford high
interest rates they will either nor take up the service or take it up and get into financial
difficulties. Also where group lending is used, the very poor may be excluded by other members
of the group, because they are seen as a bad credit risk jeopardizing the position of the group as a
whole.

2.9 Outreach and Financial Performance

This section focuses on the achievements expected from MFIs as a result of products and
service:
2.9.1 Outreach
Outreach can be measured in terms of breadth (number of clients served and volume of services)
or depth (the socioeconomic level of clients that MFIs reach) (Lafourcade et al 2005:4).In
addition to this, Richard Meyer (2002) noted that outreach is multidimensional concept. In order
to measure outreach, Meyer emphasized on the number of poor clients served that were
previously denied access to formal financial services; the number of women served since women
face greater problem's than men in accessing financial services; depth of poverty that shows how

22
well MFIs reach the very poor. Finally, the variety of financial services provided because 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 loan (Mayer, 2002:4).
According to Ledgerwood (1999:39) MFI commonly measure their outreach of services in terms
of scale or the number of clients they reach and depth or the level of poverty of their clients? The
depth of outreach achieved by an MFI will depend to great on its objectives and its ability to
design products and services suitable to the level of poverty it is targeting.

2.9.2 Financial Performance

MFIs earn financial income from loans and other financial service in the form of interest fees,
penalties, and commission etc. these financial assets, such as investment income. MFIs financial
activities also generate various expanses, form general operating expenses and the cost of
borrowing to provisioning for the potential loss form the cost of borrowing to provisioning for
the potential loss form defaulted loans. Profitable institutions earn a positive net income i.e.
operating income exceeds total expenses. In order to measure the overall financial performance,
financial revenue and financial expense indicators as well as returns can be compared against the
institutional of equity and assets (Lafarcade et al, 2005).

Efficient and effective institutions reach number of poor people with minimum costs of
delivering service. The efficiency of an MFI can be calculated in various ways; Lafourcade et al
used operating expense ratio, costs per borrower and costs per staff member and savers per staff
members. Productive MFIs maximize services with minimal resources, including staff and funds
(Lafourcade et al, 2005:11).

2.10. Impact of Microfinance

In the year 2000, the United Nations drew up a list of Millennium Goals which aims to spur
development and eradicate extreme poverty. In 2002, Murdoch and Haley were authorized to
determine the impact that microfinance has on the realization of the seven Millennium Goals. In
an extensive work, Murdoch and Harey concluded that there is a ample evidence to support the
positive impact of microfinance on poverty reduction as it relates to the first six of the seven

23
millennium goals'. The study of shows that clients who participate in microfinance programs
have increased household income, better nutrition and health, the opportunity to achieve higher
education, a decreasing in vulnerability to economic shock, greater empowerment, and in some
cases, the ability of completely life themselves and their families out of poverty (Murdoch and
Haley 2002:5).

Poverty reduction through 'poor' growth has become a central concern to policy makers and a
focus of development programming microfinance is considered to be an effective tool for
reaching the poor and stimulating the transformation of the vicious circle of poverty into a
virtuous cycle of economic advancement. Indeed, public discourse a virtuous cycle of economic
advancement. Indeed, public discourse on micro credit has often presented as a panacea for
poverty reduction. Much of the legitimacy of the argument which associates micro credit with
poverty reduction rests on the perceived success of the Grameen Bank, which comes to serve as
a model of the virtuous out come of credit for poor women in Bangladesh (Lont and Hosper,
2004:27).

Over the last two decades, the micro credit sector has grown fast, as has the enthusiasm and
belief of its proponents that lending to the poor will reduce global poverty. The efficiency of
microfinance's are rising in respect of its impacts on the poor, and some of the globally
institutions are rethinking their practices. They prove small loans to poor families need to have
access to public funding during the early years of their operations. The public funding will
eventually be phased out as institutions achieve financial sustainability (Ibid).

Zeller and Meyer (2002:221) review and synthesis of empirical evidence until the carly 1980s
only a handful of microfinance intermediaries existed; today the number of microfinance
institutions are reaching 7,000 approximately 16 million poor people. The spectacular growth by
the microfinance industry has been fuelled not by anonymous market forces, but by deliberate
actions of national governments, non-governmental organizations and donors who view
microfinance as an effective tool for alleviation poverty. This view is based on the assumptions
that poor households have worthy activities that could potentially raise their living standards.
Microfinance helps household's smooth consumption in the face of decline in health of adult

24
family members. Bangladesh is strong and positive and probably is the clearest evidence there is
that microfinance is working in the way intended to bring sustained relief from poverty. The
programs had a positive effect on household consumption, which was significantly greater for
female borrowers (Weiss: 258). Other scholars (Wright 2000:31, Simanowitz and Walter 2002,
Cherston and kuhn 2002), also argued that microfinance contributes to increased income,
consumption smoothing, better health and nutrition, improvement in school attendance and
empowerment. All of these benefits are interconnected; the improvement of one will invariably
have a positive effect on the others. The combined enhancement in all areas of life brings a
marked increase in living conditions for the poor and a new message of hope for the eventual
reduction of poverty. However, according to David Hulme (2000:79), although some scholars
support that microfinance has positive economic and social impacts on the poor, others argued
that microfinance has negative impacts on the poor clients. There are also in between who
supports the positive impact but not necessarily for the poorest, as claimed. Therefore, this
research contributes on this debate.

2.11. Challenge in Serving the Poorest

The challenges of reaching the poorest population with microfinance include physical and
economic barriers; self- selection and self- exclusion as well as sector risks and the deprivation
of extreme poverty itself. Maes (2006) has put main challenge of microfinance institution in
serving the poorest such as economic barriers, physical barriers, sector risk, self-selection, self-
Exclusion, and Impact of chronic poverty.

Economic barriers: many microfinance programs use group lending methodology clients to
attend a weekly or monthly meeting to access credit. The cost of transportation to this meeting,
together with the opportunity cost of attendance can present a barrier for the very poor to
participate microfinance programs. Alternatively many, individual lending or saving programs
require clients to save a certain amount before they can by the poorest populations. Sector Risk:
very poor people are often dependent on subsistence economies and the unique requirements of
financing such activities (payback of the loan for instance, can only take place after the
production period that often lost several months), microfinance institutions usually shy away
from lending to this sector.

25
Self-selection: it is well known that solidarity groups in Gramen style microfinance programs
and village banks reject very poor members because thus risk the credit value of the entire group.

Self-Exclusion: Even when very poor people are not actively excluded by a community, they
often opt out of community related projects because they are intimidated, believing that the
services offered by such project are not suited to their needs. To strengthen this point, Fisher and
Sriram (2002) points out that Poor people are excluded not only by better off members, but they
also exclude themselves. Impact of chronic poverty: living in absolute poverty for a prolonged
time strongly affects a person's dignity and hope for the future, as well as his or her ability to
take initiative and overcome stigma. Moreover, poor health (especially chronic discases such as
malaria HIV/AIDS) presents a major obstacle for conduction success full micro-enterprise
activities (Maes, 2006).

2.12. International Experiences on Micro-Finance

Today most countries try to encompass the program of microfinance their strategies of
development. Therefore, it becomes important to deal with the experience of some countries
regarding microfinance institutions.

Microfinance and Financial Sector Diagnostic Bangladesh (World Bank,

2009:12-57)

The most common account is that the microfinance industry has its roots in Bangladesh with the
Grameen Bank and it's on Bangladesh focus. Microfinance services in Bangladesh are provided
MFIs microfinance hanks government programs nationalized MFIs microfinance banks;
government programs nationalized commercial banks and private commercial banks. Group
based lending methodologies prevail (World Bank, 2009).

According to Bangladesh bank NGO-MFIS (estimated at 5000 in number) are the largest
providers of microfinance service in the country serving 61 percent of all borrowers. A striking
go percent of MFI clients are women and the average loan size is about BDT 4000($57). The

26
average interest rate on saving is 5 percent, the service charges on credit range from 10 to 20
percent for flat collection. The total loan portfolio of the microfinance borrowers, taking in to
account their cross indebtedness to different microfinance providers, they likely number 18
million. It is estimated that just over 60 percent of them have incomes below the poverty line
(World Bank, 2009).

Given that financial education is not widely recognized as being an important measure for
improving the country's development there are currently no noteworthy, broadly applied national
wide financial education program in Bangladesh. Bangladesh bank has, however, established a
training academy to develop professionals in the banking sectors. Microfinance activities in
Bangladesh are regulated by the micro credit Regulatory Authority Act of 2006, which establish
the oversight body for microfinance activities, the micro credit Regulatory Authority. The goal
of the Act is provide on all encompassing regulatory framework for microfinance with in
Bangladesh and improve transparency and accountability with in the sector (World Bank, 2009).

The Act stipulates that all MFIs must obtain license before carrying out microfinance activities.
As of February 2007, 4236 MFIs had applied for a license minimum criterion require that on
MFIs have cither a minimum of 1000 borrowers or BDT 400 million in loan principal
outstanding. Under the Act, MFIs are allowed to provide loans, advice, and support to poor
people; accept deposits from their members; provide insurance services and their social
development- oriented loan products for clients; and receive refinancing.

Transformation Microfinance Institutions providing full Financial Services to

the Poor in Uganda (Joanna Lendgerwood and Victoria White: 2006-459)

Uganda microfinance (UM) received official notice from the bank of Uganda microfinance
limited had been licensed as microfinance. Deposit taking institution. Long anticipated this
notification market the realization of a long- term vision that motivated two aspiring
entrepreneurs to launch UM in August 1997, as well as the culmination of three years of
intensive preparation, planning, and negotiation.

27
From UM initial days, the founders were clear about their vision for the organization to offer
quality financial services to micro entrepreneurs and low income people living in Uganda. When
presented with the opportunity to change institutional form and come under the supervision of
the bank of Uganda to after even more services as well as to access broader sources of funding
and expand operations.

Unlike other MFIs operating in Uganda at the time, Uganda microfinance was never a one
product organization. The organization started operations by offering a range of credit products
and today offers micro enterprise working capital loans (both group and individual), various loan
products for salaried employees, a home improvement loan, a school fees loan, and a small and
medium enterprise loan. Uganda microfinance lending methodology included a compulsory
savings components, mandated at 20 percent of the loan amount for some of its products. UMF
believed the demand for savings services would be quite high, particularly outside Kampola. In
addition, because Uganda capital markets are not yet well developed, deposits represented the
best source of local funding for loan portfolio
Deposits represented the best source of local funding for loan portfolio for the longer term
(Lendger wood and White, 2006-459).

2.13. An Over View of Addis Credit and Saving Institution in Ethiopia (ADCSI, 2001:1-8)

Addis credit and saving Institution (AdCSI) is a micro financial institution which operates within
the boundaries of Addis Ababa city administration. It was established and registered at the
national bank of Ethiopia on January 2000 according to the bank of (NEB) proclamation
No.40/1996. The major services given by AdCSI are; providing credit service to micro and small
enterprise potential operators counseling and provision of advice for the targeted group on
business and financial affairs, facilitating business development services for clients, affecting
payment and collecting revenue for other institutions city Administration through 10 sub cities of
Addis Ababa. Loan disbursed, saving mobilization, numbers of clients from years 1997-2001E.C
(Appendix-

28
Objective, Mission and Vision of the Intuitionist
AdCSI vision is to become can active contributor towards poverty reduction efforts and would
like to see improvement in the life of low income people. And its mission is promoting micro
and small enterprises to alleviate poverty and unemployment prevailing in Addis Ababa city
administration territory through provision of sustainable financial and other related services with
particular attention to women. Having this vision and mission, the institution has broad
objectives such as: Provision of credit and saving services to as many active poor as possible;
Enhancing the development of micro and small enterprises; Giving the priority to women in the
provision of financial services; Creating long term self-employment income generating activities;
Enhancing the culture of saving by target people and wider public; Assume financial and
operational self-sufficiency of the institution.
Operational Lending Models
Similar to other parts of the world, MFIs in Ethiopia focus mainly on group-based lending and
promote compulsory and voluntary savings. They use a solidarity group approach, whereby
clients join into groups of 3-7 members and co-guarantee each other's loans. These groups meet
on the weekly or monthly bases to make loan repayments and savings deposit. Working through
groups is considered as an effective means to expand outreach and reduces the transaction costs
for MFIS. A few MFIs deliver services through traditional social groups like Idir whose
members also guarantee each other's loans. The co- guarantee mechanism within the groups
serves as an alternative form of collateral. In addition to group lending methodology, most MFIs
use individual lending on the basis of physical or other collateral. Staring in the mid of 1995 E.C
change in policies, procedure and methodology of the institution has started to provide this
individual loans. Cooperatives and joint ventures are also entertained on the same line.

Type of Loan Products

There are four types of loan products such as micro business loan sometime called general loan,
small business loan, micro lease and housing loan. Micro business loan product has a nature of
installment and it is disbursed for this type of loan ranges from 700 birr to 5000 birr. The second
type of loan is small business loan, disbursed relatively for well established businesses and

29
technical and vocational school graduate students who want to enter in to productive ventures
and the size of the loan is usually greater than 5000 birr and less than 50,000 birr for each
entrepreneur. Micro lease loan disbursed for the purchase of machines according to the choices
of clients. This type of loan is rendered mostly to people who are organized in to cooperatives.
Housing loan product is to enable clients construct a new house or complete a construction in
progress. The maximum loan size is 50,000 birr with loan term of 60 months (or 5 years) and
repayable monthly. Depending up of the nature of, the business, the loan products are
characterized in to term loan and installment loan. Term loan is a type of loan disbursed and
collected within a given time, which have gestation period; while for installment loan collection
of payment is made monthly. Loan can be provided for the purpose to start and expand business
engaged in weaving and tailoring metal and wood work, food processing and production of
construction input, municipal service like solid waste disposal and parking retail trade, urban
agriculture, leather products and other income generating activities. The main loans are Addis
Ababa city residents who are 18 years old and above, edirs (legally registered), cooperatives,
joint ventures and other business association.
Loan Size, Interest Rate and Service Charge
The feasibility of the project is given the prime importance in the determination of the amount of
loan to be given on credit and for controlling purpose and the institution decide the loan size
accordingly. This includes both working capital as well as investment. AdCSI charges 9% of
lending interest for installment and micro lease and 9% for term loans per annum on flat rate
basis. In addition to this 2% service charge is paid for all micro lease and small loans. For the
housing and consumption loan, the interest rate is 10% per annum on decline rate basis. Its loan
size and time of repayment is as shown below:
Loan Size Maximum Time Allowed for Repayment
Up to 2000 birr Up to 18 months (the duration varies with
loan size and business ability to pay)
2001-5000 birr 24 months
Above 5000 birr 36 months
Term loan 18 months
Housing loan 60 months
Source profile of Addis credit 2001E.C

30
Saving is an important component of the program, it serves as a sources of lending capital,
provides cash collateral for loans and enable to generate income through interest spread. AdCSI
provides saving service to both borrowers and non-borrowers. There are three types of saving
services provided by the institution. There are mandatory saving (borrowers specific), personal
(voluntary) saving (borrower and non-borrower clients). Except for the time deposit, the
institution pays an interest of 4.5% per annum for the amount mobilized through saving. Apart
from the saving service AdCSI provides two types of insurance. The first is credit insurance
provided to borrowers only. To write off the loan in case of a death, the client is required to pay
1% of the outstanding balance for the coming year if any. The second is a business insurances
provided to cooperative and joint ventures in case of a complete damage of their business. The
insurances premium to be paid is the same as the first types. AdCSI changes 9% interest for
installment and micro lease and 9% for term loans per annum on flat rate basis. In addition to
this 2% service change is paid for all micro and small loans. For the house and consumption
loan, the interest rate is 10% per annum on decline rate basis. Therefore, this research is
investigate in a certain extent the loan, saving and non-financial services.

31
Chapter Three

3. Research Methodology and Study Design

3.1 Study Area

Kirkos sub-city is one among eleven sub-cities of Addis Ababa City Administration. Its
neighbors are: in the north Arada sub-city, in the south Nifas Silk Lafto sub-city, in the east Bole
and Yeka sub-city and the west Lidata sub-city. The total area of the sub city is estimated about
14.72 square kilometers. As of 2011, the total population live in this area is 235,441. The sub
city is established according to the proclamation No.1/1995 of Addis Ababa city administration,
and it has 11 Kebele administrations; and 10 sub-branches of microfinance institutions, 13
government, 21 public and, 48 private-owned schools as well as 3 government and 96 privately
owned health institutions. However the researcher focused in 5 Kebeles by taking 50 percent of
the entire kebele branches due to two reasons on one hand all branches are performing the same
activities, on the other hand the researchers has limited time boundaries.

3.2 Study Design and Method

This study attempted to assess the role of microfinance in urban poverty alleviation in Kirkos
Sub City of Addis Ababa. The researcher thus employed a case study design. In addition, both
quantitative and qualitative research approaches were applied to achieve the objectives and to
address the research questions. Specifically, the researcher used the descriptive sample survey
research method of the quantitative research approach. Semi-structured interviews and
documents analysis research methods of the qualitative research approaches used.

3.3 Sampling Methods

The researcher used both probability sampling methods for conducting descriptive sample
surveys and non-probability sampling techniques for undertaking qualitative study to generate
qualitative data using semi-structured interviews. This purposive sampling technique was used in
the study due to the familiarity with the area under investigation and their ability to furnish
information readily since the researcher also required specific, accurate, and appropriate
information. The ideal sample should be large enough to serve a sufficient representation of the
targeted population about which the researcher desires to generalize and small enough to be

32
selected economically in terms of subject availability, expense, and difficulty of data analysis. To
gather data through questionnaires, in Kirkos sub branches, 153 respondents (clients) were
included in the sampled. Moreover, out of 12 managers' 50 percent that is, 6 of them were
interviewed to the study. In this sub city, there are 10 sub branches of AdCIs which are operating
microfinance services.

3.4 Data Gathering Tools and Procedures

Selection of appropriate methods and tools for date collection depends on the purpose and focus
of the assessment, its context, the capacity and skill those involved, and the resource available.
One of the major skills needed is managing properly the results obtained by those combinations
and sequencing of tools and methods. Therefore, structured questionnaires to collect quantitative
date from borrowers and interview guide to collect qualitative data from key informants were
prepared and used. Documentary analysis matrix was used to generate secondary data on Addis
Credit and saving institution. The interview schedule formulated to explore and to collect the
respondents written reflections on the questions. Forty five borrowers and five key informants
were participated in the research study. The interview schedule was designed to collect pertinent
quantitative and qualitative data from the selected respondents regarding their demographic
condition ; employment situation ; monthly income ; accessibility to basic facilities ; members’
expenditures patterns; their decision making power in family and community affairs; and
problems they faced in accessing and utilization of loan from AdCSI. The researcher also
considered the possibility of providing for anonymous responses for delicate or confidential
information to obtain objective and honest responses. In general, the interview schedule consists
of close , open-ended and mix questions used to assess the general profile ,income, and asset
,expenditure ,access to education ,access to healthcare, employment creation ,savings and loans
disbursement ,training and experience ,decision making power and general information and
perception of the respondents regarding the positive contributions of Addis Credit and Savings
Institution in urban poverty alleviation. Asking only one question at a time, repeat a question (if
necessary) in order to make sure that the interviewee will understood the question, and then
listening carefully to the interviewee‘s responses, observing the interviewee’s facial expressions,
gestures and tones / voices so that the researcher may derive meanings from informants’ body
language were followed procedures by the researcher. The researcher further allowed key
informants sufficient time to answer the questions, avoid suggesting answers to questions,

33
maintained a neutral. The researcher used logbook to take note to record the responses in details.
The researcher chatted briefly with each respondent in attempt to put both the researcher and the
respondent at ease prior to engaging in administering the instrument. Then, the researcher
prepared each respondent for the interview by explaining the purpose of the study, ethical
considerations and confidential issues and by gaining their verbal consent. Semi-structured
interviews conducted with staff of the institution to collect additional relevant information that
contributed to the achievement of objectives of the study.

3.5. Data Analysis Technique

To simplify the data analysis, the row data was coded and entered into computer for processing it
using the statistical package for social studies (SPSS). Since, the research is descriptive and both
qualitative and quantitative data analysis techniques were employed. Specifically, simple
statistical analysis like percentage, mean, tabulation and graph was used in order to analyze the
data easily.

34
Chapter Four

4. Data Presentation and Analysis

4.1 Introduction

This chapter deals with data presentation, analysis and discussion collected from primary and
secondary sources according to the arrangement of the research questions that guide this study.
The basic research questions are: What are the impact or outcomes of AdCSI in poverty
alleviation? Especially on its customers? To what extent do AdCSI schemes help beneficiaries to
create employment opportunities, to generate income, own assets and meet their basic needs?
What are the services/products provided and what results have been achieved? What
constraints/challenges do clients of AdCSI in Kirkos sub-city face in getting and utilization of
credit?

Still out of 153 sampled respondents around 2 percent of them are not returned. As indicated in
the methodology part, data collected through questionnaire and interview will be systematically
presented, analyzed and discussed in the following sections.

4.2 Characteristics of Respondents

As revealed in Table 3.1, of the total sample clients of AdCSI in Kirkos Sub city, 89(59.3%) of
the respondents are females and 61(40.7%) of them are males. This shows that AdCSI gave
weight to women borrowers as compared to men clients and the participation of women in
AdCSI financial services is relatively better. Though the AdCSI financial service provision is
relatively better participation of women, there is a need to encourage addressing more women in
the service so that they can take a loan and get involved in income generating activities.

35
Table 4. 1 Respondents by Sex and Age

Description Number of Percentage of

respondents respondents
Sex Male 61 40.7
Female 89 59.3
Total 150 100
Age 18-35 Years 87 58
36-45 years 47 31.3
Over 46 Years 16 10.3
Total 150 100

Source: Survey data, 2024

As indicated in Table 3.1, out of the total respondents, 87(58%) of them are in the age range of
18-35 years, 47(31.3%) of respondents are in the age range of 36-45 years and only 16 (10.7%)
of respondents are in the age range of over 46 years. From this, the researcher understood that
the majority (89.3%) of the respondents categorized under the productive age group (18-45 and
only 10.7% of clients of borrowers have an age of over 46 years. Hence, the majority of AdCSI
clients are in the productive age that they can work to change their life and they can use the loan
in different income generating activities.
Table 4. 2 status and family size

Description Number of Percentage of

respondents respondents
Marital status Married 74 49.3
Unmarried 50 33.3
Divorced 26 17.3
Total 150 100
Family size 1-4 97 64
5-10 48 32
More than 10 5 3.3
Total 150 100
Source: Survey data, 2024

36
Table 4.2 revised that, 74(49.3%) of clients are married, 50(33.3%) of respondents are unmarried
and 26(17%) of them are divorced. This indicates that majority of the borrowers are married and
the evidence shows that ADCSI gives loan to married clients than unmarried and divorced
clients. This could be to minimize the default rate and maximize the repayment rate. It might also
be due to group exclusion of the unmarried clients during group formation to minimize risks.
With respect to family size, 97(64%) of clients respondents have the family size of 1-4, 48 (32%)
respondents have family size of 5-10 and 5(3.3) respondents have a family size of more than 10.
This shows that almost all ADCSI clients do have at least one family member. This has
implication on the use of loan on income generating activities or other purposes.
Table 4. 3 Sample respondents by level of education

Description Number of respondents Percentage of respondents

Illiterate 23 15.3

Primary (1-8) 50 33.3

Secondary (9-10) 51 34

Preparatory 11 7.3

Diploma 12 8

BA Degree and above 3 2

Total 150 100

Source: Survey data 2024

As indicated in Table 4.3, from the total respondents, 51(34%) are high school (9-10), 50(33.3%)
respondents are primary (1-8), 23 (15.3%) respondents are Illiterate, 12 (8%) respondents are
Diploma holders, 11(7.3%) respondents are preparatory and 3(2%) respondents have BA Degree
and above. This shows that the majority of clients have low level of education. Only 17.3% of
the respondents have Diploma and above. This has implication on loan use and managing the
businesses or using loan for income generating activities.

37
4.3 Targeting the Poor
Addis Credit and Saving Institution target the low income segment of urban community,
productive poor, with special emphasis on women. The term “productive poor” refers to those
among the poor who have some form of employment as well as the capacity to repay back the
loans and who face non-sever food deficits and not destitute (Robinson, 2001), Experience
shows that unless there is a targeting tool, the poorest will either be missed or they will tend to
exclude themselves from the program. Hence, MFIs that design programs related to the needs of
the poor are likely to retain them as clients.

The urban loan program is launched mainly to address the problem of the urban poor through
providing certain credit access in order to enabling them to involving in different socio-economic
activities. To be clear micro-finance program gives emphasis more on low level of income group
by targeting the urban poor to improve the living standard of the poor. Thus, AdCSI in Kirkos
sub-city borrowers answered about the credit system as can be shown in the next Table 4.4.

Table 4.4 Respondents according to Their Lending system

Description Number of Percentage of
respondents respondents

Lending model Individual 44 29.3

Group 106 70.7

Total 150 100

Source: Survey data 2024

According to Table 4.3, among the total sampled respondents 106(70.7%) of them confirmed
that they borrow in a group lending system and 44(29.3) of respondents reported that they
borrow in individual lending model. The solidarity group model incorporates minimal technical
assistance to the borrowers. The group members cross quarantine each other’s loans to replace
traditional collateral (Lederwood, 1999:84). This implies that such approach has an advantage
because of borrower can use group as a collateral. From the clients response one can understand
that the institution is applied both group and individual lending system. However, the individual
lending require personal guarantee as collateral which might be difficult for the poor to borrow.

38
Moreover, majority of interviewed AdCSI officials explained that the mechanism used for
addressing the poor in addition to group lending is an individual lending which permit the poor
to get loan with collateral basis and the collaterals include: house, vehicles, machineries, regular
job salary for government and non-government employees etc. thus strict collateral requirements
are difficult for the urban poor in order to fulfil the requirements. Certainly, such types of
practice lead to screening the poor as they do not have capacity to meet the collaterals
requirements and to get loan from AdCSI.

From the view point of selection requirements of the targeted poor, the needed requirement to
access the credit service includes, letter of approval from the kebele which shows that they are
the residents of Addis Ababa, certification, the evidence that confirms that the activities would
be implemented in Addis Ababa city etc. in addition to this screening committee in the kebele
level put their comments and decisions concerning applicants. This implies that in Kirkos sub-
city it is likely to be marginalization of the poor through different requirements and direct
interference of kebele administration in loan service provision.

Table 4.5 Distribution of Respondents According to Credit Criteria

Description Number of respondents Percentage of

respondents

Do you think- that the criteria by

which one are being allowed to
get access to credit services are Yes 64 42.7
suitable?
No 77 51

No answer 9 6

Total 100 100

Source: Survey date, 2024

As indicates in Table 4.5, from the total sampled of respondents 77(51.3%) of them said that the
credit criteria is not suitable. 64(42.7%) respondents reported that the credit criteria is suitable,
and 9(6%) of respondents gave no answer. This implies that even if more than half of the

39
respondents agreed that the loan service is suitable, significant number of clients replied that the
criteria allowed getting access to credit services from AdCSI is not suitable. Hence the credit
criteria to get a loan needs some improvement to encompass the greater number of clients.
Table 4. 6 Distribution of respondents according to their group formation
Description Number of respondents Percentage of respondents

Kebele administration 39 26

Directly, I asked other group members 15 10.3

to join me, and they agreed

Previous group members asked me to 26 17.3

join them and I agreed

Addis credit and saving institution staff 62 41.3

helped me to join group

Other 11 5.3

Total 153 100

Source: Survey date, 2024

The above Table 4.6, depicts the clients’ group formation made by different stakeholder.
62(41.3%) of respondents reported that Addis Credit and Saving Institution staff helped them to
join in the group, 39(26%) respondents reported that kebele administration assists them to join
the service, 15(10.3%) of respondents said that they directly ask other group members to join
them, and 11(5.3%) respondents said that they establish their group with insisted by others such
as parents and relatives. This implies that all stockholders are given their technical support to the
poor for group formation. Hence, it is a good practice for helping the urban poor and it should be
encouraged the practices to motivate the low income group. However, care must be taken when
the kebele administration and other bodies from the group because the clients should have the
right to from their group voluntarily and get the service without others influence.

4.3.1. Income Generation

The major objective of micro-finance is to help generate income by poor households and there
by alleviate poverty. The increase or decrease in the level of income may have an implication on
the life standard of the individuals. Increasing income, for instance, can pave a way the
opportunity to open business, employment, access to health service, education, a means to fulfill

40
 basis needs and own assets. Moser’s emphasized that the development of human capital one of
the element of his framework is closely linked to the economic and social infrastructures such as
education, healthcare ensure skills and knowledge productivity (Moser, 1998:31). AdCSI
borrowers were asked to tell their average monthly income and expenditure to know, the status
of beneficiaries which is summarized in Figure 1.
Figure 1: Average income of respondents
Figure 1 The average income of respondents

50

40

30
percent

20

10

0
<250 251-500 501-1000 >1000

40-

30-

20-

10-

0- <250 251-500 501-1000 >1000

<250 251-500 501-1000 >1000

Figure 2 The Average Expenditure of respondents

41
Mean for the Average Mostly Income and Expenditure
Numbers of Minimum Maximum Mean
respondents

Average Monthly Income 150 90 4000 716.61

Average Monthly Expenditure 150 30 3,500 576.68

As can be shown in Figure 1 and 2, 19(12.76) of the respondents have monthly income below
250 Birr, 59(39.3%), the highest number of sampled clients, have average monthly income range
from 251-500 Birr, 52(34.7%) respondents have an average monthly income 501-1000 Birr and
20(13.3%) respondents have an average monthly income greater than 1000 and the mean is
716.61 Birr. In terms of expenditure, 26(17.3) of respondents have less than 250 Birr of average
monthly expenditure, 50(33.3%) respondents have monthly average expenditure 251-500 Birr,
50(38.7%) of respondent have average monthly expenditure 501-1000 and 16(10.7%) of
respondents have and average monthly expenditure greater than 1000 Birr. And the mean is
576.68. This implies that the clients of AdCSI are in a position to cover their expenditure from
their income. However, it is very difficult to conclude that the income is gained from the loan
advantage and it is doubtful to say that the credit institutions are addressing the urban poor in
Kirkos Sub-city.
Table 4.1 7 Respondents according to their source of income before and after joining MFI
Description Number of respondents Percentage of
respondents

Did you have any Yes 99 66

business and
income sources No 51 34
before joining this Total 150 100
credit program?

Did your income Yes 87 66

increase after
joining the loan No 47 28
credit program
No answer 16 6

Total 100

Source: Survey Data, 2024

42
As indicated in Table 3.7, 99(66%) of AdSCI clients reported that they had business and their
own income source before joining in the credit program and 51(34%) of borrowers said that they
had not any business and income source before joining this credit program. This implies that the
majority of the clients had their own income generating sources before joining the institution.
Therefore, it is very difficult to conclude that AdCSI in Kirkos sub city is reaching the targeted
urban poor though this needs further investigation. Moreover, AdCSI clients asked about their
income after joining the credit program. Accordingly, 99(66%) of respondents said that their
income has been increased after joining the loan program, 42(28%) respondents replied that their
income have not increased and 9(6%) of income has been increased after joining the loan
program, 42(28%) respondents replied that their income have not increased and 9(6%) of
respondents gave no answer. This implics that most of the respondents have increased their
income after getting credit service from AdCSI though it is difficult to suggest that this income
growth is as a result of loan service.

4.3.2 Impact of Microfinance on Education

Urban households are for the most part obliged to pay for their food, shelter, health care and
education in comparison to rural areas. Accordingly, microfinance institution in Kirkos sub- city
gives credit service to generate income in order to address the poor peoples' problems. Hence,
the present study attempts to see how their basic needs such as education, health and nutrition are
met.

Table 4. 8 Respondents' Change in Education before and after Joining the Credit Program
Description Number of Percent of
respondents respondents

Were you able to pay your

children’s education fees before
involving in the ADCSI program? Yes 66 44

No 49 32.7

No answer 35 23.3

Total 150 100

Your capacity to pay for your Increased 49 32.7

43
 children’s quality of schooling after Decreased 7 4.7
joining in credit program?
Remain the 94 62.7
same

Total 150 100

Sours: Survey data 2024

According to Table 3.8, 66(44%) of the respondents reported that they are able to pay their
children's education fee before involving in AdCSI program and 35(27%) respondents gave no
answer for their children's education fee before involving in AdCSI program. This indicated that
a significant number of respondents are able to pay their family education fee. So, it is related to
the idea of that the majority borrowers had their own income source before joining in ADCSI.
Sampled borrowers were asked the capacity for paying quality schooling fee after joining it.
94(62.7%) of respondents reported that they remained the same related to their capacity for
paying schooling, 49(32.7%) of sampled respondents confirmed that increasing the capacity for
paying school fee of AdCSI clients in this sub city and 7(4.7%) of respondents said that they
have decreased the capacity for paying their children's quality of school fee. This shows that
most of AdCSI borrowers are not able to meet their needs related to education. There is a need to
encourage them to involve in additional income sources to enable them paying school fee.
Besides, the following section shows the impact of financial services on health care and
nutrition.

4.3.3. Microfinance Impact on Health

Graham Wright argued that microfinance has a substantial effect on the nutrition and health of
the poor, especially for children (Wright, 2000:3). To Simanowitz and Walter increase in income
through participation in microfinance programs inevitably will lead to higher nutrition as a result
and health for individuals. Thus, one of the challenges that face the poor people is ill health. So
this study also tells how microfinance contributes to the health of the clients. In this regard, to
what extent the clients of microfinance institutions in Kirkos sub-city can afford to pay the
medical expenses. Hence to understand the respondents' situation before and after being engaged
the credit program in the Kirkos sub-city of AdCSI see Table 4.9.

44
Table 4. 9 Medical Responsiveness of the Respondents
Description Number of Percent of
respondents respondents

How do you explain the differences (in terms of

before and after joining the credit program) in
affording to pay the medical expenses whenever you
or your family members get sick?

• Better before joining the credit program 33 22

• Better after joining the credit program
117 78

Total 150 100

The number of food items and quality of food that

you are consuming now has

• Improved 88 58.7
• Worsened
• Remained the same 7 4.7

55 36.7

Total 150 100

Sours: Survey data 2024

As is indicated in the above Table 4.9, the makority of the respondents 117(78%) reported that
they can afford to pay the medical expenses after joining the credit program whenever their
family members fall sick and 33(22%) reported that it was better before joining to pay the
medical expenses. Although the result of the majority of respondents confirm that they can be
able to pay their medical expenses, the result is not satisfactory. Hence, AdCSI in Kirkos Sub-
city should assist the clients more in paying their medical expenses. Moreover, sampled
borrowers were also asked to single out the number of food items and quality of food that are
consuming now. Accordingly, 88(58.7%) of respondents reported that they improved the number
of food items and quality of food now than before, 55(36.7) of respondents confirmed that the
number of food items and quality of food that they are consuming now remained unchanged and

45
7(4.7%) respondents reported that the number of food items and quality of food that are
consuming now become worsened. This implies that a significant number of the respondents are
not satisfied. Hence, the service of AdCSI should need further investigation to know the reason
thoroughly.

Table 4. 10 Respondents according to their ability to buy cloth

Description Number of Percent of

respondents respondents

How do you explain ability to buy clothes for

yourself and for your children in general

• Better before joining the credit program 99 66

• Better after joining the credits program 51 34

Total 150 100

Sours: Survey data 2024

As can be shown in Table 4.10 above, 99(66%) of respondents reported that they had better
ability to buy clothes for their children before joining the credit program, 51(34%) of
respondents said that they had more ability to buy clothes for their children after joining the
credit program. This implies that the majority of clients of ADCSI are not able to buy their
clothes after joining the credit program. According to some interviewed respondents, the reason
behind having a large number of respondents that better to buy their clothes before joining in
credit program was due to the increasing prices of clothes and the low purchasing power of Birr
today.

4.3.4. Employment Opportunity

The immediate positive impact of micro financing scheme is an employment generation. Type of
business activities and trends of employment opportunities were collected. Critical to the issue of
micro-finance institution service is its employment creation among the poor society where
money can use their “labor-commonly identified as the most important asset of the poor” to
generate income (Moser 1998:25). It has been noted that in many countries of the world, micro-
finance programs, provides access to the small amount of startup capital for the entrepreneurial

46
projects which will then presumably help individuals to create employment opportunity and to
create long term self-employment in income generating activities. Hence, sample borrowers in
Kirkos Sub-city were asked for their responses regarding employment opportunities created by
the activities of the institution which is tabulation in Table 4.11.

Table 4.11 Respondents According to their Employment Opportunities

Description Number of Percent of

respondents respondents

What were you doing before you started the

business?

o Unemployed 64 42.7

• Employed ells where in similar business 57 38.0

• Studentship 11 7.3

• Working unpaired in the family business 11 7.3

• Employed in government organization 5 3.3

• Others 2 1.3

Total 150 100

Sours: Survey data 2024

As indicated in Table 4.11, 64(42.7) of respondents reported that they were unemployed before
starting the business, 51(34%) of respondents said they were employed elsewhere in a
similar business, 11(7.3%) of respondents reported that they were working unpaid in family
business, 8(5.3%) sampled respondents reported that they were employed in other places
such as daily worker, temporary hiring, etc, and a very small number of respondents i.e.
5(3.3%) of them said that they employed in government organization. This implies that the
majority, 86(57.3%), of respondents, can be able to create employment opportunities for
themselves. Therefore, AdCSI needs to be encouraged to employ opportunities for clients
themselves.

47
Table 4. 12 Respondents reply about number of employees

Description Number of respondents Percentage of respondents

1. Do you have employees before

joining your business?
Yes 28 25.3

No 109 72.7

No answer 3 2.0

Total 150 100

2. Do you have employees before

joining your business?
One 39 26

2-5 27 18

>5 5 3.3

None 79 52.7

Total 150 100

Source: Survey Data, 2024

According to above Table 4.12, out of the total sampled respondents, 109(72.7%) reported that
they did not have employees before joining ADCSI, 38(25.3%) of respondents said that they
had employees before joining the credit program and 3(2%) of respondents gave no answer.
The result reveals that the majority of the sampled clients were not employees who were
hired by borrowers themselves. Besides, there was another question concerning the number
of employees as indicated in Table 4.12. Accordingly, 79(52.7) of respondents said that they
did not hire employees in their business, 39(26%) of respondents reported that they hired
one employee in their business activities started through credit, 27(18%) of them said had 2
up to 5 employees and 5(3.3%) respondents reported that they hired employees greater than
5. This implies that most of the sampled respondents did not hire employees. Hence, micro-
finance towards creating job opportunities for others who do not have employment is not
satisfactory.

48
4.3.5. Value of Assets
The value of the assets of the borrowers is expected to have a positive impact on loan repayment
performance having the perception that the assets will be under liability in case of default. Asset
shows material assets which included other physical and financial assets such assets which
included other physical and financial assets such as land, housing, savings, and jewelry, enable
people to withstand shocks and expand their horizon of choices (World Bank, 2002:15). The
situation of ADCSI borrowers gave a response towards movable and immovable assets as
exhibited in the next Table.
Table 4.13 Distribution of respondents according to their assets
Description Number of Percentage of
respondents respondents

Did you have a fixed property before being engaged in AdCSI?

Yes 65 43.3

No 83 55.3

No answer 2 1.3

Total 150 100

Do you have fixed and movable assets after being engaged in AdCSI
program?

Yes 72 48

No 78 52

Total 150 100

What assets do you have after being engaged in AdCSI program?

• Owner of a house 13 5.5

• Have money to pay the school fees of my children 60 25.5

• Access of payment for health care for my family 73 31.7

• Improve my food situation 65 27.7

• The saving increased 24 10.2

Source: Survey date, 2024

49
As indicated in Table 4.13, 83(55.3%) of respondents said that they did not have fixed property
before being engaged in ADCSI program. 65(43.3) respondents reported that they had a fixed
property and a very few number 2(1.3%) of respondents gave no answer. Even though the
majority number of borrowers had not asset before joining in the program, a significant number
of respondents conformed that they engaged in ADCSI they had as asset, such as table and chair,
sofa, shelf, and house. This implies that it is similar idea as mentioned before under income
generating question due to the significant number of borrowers who have their own assets.
Hence, micro-finance institution in Kikors sub-city does not achieve the indicated purpose to
address the target group.

Moreover, ADCSI borrowers were asked fixed and movable asset whether they have or not after
being engaged credit program. As a result 72(48%) of respondents reported that they have an
asset after engaged it, and 78(52%) of respondents said that they do not have assets through
credit program. However, I found out from the ADCSI officials’ interview that have two
opposite idea on the one hand some clients have an asset due to their effort through credit
service. On the other hand a significant number of borrowers bought different equipment like
sofa, TV, etc, with the credit itself. Hence, ADCSI in Kirkos Sub-city needs to give attention to
how direction for clients to use the loan for income-generating activities and to be able to own
assets.

Apart from serving the poor people, a house is the most valuable asset people should have. In
urban areas when the house is improved, its value boosts and can be used for rental or enterprise
purposes for generating income and thereby increasing an individual and household's material
wealth. In line with this, Moser found that housing ownership was the most important productive
asset of the urban cushion households (Moser, 1998:32). However, ADCSI borrowers in KIrkos
Sub-city reported assets that, 73(31.1%) of respondents have assets of health care payment for
their family, 65(25%) of the respondents reported that they improved their food situation,
60(25.5) of the respondents confirmed that they afford to pay for school fees their children, from
the total respondents 24(10.2%) of them reported that they increased their saving through credit
program and only 13(5.5%) of respondents reported that they are the owner of the house. This
reveals that the majority of urban poor couldn’t be able to own their house through micro-finance
programs.

50
 4.4. Micro-finance Products and Services
An inventory of products and services provided by ADCSI was done during this study and the
analysis of which answers my third research question which was to examine the nature of
products and services provided by the micro-finance. The degree to which MFIs provide service
depends on whether it takes a minimalist or integrated approach. Advocates for the integrated
approach argue that MFIs need to focus on poverty reduction as their primary goal is to provide
services to the poor that integrate training, basic education, and primary health are
interconnected, and the impact for each can increase when they are delivered together (Moduch
and Haley 2002). The argument for the minimalist approach is that it is necessary to achieve
financial sustainability first (through financial services mainly credit and savings) and then,
when sufficient profit has been accumulated the MFIs can look into the possibility of providing
training and educational services. First, let us examine the financial service.
4.4.1. Loan/Credit Service
The service provided by ADCSI included loans, saving, consultancy, and managing third party
money. There are (a) micro-business that have a nature of installment repayment and are
disbursed for high turnover activities: (b) a small business loan (c) micro lease loans that aim to
enable clients to construct a new house (e) consumer loan (f) short-term loans targets very urgent
financial problem (ADCSI: 2009), accordingly, ADCSI disbursed the loans in different year
which is shown in Figure 3 below:
Figure 3 Trend of Loan Disbursement
4000000.00-
Loan Disbursement

1200000.00-
Total Birr

1000000.00-

8000000.00-

8000000.00-

4000000.00-

2000000.00-

2020-21 2021-22 2022-23 2023-24 2024

Year

Source: Survey data, 2024

51
As can be shown in Figure 3, even though loan disbursement sharply declined in the year 2021-
2022 it has good upward progress afterward. The disbursement of loans after 2021-2022 showed
an increment and ADCSI shows encouraging improvements in disbursing loans. Moreover,
concerning the amount of loan size given by ADCSI, the directive of the National Bank of
Ethiopia that limits the maximum loan amount to one borrower has given 5000 Birr for the
reason of targeting the poor and diversity of loans. Thus, sampled respondents were asked their
opinion on the amount of loan size which can be shown below in Table 4.14.

Table 4.14 Respondents according to loan size

Description Number of Percentage of

respondents respondents

What do you feel about the amount of loan

size given by Addis credit and saving
institution relative to your business

• Very low 25 16.7

• Small than required 37 24.7

• Good enough 86 57.3

• More than enough 2 1.3

Total 150 100

As indicated in Table 4.14, 86(57.3%) of respondents reported that the loan size is relatively
good, 37(24.7%) of respondents said that the amount of loan size is smaller than required,
25(16.7%) respondents reported that the loan size is very low and 2(1.3%) of respondents said
that the loan size is more than enough. The outcome shows that majority of sample respondents
are satisfied by the provision of loan amount. However, there is an indication that some clients
were dissatisfied by the loan size.

Moreover, the loan service is given for different activities and ADCSI provides mainly financial
services and restricts its loan products to income generating activities such as weaving and
tailoring, metal and wood works, food processing, and production of construction material,
municipal services like solid waste disposal and parking, retail trade, urban agriculture, leather

52
products and other. Borrowers shall be residents in Addis credit is delivered to productive
purpose, and the majority of clients are engaged in the traditional businesses of petty trade with
low levels of education and skill.

Table 4.15 Respondents according to the reason loan plus the first loan used

Description Number of respondents Percentage of

respondents

What was your first loan

mainly used for

• Pety trade 115 76.7

• Garment 4 9.3

• Construction work 3 2

• To pay my old debt 1 0.7

• Other 17 11.3

Total 150 100

What is your reason to take a

loan?

• To open new business 55 36.7

• To expand my business 65 43.3

• To change over another 6 4.0

business
• To solve the serious 24 16
problems of my lack of
money
Total 150 100

Source: Survey date, 2024

As indicated in Table 4.15, 115 (76.7%) of respondents used the first loan for petty trade,
14(9.3%) respondents used the first loan for garments, 1(0.7%) of respondents use the first loan
to pay old debt, 3(2%) respondents said that they used for construction and 17(11.3%) of
respondents reported that they used the first loan for other things such as to solve serious
problems, to send their children in abroad and the like. Beside, 65(43.3%) of respondents

53
 reported that they take loan to expand their business, 55(36.7%) of respondents confirmed that
the main reason to take a loan is to solve the serious problem of their lack of money and small
number of respondents. 6(4%) said that the reason of loan is to change over another business.
However, the researcher understood that business development services that provide
opportunities to upgrade skills into other areas are not well developed. Similar products are
offered on the market which easily saturates.

4.4.2. Saving Mobilization

Most MFIs focus on disbursing loans. Their savings services are designed as a means of
collateralizing loans and providing cost capital, they are not designed to meet the poor need for
saving mechanisms (Dicher and Haper, 2007 1-2) ADCSI provides voluntary and compulsory
savings that is the former saving is made by clients and non-clients while the latter saving is
done by clients only who are required to save until the loan repayment is successful completed
and the amount of interest rate for saving is 4.5% per annum. From the perspective of saving
ADCSI borrowers answered the question that mention in the next Figure below about the
average saving.

Average Saving in Months

43

35
percent

25

15

6
25 26-50 51-400 500
Figure 4Average Saving in Months

Source: Survey data 2024

54
Out of total respondents 116(77.3%) said that they have saving accounts and the rest, 34(22.7%)
of respondents reported that they do not have saving accounts. The reasons were that they do not
have money to save in MFI due to high inflation, low purchasing power of money in the market
and less amount of profit, etc. out of 166(77.3%) of respondents, 45(30%) of them reported that
they save less than 25 Birr, 34(22.7%) respondents said that they save in the range of 51-100 Birr
and 22(14.7%) respondents said they save more than 100 Birr. This implies that the majority of
borrowers either they do not have a saving account or they save less amount of money i.e., less
than 25 Birr per month. Hence ADCSI should revise the saving system to meet the demand of
the poor specially to increase the number of voluntary saving and the borrowers should learn
about the benefit of saving that can be the part of assets.

4.3.3. Interest Rate and Service Charge

Micro-finance institutions charge a higher interest compared to the formal financial banks. It
charged 14% interest for installment and micro-lease and for term loans per annum in flat rate
basis. For housing and consumption loan, the interest rate is 10% per annum on decline rate
basis. In addition to the interest rate, 2% service charge is paid for all micro and small loans
(ADCSI, 2024:5). Thus, sampled borrowers in Kirkos sub-city were asked to give their responses
on interest rate charged by ADCSI. That is being shown below in Table 4.16.

Table 4. 16 Respondents according to their response on interest rate

Description Number of respondents Percentage of respondents

Do you pay interest for the loans?

Yes 142 94.7

No 8 5.3

Total 1`50 100

Source: Survey date, 2024

55
Figure 5 opening about the interest rate

As indicated in above Figure 5, 81(54%) of respondents of AdCSI clients reported that the
interest rate is high, 9(6%) of respondents said the interest rate charged by AdCSI is low and 60
(40%) respondents reported the interest rate is normal. This implies that the majority of
borrowers have an opposite idea concerning low interest rate. Hence AdCSI should give
emphasis towards rationalizing interest rate to attract the urban poor.

4.4.4 Training and Supervision

MFIS provide both financial and non-financial services to poor clients (Ledgerwood 1999; 64).
Moreover, integrated approach refers to the provision of non-financial services such as training
in health, literacy, social action environmental awareness besides financial service (Hickson,
2001; 64). Beside the key issue in anti-poverty strategy is to build up the asset base of the poor
and to expand better their capabilities to manage their existing portfolio of asset (Moser
1998:24). The urban poor are characterized as risk of knowledge, lack of information, lack of
financial service etc. therefore, to escape from poverty; the poor should get not only financial
service like loan and saving but also it is essential to provide training, education etc. to develop
the poor capacity and awareness in managing the financial services. Hence, sampled respondents
were asked for their responses about supervision and training that is given by the institution. The
following Table 4.17 tabulates the responses.

56
Table 4. 17 Respondents according to training and supervision

Description Number of respondents Percentage of respondents

What is your opinion

about follow up and
supervision provided by
the officer?

Low 54 36

Bad 74 49.3

Very good 22 14.7

Total 150 100

Did you get and formal

training that helped you to
undertake the kind of
business you are involved
in?

Ye 65 43.3

No 85 56.7

Total 150 100

Source: Survey date, 2024

As is indicated in Table 4.17, out of the total respondents 54 (36%) reported that the supervision
by AdCSI was low, 74(49.3%) good and 22(14.7%) very good. This implies that the institutional
supervision and follow up of their borrowers seems to be encouraging. Moreover, borrowers
were asked whether they have got formal training or not. As a result, majority of respondents,
85(56.7%) reported that they did not get any formal training that help to undertake the kind of
business and 65 (43.3%) respondents said that they have got formal training. This implies that
the majority borrowers of AdSCI did not get a very important input to coping up the situation to
be effective and escape from poverty. Hence, AdCSI should give due attention not only for
financial services but also for non financial services through training and education of the clients.

57
 4.6 Challenges in Financial Service of the Poor
According to Simanowitz and Walter (2002) the most known explanations of defaulters are
either external products like similar saturated product produced or internal services i.e. in the
institution itself like short repayment period, low interest rate for saving, and low amount of loan
and high interest rate for loan. In Kirkos sub city AdCSI borrowers' responses towards time of
repayment of the loan is summarized in the Table 4.18.

Table 4. 18 Respondents according to the reason loan plus the first loan used

Description Number of respondents Percentage of respondents

Does Addis credit and saving institution

give enough time to repay

Yes 69 46

No 81 54

Total 150 100

Source: Survey date, 2010

As indicated in Table 4.18, out of total sampled respondents, 69 (46%) said that AdCSI gives
enough time to repay their loan and majority of respondents, 81 (54%) of borrowers, reported
that they do not give enough time to repay the loan. They justified the reason for this credit and
saving institution after gave it the credit, the institution gives an order to borrowers to repay with
in short period of time AdCSI should give enough time to borrowers to adapt to the business
environment specially the market situation.

Moreover, AdCSI clients answered on things they dislike, and challenges which are faced in
business activities as indicated in the Table below 4.19.

Table 4. 19 . Respondents according to their constraints/challenges

58
Description Number of respondents Percentage of respondents

State what you dislike in AdCSI

• Group lending 80 30.4

• Amount of loan smaller than 50 19

requested
• Delay in services delivery 25 9.5

• High interest rate 56 21.3

• Short repayment period 52 19.8

Total 263 100

What the main constraints to use the

credit?

• High interest rate for loan 54 29

• Shorter repayment period 67 36

• Low interest rate for saving 16 8.6

• Low amount of loan 49 26.3

Total 126 100

Source: Survey date, 2024

As can be shown in Table 3.19, 80 (30.4%) respondents reported that they do not like group
lending system, 50(19%) of respondents said that they dislike the amount of loan due to the
amount of credit smaller than requested, 25(9.5%) of respondents reported that they dislike delay
of in service delivery, 56(21.3%) of borrowers said that they dislike high interest rate and
52(19.8%) of respondents reported that they dislike short repayment period of time.

Beside to this, borrowers were asked the constraints when they use the credit, based on this as
indicated in the above table, 67(36%) of respondents reported that the main constraints to use
their credit is shorter repayment period, 54(29%) of respondents reported the main constraint is
high interest rate of loan, 49(26.3%) of respondents said that they face the challenges of low

59
amount of credit for required and 16(8.6%) respondents reported that the constraint to use the
loan is low interest rate for saving. Thus, shorter repayment period (1), high interest rate for loan
(2), low amount of loan (3), and low interest rate for saving (4) can be ranked one to four
respectively. Hence AdCSI should give attention to solve the above constraints as per the
responses.

Figure 6 Number of Clients in Terms of sex (AdCSI)

2,000

1,500

1,000

500

2021 2022 2023 2024

Source: ADCSI Profile, 2024

As can be shown in Figure 6, the number of women borrowers is more than men every year.
However, the actual loan taken by women is lower than men except in recent years as can be
shown in the next figure.

60
 Figure 7 Loan Disbursed in Terms of sex in AdCSI

8,000,000 Loan
disbursed

Loan
disbursed in

8,000,000

8,000,000

8,000,000

2020 2021 2022 2023 2024

Sources AdCSI profile, 2024

As is graphed in the above Figure 7, loan disbursement of males is more every year than loan
disbursement to females except 2006 and 2009. Hence, the question here whether men benefit
more than women borrowers from the outcomes of the program, it needs further research to
understand the role of microfinance in Kirkos sub city for the beneficiaries of loan disbursement
in term of sex.

61
 Chapter Five

5. Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings
The previous chapters provide information about microfinance services and their contribution to
urban poverty alleviation. The primary and secondary data presented, analyzed and discussed
based on the case of Kirkos sub-city branch office of AdCSI illustrates a practical insight
concerning the role of microfinance practice in urban poverty alleviation. Hence, based on the
previous chapters and data analysis the findings of this study are summarized as bellow: 4.1.1
targeting the credit and saving to the productive poor is one of the various instruments for
poverty reduction. AdCSI in Kirkos Sub city target the productive poor groups particularly
women (in principle). However, in practice it serves both men and women who have an income
base. This seems that AdCSI didn't work based on its objectives and targeting strategies.

5.1.2 ADCSI provides mainly financial services with group and to a certain extent for individual
borrowers'. But, the individuals lending require strong collateral. This might discourage the
poorest not to borrow from AdCSI.

5.1.3 Increasing or decreasing in the level of income may have an implication on the living
standard of individuals. Even though, the clients had business and their own income source
before joining the credit program, some of the AdCSI clients showed significant improvement in
generating income and owning assets after joining the program.

5.1.4 Increasing income through participation in microfinance programs inevitably will lead to
better nutrition and health for individual. Evidences in this study show that the majority of
ADCSI clients in Kirkos sub city are able to pay their medical expenses and they improved the
quality of food item. However, most of the clients were not able to afford fees for quality
education. In addition, the clients were not in a position to buy clothes for themselves and their
families.

5.1.5 The immediate positive impact of microfinance scheme is an employment opportunity. It

has been noted that in many countries of the world, microfinance programs provide access to
small amount of startup capital for entrepreneurial projects which will then presumably help

62
individuals to create employment opportunity. Although AdCSI clients create job for themselves,
the majority of them didn't create job opportunity for others.

5.1.6 Microfinance implies providing credit and saving facilities to the poor, there-by improving
the living standard of the borrowers. The targeting group and client selection mechanisms then
should gear towards addressing the poor. However, the information gathered from respondents in
Kirkos sub city shows that the poor tend to be ignored during group formation by offering
different criteria.

5.1.7 Microfinance institutions expected to encourage their clients in mandatory and voluntary
savings. However, the practice shows that either they did not save or they save small amount of
money which cannot secure the future needs of the poor clients. 4.1.8 Financial and non-
financial services are primarily expected to be effective in poverty reduction. However,
investigation in this study shows that there is lack of the provision of non-financial service such
as training and education to develop the awareness of borrowers towards the use of their loans.

5.1.9 Microfinance services are intended to reduce poverty through enabling the urban poor to be
active participants in income generating activities. However, the borrowers in kirkos sub city
mentioned some of the constraints/problems they faced in service provision like short repayment
period, high interest rate on loan, small amount of loan provided, low interest rate on saving, and
some of them were dissatisfied on the application of group lending system.

5.1.10 In order to reduce poverty, women who suffer the most must be empowered because
poverty reduction strategies that focus on empowering women not only improves the lives of
women but also positively affects the entire family and community. Even though, AdCSI gives
priority to women clients on the provision of financial services as indicated in its organizational
objectives, loan disbursement of men is higher than loan disbursement of women. This shows
that men obtained greater advantage than women in availing AdCSI financial services.

63
5.2 Conclusions
Microfinance has been widely accepted as a viable option for poverty reduction. In order to
investigate this underlying premise, this study examined empirical evidences related to AdCSI in
Addis Ababa to check whether microfinance is contributing to poverty reduction or not. For this
purpose, Addis Credit and Saving Institution in Kirkos Sub city was analyzed through primary
and secondary data. From this study it is possible to conclude that ADCSI Kirkos sub city indeed
supports the poor in changing their life particularly in generating their own income, education,
health and nutrition, housing, etc. However, the result is not satisfactory. AdCSI didn't mainly
focus on the productive poor section. AdCSI utilized different lending models but those lending
models didn't consider the interest of the poor clients. Financial services are not integrated with
non-financial services so as to assist the poor how to use the loan effectively for income
generation. In addition to this, there were different constraints and problems reported from the
clients of AdCSI related to financial services like short repayment period, high interest rate on
loan, small amount of loan provided, and low interest rate on saving. In order to solve these
problems, the following recommendations are suggested.

5.3 Recommendations
Poverty has remained to be a frightening challenge to developing countries and it can be
observed in many forms. It has both income and non-income dimensions. It might be reflected in
lack of income, lack of coping capacity, lack of basic human capabilities and the like. This study
has analyzed the microfinance contribution for poverty reduction in Kirkos sub city and
confirmed that microfinance is indeed a sound strategy for poverty reduction. However, the
results may vary based on the practical involvement of micro financial institutions. Based on the
experience of AdCSI and the summary of findings stated above, the following recommendations
are put- forward.

5.3.1 Although AdCSI targets the productive poor groups especially women in principle, they
didn't support the poor particularly women to get benefit like men due to low participation in
income generating business activities. Therefore, AdCSI needs to focus on its objectives and
targeting strategies so as to contribute for poverty reduction.
64
5.3.2 The analysis shows that AdCSI practiced both group and individual lending models in
Kirkos sub city. However, the group lending model constrained by different requirements from
the Kebele administration as well as the process of group formation. Moreover, the individual
lending model is also constrained by its collateral requirements. Therefore both models excluded
the poorest from financial services in one way. Or another. Hence, AdCSI need aware of this
exclusion and implement flexible lending approach in order to satisfy the needs of the poorest
and contribute to poverty reduction.

5.3.3 The study shows that AdCSI has positive impact on its clients specifically improvement of
income, education, health and nutrition, housing, and empowerment of the poor. However,
significant number of borrowers couldn't improve their life situation in Kirkos sub city.
Therefore, AdCSI should give attention to the poorest through the provision of financial service
in the right way and there is a need to support clients in non-financial services like skill based
training. Moreover, borrowers should be guided to invest their loan for the intended purposes and
productive income generating activities.

5.3.4 Although AdCSI clients create job for themselves, the majority of them didn't create job
opportunity for others. Therefore, there is a need to assist AdCSI clients in Kirkos Sub City to
utilize their loan for income as well as employment generation activities through different
support services like business development services, market oriented production and skill
development training.

5.3.5 AdCSI have to support borrowers to save voluntarily and own assets. For this of course
AdCSI need adopt flexible approach in saving rate that attracts both clients and non-clients to
save.

5.3.6 Literature shows that microfinance provides financial and non- financial services to
enhance the income and to improve the living standard of the poor. However, AdCSI focuses
only on financial service provision especially credits and savings. Hence, either it needs to have
skill training and awareness creation programs for its clients or it needs to establish network with
other stakeholders who can give training and education for its clients.

65
5.3.7 AdCSI should revise its strategy related to the loan repayment period, its high interest rate
on loan, small amount of loan, its low interest rate on saving, etc, so as to encourage the poor in
both financial and non-financial services.

5.3.8 Finally, women borrowers are required to obtain more advantages from the financial
services of AdCSI like that of men clients. All stakeholders have to involve in enhancing the
women participation in both financial and non-financial services. Loan disbursement for women
should be increased in order to improve the living standard of the poor women. Therefore,
AdSCI needs to revise its service provision strategy to give benefit women client

66
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71
Appendix 1

Department of public administration

Questionnaires to be filled up by clients of Addis credit and saving institution
Dear respondents,
This questionnaire is prepared b me, a student of addis ababa university masters program in public
administration. Its objective is to assess “the role of microfinance institution in urban poverty
alleviatin”. The information you provide is totally sought for academic purpose and shall be kept
strictly confidential. Please feel free to share your experiences regarding the microfinance
institution services. Thank you in advance for your kind cooperation. Youe ayelech eshete
Remember: put mark on the box answer you choose.
1. Personal data on the respondents
1.1. Gender: male female
1.2. Age breakup: A.18-35 year B. 36-45 years C. over 46 year
1.3. Education: A. illiterate B. primary (1-8) C. high school (9-10) D. preparatory
E. diploma F. BA Degree and above
1.4. Martial status: A married B. unmarried C. divorced
1.5. Family size: A. 1-4 B. 5-10 C. more than 10
2. Social economic condition of the respondent
2.1. Your average monthly income_________birr
2.2. Your average monthly expenditure_________birr
2.3. Did you have any business and your own income source before joining this credit program?
2.4. If yes explain
2.5. Were you able for paying for your children’s education fee before involvement in Addis credit
and saving institutions program<
A. Yes B. no C. no answer
2.6. Your capacity for paying for your children;s better quality of schooling after joining the
program?
A. Incresed B. decreased C remains the same
2.7. How do explain the difference (in terms of before and after joining the credit/loan program) iin
affording to pay the medical expenses whenever you or your family members get sick?
A. Better before joining the credit program
B. Better after joining the credit program

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2.8. How do you explain your ability to buy clothing for yourself and for your children in general

A. Better before joining the credit program

B. Better after joining the credit program
2.9. The number of food items and quality of food that you are consuming now has
A. Improved B. worsened C. remained the same
3. Information concering asset of respondents
3.1. Did you have fixed property before being engaged in addis credit and saving institution?
A. Yes B. no C. no answer
If “yes” state the asset -
___________________________________________________________________________
_________________________________________________________
Credit and saving institution program?
A. Yes B. no
If “yes”:
A. State the fixed asset

B. State the movable asset

3.3 What assets do you after being engaged in addis credit and savings institution program? (You
can tick more than one answer)
A. Owner of a house

B. have money to pay the school fees of may children

C. access of payment for health care for my family

D. Improve my food situation

E. the saving has increase

If any other, specify

4. Information regarding employment opportunity and empowerment of respondents

4.1 what were you doing before you started the business?

A. unemployed B. employed else where in similar business

C. A student D. working unpaid in family business

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E. employed in government

IF any other, specify

4.2 do you employees before joining in your business?

A. yes B. No C. no answers

4.3 How many employees (even family members employed) do you have in your business?

A. One B. 2-5 C. more than 5 D. none

4.4 is there gender segregation to be beneficiary in this program?

A. yes B. No

4.5 If yes, which sex is more favored?

4.6 What is the reason for this?

5. Information concerning Financial and Non-financial Services to Respondents

5.1. What do you feel about the amount of loan size given by Addis Credit and Saving
Institution relative to your business?
A. very low B. small than required
C. good enough D. more than enough
5.2. What is your reason to take a loan?
A. To open new business
B. To expand my business
C. To change over another business
D. To solve the serious problem of my lack of money
If any other, specify
5.3. What was your first loan mainly used for?
A. Petty trade B. Garment
C. Construction work E. To pay my old debt
Specify if any other
5.4. Are you borrow by:
A. Individuals D. Group

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5.5. If you borrowed by a group, have you ever paid defaulter's penalty to the group?
A. Yes B. No C. No Answer
5.6. Who do form your group?
A. Kebele administration
B. Directly, I asked other group members to join me, and they agreed
C. Previous group members asked me to join them and I agreed
D. Addis Credit and Saving Institution staff helped me to join the group
If any other, specify
5.7 Do you think that the criteria by which you are being allowed to get access to credit
services are suitable?
A. Yes B. No C. No Answer
5.8. Did you pay interest for the loan?
A. Yes B. No
5.9. What is your opinion about the interest rate?
A. High B. Low C. Proportional C. Proportional

5.11. State what you dislike in Addis Credit and Saving Institution service (You can tick
more than one answer)

A. Group lending

B. Amount of loan smaller than requested

C. Delay (bureaucracy) in service delivery

D. High interest rate

E. Short repayment period

5.12. Do you have a saving account in any of the following, if yes, how much is the amount
of savings?

A. In a week Birr B. In a month Birr

C. In quarter Birr D. In a year Birr

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If "No" why

5.13. What is your opinion about training, follow up and supervision provided by the
office?

A. Low B. Good C. Very good

5.14. Did you get any formal training that helped you to undertake the kind of business you
are involved in?

A. Yes B. No C. No Answer

5.16. What are the main constraints/ challenges to use the credit?

A. High interest rate for loan

B. Shorter repayment period C. Low interest rate for saving

D. Low amount of loan

If other, specify

6. Please make some suggestions

Thank you very much for your cooperation

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Appendix 2
Interview Questions to Kirkos Sub City Addis Credit and Saving Institution Branch and Sub
Branches Mangers

Dear respondents,

The question is prepared by the student of Addis Ababa university master program in public
administration. These interview questions to Kirkose sub city Addis Credit and Saving institution
branch and sub branches manages to gather information about "The Role of Microfinance
Institutions in Urban Poverty Alleviation". Specially, they are designed to investigate how
microfinance institutions target the poor, to what extent improve the living standard of the
beneficiaries and to identify the types of service provided by the institution. In addition to these,
it helps to obtain information of the major constraints or challenges that hinder the program.

1. What type of services /products do you provide for Addis credit and saving institution clients?

2. Tool for targeting

Explain the mechanism used for addressing the poor.

• How do you treat women and men in the provision of service of credit?

⚫What types of lending systems do you follow?

3. Would you suggest your observation on the improvement of Addis credit and saving
institution client's living situation?

4. What is your suggestion concerning?

⚫ Repayment period

⚫ saving situation

⚫The amount of loan that gave for the institution of clients

• Interest rate compared with other financial institution

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5. What was the main problems and constraints face during the provision of credit and saving
services?

6. If you have any additional suggestion which don't address in the above, you can explain it.

Thank you very much for your cooperation

78