Performance of MFIs and Their Role in Poverty Alleviation: The Case of Selected MFIs in Ethiopia

Abstract

The purpose of this research is to analyze the performance of selected MFIs and their impact on poverty reduction in Ethiopia. To achieve the objectives sought four MFIs were selected randomly and their outreach and financial performance, institutional sustainability and their program impact on poverty have been evaluated in-depth. Methodology ─ A mixed methods approach has been adopted. Accordingly, both primary and secondary data were collected and have been processed and analyzed using quantitative and qualitative analysis techniques. Findings ─ There is a weak governance and management capacity in all sample MFIs. Moreover, product diversification and the application of modern MIS are still not developed in most of the sample MFIs. However, some of them were performing well in terms of some of the outreach and financial indicators. Except OMO the remaining sample MFIs did not achieve level of OSS, and all of them were not attaining FSS yet. With negative AROA and AROE ratios, MFIs in Ethiopia are still not profitable. It is revealed that there is no trade-off between scaling up outreach as measured by NAB and financial self-sufficiency. However, when ALS (which measures client’s poverty level) was compared to profitability, there exist positive correlation, indicating that there is trade-off between depth of outreach and sustainability. Nonetheless, since the coefficient is weak, it doesn’t mean that MFIs should focus on large loans at the expense of their social mission. It is suggested that the twin goals of the MFIs can be attuned depending up on the adoption of appropriate strategies, which, judging by the findings of this study, including charging a relatively high real interest rate, making productive use of loan officers, keeping operating costs at minimum, diversification of income sources and encouragement of voluntary savings