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Credit Risk of the Microfinance Institutions Industry in Ethiopia

Credit Risk of the Microfinance Institutions Industry in Ethiopia. by Wolday Amha Association of Ethiopia Microfinance Institutions (AEMFI) Presented at Expert Meeting in JB, South Africa, April 1-3 2009. Growth of Microfinance Industry in Ethiopia (December 2001-September 2008).

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Credit Risk of the Microfinance Institutions Industry in Ethiopia

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  1. Credit Risk of the Microfinance Institutions Industry in Ethiopia by WoldayAmha Association of Ethiopia Microfinance Institutions (AEMFI) Presented at Expert Meeting in JB, South Africa, April 1-3 2009

  2. Growth of Microfinance Industry in Ethiopia (December 2001-September 2008)

  3. Outstanding Loans and Savings ( June 2003-June, 2007)

  4. Active Clients (June 2003- June 2007)

  5. Purpose of Loans • Agriculture (66%) • Micro and small enterprise (7%) • Trade (19%) • Services (5%) • Consumption (3%)

  6. Risks of MFIs in Ethiopia  • Credit risks: Risks of non-repayment of client loans • Operational risks: Risks due to failed internal process, systems, external event, or human errors (eg. fraud) • Market risks: Risks due of changes in the market rates prices (liquidity, interest rate and foreign exchange risks)

  7. Risks of rural households (A study of Oxfam USA focusing on a case study of Adi Ha Tabia) • Households practicing rain-fed agriculture • Hail • Water logging • Weeds • Drought (late rain and early stop of rain) • Insects • Soil infertility

  8. Continued • Households practicing irrigated agriculture • Soil infertility • Shortage of water in the irrigation scheme • Plant disease • Flooding • Households indicated drought as the most important risk followed by pest and disease and water logging

  9. Households’ preference of risks to be handled by insurance

  10. Key findings of the study by MDTCS funded by Oxfam USA • Household risks • Death of family members • Death of the husband • Illnesses • Crop failures • Loss of livestock • Market risks (price fluctuations) • Fire/theft • Car accident • Unemployment • HIV/AIDs

  11. Continued • Agricultural risks • Crop loss • Market risks • Livestock loss • Non-agricultural risks • Death in the family • Accident and illness • Property losses due to flood, fire, theft, etc • Market risks due to price fluctuation, power cut, default of customers, etc

  12. Ranking of household risks, by region

  13. Continued • Coping strategies of households (Ex-ante) • Savings in cash or in kind • Depending on god (faith and prayer) • Diversifying the source of income • Loan from finance providers • Traditional reciprocal social networks • Keeping personal and environmental hygiene • De-stacking of cattle before drought happens • Government subsidy and support • Reserving community land and water ponds

  14. Continued • Coping strategies of households (Ex-post) • Selling productive assets • Reducing quality and quantity of consumption • Mobilizing labor and looking additional job • Depleting cash saving • Depleting saving in kind • Support or gifts from friends in the form of loan • Iddir • Calling for traditional support system • Migration`

  15. Continued

  16. Credit risks of MFIs • Internal to the MFIs • Inappropriate products • Weak targeting approaches • Limited capacity of the staff to appraise the projects of clients • Weak MIS • Limitations in the commitment and efficiency of staff • Lack incentives to collect loans

  17. Continued • External risks and specific to the clients • Death of the client • Illness • Death of livestock • Limited market • Limited capacity to manage the enterprise • Lack of credit history and track record • HIV/AIDs • External risks involving groups of clients (covariant risks) • Drought and natural disasters leading to crop failure • Market risks such as prices • War and political crisis (Ethio-Eritrea) • Political intervention to by votes

  18. Risk mitigating mechanisms of MFIs • Group lending • Avoiding high risk and vulnerable groups • Rescheduling loans • Provide financial services to diversified activities • Developing insurance products particularly for loans • Credit guarantee schemes (guarantee schemes of the regional government) • Require property collateral for bigger loans • Strong follow-up and supervision • Developing saving products

  19. Challenges of MFIs in addressing risks • Lack of client awareness • Limited knowledge and understanding of the MFIs on the magnitude of the risks • Limited insurance products • Limited capacity of the MFIs and insurers to develop insurance products • Absence of a regulatory framework to provide micro-insurance • MFIs focusing on insuring credit not protecting the clients

  20. The way forward • Conduct a study to identify and prioritize risks of MFIs • Create awareness on the importance of micro-insurance • Develop preventive tools to mitigate risks • Develop insurance products for the insurable risks • Initiate the development of a clear regulatory framework to facilitate micro-insurance

  21. Thank You

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