ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

REGIONAL AND LOCAL DEVELOPMENT STUDIES

IMPACT OF MICROFINANCE IN ADDIS ABABA:

THE CASE OF GASHA MICROFINANCE

INSTITUTION

SAMUEL MOCHONA

February, 2006

ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

REGIONAL AND LOCAL DEVELOPMENT STUDIES

IMPACT OF MICROFINANCE IN ADDIS ABABA: THE

CASE OF GASHA MICROFINANCE INSTITUTION

A THESIS PRESENTED TO THE SCHOOL OF GRADUATE STUDIES,

ADDIS ABABA UNIVERSITY

IN PARTIAL FULFILMENT OF REQUIREMENTS FOR THE DEGREE

OF MASTER'S OF ARTS IN REGIONAL AND LOCAL

DEVELOPMENT STUDIES (RLDS)

Adviser: Beyene Tadesse (PhD)

SAMUEL MOCHONA

February, 2006

Addis Ababa University School of Graduate Studies

Regional and Local Development Studies

Impact of Microfinance in Addis Ababa: The Case of Gasha Microfinance Institution

by Samuel Mochona

Approved by Board of Examiners Signature

---------------------------------------- --------------------------------

Chairman, Graduate School

---------------------------------------- --------------------------------

Advisor

---------------------------------------- --------------------------------

External Examiner

----------------------------------------- ---------------------------------

Internal Examiner

ACKNOWLEDGEMENTS I am grateful to my advisor Dr. Beyene Tadesse without whose support and guidance this

thesis would not have come in its present form.

I would like to express my heart felt thanks to the staff of Gasha Microfinance Institution

for providing me with all necessary documents and information.

My special gratitude also goes to Ato Gebre Egziabher Hadera who provided me with

invaluable support while writing the thesis.

TABLE OF CONTENTS

Acknowledgements --------------------------------------------------------

------------------------I

Table of Contents ---------------------------------------------------------------------------------II

List of Tables -------------------------------------------------------------------------------------VI

List of annexes ------------------------------------------------------------------------------------VII

Explanatory Notes ---------------------------------------------------------

----------------------VII

Acronyms -------------------------------------------------------------------

---------------------VIII

Abstract --------------------------------------------------------------------

---------------------IX

CHAPTER ONE: INTRODUCTION --------------------------------

--------------------------1

1.1. Background of the Study --------------------------------------------------------------------1

1.2. Statement of the Problem -------------------------------------------------------------------4

1.3. Research Questions ----------------------------------------------------------------------------6

1.4. Objectives of the Study ----------------------------------------------------------------------7

1.5. Significance of the Study -------------------------------------------------------------------8

1.6. Limitations of the Study ---------------------------------------------------------------------9

1.7. Organization of the Study ------------------------------------------------------------------9

CHAPTER TWO: REVIEW OF RELATED LITERATURE --

------------------------11

2.1. Microfinance and Poverty Reduction -----------------------------------------------------11

2.2. Microfinance and Poor Women ---------------------------------------------------------13

2.3. Ourteach -------------------------------------------------------------------------------------15

2.4. Sustainability ---------------------------------------------------------------------------------17

2.4.1. Microfinance Commercialization --------------------------------------------------18

2.4.2. The Debate on Subsidy -------------------------------------------------------------20

2.5. Risk Management in Microfinane --------------------------------------------------------22

2.6. Loan Repayment and Impact --------------------------------------------------------------23

2.7. Development of Microfinance in Ethiopia -----------------------------------------------25

2.8. Empirical Microfinance Impact Studies on Ethiopia ------------------------------------27

CHAPTER THREE: METHODOLOGY --------------------------

------------------------31

3.1. Theoretical Approaches --------------------------------------------------------------------31

3.2. Data Types and Sources ---------------------------------------------------------------------31

3.3. Sampling Method and Sample Size ------------------------------------------------------32

3.4. Hypothesis and Variables -----------------------------------------------------------------33

3.4.1. Outreach --------------------------------------------------------------------------------33

3.4.2. Poverty Reduction --------------------------------------------------------------------34

3.4.3. Building Capacity to Manage Risks ------------------------------------------------34

3.4.4. Women’s Empowerment -------------------------------------------------------------34

3.4.5. Financial Sustainability and Serving the Poorest ---------------------------------35

3.5. Analysis ---------------------------------------------------------------------------------------35

CHAPTER FOUR: RESULTS AND DISCUSSION -------------

------------------------37

4.1. Outrach ---------------------------------------------------------------------------------------37

4.1.1. Group Formation and the Poorest of the Poor --------------------------------------39

4.1.2. Access to Formal Sector Finance and Outreach -----------------------------------40

4.1.3. Employment of Clients --------------------------------------------------------------40

4.1.4. Gender of Clients ----------------------------------------------------------------------41

4.2. Microfinance and Poverty Reduction ------------------------------------------------------42

4.2.1. Income and Savings --------------------------------------------------------------------42

4.2.1.1. Income ---------------------------------------------------------------------------43

4.2.1.2. Savings --------------------------------------------------------------------------44

4.2.2. Asset Formation ------------------------------------------------------------------------46

4.2.3. Expenditure -----------------------------------------------------------------------------49

4.2.3.1. Business Input Cost -----------------------------------------------------------49

4.2.3.2. Consumption Expenditure --------------------------------------------------50

4.2.4. Improvements in Occupation -------------------------------------------------------51

4.2.5. Reduced Dependency on Expensive Financial Services --------------------------52

4.2.6. Improvements in Nutritional Intake ------------------------------------------------53

4.2.7. Ability to Send Children to School ---------------------------------------------------55

4.2.8. Access to Health Facilities ------------------------------------------------------------56

4.3. Capacity to Manage Risks -------------------------------------------------------------------58

4.4. Financial Sustainability and Serving the Poorest of the Poor ---------------------------60

4.4.1. Loan Repayment Rates ----------------------------------------------------------------60

4.4.2. Financial sustainability of Gasha MFI ---------------------------------------------61

4.4.3. Outreach to the Poorest and Loan Repayment -------------------------------------63

4.5. Women’s Empowerment -----------------------------------------------------------------64

4.5.1. Decision-making Role ---------------------------------------------------------------65

4.5.2. Business Skills -------------------------------------------------------------------------68

4.5.3. Self-esteem ------------------------------------------------------------------------------68

4.5.4. Sending Children to School -----------------------------------------------------------69

4.5.5. Women and Compliance to regulations --------------------------------------------69

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS

5.1. Summary and Conclusions -----------------------------------------------------------------71

5.2. Recommendations -------------------------------------------------------------------------75

References ---------------------------------------------------------------

------------------------77

Annexes -------------------------------------------------------------------------------------------83

List of Tables Page

Table 1: Microfinance outreach of Gasha MFI-------------------------------------------------38

Table 2: Microfinance Outreach of some MFIs (June 2003) ---------------------------------39

Table 3: Urban Female Clients of Gasha Microfinance Institution -------------------------41

Table 4: Independent Samples T Test Result for Weekly Income --------------------------44

Table 5: Average Annual Savings of

Clients --------------------------------------------

-------45

Table 6: Independent Samples T Test Result for Monthly Savings -------------------------45

Table 7: Independent Samples T Test

Result for Expenditure on Key Assets -----

--------48

Table 8: Independent Samples T Test Result for Business Input Cost ---------------------50

Table 9: Independent samples T Test Result for Consumption Expenditure --------------51

Table 10: Clients’ Responses on Improvements in Occupation after Taking Loans ------52

Table 11: Chi-Square Test Result for Nutritional Intake -------------------------------------54

Table 12: Chi-Square Test Result for Children’s Education ---------------------------------56

Table 13: Chi-Square Test Result for Access to Health Service -----------------------------57

Table 14: Some Performance Indicators of Gasha Microfinance

Institution --------------61

Table 15: Chi-Square Test Result for Decision-making in Household ---------------------66

Table 16: Chi-Square Test Result for Decision about Loan Taking ------------------------66

Table 17: Chi-Square Test Result for Women’s Role in Community ----------------------67

List of Annexes Annex 1 Questionnaire --------------------------------------------------------------------------83 Annex 2 Summary of focus group discussion -----------------------------------------------91 Annex 3 Summary of interview with Gasha MFI staff ------------------------------------93 Annex 4 Balance Sheet of Gasha MFI -------------------------------------------------------95 Annex 5 Income Statement of Gasha MFI --------------------------------------------------96 Annex 6 Guidelines for an interview with ex-clients of Gasha MFI---------------------97 Explanatory Notes Ambasha: type of bread baked from dough of flour leavened by yeast

Areke: home-made distilled alcoholic drink

Birr: Ethiopian currency equivalent to 100 cents

Gulit: a small open-air road side market

Injera: a type of light bread baked of leavened flour of an Ethiopian cereal called teff

Kebele: the lowest administrative level of government in Ethiopia

Kitta: a type of bread of baked dough that is not leavened

Sindedo:a household utensil made of strong grass

Tella: a type of home-made beer

Woreda: the second lowest level of government administrative structure

Acronyms NGO Non-governmental Organization

MFI Microfinance Institution

IDA International Development Association

SNNPS South Nations, Nationalities and People’s State

ABSTRACT

Microfinance is provision of small amounts of institutional loans to low income people who could not access loans from formal sector finance. Major objective of extending the loans is to alleviate poverty by creating jobs and incomes. While reducing poverty, microfinance services are supposed to build asset bases of their clients to manage and cope up with risks. Microfinance programmes are also expected to empower women clients by improving their decision-making roles and self-esteem, among others. However, whether microfinance programmes are bringing about desired changes is debatable. In addition, some argue that microfinance has been pushing the low income people further into poverty. Although non-governmental organizations began delivering mirofinance services in Ethiopia to rehabilitate people affected by recurrent droughts and poverty, government commercialized it with proclamation. Pro Pride was one of such non-governmental organizations that evolved into Gasha Microfinance Institution following the promulgation of the proclamation. Gasha Microfinance Institution is providing financial services through its four branches in Addis Ababa and one branch in Debrezeit giving special emphasis to women. Attempts were made in this study to assess impact of programmes of the institution in terms of outreach, poverty reduction, managing risks, and women's empowerment. For the study, the following hypotheses were constructed: Gasha Microfinance Institutions extends financial services to the poorest; microfinance services of Gasha MFI lead to reduction in poverty; financial services of Gasha MFI improve clients’ capacity to manage and cope up with risks; and participation of women in microfinance programmes empowers them.

Quantitative and qualitative data were collected from the institution and the clients for the study. Semi-structured

interview, focus group discussion and case study were used as tools to gather data

from frequent, new and former clients. A sample size of 80 (40 experienced and 40

pipeline clients) was selected for the survey. Interview was also conducted with 30

former clients and 20 clients were

participated in two focus group discussions. T test, chi-square test, and

qualitative data summarizing method for microfinance impact assessment with

quantitative evidence were used to draw conclusions from the data.

Accordingly, the institution is extending loans to 'productive poor' which have been selected by different criteria. Although the livelihood of clients of the institution like selling dung for fuel indicate that they are nearly the poorest, the selection criteria and group formation have been excluding the extremely poorest of the poor from receiving microfinance services. Qualitative data show improvements in the livelihoods of clients, their savings, forming assets, improvements in nutritional intake, reduced dependency on expensive financial services, and to a very limited extent in capacity to manage risks and women’s empowerment. The quasi experimental control group hypothesis testing methods indicated that there are statistically significant differences in income, business and consumption expenditures between clients and non-clients. However, differences observed in monthly savings, asset building, nutritional intake, women’s empowerment, ability to send children to school, and access to health facilities between participants and non-participants were not statistically significant.

CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Poverty is generally perceived as individuals’ or households’ lack of resources to meet

their needs for a healthy living or when their resources are so limited than other

community members to exclude them from a traditionally acceptable way of life. Such

poor people, according to World Development Report 2000/2001, often lack adequate

food, shelter, education and health besides facing extreme vulnerability to economic

problems and natural disasters. In addition to the very limited assets, inaccessible markets

and scarce jobs that lock them in material deprivation, poor people “are often exposed to

ill treatment by institutions of the state and society, and are powerless to influence key

decisions affecting their lives” (World Development Report, 2000/2001). Moreover, they

lack the freedom of choice and action to shape their lives; control over resources; and

make decisions, as their freedom is severely curtailed by their voicelessness and

powerlessness in relation to institutions such as state and market (World Bank, 2002).

Explaining this kind of extreme deprivation in Ethiopia, Development and Poverty

Profile of Ethiopia (2002), which was compiled based on data gathered in 1999/2000,

pointed out that 44.2 percent of Ethiopia’s population was absolutely poor (unable to

meet basic needs), of which 37% was urban and 45% rural. According to the Sustainable

Development and Poverty Reduction Program (2002) of Ethiopia, poverty is observed in

the country in terms of low level of consumption, household characteristics like large

family size, vulnerability to shocks, poor health and low level of education, among

others.

Women and men, living in such kinds of deprivations, need a wide range of assets such

as land, housing, livestock and savings, and capabilities in order to lead healthy lives;

withstand shocks; and expand their horizon of choices. This can be done by increasing

their well-being, security, and self-confidence as well as by mitigating the extreme

physical and financial limitations, which constrain their capacity and exacerbate their

vulnerability (World Bank 2002).

With the view to improving the lives of the poor and mitigating the extreme conditions of

deprivation in which the poor households live, various poverty reduction strategies such

as promoting opportunities to the poor, empowering them and reducing their vulnerability

have been taken at international, national, regional and local levels. In connection with

poverty reduction, the World Development Report 2000/2001 suggested the creation of

opportunities for the poor such as jobs, credit, roads, markets for their produce, schools,

water facilities, health and sanitation; empowerment of the poor that is implementing

action responsive to the needs of poor people to facilitate the political, social and

institutional interactions of the poor; and enhancing security by reducing their

vulnerability to economic shocks, natural disasters, ill health, disability, and personal

violence.

Microfinance programmes have been introduced as one of these actions to alleviate

poverty, empower low-income people and reduce their vulnerability to risks. According

to Aguilar (1999), microfinance services have been believed to alleviate poverty by

creating jobs and increasing incomes as they link the poor into productive economic

activities. In many cases, basic business skill training accompanies the provision of

microloans to improve the capacity of the poor to use funds (Webster and Fidler 1996).

According to the 1999/2000 Annual Report on the Ethiopian Economy Vol. I, to bring

about stability and improvement in the lives of people negatively affected by recurrent

droughts in Ethiopia, non-governmental organizations (NGOs) were providing saving and

credit services aimed at creation of employment and generating income.

Pro Pride is one of such NGOs, which led to the formation of the Gasha Microfinance

Institution following the promulgation of proclamation No. 40/1996 on licensing and

supervision of microfinance institutions. According to Gasha Microfinance Share

Company Progress Report (1997-2000), Pro Pride was established in 1995 to empower

disadvantaged individuals, families and communities in urban settings and alleviate

poverty by helping them actualize their potential. The belief of the organization stated in

the report was that every human being is equal by nature and is capable of sustaining

him/herself. The NGO, in collaboration with community representatives and local

government officials, identified Woreda-5, usually known as Merkato, in Addis Ababa,

which it said to be poverty stricken, to introduce its poverty mitigation interventions.

Challenged by complexity of poverty and its limited resource capacity, Pro Pride started

its intervention with a savings and credit programme called the livelihood promotion.

For the credit and saving programme, Pro Pride decided to organize 300 individuals from

kebeles: 05, 15, 16, 20 and 21 of the woreda. All the kebeles were selected for being

residential areas, except 05 that was selected for its commercial sex workers. Members

were selected on the bases of being identified by the members of the community as poor

and without any assistance; capable of getting engaged in productive economic activity;

willing to take loan and repay on time; socially, accepted as credit worthy; and being

female household head preferably. Eventually, a special committee formed to organize

the group, selected 411 individual (401 females and 10 males). Pro Pride organized a

total of 3,630 clients; disbursed 3,917,753 birr loan; mobilized 686, 579 birr savings; and

collected 2,108, 857 birr on loan repayment until the microfinance institutions licensing

proclamation and different directives of the National Bank of Ethiopia prohibit

involvement in microfinance without obtaining license from the bank.

Convinced in the importance of streaming savings and credit in a microfinance modality,

Pro Pride applied to establish a microfinance institution called Gasha in 1997 and was

licensed in 1998 with 200,000 birr paid up and 800,000 birr subscribed capital, and 756

shareholders as owners.

1.2. Statement of the Problem

Microfinance services have been provided since the 1970s to alleviate poverty by

creating jobs and increasing income. This has been done on the basis of the assumption

that by integrating the poor into productive economic activities, development would be

promoted automatically through microfinance (Aguilar, 1999). In recent years, however,

policy makers, donors and practitioners have been in increasing doubt whether the

desired results have been achieved (Aguilar 1999, Hulme 2000, Wright 1999). The

doubts called for impact assessment studies, and as a result, a number of such research

have been conducted in Asia, Latin America and Africa where the majority of the society

are poor and microfinance programmes are being carried out. The objectives of most of

these studies were to assess the impacts of having access to microfinance services on

incomes and their sources, standards of living, better health and children’s education as

well as better self-image and decision making power as a direct result of the loans. These

studies, however, reported mixed results like little positive change in alleviating poverty

(Dunn and Arbuckle, 2001); accumulation of increased working capital by the poor,

increased investment in fixed assets, self-employment, and more incomes (Wright, 1999);

and increased debt liability (Hulme, 2000, Rahman, 1999).

Microfinance impact assessment studies have been undertaken at different levels such as

individual, household, institutional and community levels. For instance, the conventional

evaluation of performance of microfinance institutions (MFIs) with emphasis on financial

sustainability and outreach give overriding emphasis to financial criteria. This

conventional wisdom states that clients will automatically follow if the services of

microfinance institutions are available, and high rates of repayment and repeated

borrowing can be taken as proxies of client satisfaction and are indicators of positive

valued service (Cohen and Sebstad, 1999). This approach suggests that financial

performance indicators are sufficient to show whether or not the MFIs are doing a good

job, arguing that if clients are willing to pay for service, it can, then, be assumed that they

are happy to pay for the services because they are doing them good. This point of view

states that market is the indicator of the impact.

However, this approach fails to answer the key questions of microfinance impact such as

whom these programmes reach and how they make positive difference to the lives of

clients. Because financial performance of an MFI does not measure changes occurred in

the lives of clients. Indebted clients may repay loans even when their businesses fail and

much hardship results. Thus, it is critical for microfinance impact assessment

practitioners to be sensitive to the impact of the programmes on the clients rather than

financial sustainability of the providing institution.

Therefore, the starting point of this study was about whether the programmes of Gasha

Microfinance Institution are making positive changes on clients. This is further explained

in the following research questions.

1.3. Research Questions

This study attempts to answer the following key research questions:

1. Which groups among the poor does Gasha Microfinance Institution reach? Are the

poorest left out?

2. Do microfinance services of Gasha result in poverty reduction at household level?

3. Do financial services of Gasha Microfinance Institution improve clients’ capacity to

manage and control risks, and build up their asset base to protect against and cope

with such unfortunate events?

4. Does women’s role as clients of microfinance programmes translate into

empowerment for them?

1.4. Objectives of the Study

Microfinance programmes are expected to alleviate poverty by creating income and jobs,

and consequently promote development through provision of small amount of credit and

saving to low-income people. Participants of the microfinance programs are expected to

invest the loans in productive activities that generate income to exit them from poverty;

expand their businesses; and improve the quality of their lives. As a result, the clients of

microfinance programs are supposed to have higher and more stable income, increased

household expenditures for basic needs, employment opportunities, improved nutritional

intake and better children's education than they did prior to their participation. Familiarity

with financial institutions; gaining of confidence; saving for emergency use; building up

of collateral for loans; having access to market; and increased women empowerment, and

better health services, including contraceptive use, are also anticipated from microfinance

programmes.

Gasha Microfinance Institution, until the end of 2004, was providing microfinance

services to about 6,990 urban clients through its four branches in Addis Ababa with the

general objective of alleviating poverty and specific objectives of providing financial

services to micro and small enterprise at a cost recovery and sustainable bases; promoting

the culture of saving among lower segments of the society; facilitating access of the poor

to various saving and credit services; providing demand driven business skill training;

developing self-esteem among clients; and encouraging women to be involved in micro

enterprises through membership in Gasha as shareholders, board members, client groups

leaders and staff.

In this respect, the general objective of the study is to determine whether Gasha

Microfinance Institution is meeting its objective, which is alleviating poverty at

individual level. Specific objectives of the study include:

1. To examine the impact of microfinance services of Gasha MFI on poverty of its

clients;

2. To examine if microfinance services have positive impacts on women’s

empowerment; and

3. To recommend some improvement measures in the area of microfinance.

1.5 Significance of the Study

Microfinance service providers, microfinance promoters, and development policy makers

could use the findings of this study to improve microfinance products and services as

well as to justify investment in the sector.

1.6 Limitations of the Study

In microfinance impact assessment data should be collected at more than one point in a

time in order to compare changes in important variables between two or more points in a

time through a longitudinal research design. The data used in this study, however, were

gathered in one point at a time because the research was limited to one year due to

academic calendar. Therefore, a retrospective research design that alternatively allows the

use of recall data was employed.

Of the more than 10,734 clients and

dropouts of Gasha Microfinance Institution, a sample size of only 80 was used in this study. This was done due to two major reasons. First, very limited time to gather and analyze the data as well as shortage of financial resource

forced the researcher to limit himself to small sample size. Second, the qualitative

data needed for the study requires in-depth interview and longer time combined with the very limited

experience of the researcher in analyzing them necessitated small sample size.

In addition, quantitative information concerning expenses of clients on child education, health service, and labour could not be gathered due to recall problems on the part of informants.

1.7. Organization of the Study

The paper is organized in five chapters. General introduction is given the first chapter. The relevant literature in the

field is discussed in the second chapter. In chapter three research design and

methodology are presented. Following this, chapter four contains results and

discussion. Finally, summary, conclusions and recommendations are presented in

the fifth chapter.

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1. Microfinance and Poverty Reduction

Microfinance is provision of small amount of institutional credit and saving to jointly

liable low-income people, who are unable to obtain loans from formal sector banks for

lack of collateral (Rahman 1999, Morduch 2000). The Grameen Bank in Bangladesh

(Wright 1999:39) first began it in 1976. Formal sector banks do not lend to the poor, as it

is difficult for them to identify the truly reliable borrowers, monitor their behavior and to

make them accountable when it needs (Morduch 2000:622-23). It is with the view to

overcoming this phenomenon that the microfinance movement emerged by substituting

material collateral with social collateral, organized social pressure from group members

among the poor to make each member of the group responsible to and for the collective

to enhance social solidarity (Rahman 1999:7, Morduch 2000:622-23).

According to Aguilar 1999, the aim of integrating the poor into the economic circuit

through microfinance programmes is to alleviate poverty by creating income and jobs,

and consequently promote development. To that end, participants of microfinance

programmes are expected to invest the micro-loans in productive activities

(Rahman1999:75) that generate enough income enabling the low-income households to

exit from poverty; expand their businesses; and improve the quality of their lives

(Morduch 2000:620).

In this regard, Webster and Fidler (1996:23 ) stated that clients of microfinance programs

have higher and more stable income, increased household expenditures for basic needs,

employment opportunities, nutritional intake and better children's education than they

did prior to their participation . Aguilar (1999) said that the poor undoubtedly benefit

from microfinance services in growing levels of health care and education expenditures,

better income, and better quality of nutrition, asset holdings, and weights of preschool

children. They also become familiar with financial institutions; gain confidence; save for

emergency use and build up collateral for loans; have access to market; and increased

women empowerment and contraceptive use, among others.

Gulli and Berger (1999:17) summarized the assistance of microfinance programmes to

poor households in to four major areas:

1. Investment in productive assets for income generation;

2. Facilitating the household's livelihood activities;

3. Protection against income shocks and reduced vulnerability; and

4. Qualitative factors such as empowerment and building of social capital.

To put poverty-reduction intervention of microfinance programmes in a nutshell, they

reach the poor in need of credit, and the poor pull themselves out of poverty through

income generating activities and empowerment (Gulli and Berger 1999:17).

Empirically, however, not all microfinance programmes have led to reduction in poverty.

In this regard, Rahman (1999:68) said that "…there are still many borrowers who become

vulnerable and trapped by the system; they are unable to succeed." According to Hulme

(2000:26), calling micro-credit 'microdebt' help us be more realistic as it increases

borrower debt-liability, and anxiety and tension among household members (Rahman

1999). Moreover, Hulme (2000:26) wrote, "outside Bangladesh the microfinance industry

has not even scratched the surface of poverty." On top of that, Hulme (2000) and Rahman

(1999) reported that the poor are very frightened about getting in to debt, and female

clients of microfinance service of the Grameen Bank committed suicide when they faced

problems with repaying loans. Possessions of debtors (pots and pans, roofing irons) were

seized, while the poor have been arrested by police and even threatened with physical

violence (Hulme 2000:27).

2.2. Microfinance and Poor Women

Since the mid-1980's, microfinance programmes started preferring women to men to

address poverty (Rahman 1999, Wright 1999) as poor women are disadvantaged in their

access to education, skills, capital and improving ability to succeed in business activities

(Webster and Fidler 1996). This is done on the bases of the following poverty reducing

assumptions of microfinance (Gulli and Berger 1997:17-8), which give overriding

emphasis to the poor in general and poor women in particular.

1. Microentrepreneurs- especially women- are poor;

2. Microentrepreneurs are severely constrained by inadequate access to credit for

income generating activities;

3. Microfinance institutions aim at poverty reduction;

4. Microfinance institutions do reach poor people; and

5. Microfinance has a positive impact on poor people's income and empowerment.

Webster and Fidler (1996:24) explained the strong emphasis placed on gender issues by

microfinance institutions and donors as recognizing "the constraints that limit the access

of the poor to financial services are particularly harsh for women." Microfinance

institutions' rationale for targeting women over men, according to Rahman (1999:69), is

based on the assumption of their greater contribution for the household welfare.

…women's priority is to invest their earnings in their children, followed by their spending on their household necessities. Therefore, lending to women and increasing their earnings bring more qualitative benefits to family welfare than the earnings of men. In addition, lending to women is perceived an effective way to assist the poor women in attaining their socio-economic empowerment in the larger society (Rahman 1999:69).

In connection with microfinance institutions' focus on women, McCormick and Munguti

(2003:57) noted that credit services bring about economic benefits such as higher

business incomes and better empowerment, greater self-confidence, increased role in

household decision-making and better social capital. In Webster and Fidler (1996:23)'s

words, "they (women involved in microfinance) feel less marginalized, have higher

aspirations for their children's education and future, use more reliable sources of drinking

water, and are more likely to use latrines and contraceptives."

On the other hand, microfinance institutions prefer women to men not only because they

have been marginalized in socio-economic relations, but also they tend to be excellent

clients, which Rahman (1999:69) called 'the hidden transcript'. According to Rahman

(1999:69-70), Grameen Bank targeted at women strategically for recovering of loans

because of women's positional vulnerability such as shyness, being passive and

submissive in some societies as well as they are more reliable and more disciplined. In

addition, women in many programmes have been proved for repaying their loans at

higher rates than men (Webster and Fidler 1996:24). As it was stated in Rahman

(1999:24), lending to women gives microfinance institutions an unwritten guarantee of

getting back their money.

2.3. Outreach

It is generally thought that the clients of microfinance institutions (MFIs) are the poor.

However, studies indicate that very few MFIs reach the poorest of the poor, and that

many MFIs have a high percentage of non-poor clients (Gulli and Berger 1999:22).

Regarding the scale of outreach (the number of people reached with microfinance

service) and depth of outreach (the extent to which clients are poor and underserved),

Webster and Fidler (1999:32) said that only few microfinance institutions have achieved

impressive results. According to Rahman (1999:67), the largest micro-lending institution

with 1,046 rural branches operating in 34,913 villages of Bangladesh, is providing

microfinance service to 2.02 million people, 94 percent of them women. Another bigger

microfinance institution in Indonesia provides financial services to 2 million micro-

borrowers and 12 million savers (Webster and Fidler 1996:32). Most successful

microfiance institutions reach the poor with loans that average $200 to $500, and some

others reach the poorest with loans from $100 to $40, said Webster and Fidler (1996),

and added that reaching the underserved means providing the service to the rural people

and women.

However, according to Hickson 2001, microfinance institutions have begun to doubt that

their programmes are reaching or benefiting the very poor despite their fame in being

committed for the poor. In reaching the poor with microfinance services, Hickson

(2001:57) noted that very poor households are either excluded from entering

microfinance programmes, or drop out of these programmes at early stage.

Explaining why microfinance institutions could rarely manage to serve the extremely

poor, Hickson (2001:60) stated that there is an inherent problem with giving credit as an

investment tool to the very poor households, which generally rely on wage labour and

usually lack the experience and confidence to become successful entrepreneurs

independently. In the view of addressing the problem, micro-lenders in Bangladesh

developed technical and business mechanisms for skill training for the very poor, and in

some cases established their own marketing channels particularly for their businesses

(Hickson 2001:60). For instance, Grameen Bank officials identify the most vulnerable

like landless due to riverbank erosion, refugee in some else's home, make their

livelihoods from begging, abandoned, widowed and divorced women; and provide some

training to enhance their skills to use credit; and give marketing assistance to their

products (Hickson 2001:59.)

2.4. Sustainability

Sustainability in microfinance programmes is ensuring permanence (Navajas et. al 2000:

35). It can also be defined as covering all the recurrent costs of operation (Dunford 2000:

43). According to Webster and Fidler (1996: 33), financial sustainability refers to the

ability to generate sufficient revenues that cover total costs of service delivery, including

operational and financial costs (the cost of the funds). This is explained by Copestake et.

al (2002) as getting costs of provision less than the benefits (net of transaction costs) to

clients , and then business is possible , with benefits shared between provider and user

according to the price that is struck between them .

Webster and Fidler (1996: 34) pointed out three factors that determine an MFI's ability to

earn sufficient revenues to cover operational and financial costs. These include the loan

repayment rate, the scale of lending and the interest rates charged on loans. They further

explained how the factors affect sustainability, as repayment rates of less than 95 percent

are not acceptable; it is difficult for an MFI lending to small number of borrowers to earn

sufficient revenue to cover full cost even when high interest rates are charged, and

interest rates should be based on the cost of loan delivery, not on rates of commercial

banks.

Concerning sustainability, Duford (2000) classifies MFIs as focusing on business

profitability and social objective-serving the poor. Objectives of MFIs aiming at

profitability are assumed by their financial services and institutional objectives. As

serving the poor is not their objective, they can easily manage to recover costs. The

objective of social service providers, giving loans at or below market rates to the poor

who need special considerations, on the other hand, is not sustainable institution building.

For microfinance programmes purely aiming at poverty alleviation, full cost recovery is

hardly possible. Morduch (2000:618) noted that almost all microfinance programmes

with explicit social objectives that target the poorest borrowers generate revenues

sufficient to cover not more than 70% of their costs. Gulli and Berger (1999:23) stated,

"…the more MFIs aim for financial sustainability, the less will be their impact on poverty

reduction." As noted by Wright and Dondo (2001:60), for many of the advocates of

'target the poorest' it is this move towards an emphasis on sustainability and commercial

funding that resulted in ' mission drift', and as a result, the MFIs are focusing increasingly

on the non-poor as their preferred clients.

2.4.1 Microfinance Commercialization

In connection with financial sustainability, microfinance prorammes have been inclining

more to profit making. Woller (2002:12) said that the microfinance industry is now in the

middle of transition from its roots as a social movement dominated by development

concerns to a commercial industry driven by competitive market share and profits.

Commercialization here can be taken as the MFIs adoption of commercial approaches

such as introduction of cost saving mechanisms; gathering, disseminating and using

market intelligence; the introduction and market testing of new products and services to

microfinance programmes in response to market forces (Woller 2002:13).

Profit making in microfinance assumes that households require access to credit, but not

cheap credit (Morduch 2000:620), and its principal win-win claims include:

1. Raising costs of financial services does not diminish demand;

2. Financially sustainable programmes, due to their scale, can make the greatest dent

in poverty;

3. Financial sustainability will give programmes access to commercial financial

markets;

4. Financially sustainable programmes are superior weapons for fighting poverty;

5. Subsidized programmes are inefficient and thus bound to fail;

6. Subsidized credit most often ends up in the hands of non-poor;

7. Successful microfinance programmes must be non-government programmes; and

8. Subsidized credit undermines saving mobilization.

According to Woller (2002:14), commercialization of microfinance programmes

promises lower prices, new products and services, greater number and variety of market

offerings, improved product and service quality, and technological innovations that go

hand in hand with competition and organizations' response to it and other market forces.

It would also increase outreach as well as enforce accounting and performance standards

to the programmes. On the other hand, it has a danger of drifting the defined mission of

poverty alleviation in pursuit of higher financial returns (Guller 2002:15). As a result,

when profit making becomes an objective, it will bypass certain segments of the

microfinance market and result in the marginalization of the poor by de-linking the

microfinance from poverty alleviation, which is its ultimate goal (Woller 2002:12-4).

Morduch (2000:620-1), who was bitterly criticizing high interest rates and profits by

equating it as arguing 'money lenders charge high interest rates, microfinance

programmes can do too', said that the low-income poor households cannot afford the

120% annual interest rate Las Vegas money lenders charge or 300% per year of that of

the gambling town of Biloxi, Mississippi. He also said that each of the win-win

propositions of the profit oriented high interest rate microfinance argument are not fully

acceptable and have not fully been translated into action.

2.4.2 The Debate on Subsidy

Initially, microfinance programmes were mainly run by public and NGO funds for they

were thought to have mandate to serve the poor (Navajas et. at 2000:334). Gradually,

however, failures in subsidized programmes combined with the movement for

sustainability emerged as criticisms. One of the sharper criticisms of subsidized credits,

according to Morduch (2000:623), is that they cannot survive over time as funding will

dry up and they fail before reaching significant numbers. The second criticism is that

subsidized microfinance programmes are inefficient because funding hinders them from

efficient institutional performance expected from self-sustained profitable MFI (Morduch

2000:624). The third argument against subsidy, which is based on the experince of credit

programmes during the 1970s when politically powerful groups, usually not poor,

managed to grab the money, is that subsidized credit most often ends up in the hands of

non-poor households (Morduch 2000:624). Another argument against subsidy as stated

by Morduch (2000:625) claims that mobilizing saving is not likely to make sense for

subsidized credit programmes as they may assume the poor households are too poor to

save.

Inspite of the arguments, however, as it has been notoriously difficult to serve the poorest

of the poor and become financially sustainable at the same time, said (Dunford 2000), the

reality is that subsidy is available in most of microfinance programmes. In this regard,

Wright and Dondo (2001:60) noted that for programmes targeting the poorest the move

towards sustainability and commercial funding are resulting in mission drift and the MFIs

are focusing increasingly on the non-poor as their preferred clients. Dunford (2000:44)

argued that if "sustainable" means "totally subsidy-free", some microfinance programmes

will never be sustainable, and "a really good, sustainable social enterprise is not highly

dependent on subsidy but also not necessarily subsidy free."

Furthermore, Morduch (2000:620-5) argued that the claims against subsidy are false

generalizations, as donors and governments are committed to poverty alleviation as their

top priority they should fund the programmes over the long term; subsidized credit

programmes can be efficient; it is possible to harness the subsidized credit directly to the

poorest; and a saving programme may be an essential feature of both subsidized and

financially sustainable programmes. Since "there has never been a general presumption

that most effective poverty alleviation programs can be-or should be self financing," it is

not clear that why the starting point for microfinance programmes is pulling away

funding.

Therefore, Dunford (2000:44) contends that instead of longing for totally subsidy-free

programmes, it would be more advantageous if one seizes all opportunities offered

whether subsidy or sustainability, and value (subsidizing) can keep on doing that for a

very long time. Moreover, Wright and Dondo (2001:59) suggested that MFI programmes

should include the non-poor on the grounds that this more profitable business can cross-

subsidize outreach to the poorest.

2.5. Risk Management in Microfinance

Historically, microfinance institutions have mainly focused on extending credit and

saving (McCord 2001:26), and in some cases on basic business skill training (Webster

and Fidler 1996:26). On the other hand, the MFIs, until recently, have given little

attention to the risks arising from illness, death in the household, crop failure, theft of key

assets, dramatic price fluctuations, dowry payment and other shocks (Wright 1999:40)

that can lead the target of microfinance programmes, the poor, further into poverty

(Brown 2001:11)

Donors and MFIs have recently begun developing mechanism, such as micro insurance

schemes, to protect their clients against such risks (Brown 2001:11), and to mitigate

unfortunate events that are comparatively expensive for the poor (McCord 2001:26). In

this respect, micro insurance scheme refers to financial service that uses risk pooling to

give compensation to the low-income individuals or groups that are adversely affected by

a specific risk or event, by collecting large groups, or pools, of individuals and groups to

share the resulting losses so that persons harmed by the risk can benefit from the

contributions of those who are not affected. Regarding risks, Roth (2001:39) noted that a

typical poor household in Africa spends many times its average monthly income on

funerals, which is exacerbating the poverty. As stated by Navajas et. al (2000:334), rural

lenders, in particular, should deal with more seasonality, poor information, greater risks,

less smooth cash flows and similar conditions.

Although the reality of such unfortunate events call for the management of risks (Wright

1999:40), most MFIs are not suitably equipped to provide micro insurance (Brown

2001:11). In this regard, McCord (2001:26) noted that MFIs can develop less expensive

micro insurance products that could play crucial role in mitigating risks. Brown

(2001:11) suggested that MFIs can develop partnership with existing micro insurers to

provide the benefits of insurance to their clients, without taking the insurance risk or if

they insist on developing their own insurance products, they should consider both

ensuring provision of good values to their clients and increasing their prospects for

financial sustainability.

2.6. Loan Repayment and Impact

Microfinance institutions give loans to individual members of the group for investment in

productive activities; generate income; and repay loans with interests, among others. For

instance, according to Rahman (1999:75), the Grameen Bank expects from its clients to

start their repayment on the second week to the loan receiving by using part of the profit

earned from the investment. In many cases the repayments should cover the total costs, if

not profit making. In connection with repayment of installments, Webster and Fidler

(1994:34) noted that "...there is now strong consensus that repayment rates of less than 95

percent are not acceptable." Webster and Fidler (1996:35) said microfinance institutions

have been succeeding in cost recovery and brining about positive impact on their clients

even at interest rates more than 70 percent. While arguing for the existence of positive

relations between financial sustainability and positive impact on clients, Beth (2001:4)

said, "no test for impact comes close to institutional sustainability" as an indicator it

makes microfinance meet market test; and if the institution is profitable, it is proof of

positive impact.

On the other hand, Simanowitz (2001:11) critically questioned the existence of positive

relations between loan repayment and positive impact by describing what was observed

in Kenya when drought devastated poor women, amidst famine, were repaying loans by

selling chicken when a particular region was experiencing its third consecutive crop

failure as a result of drought; while the community was reaching crisis situation;

livestock were dying; and people were leaving the area. In addition, studies on Grameen

Bank also reported mixed results. For example, Wright (1999:43) reported that direct

effect of the bank has been observed on the accumulation of capital by the poor; working

capital of members' enterprises increased by an average of three times within 27 months;

investment in fixed assets increased by 2.5 times; and members had incomes about 43

percent higher than the target group in the control village, while Hulme (2000:27) and

Rahman (1999:68) were pointing out worsening conditions of clients with repayment

problems as their possessions like pots were seized; the debtors were arrested; and even

some women committed suicide due to excessive pressure exerted by bank workers and

peer group members on borrowers for timely repayment, rather than working for

borrower empowerment as originally envisaged. To cope up with the problem many

borrowers maintain their regular repayment schedules through a process of loan recycling

(paying off previous loans by acquiring new loans from members of other groups), which

considerably increases borrower debt-liability (Hulme 2000, Rahman 1999).

2.7. Development of Microfinance in Ethiopia

The culture of credit and saving in semi-formal way emerged in Ethiopia during 1960s

with credit and saving cooperatives (1999/2000 Annual Report on the Ethiopian

Economy Vol. I.), though people in the country have had long history of borrowing

money and assets to carry out economic activities, build assets, and manage unfortunate

events. In their relief works, many NGOs have also included saving and credit aimed at

creating employment and generating income with the view to improving the lives of

people affected by recurrent droughts in the country during the past two decades.

Government institutions like commercial and development banks have also been

providing credit to rural households for purchase of agricultural inputs and tools. More

formal microfinancing step, according to the 1999/2000 Annual Report on the Ethiopian

Economy Vol. I., however, was taken in 1990 when an urban microfinancing scheme was

initiated at national level with credit agreement signed between Ethiopian government

and International Development Association (IDA). The credit scheme implemented since

1994 in 59 towns of Amhara, Tigray, Oromia and SNNPR has dispersed, up to the end of

1997, a total of 17.3 million birr, 20 percent contributed by the Ethiopian government and

80 percent covered by IDA, among more than 34,000 beneficiaries of which 65 percent

were women. The reported recovery rate for 1996/97 of the successful scheme that

provided evidence for success of group based lending and specialized MFIs was 92

percent.

The legal foundation for the microfinance industry was laid in the country with the

issuance of Proclamation No.40/1996 on licensing and supervision of microfinancing

institutions in 1996. MFIs established in accordance with the proclamation can provide a

loan amount of not more than five thousand birr on the basis of group guarantee and to

borrowers who have joined a membership arrangement as well as lend on limited scale to

non-members on the basis of physical or other collateral (Directive No. MFI/17/2002 of

National Bank of Ethiopia). The minimum annual interest rate on saving is 3% while

interest rate charged on loans extended by microfinance institutions is determined by the

respective boards of the MFIs (Directive No.MFI/13/2002 of National Bank of Ethiopia).

In line with the proclamation and different directives, 26 MFIs have been licensed until

this paper was compiled. According to Haftu (2004:57-8), the level of outreach achieved

by the MFIs until 2003 in terms of borrowers reached 720,980 with outstanding loan

510,066,701 birr in the hands of clients while the number of savers was hitting 801,858

with outstanding 317,579,539 birr. Worku (2000:126) noted that the overall objective the

MFIs in Ethiopia is poverty reduction by increasing the productive potential of the poor

people, particularly poor women headed households and improving household food

security. However, the 20 MFIs registered under the National Bank of Ethiopia until

2001 met less than 9 percent of the demand for microfinance service (Wolday 2002, GTZ

2002).

Concerning loan distribution and repayment, Worku (2000:130) reported that loan sizes

provided by Ethiopian MFIs are modest, averaging about 50 birr to 5,000 birr to each

client to start using within 7 days and begin monthly repayments. According to Wolday

(2002:9), all MFIs in Ethiopia deliver limited and the same types of loan products to

clients copying from each other, and their methodologies and products are "supply-driven

instead of being demand-driven." Haftu (2004:60) wrote MFIs in Ethiopia are trying to

move towards considering and applying new approaches in group sizes and other

procedures instead of following Grameen methodology.

Gasha Microfinance Institution, one of the MFIs in the country, was licensed in 1998

under the National Bank of Ethiopia. By the end of 2004, the institution had 10,734

clients served by four branches in Addis Ababa and one branch in Debrezeit (Gasha

2004).

2.8. Empirical Microfinance Impact Studies on Ethiopia

Microfinance has become a growing sector in Ethiopia. This is partly because of the

demand created by the abject poverty in the country and encouraging policy atmosphere

for the microfinance services as part of poverty reduction strategy. Accordingly, there

have been a growing number of microfinance impact studies being conducted by

academic institutions, microfinance associations, government agencies, and funding

organizations and donors. As a result, it seems difficult to get all the impact studies

undertaken by the host of actors and partners. However, some of the studies to which the

researcher granted access have been reviewed here.

For instance, Wolday (2003: 42-3) concludes that the microfinance industry in Ethiopia

showed remarkable growth in terms of outreach. He states that the “MFIs have been

successful in addressing the financial needs of the rural poor.” Good repayment rates,

mobilization of significant amount of savings from the poor, and promotion of food

security among the poor were reported by the study.

Doocy et.al (2005) in their research on programmes of Wisdom Microfinance Institution

in southern parts of Ethiopia suggested that microfinance programmes have important

impact on nutritional status and well-being of female clients and their families. The paper

noted that clients were significantly less likely to be food aid recipients than non-clients.

It also reported success in reducing vulnerability to prolonged drought and food

insecurity.

The paper by Fitsum and Holden (2005) indicated that the impact of participation in

microfinance resulted in positive changes in per capita consumption expenditure but not

statistically significant. The impact on off-farm income and children’s education was

statistically significant positive change. However, livestock holding is negatively

correlated with participation in the microfinance.

In his study undertaken in Amhara Regional State, Getaneh (2004) said that even though

microfinance programmes are expected to positively affect household economic

portfolio, income, coping mechanisms against risks, empowerment of the poor, food

security, and business profitability, “the available evidence suggests little progress in this

regard.”

The findings of Mayoux (1998) shown that links between microfinance and women’s

empowerment are positive but limited by design, cost effectiveness in eliminating

poverty, and a misplaced diversion of resources. The paper stated many women did not

control loan use. Microfinance programmes in some cases create domestic tension

between spouses, and many women focused on personal rather than social objectives. In

connection with women’s empowerment, Padma and Getachew (2005) reported positive

impact of microfinance.

Tsehay and Mengistu (2002) reported more positive impact of microfinance on poor

women in Ethiopia. They concluded that participation resulted in significant increase in

household income. Women were said to be able to provide for the basic needs of their

families; had control over resources; owned assets; able to cope up with risks; save more

for future use; and increased empowerment, among other things.

According to Meehan (2000), services of Dedbit Credit and Saving Institution had a

significant impact on increasing agricultural production, increasing trading activities,

increasing income, food supply, child education, clothing and other basic necessities. The

study concludes that the credit provision had a positive impact on alleviating poverty.

Asmelash (2003) said though not statistically significant, clients had higher income than

non-clients. He also reported more diversified income sources, building of key assets,

improved child education, increased access to health facilities and nutritional intake, and

improved risk management capacity.

Most (if not all) empirical microfinance impact assessment studies on Ethiopia reported

positive changes in the lives of the clients. However, some of the changes observed were

not significant.

In summary, microfinance has been carried out to alleviate poverty by connecting the

poor into productive economic circuit. This objective was expected to be attained by

creating jobs, increasing income, diversifying income sources, availing better access to

health and education, empowerment, and protecting against risks, among others. Practice,

however, revealed that the outcomes of microfinance have been both the anticipated

positive changes and in some cases unexpected negative results. These outcomes include

generating sufficient income to exit the low-income people from poverty and

powerlessness; achieving slight economic objectives in reducing poverty; and pushing the

participants further into poverty. Such mixed research findings cause prevailing doubt

concerning positive impact of microfinance that also became the beginning of this study.

CHAPTER THREE

METHODOLOGY

3.1. Theoretical Approaches

Microfinance impact assessment is comparing changes in important variables between

two or more points in time. This can be accomplished through a longitudinal research

design by collecting data at more than one point in time or a retrospective design, which

is comparing present with a previous point(s) in time in order to assess changes by using

recall data. Due to time and other resources shortage, the retrospective research design,

which employs recall data, was selected for the data gathering.

Besides, a quasi-experimental design that employs control group was used to rule out

other possible reasons for the changes by establishing plausible association between

participation in the microfinance programme and changes experienced. This was done

with the assumption that changes occurred to the control group that has not received

programme services, but is similar to programme participants on key factors such as

gender and location, are changes that would have occurred among the clients irrespective

of programme participation. In other words, differences in changes in the target group

and changes in the control group reveal changes that resulted from programme

participation.

3.2. Data Types and Sources

Quantitative and qualitative data on loan disbursement and loan repayment were

collected from all branches and central office of the Gasha MFI. Data, quantitative and

qualitative, were gathered from target (experimental) group that includes clients that have

been receiving microfinance services for at least two years as well as control group,

which comprises new (pipeline) clients. Focus group discussions were also held with

clients. In addition, case study was undertaken to get in-depth qualitative data from ex-

clients concerning their dropping out of the microfinance programmes. Interview was

held with staff of the MFI to get information on issues such as client selection criteria and

compliance of clients. Secondary data sources such as annual and monthly reports,

brochures, publications and records of Gasha Microfinance Institution, Association of

Ethiopian Microfinance Institutions, and National Bank of Ethiopia were also used

besides the primary sources.

3.3. Sampling Method and Sample Size

A stratified two stage cross sectional sampling method was employed for the

study. At first stage the two oldest branches (Merkato and Gojjam Berenda) were identified for sample taking, and at

the second stage both frequent clients (target group) and pipeline clients

(control group) were selected.

Sample size was determined based on the Central Limit Theorem (Chandan 1998) that states regardless of the shape of the

distribution of the population, the distribution of the sample means

approaches the normal probability distribution as the sample size increases, and for this purpose the sample size of 30 or larger are considered adequate. Thus,

a sample size of 80, frequent and pipeline clients, 40 from each of Merkato and

Kolfe-Gojjam Berenda, the two oldest branches, was taken. The sample includes

35 female frequent clients (4 single, 19 married, 2 divorced and 10 widows), and

35 new female clients (3 single, 21 married, 4 divorced and 8 widows) as well as 5 males from each group. In addition, 30 dropouts were selected for case study and 20 clients participated in two focus

group discussions.

3.4. Hypotheses and Variables

Microfinance impact assessment is identifying that the programme led to observed or

stated changes. To assess the changes, different indicators or variables can be used based

on the objective of the study and resources (human, financial and time) available. In this

respect, the four key research questions have been evolved into the following hypotheses,

which were further analyzed into different variables to be changed to assumptions to test.

1. Gasha Microfinance Institutions extends financial services to the poorest;

2. Microfinance services of Gasha MFI lead to reduction in poverty;

3. Financial services of Gasha MFI improve clients’ capacity to manage and cope up

with risks; and

4. Participation of women in microfinance programmes empowers them.

Attempts were made to test these assumptions in terms of the following indicators.

3.4.1. Outreach

Microfinance is supposed to be effective strategy to extend financial services to the poor

and other disadvantaged groups not reached by formal sector banks. Generally, outreach,

according to Webster and Fidler (1996:21), is evaluated in terms of scale (the number of

people reached) and depth of outreach (the extent to which clients are poor and/or under-

served by financial institutions.) The outreach of Gasha Microfinance Institution would

be studied considering the number of people receiving microfinance services, types of

jobs in which clients were engaged as livelihood, and their prior access to formal sector

finance.

3.4.2. Poverty Reduction

Asset formation (including savings), incomes, expenditure, reduced dependency on

financial services from money lenders, increased ability to send children to school and

access to health facilities were used as indicators of reduction in poverty.

3.4.3. Building Capacity to Manage Risks

Microfinance programes are also expected to play protective role by enabling the

vulnerable groups such as the poor and female-headed households to cope up with risks.

Whether capacities of the clients have been improved to withstand misfortunes or not

were studied to assess the relation between microfinance and risk management. Attention

was given to coping mechanisms of the clients who faced risks and ex-clients’ reasons for

dropping out of programme participation.

3.4.4. Women’s Empowerment

Microfinance programmes are assumed to contribute to empowerment of women. To

assess this, decision-making role in household and community, ability to send children to

school, self-esteem, and business skill of female clients were studied.

3.4.5. Financial Sustainability and Serving the Poorest

Microfinance providers always claim to serve the poor. However, it becomes a challenge

to many microfinance providers to strike balance between providing financial services to

the poorest and becoming financially sustainable at the same time. In this respect,

financial sustainability of Gasha MFI, its outreach to the poorest, and loan repayment

trends of the poorest clients were studied.

3.5. Analysis

A statistical summary of field data was used to examine the impact of microfinance

programmes of Gasha Microfinance Institution. The method for analyzing the data

included test for statistically significant differences in the mean values between the target

group and control group. To test statistical significance of the differences in the mean

values of the two categories (experimental and control groups) t-test was used, and for

comparing categorical data chi-square test was employed. For the hypothesis testing,

95% confidence level (0.05 level of significance) was established.

In addition, a qualitative data analysis method with the support of quantitative data

evidence when available and necessary was used simultaneously. In carrying out the

qualitative data analysis, the mass of information was reduced and organized

meaningfully by selecting and focusing on research questions giving attention to patterns

and common themes on specific issue; deviations from the patterns, and the factors that

might explain the deviations; and/or interesting stories that help illuminate the research

questions.

Finally, conclusions were drawn by stepping back to consider the meaning of the

information and its implications in relation to the key research questions.

CHAPTER FOUR

RESULTS AND DISCUSSION

In this section an attempt has been made to discuss how services of Gasha

Microfinance Institution (MFI) have changed the lives of its clients. Data gathered through semi-structured

interview, focus group discussion, and open ended case study questions with

clients of the MFI, ex-clients and the MFI staff as well as collected from reports,

records and brochures of the microfinance institution concerning the

services and clients were mainly used for the analysis.

4.1. Outreach

Gasha Microfinance Institution is extending loans to group of people what it calls

“productive or active poor.” According to the MFI staff, to identify the productive poor,

the institution is using criteria such as getting engaged in micro-businesses (willing to get

engaged in productive activity), having permanent address, good health to carry out

economic activity, good social acceptance, productive age range (18-64), and preferably

female household head or member of female-headed household. However, the ‘active

poor’ are given loans only if their business proposals are assessed ‘feasible’ by the

microfinance staff after the prospective client filled a form that is supposed to be business

project proposal. Accordingly, until the end of 2004, Gasha Microfinance Institution

extended microfinance services to 10,734 people, of whom 6,990 are clients in Addis

Ababa.

Table 1: Microfinance Outreach of Gasha MFI

Source: Loan disbursement records of Gasha MFI (1999-2004)

YEAR Outreach 1999 2000 2001 2002 2003 2004 No. of service outlet kebeles

38

40

52

82

112

118

No. of groups 467 877 1642 1480 2255 1858 Total group members

2802 5262 6569 6868 8469 10734

No. of women

2102 3947 4927 4824 5157 5553

Loans disbursed in birr (‘000)

1,443.2

2,590.5

3,529.0

3,870.9

5,265.5

8,548.7

The outreach of Gasha MFI might be considered low in relation with about 90 percent

unmet microfinance need in the country (Microfinance Development Review, Vol.III No.

2, 2004, Editors Note) while some 26 MFIs are engaged in the business. However, as

indicated in Table 1, its outreach in terms of clients and loan disbursement shows

increasing trend. When compared with other microfinance institutions, outreach of Gasha

MFI is neither the highest nor the lowest. For instance, at the end of 2003, Gasha

exceeded MFIs like Meklit, Metemamen, Shashemen Edir, Eshet, Wassasa (though

younger MFIs) in its outreach in terms of loan size and number of clients while other

such as Dedebit Credit and Saving Institution, Amhara Credit and Saving Institution were

far above Gasha in both as shown in Table 2.

Table 2: Microfinance Outreach of some MFIs (June 2003)

MFI Savers Borrowers Outstanding Loan in Birr (‘000)

Amhara 397,254 267,534 187,996.0

Dedebit 184,000 238,904 9,329.6

Metemamen 0 1132 275.7

Wassasa 3458 3458 2,484.5

Eshet 5399 5033 2,821.4

Shashemene Edir 2083 2083 1,300.0

Meklit 2904 2904 1,960.1

Source: Haftu (2004) Microfinance Development Review

4.1.1. Group Formation and the Poorest of the Poor

Gasha MFI is providing loans to the clients after they are voluntarily organized in a group

of 4 to 6 members where all group members are accountable if any member fails to repay

the loan. The collective accountability, in turn, forced the clients to choose somebody

whom they think more reliable, have some assets and engaged in profitable business to

form the group with, and hence, escape the responsibility. In this regard, the clients

interviewed were asked if they accepted somebody without assets or business in their

groups as a member. All the interviewees (40 clients or target group members)

unanimously reacted that they did not accept such people as group members. They reject

people without assets or businesses of group membership lest they should fail to repay

loans and make them accountable. This shows that the poorest of the poor are being

excluded from getting the microfinance services.

4.1.2. Access to Formal Sector Finance and Outreach

All the clients who participated in this study (40 clients) responded that they did not/do

not have access to formal sector banks. They also informed that they never accessed

loans from other microfinance institutions or any institutional body. Thus, it seems that

Gasha MFI is providing microfinance services to those who have not been served.

4.1.3. Employment of Clients

The types of activities at which the clients engage as livelihood may indicate their living

conditions. The clients were asked what their livelihoods were before they join loan

programme of Gasha Microfinance Institution to compare with their condition after

participation (see section 4.2.4). The responses include no jobs (2), embroidery (making

decorations on clothes manually) (1), renting a room with mat to low income passengers

(1), selling tella (home-made local beer) (6), selling injera (type of Ethiopian bread) in

gulit (small open-air road side market) (7), selling spice in guilt(5), selling tea in

residential home(1), making nappy (diaper) from remains of used clothes and selling to

low income households (2), selling grain in guilt(2), selling used household utensils (3),

selling sindedo (household utensils made of a strong grass) (2), running very small shops

(2), selling food at streets (2), selling dung for fuel (2), and selling malt at guilt (2).

4.1.4. Gender of Clients

Client records of Gasha Microfinance Institution indicate that 65.58 percent of clients in

urban branches, which are operating in Addis Ababa, were women (4,584 females of the

6,990 total urban clients). The share of women in some urban branches like Markato goes

to 74.61 percent (see Table 3).

Table 3: Urban Female Clients of Gasha Microfinance Institution (2004)

Branch No. Clients No. Female Clients % of female clients

Merkato 1816 1355 74.61

Entotto 2137 1335 62.47

Kolfe-Gojjam Berenda 1858 1137 61.19

Yeka 1179 757 64.20

Source: Gasha Microfinance Institution Clients Record

To sum up the outreach, Gasha Microfinance Institution was delivering microfinance

services to 10,734 people living in 118 kebeles by the end of 2004. While giving the

services, the institution was selecting its ‘active poor’ clients who have been engaged or

willing to engage in micro-businesses, at good health conditions, have good social

acceptance, and come up with feasible business plan, among others. Although the MFI

has set these criteria, it has not been directly selecting its clients. It has been verifying

only after they came to get the services being organized in groups of about 4 to 6

members. During group formation, however, the clients exclude those whom they think

without assets and incomes (the poorest) for fear that they may not repay loans and make

them accountable. The clients, before joining the microfinance programmes, did not have

access to formal sector finance. Their livelihoods such as selling tella, dung for fuel, food

at streets, and making diapers from old clothes and selling them to the poor people show

that the clients were engaged in businesses with very small returns. Concerning their

gender, more than 65 percent of the clients in addis Ababa were women. It is possible to

understand from these that Gasha MFI is providing microfinance services to almost the

poorest. However, the real poorest of the poor who could not deserve the institution’s

‘active poor’ status have been still marginalized by the selection criteria and excluded by

clients while forming loan groups for failure to win social acceptance and trust.

4.2. Microfinance and Poverty Reduction

To examine whether participation in microfinance programmes resulted in reduction in

poverty, income and savings, expenditure, asset formation, diversification (improvement)

in livelihoods, reduced dependency on financial services from money lenders,

improvements in nutrition intake, increased ability to send children to school, and

improved access to health facilities were used as indicators.

4.2.1. Income and Savings

One of the major objectives of microfinance programmes is enabling the

poor to generate enough income to exit them from poverty by investing in

productive activities. Saving profits for emergency use besides future investment; and improving the quality of the lives of

the beneficiaries are also objectives expected to be achieved by the provision

of the credit and saving services. 4.2.1.1. Income

Microfinance programmes are mainly expected to reduce poverty by increasing incomes

of the poor households. Those households participating in microfinance programmes are

assumed to generate more income than non-participating families in similar conditions. In

this study, average weekly incomes of target group (40 clients that had been receiving

microfinance services at least for two years) and control group (40 newly joining or

pipeline clients), which were similar in location, livelihoods, and gender, were compared.

To test the assumption, the following two hypotheses were constructed.

Null hypothesis (H₀): There is no significant difference between the income of target

group (the frequent clients) and control group (pipeline clients.)

Alternative hypothesis (H₁): The income of frequent clients is significantly more than that

of the pipeline clients.

Here 95% confidence level (0.05 level of significance) was established to accept or

reject the null hypothesis.

If we look at the descriptive statistics for the target and control groups in Table 4, the mean income of target group is more

than the income of the control group. However, to ensure whether this

difference is a matter of chance element or it is statistically significant, we should

look at the results of independent samples t test based on the decision rule: Reject H₀ if the significance value is less than alpha

and do not reject it if it is greater than alpha.

Table 4: Independent Samples T Test Result for Weekly Income Mean of Target Group

Mean of Control Group

Std. Deviation of Target G.

Std. Deviation of Control G.

Mean Difference

Sig. (2-tailed)

374.88

234.13

265.78

166.95

140.75

0.006

As indicated in Table 4, the mean difference in weekly income between the target group

and the control group is 140.75 birr. To test if the mean difference is statistically

significant (to decide if we should reject the null hypothesis or not), we compare the

significance value to alpha, which is usually 0.05. As the decision rule is reject H₀ if the

significance value is less than alpha and do not reject it if it is greater than alpha, and

0.006 is less than 0.05, we reject the null hypothesis. Therefore, we can say that there is a

significant difference between the income of target and control groups, i.e. participation

in the microfinance programme has brought about increase in incomes of the clients.

4.2.1.2. Savings Savings are critical indicators of

improvement in the lives of beneficiaries of microfinance programmes. Households

with increased savings have better

economic and investment capacities in addition to increased ability to withstand

risks. One of the objectives of Gasha Microfinance Institution, in this respect, is increasing saving capacities of the poor

households it is serving. To assess achievement of this objective, savings of

the clients were collected and presented in Table 5.

Table 5: Average Annual Savings of Clients

Year Item

1999

2000

2001

2002

2003

2004

Average Saving in birr

per Client

137 141 180 186 249 292

Source: Gasha MFI Records of Clients’ Saving Records (1999-2004)

As indicated in Table 5, clients’ savings

show increasing trend. To test if the savings of the clients could directly be

associated with participation in microfinance, similar hypothesis testing

procedure was undertaken.

H₀: There is no significant difference in saving capacities between target and

control groups. H₁: Target group has significantly more saving capacity than the control group.

Table 6: Independent Samples T Test Result for Monthly Savings Mean of Target Group

Mean of Control Group

Std. Deviation of Target G.

Std. Deviation of Control G.

Mean Difference

Sig. (2-tailed)

39.75

30.40

22.89

19.31

9.35

0.052

As Table 6 indicates, mean monthly saving of the target group 39.75 birr is more than

that of the control group (30.40 birr). Whether the mean difference (9.35) is statistically

significant, independent samples t test result is more appropriate. The t test shows that the

significance value for the savings is .052, which is little more than alpha (.05). Therefore,

though the monthly savings of target group are more than that of the control group, it can

not be considered as statistically significant. Thus, it could be said that participation in

the programme not yet resulted in significantly increased capacity to save for future use.

On the other hand, 17 of the 30 ex-clients included in the study informed that they

dropped out of the microfinance programe because they already saved much more than

2,000 birr, which most members of loan groups agree to be the highest amount of money

that a member can receive in loan. Their opinion is that it is now possible for them to

carry out a type of business that can be undertaken with the very small loans Gasha is

extending through the group with their own money. They said if the group members

agree on their receiving of loans more than 2,000 birr or the institution arranged another

way for individual loans that exceed 2,000 birr, they would have continued as clients.

This indicates that some clients have saved money that is enough to run their business.

4.2.2. Asset Formation

Asset formation, including building up of collateral for future loans, is among the key

indicators of microfinance impact. In other words, mcirofinance positively contributes to

asset building. To test this claim in the context of Gasha Microfinance Institution,

qualitative and quantitative data were gathered.

Information gathered through qualitative method shows that participation in the

microfinance programme resulted in positive impact. Clients participated in the focus

group discussion were asked what changes have occurred to their lives after 1st, 2nd, 3rd

etc loans. One of the responses of the clients was that they have built the asset with which

they are making a living. For instance, a female focus group discussion participant said

she was making areke (a local alcoholic drink) with borrowed pots and filtering utensils.

But after first loan, she owned her own such utensils. Others also spoke of purchasing

better food and drinks making and serving utensils. It was also learnt from the group

discussion that after repaying loans, the clients have goods in their small shops, which are

sources of much confidence and sense of self-sufficiency though they did not have

money in cash.

To study if these changes are direct results of programme participation, independent

samples t test was carried out by constructing the following null and alternate hypotheses.

H₀: There is no significant difference in asset building between clients of microfinance

and non-clients.

H₁: There is significant difference in asset building between clients and non-clients of

microfinance.

To carry out independent samples t test, in this regard, 80 interviewees in two groups (40

frequent clients and 40 new clients) were asked whether they have built key assets during

the last two years. As indicated in Table 7, 12 of the 40 frequent clients (target group)

and 7 of the equal number of new clients (control group) reported owning assets such as

tables and chairs, radio/tape player, TV/deck, refrigerator, sofa, bed/mattress, and others

like buying electricity, pipe water and telephone services.

When we see the descriptive statistics for the two groups in Table 7, the mean cost of key assets owned by the target group,

3643.08 birr is higher than that of the control group (2128.57 birr).

To reject or accept the null hypothesis by considering whether this difference is

accidental (chance element) or statistically significant enough, t test was undertaken by SPSS at 95% confidence

level.

Table 7: Independent Samples T Test Result for Two-year Expenditure on Key

Assets Mean of Target Group

Mean of Control Group

Std. Deviation of Target G.

Std. Deviation of Control G.

Mean Difference

Sig. (2-tailed)

3643.08

2128.57

4380.10

1361.33

1514.51

0.391

As indicated in independent samples t test result in Table 7, the significance value is

0.391, which is greater than alpha (.05). As the decision rule here is reject H₀ if the

significance value is less than alpha and do not reject if it is greater than alpha, we

can not reject the null hypothesis. Therefore, it is possible to conclude that major

asset building capacity has not been resulted from participation in the microfinance

programme.

The insignificance in achievements in terms of asset building might be related to the

business types of the clients. During the focus group discussion, clients were asked why

they aren’t showing significant changes or moving to bigger businesses. They said they

are old women, some are widows. It is very difficult to them to think of bigger businesses

in which they have never engaged. Most of them who are not educated said they don't

know how to manage bigger businesses and spoke of fear of taking bigger risk. Some of

them also complained against small loan size.

4.2.3. Expenditure

As expenditure is a good proxy of a household’s living standard, an attempt was made to

collect expenditure on the interviewees’ monthly business labour cost, weekly business

input expenditure, monthly consumption cost, annual child education cost, and annual

medical service expenditure. However, due to recall related problems, data could not be

gathered except on weekly business input cost and monthly consumption expenditure.

4.2.3.1. Business Input Cost

Participation in microfinance programmes is supposed to stimulate business transactions

of the micro entrepreneurs, which could be observed in increased income and

expenditure. To examine the assumption that participation in microfinance improves

households’ economic capacities and, hence, increases business expenditure, independent

samples t test was carried out in the following way.

H₀:  Mean weekly business input expenditure of target and control groups are not

significantly different.

H₁: Mean weekly business input expenditure of target group is significantly higher than

that of control.

Table 8: Independent Samples T Test Result for Weekly Business Input Cost Mean of Target Group

Mean of Control Group

Std. Deviation of Target G.

Std. Deviation of Control G.

Mean Difference

Sig. (2-tailed)

245.70

149.45

185.88

96.94

96.25

0.005

As it was indicated in Table 8, when we see the descriptive statistics for the two groups,

we can see that the mean weekly business input cost of the target group (245.70 birr) is

higher than that of the control group (149.45 birr). This means that the business input cost

of people who receive the microfinance services, on average, is higher than that of who

do not access the service. To test the mean difference is statistically significant it is

important to look at the independent samples t test result. As the result indicates the

significance value (.005) is much lower than alpha (.05). Thus, the null hypothesis could

not be accepted. Therefore, we accept the claim that is accepted when the null hypothesis

is rejected, i.e. the alternative hypothesis, which states that mean weekly business input

expenditure of target group is significantly higher than that of the control group. This

shows that microfinance programme is improving economic role and status the clients.

4.2.3.2. Consumption Expenditure

Consumption is directly linked with the living conditions of households. And expenditure

on consumption, including nutrition intake, could be a good representative of the

condition. In this regard, to assess the impact of microfinance on consumption, monthly

expenditures of both groups were compared as follows.

H₀: Monthly consumption expenditures of both groups are not significantly different.

H₁: Monthly consumption expenditures of both groups are significantly different.

Table 9: Independent samples T Test Result for Monthly Consumption Expenditure

Mean of Target Group

Mean of Control Group

Std. Deviation of Target G.

Std. Deviation of Control G.

Mean Difference

Sig. (2-tailed)

328.00

254.48

158.46

158.79

73.53

0.041

As Table 9 shows, mean monthly consumption expenditure of target group (328 birr) is

higher than the mean monthly consumption expenditure of the control group (254.48

birr). This indicates that clients’ consumption expenditure is more than non-clients. To

test whether this difference is statistically significant, we should pay attention to

independent samples t test. Here we reject the null hypothesis because the significance

value (.041) is less than alpha (.05), and we can say that there is significant difference in

consumption expenditure between the target group (frequent clients) and the control

group (new clients). Therefore, we can conclude that microfinance is contributing

significantly to the improvement of consumption of the clients.

4.2.4. Improvements in Occupation

Improvements in the livelihoods (employment) of clients such as diversification or

getting engaged in the business with better return could be accepted as indicators of

positive microfinance impact. The clients were asked if there have been improvements in

their livelihoods since they began receiving loans. Their responses have been summarized

in the Table 10.

Table 10: Clients’ Responses on Improvements in Occupation after Taking Loans

Source: Data collected through interview

As presented in the above table, 33 of the 40 clients responded that their occupations

were improved after participating in the microfinance programmes. Improvements

reported by the clients from the two urban branches include increase in the amount of

goods/services supplied by them (8); establishing small shops instead of selling goods at

streets and/or gulits (6); beginning of businesses of those previously without jobs (2);

diversification of business such as selling food in addition to the local drinks (8); selling

food instead of selling injera alone (7); and establishing micro-businesses for children

(2).

Response Frequency Percent

Improved 33 82.5%

Not improved 7 17.5%

On the other hand, those clients reported no change or deterioration in their businesses

noted the causes of the problem as facing health problem; spending the money on funeral

of household and other disasters.

4.2.5. Reduced Dependency on Expensive Financial Services

One of the anticipated benefits of microfinance programmes is their clients reduced

dependency on financial services from moneylenders. In this regard, the clients were

asked questions concerning their dependence on financial services from moneylenders. A

significant number of interviewees, 18 of the 40 clients, reported that they were taking

loans from moneylenders prior to their participation in the loan programme of Gasha.

They stated that they were repaying loans at annual interest rate of 100 percent. Their

reasons for depending on such expensive financial services were purchasing business

inputs; coping up with risks such as death of household member, marriage ceremonies,

theft of key assets and other disasters. Their responses show that none of them were

taking loans from moneylenders since their participation in the microfinance programme.

4.2.6. Improvements in Nutritional Intake

One key indicator of the impact of microfinance on poverty is improving nutrition intake

of the participating households. To test this assumption in the context of Gasha MFI, the

following null and alternative hypotheses were constructed and chi-square test was

carried out.

H₀: There is no significant difference in nutrition intake between the two groups. 

H₁: There is significant difference in nutrition intake between the two groups.

Both the target and control groups were asked what the trend of their nutrition intakes

seems during the last two years. As indicated in Table 11, 9 of the 40 interviewees

(22.5%) of each group responded their household nutrition intake has improved during

the last two years. On the other hand, 31 or 77.5% of the target group and 28 or 70% of

the control group reated it stayed the same while 3 or 7.5% of the control reporting

worsening of the nutrition trend.

To test if these differences in nutrition intake are statistically significant, chi-square test

was carried out through SPSS and its result was summarized in Table 11.

The chi square test result (Table 11) leads us to accept the null hypothesis that there is no

significant difference in nutritional intake between the two groups. Therefore, here it

could be said that services of Gasha Microfinance Institution has resulted in improved

nutritional intake, but statistically significant change has not been achieved.

Table 11: Chi-Square Test Result for Nutritional Intake

Target Control Nutritional Intake in Last two years Count % Count %

Sig. (2-sided)

Improved 9 22.5 9 22.5 Stayed the Same 31 77.5 28 70 Worsened 0 0 3 7.5

0.207

However, the responses of those clients who reported improvement in their nutrition

intake since their participation in the microfinance programme said that the new jobs

created by the loan, expansion of their businesses, and additional incomes from those

activities caused the improvement in the nutrition intake. The clients were asked to

mention the types of improvements or give examples. The answers of the nine clients are

having sufficient to eat, having variety of food to eat, taking animal and dairy products.

They also said their participation in the loan program enabled them to eat injera (better

Ethiopian bread) instead of Kitta (poor quality bread); make better injera at home instead

of buying poor injera from gulit; have enough food in home instead of the previous

scarcity; take different types of foods rather than eating the same type every day; and

choosing what to eat instead of eating whatever is available.

During the focus group discussion, participants were invited to express their views of

positive changes caused by the participation in the microfinance programme. One of their

responses was having enough grain (food) to feed their households. They said their real

problem before receiving loans was finding something to feed children enough. Almost

all of the participants of the discussion were speaking of finding the problem mitigated by

the loans. In addition, the client reported having enough resources to serve food and

drinks to neighbors during celebrations of holidays and commemoration of death of

household member, which they said were previously causing humiliations to them.

4.2.7. Ability to Send Children to School

As increased ability of clients to send children to school and increase in their expenditure

on education were used as indicators of reduction in poverty, the interviewees were asked

what their annual child education expenditures have been before and after microfinance

programme participation. As the interviewees do not have culture of recording their

incomes and expenditures, they could not give the required information on annual

education expenditure. However, the interviewees were asked another question on

children’s education that if they think their children’s education has been improved

during the last two years in relation to the following null and alternate hypotheses.

H₀: There is no significant difference in improvement of child education between the two

groups. 

H₁: There is significant difference in child education between the two groups.

Table 12: Chi-Square Test Result for Children’s Education

Target Control Children’s Ed. in Last Two Years Count % Count %

Sig. (2-sided)

Improved 6 15 11 27.5 Stayed the Same 15 37.5 14 35 Worsened 2 5 3 7.5 Don’t Know 17 42.5 14 35

0.514

Six of the target (15%) and 11 of control group (27.5%) responded improvement in child

education; 2 of the target (5%) and 3 of the control group (7.5%) reported worsening

trend; while 15 of the target (37.5%) and 12 of the control group (30%) reacting stayed

the same; and 17 of the target (42.5%) and 14 of the control group (35%) answering don’t

know. The result of chi-square test for these counts (Table 12) leads us to accept the null

hypothesis  that there is no significant difference in improvement of child education

between the two groups. This leads us to conclude that programme participation has not

resulted in improvement in children’s education.

4.2.8. Access to Health Facilities

To assess whether clients’ access to health services have been improved as a result of

microfinance programme participation, both the new and experienced clients included in

the study were asked at which one of the government, private or traditional health

institutions they get medical services when the face health problems. The following

hypotheses were formulated to test the assumption.

H₀: There is no significant difference in access to health service between frequent clients

and new clients. 

H₁: Frequent clients have significantly better access to health service than the new.

As in Table 13 indicates, 22.5% of the target group and 7.5% of the control group get

health service in private health institutions while 70% of the target group and 90% of the

control group are getting the service in public health institution. The chi-square test result

shows that the difference in access to health service between the two groups is not

significant, and we accept the null hypothesis because we do not have sufficient evidence

to reject it. Therefore, it is possible to say that microfinance programmes of Gasha have

not brought about the expected improvement in the access of clients to health facilities.

Table 13: Chi-Square Test Result for Access to Health Service

Target Control Household Member Gets Health Service Count % Count %

Sig. (2-sided)

Private Health Institutions 9 22.5 3 7.5 Public Health Institutions 28 70 36 90 Others 3 7.5 1 2.5

0.082

In general, the information gathered from the clients shows that participation of the

people in microfinance programmes resulted in reduction in poverty. The clients’ income

improved. They have built assets and saved money; their business inputs and

consumption expenditures increased; their livelihoods improved; their dependency on

expensive financial services from moneylenders decreased; their nutrition intake

improved; and their access to health services has improved.

However, the quasi-experimental comparison between target and control groups to

establish plausible association between participation in the microfinance programme and

changes experienced, with the assumption changes in the target group minus changes in

the control group reveal changes resulted from programme participation, only partially

attributes the changes to participating in the microfinance programme as significant.

In this respect, the independent samples t test shows that there is statistically significant

difference in income, business inputs expenditure, and consumption expenditure between

the target and the control groups. However, it indicated that there is no significance

difference in monthly savings and asset building between the two groups. On the other

hand, the chi-square test result shows that there are no significant differences in

improvement in household nutrition intake, ability to send children to school, and access

to health facility between the two groups.

4.3. Capacity to Manage Risks

Alongside poverty reduction, microfinance programmes are also supposed to build

capacities of clients to cope up with unfortunate events or they arrange risk pooling

mechanisms to compensate the low-income clients who may be adversely affected by

risks. Clients were asked if they faced major risks and how they could manage, and 30 of

the 40 target group interviewees reported facing risks during the last two years. Risks

faced by the clients include severe health problem (7), fall in price of goods that were

purchased with higher prices (1), death in the household (3) matrimonial ceremony (2),

and theft of key assets (17). Twenty of the 30 interviewees who faced major unfortunate

events and informed continuing as clients of the MFI, said that they continued repaying

loans and running their businesses by making use of savings in cash and/or assets.

However, 10 of them (33.3%) said that they had been repaying the loans and carried on

their businesses by taking other loans from relatives or friends.

Moreover, a significant number of the ex-clients included in the study, 13 of the 30 (43.3%), reported that they dropped out of the microfinance programme because

they could not manage to continue as client by regularly repaying loans and

carrying out their businesses after facing risks. The problems that adversely

affected their economic capacities include repaying loans by selling assets; funeral expenses following consecutive deaths of household members; being left without resources after paying all they have for medical services; and being denied by business partners after transferring

goods.

They reported that their economic conditions after encountering risks have

been worse than that of their status before joining the microfinance

programmes as they repaid loans by selling key assets that they owned even

before the loans. They were of the opinion that if somebody shared their burdens

they would have been in better condition.

In short, the microfinance programmes have enabled some clients to control and

manage risks they faced by making use of previous savings in cash and assets.

However, some clients reported that they could not withstand the problems they

faced with their own economic capacities. Therefore, they took additional loans, which may create vicious circle of debt

burden, from relatives and neighbors to repay loans from the microfinance

institution and to continue in the business. This calls up on the microfinance

programme for an important missing component to build up capacities of the

poor: establishing micro insurance scheme.

4.4. Financial Sustainability and Serving the Poorest of the Poor

Providing microfinance services to the poorest on permanent basis has been

thought to be difficult because it might be impossible to generate sufficient revenues to cover all costs from the poorest clients. Therefore, it has been said that an MFI

should either focus on the better poor or be subsidized. To assess this assumption,

loan repayment trends, financial sustainability of Gasha Microfinance

Institution, and outreach to the poorest were studied.

4.4.1. Loan Repayment Rate

One of the major factors needed to generate sufficient revenue to cover costs is loan

repayment rate (in addition to scale of lending and interest rate). In this regard, according

to Webster and Fidler (1996:34), “there is now strong consensus that repayment rates of

less than 95 percent are not acceptable.”

Table 14: Some Performance Indicators of Gasha Microfinance Institution

Year Items 1999 2000 2001 2002 2003

Repayment rate 78% 92% 90% 92% 94%

Financial self-sufficiency ratio 31% 79% 51% 54% 46%

Donations and grants ratio 40% 41% 42% 50% 41%

Source: Gasha MFI Annual Performance Indicators (1999-2003)

As presented in Table 14, loan repayment rate of Gasha Microfinance Institution, the

ratio of the amount of loan collected during the year to the amount of loan expected

during the year, (from 1999 to 2003) has been less than the expected rate for financial

self-sufficiency, though it eventually approaches the needed level. The loan repayment of

Gasha MFI (78% in 1999, 92% in 2000, 90% in 2001, 92% in 2002, and 94% in 2003)

shows increasing trend (See annexes 4 and 5 for detailed information).

4.4.2. Financial Sustainability of Gasha MFI

Financial sustainability is generating sufficient revenue to cover all operational and

financial costs. This depends on many factors such as rate of administrative cost, average

number of clients per credit officer, interest rate. For instance, to provide efficient

microfinance service, administrative costs should not exceed 10-30 percent, and average

ratios of clients to loan officers should be more than 200 (Webster and Fidler 1996).

Financial sustainability of Gasha Microfinance Institution was estimated by using its

financial self-sufficiency ratio. The institution’s financial self-sufficiency ratio here is the

ratio of financial income to all costs of the institution (Detailed data are presented in

annexes 4 and 5)

.

As indicated in Table 14, Gasha Microfinance Institution has been generating not much

more than half of the revenue needed to cover full costs of service delivery. A lot of

factors could be accountable for the low level of financial sustainability. For example,

nearly 50 percent administrative cost (see Annex 5), which should have been less than 30

percent might cause low level of efficiency.

An interview was also conducted with the staff of the institution concerning the low

financial self-sufficiency. According to the staff’s response, low efficiency of the staff

members in carrying out tasks, lack of appropriate information system, lack of skill to

disburse loans and make necessary follow ups, market problem, and increasing trend of

death and high prevalence of diseases among staff members and clients in addition to

providing the service to poor people were accountable for the low level of financial

sustainability. High operation costs due to small amount of loans (500 birr to 2000 birr in

many cases), and small interest rate on loans (13 percent) could also cause low financial

self-sufficiency.

While the MFI was generating revenues in the above way, it could only survive with

donations and grants (Table 14). Donations and grants ratio here is the ratio of operating

donations and grants to the average performing assets (See annexes 4 and 5 for detailed

data).

As shown in Table 14, external bodies have covered 40 percent to 50 percent of the

institution’s costs and the institution has been heavily subsidized. When this is compared

to four MFIs, which, according to Haftu (2004:58), achieved financial self-sufficiency

(Amhara Credit and Saving Institution (143%), Dedebit Credit and Saving Institution

(100%), Eshet (131%), and Wassasa (170%), it may be considered as significantly low. If

the institution continues that way and the donations terminate, it may collapse because

subsidized programmes cannot survive overtime as funding may dry up.

4.4.3. Outreach to the Poorest and Loan Repayment

To study whether the clients of Gasha Microfinance Institution are the poorest of the

poor, its clients’ selection criteria were identified. The criteria include involvement in

micro-businesses (willingness to get engaged), with permanent address, good health to

carry out productive economic activity, good social acceptance, productive age range

(18-64), preferably female household head or a member of such household, and able to

come up with feasible business project proposal.

However, not only the institution selects the clients. As loans are given to people

organized in collectively responsible groups, clients decide who their group members

should be. In this regard, all the clients interviewed responded that they chose people

whom they think to be more reliable to repay loans, with assets, and jobs. They informed

excluding those whom they thought without assets, jobs, income sources or not socially

acceptable.

Employments of the clients were also used as proxies of their poverty. Few of the clients

(three of the 40 interviewees) did not have jobs before joining the microfinance

programmes while most of them were engaged in the following activities, which are

generally acceptable as very small businesses in which poor people engage. These are

selling tella (local homemade beer), selling injera (type of bread) in gulit (small open-air

roadside market), making diaper from old clothes and selling to the poorest households,

and selling sindedo (household utensils made of grass).

To put in a nutshell, although repayment rates were more than 90 percent, Gasha

Microfinance Institution has not been generating sufficient revenue to cover all costs.

This might have been caused by high operation costs due to provision of small amounts

of loans (in most cases not more than 2000 birr per person per year) and low interest rate

on loans. Therefore, almost half of the costs of the MFI have been covered by donations

and grants. This has been happening while the extremely poorest of the poor were still

being excluded from getting microfinance services due to the ‘active poor’ selection

criteria of the MFI and clients unwillingness to include the poorest of the poor in loan

group fearing the accountability.

4.5. Women’s Empowerment

Microfinance programmes are supposed to empower women through increased

role of decision-making in the household and community, improved business skills,

better incomes, greater self-confidence, and better social acceptance, among

others. Women who are participating in the microfinance programmes are also assumed to feel less marginalized, and

have higher aspirations for their children’s education.

4.5.1. Decision-Making Role

Microfinance is assumed to positively increase women’s decision-making role within the

household, business and community. The women’s involvement in the microfinance

funded new businesses and expansions in the existing ones are expected to open

opportunities for them to gain new experience, which in turn would enable them to

contribute something constructive to the benefits of their families or the communities. In

this regard, to test if there is significant difference in women’s decision-making role

within household between participants and non-participants, these hypotheses were

formulated:

H₀: There is no significant difference in women’s decision-making role within household

between frequent clients and new clients. 

H₁: Frequent women clients play significantly increased decision-making role within the

household than new women clients.

Data gathered from 40 frequent and 40 new clients are summarized in SPSS output

(Table 17).

Table 15: Chi-Square Test Result for Decision-making in Household

Target Control Decision-making in

Household Count % Count % Sig. (2-sided)

Mostly Husband 1 2.5 1 2.5 Husband and Wife 5 12.5 12 30 Wife Only 29 72.5 18 45 Others 5 12.5 9 22.5

0.193

The result in Table 15 shows that 12.5% (5 of the 40) of the frequent and 30% (12

of 40) new clients responded that wife and husband make decisions while 72.5% (29 of 40) of the frequent clients and 45% (18

of 40) of the new clients were reporting wives alone make decision within the

household. However, the chi-square test shows that the difference between the two groups is not significant enough to draw

conclusion about the two populations. Therefore, we can conclude that programme participation did not

contribute significantly to improvement of women’s decision-making role in the

household. Table 16: Chi-Square Test Result for Decision about Loan Taking

Target Control Decision about Loan Taking Count % Count %

Sig. (2-sided)

Husband and Wife 4 10 6 15 Mostly Wife 0 0 2 5 Wife Only 31 77.5 23 57.5 Others 5 12.5 9 22.5

0.193

Similarly, as the chi-square test result in Table 16 is indicating, there is no

statistically significant difference in women’s decision-making role concerning

loan taking between participants and non-participants. This shows that

microfinance services of Gasha did not result in increased decision-making role of women concerning their businesses.

Improved living conditions, increased business transactions, training, group

meeting and other microfinance related benefits are expected to increase women’s decision-making role and participation at community level. To test this assumption

in the context of Gasha Microfinance Institution, the following null and

alternative hypotheses were constructed.

H₀: There is no significant difference in women’s decision-making role at community

level between frequent clients and new clients. 

H₁: Frequent women clients play significantly increased decision-making role at

community level than new women clients.

As the following chi-square test result in Table 17 shows, there is no enough

evidence to reject the null hypothesis, and we accept the assumption that there is no significant difference in women’s

decision-making role at community level between frequent clients and new clients

in the context of Gasha microfinance Institution. Therefore, it is possible to

conclude that programmes did not result in increased role of women in decision-

making at community level.

Table 17: Chi-Square Test Result for Women’s Role in Community

Target Control Role of woman in the Community Count % Count %

Sig. (2-sided)

Participate as Committee Member 3 7.5 0 0 Participate as Community Member 0 0 1 2.5 Attend Meetings when Invited 0 0 1 2.5 Never Participate in Community Dev’t 31 77.5 27 67.5 Others 6 15 11 27.5

0.130

Nevertheless, the responses of the frequent clients indicate that taking loans, repaying

them, business training, group meetings, and undertaking businesses made them

resourceful to generate ideas during discussions concerning family or community issues.

Those women who informed to be household heads (widows or divorced) and making

decisions already on the affairs of their families said their participation in the

microfainance programmes further increased their decision-making roles by broadening

their experiences.

4.5.2. Business Skills

Female clients were asked whether their skills and capacities to undertake businesses

independently have been improved after their participation in the microfinance

programmes. Of the 40 women clients interviewed, 30 informed that their skills to

independently carry out economic activities have been developed as the loans widened

their horizons of business transactions besides the business training they were given by

the microfinance staff. They said the group meetings and supervision by the microfinance

staff have also been enhancing their business skills. Those women who informed not

having jobs before taking loans said that the microfinance programme introduced them to

the business world and productive economic activities.

4.5.3. Self-esteem

All of the women who asked if their self-esteem has increased since they started taking loans reported improvement in

their self-confidence. They explained that increases in their incomes due to the new

activities started with the loans and expansion of the already existing

businesses helped them feel productive, important and equal with anybody else.

During the focus group discussion, a woman spoke of being a widow with five

children, said being capable to buy clothes, even used clothes, to her children after taking loans and seeing them happy gives her the very sense of equality within

the community she lives. Many of the women participated in the focus group discussion were also saying that having

enough food and drinks during holydays and other ceremonies to the extent that

even to invite their neighborhood soothed the pains that make them suffer from

feeling inferior to others when they could not do so during those occasions. They

also said their better economic status has given them better acceptance of the

society, and better acceptance by the

community in turn is improving their self-esteem.

4.5.4. Sending Children to School

The interview and the focus group discussion indicated that there are no significant

changes in the clients’ spending on education after taking loans as some of their children

are not going to schools at all and if they go they go to government schools where

education is free. The interviewees also reported that microfinance did not contribute

much to children’s education or they do not now if it contributed any thing.

4.5.5. Women and Compliance to Regulations

Microfinance institutions' preference of women to men has been controversial. One side

of the argument says that women have become MFIs' focus of attention because women

have been marginalized in the socio-economic relation in many communities. Another

side of the issue argues that microfinance institutions have been preferring women not

only because women are marginalized but also they are good at loan repayments. To

study this issue, attempts were made to identify differences in repayment rates between

men and women. However, repayment rates have been the same for both as they had

been results of group efforts rather than that of individuals due to collective

accountability. The staff of Gasha Microfinance Institution, including management and

loan officers, was asked if there are differences in loan repayment and compliance to

other rules between men and women. The response of the staff is that women had been

far more reliable and compliant than men. They said women repay loans without pressure

and they regularly attend group meetings. The management in particular said that women

are more disciplined and trustworthy than men. According to the staff response, even

though the institution's preference of women clients is due to its humanitarian

background, it is recruiting more female staff members because they are more compliant

than males.

In summary, although women have been good clients, microfinance programmes of

Gasha have been empowering them by increasing their business skills; improving their

self-esteem; and increasing their role of decision-making in household and community

through improved access to jobs, training, expanded businesses, supervision and group

meetings. However, when decision-making role played by the client women was

compared with that of the pipeline clients, no significant difference was observed, In

addition, no improvements were reported in ability to send children to school.

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

Microfinance impact assessment is studying whether programmes are

bringing about desired changes in the lives of participants. In this regard, to

assess what changes have been caused in the lives of clients of Gasha Microfinance

Institution as a result of participation in the microfinance programmes, attempts have been made to study which groups

among the poor have been reached by the MFI; whether the microfinance services

led to reduction in poverty; if the services built capacity of clients to manage and

cope up with risks; whether serving the poorest of the poor and becoming

financially self-sufficient at the same time is possible; and if women's participation in the programmes has been empowering them. The results have been summarized

and then recommendations have been forwarded.

5.1. Summary and Conclusions

The findings of the study, in relation to the key research questions, are

summarized as follows: 1.Gasha Microfinance Institution has

been providing microfinance services

to the group of people that it calls

'productive or active poor.' The

institution uses being engaged in

micro-businesses or willing to get

involved in such activities, with

permanent address, good health to

undertake economic activities, having

good social acceptance, being in

productive age range (18-64), and

preferably being female household

head or member of female headed

household as selection criteria. As the

loans have been extended to people

voluntarily organized in collectively

accountable groups, the clients also

choose whom their group members

should be. In the process, clients have

not been willing to accept those whom

they think without assets, incomes or

not reliable to repay loans lest they

should be responsible for the debt.

Although the clients' lack of access to

financial services, their occupations

such as selling dung for fuel, and most

being women show that the people

participating in the microfinance

programme were almost the poorest,

the extremely poorest of the poor have

been marginalized by the client

selection criteria of the MFI and

excluded by self-choosing mechanism

of the clients.

2.Poverty among the clients of Gasha

Microfinance Institution after their

participation in the programmes, to

some extent, is in declining trend.

Even though majority of interviewees

informed not building key assets since

receiving microfinance services, they

have been saving money regularly.

The clients owned assets with which

they make a living, like local drinks

making and selling utensils, instead of

the prior borrowed or shared tools.

Businesses of most interviewees were

expanded or improved in some ways.

Those clients who were receiving

expensive financial services are no

more depending on loans from money

lenders. Their nutritional intake

(amount, quality and variety) was

improved.

To plausibly associate these changes

reported by the clients with the programme participation, comparison was carried out between participants and non-participants. The significant

differences in income, expenditure (business input cost and consumption expenditure) show that the changes in

these variables were caused by participation in the microfinance

programme. On the other hand, the tests show that even though there are

differences in monthly savings, asset building, nutritional intake, ability to send children to school, and access to

health facilities between the two groups, they are not statistically

significant.

3.Most present clients and some ex-

clients informed that they faced major

risks while they were carrying out

economic activities with the loan they

received from Gasha Microfinance

Institution. Some clients managed and

controlled risks such as severe health

problems, fall in prices of goods, flood,

fire accidents, theft of key assets, and

death of household member by

making use of savings in cash and

assets. However, part of the clients

could repay loans and continue

membership by taking other loans,

and a significant number of the ex-

clients dropped out of the

microfinance programmes as they

could not cope up with the

unfortunate events they faced. In

short, although some clients could

manage risks with their economic

capacities, many clients have been

pushed further into indebtedness or

dropping out of the programme when

they encounter major risks as they

could not withstand the unfortunate

events.

4.Hypotheses testing concerning

women’s empowerment show that

there is no significant difference in

decision-making in household,

business, community as well as ability

to send children to school between the

frequent clients and new clients.

However, qualitative data gathered

from the clients through focus group

discussion show that their business

skills were improved. The clients said

that their self-esteem has been

improved as they feel productive,

important and equal with any body

else due to undertaking relatively

better profitable economic activities.

Taking loans, repaying them, business

training, undertaking productive

activities, and group meetings enabled

women clients to be resourceful to

generate ideas during discussions

concerning household or community

issues that in turn increased their role

of decision-making. At the same time,

women were found to be good clients

in issues such as loan repayments and

regularly attending meetings.

5.Gasha Microfinance Institution is

providing financial services to the

'active poor'. Loan repayment rate of

the 'active poor' has been less than 95

percent, which is a minimum

acceptable repayment rate to generate

sufficient revenue to cover all costs.

Due to problems such as the low

repayment rate and high

administrative expense, the institution

has not been earning enough income

to cover its costs. As a result, its

financial self sufficiency is around 50

percent. Low efficiency of the

institution, lack of appropriate

information, market problem, and

increasing rates of disease and death

among staff and clients, among others,

were mentioned as accountable for the

low financial sustainability.

Consequently, almost half of the cost

of the institution has been covered by

donations and grants. The MFI could

not be financially sustainable while

the extremely poorest of the poor were

still excluded from getting

microfinance services by the selection

criteria of the institution and clients in

group formation. Therefore, whether

it is possible to provide financial

services to the poorest and become

financially sustainable at the same

time is not conclusive from the context

of Gasha Microfinace Institution,

which has not been financially self-

sufficient while the poorest of the poor

being left out.

5.2. Recommendations

Based on the findings, the following recommendations were made.

1.The poorest of the poor who have

been excluded by the selection criteria

of the institution and group formation

of clients could be provided with

microfinance products. Microfinance

institutions like Gasha, which have

been securing donations in millions in

the name of serving the poor, can

arrange mechanisms to improve

technical and business skills of the

poorest through training. Instead of

considering the poorest as needing

direct assistance in the form of aid, it

is possible to enhance their business

skills to use credit and establish

market channels for their products

until they do that independently.

2.The progresses observed in poverty

reduction can be further enhanced. If

various ways were arranged to extend

loans, economic capacities of those

clients needing bigger loans could

have been developed. Individual loans

could address the problem of the

maximum loan size ceiling of 2,000

birr decided by most group members

for fear that they should be

accountable. Different microfinance

products (loan sizes) matching varying

borrowing powers of clients may meet

credit and business needs of

diversified clients.

3.To withstand unfortunate events,

limited asset bases of clients that

shake when they face risks could be

enhanced if significant results are

achieved in reducing poverty.

Training on business may also help

clients to minimize transaction related

risks. On the other hand, micro-

insurance scheme could be established

to enable poor clients to pool risk or

share losses that individuals may not

withstand.

4.Empowerment of women reported by

clients in terms of business skills, and

self-esteem could also be further

extended to decision-making roles,

and improving their capacities to send

children to school.

5.Gasha Microfinance Institution

should strive to achieve financial self-

sufficiency by increasing repayment

rate, by decreasing administrative

expenses and strengthening its overall

institutional efficiency. If the MFI

could not manage to become

financially self-sufficient, it may not

survive overtime as funding could dry

up.

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Annex 1

Addis Ababa University

School of Graduate Studies

Regional and Local Development Studies

Questionnaire for the survey on the Impact of

Microfinance in Ethiopia: the Case of Gasha

Microfinance Institution in Addis Ababa

Code: -------------

Branch: _______________ Enumerator: ___________ Date: _________

Dear Respondent,

The purpose of this questionnaire is to gather information to write a research

paper on the impact of microfinance. Personal responses of interviewees would

be kept confidential, and there would not be any link between status in the

programme and responses.

Therefore, you are kindly requested to give accurate information as much as

possible.

Thank you

Part 1. The Respondent

1.1 Name __________________________

1.2 Age ____________

1.3 Gender ____________

1.4 Marital status: 1. Single 2. Married 3. Divorced 4. Widowed

1.5 Household size _______________________

1.6 Education level _________________

1.7 Participation in the microfinance programme 1. New (less than six

months) 2. Frequent (more than two years) 3. Other (specify)

___________________________________________________

1.8 Year and month of first loan taking __________________________

Part 2. Access to loan, loan utilization and repayment

2.1 Did you have an access to credit before joining microfinance programmes

of Gash? 1. Yes 2. No

2.2 If your answer for question 2.1 is yes, state the sources of the loan, amount

of the loan and purpose of borrowing

Source Amount of loan Purpose of borrowing

____________ __________ _________________

____________ ___________ __________________

____________ ___________ ___________________

2.3 Have you repaid the loan? 1. Yes 2. No 3. Partially

2.4 If you haven’t repaid the loan, state your reasons for not repaying

___________________________________________________

2.5 How many times have you received loans from Gasha Microfinance

Institutions? _____________________________

Year of borrowing Loan size in birr Amount repaid

First year _________ ____________ _____________

Second year _______ ____________ _____________

Third year ________ ____________ _____________

Fourth year ________ ____________ _____________

Fifth year _________ ____________ _____________

2.6 What guarantee did you give to Gasha Microfinance Institution for giving

you the loan?

4. Group responsibility

5. Guarantee of salaried individuals

6. Guarantee of individuals having assets like home, car etc

7. Other (specify) ___________________________________

2.7 Have you and your group been willing to accept people without any assets

and business activities as group members? 1. Yes 2. No

2.8 If your answer for Q. 2.7 is no, state why you have not been willing to

accept people without assets as group numbers

__________________________________________________

2.9 For what purposes did you receive loan from Gasha Microfinance

Institution?

Intended purposes Amount of loan

1. ___________________ _________________

2. ___________________ _________________

3. ___________________ _________________

2.10 Did you spend the total amount you borrowed on the purposes intended?

1. Yes 2. No

2.11 If your answer for the question above is no, state the other purposes on

which you spent the money

___________________________________________________

2.12 How do you see the interest you pay on loans? 1. Too high 2. High

3. Normal 4. Low

2.13 Was the loan sufficient to carry out your purpose? 1. Yes 2. No

2.14 If your answer is no, what alternative steps did you take to carry on the

business? ____________________________________________

2.15 Has the loan repayment been suitable for you? 1. Yes 2. No

2.16 If no, note why it has not been suitable for you

Reason ___________________________________________

2.17 Would you state the amount of loan you did not pay so far? _________

2.18 Have you ever been faced with problem for not repaying loans?

1. Yes 2. No

2.19 If yes, state the problems _______________________________

2.20 Did you take loans from moneylenders before two years or you began

receiving credit from Gasha Microfinance Institution?

1. Yes 2. No

2.21 If yes, why you received the loans and with what amount of interest rate

you used to repay loans to moneylenders?

Purpose of loan from moneylenders_________________________

Interest on the loan ______________________________

Part 3. Income, Assets and Expenditure

3.1. What is your source(s) of income? What do you do for living?

____________________________________________

3.2. How much is your mean weekly income? ______________________

3.3. Do you have other source(s) of income different from that is being

financed by the loan? 1. Yes 2. No

3.4. State other income sources

Other source(s) of income______________________________

Amount of mean weekly income__________________________

3.5. Do you have a saving account? 1. Yes 2. No

3.6. If yes, how much is your mean monthly saving? _______________

3.7. What is your source of money for saving?

1. Business financed by the loan

2. Another business different from that is financed by the loan

3. Gift from relatives/friends

4. Other (specify) ________________________________________

3.8. Have you acquired key assets during the last two years? 1. Yes 2. No

3.9. If yes, which of these assets have been owned?

Assets Prices Source of money

1. Chairs/tables/benches ____________ _____________

2. Radio/tape player ____________ _____________

3. TV/Video player ____________ _____________

4. Stove ____________ _____________

5. Refrigerator ____________ _____________

6. Sofa ____________ _____________

7. Bed/mattress ____________ _____________

8. Others (specify) _______________________________________

3.10. Do you use hired labour for your business? 1. Yes 2. No

3.11. If yes, what is the average cost of labour for your business? _________

3.12. Do you use purchased inputs in your business? 1. Yes 2. No

3.13. If yes, what is the average weekly cost of inputs? _________________

3.14. What is your household’s mean monthly expenditure of consumption

(food, electricity, telephone, water, etc)? _____________________

3.15. State your household’s mean annual expenditure on:

Clothing _________ Medical service _________ Education _______

3.16. Has there been any improvement (change) in your livelihood since your

participation in the microfinance? 1. Yes 2. No

3.17. If yes, what kinds of changes or improvements happened to your

livelihood? Give examples.

___________________________________________________

___________________________________________________

Part 4. Nutrition Intake, Health and Education

4.1. What has been the trend in your household’s nutrition intake over the last

two years? 1. Improved 2. Stayed the same 3. Worsened

4.2. If improved, how has it been improved?

1. Consumption of more food

(increase in quantity) 2. Consumption of variety of food (vegetables, legumes, pasta etc)

3. Consumption of animal/dairy products (meat, milk, cheese, egg etc)

4. Other (specify) ______________________________________

4.3. If your household’s nutrition intake improved state what caused the

improvement and give examples of the

improvement___________________________________________

____________________________________________________

4.4 Where do your household members go when they face health problems?

1. Private health institution

2. Public health institution

3. Traditional healers

4. Others (specify) ____________________________________

4.5. If your household members do not go to health institutions, what is the main

reason?

1. Shortage of money to pay for medical services

2. Preferring traditional healers and herbal medicines to modern

health institutions

3. High costs of medical services

4. Others (specify) ___________________________________

4.6. If your household members go to health institutions, what was the source of

money for the medical services?

1. Business profits

2. Savings

3. Borrowing from relatives/friends

4. Others (specify) ____________________________________

4.7. How many children in your household are at school age? ____________

4.8 How many of the children are presently attending school? _________

4.9. What was the trend in number of children attending school over the last two

years?

1. Increased 2. Decreased 3. Stayed the same

4.10. If increased, what contributed to the rise?

1. Establishment of new schools in the area

2. Improvement of the household’s income

3. Enrolment of those children newly joined school age

4. Others (specify) _______________________________________

4.11. If decreased, what are the reasons?

1. Shortage of Money

2. Need of help in business activity

3. Children’s completion of school

4. Others (specify) ______________________________________

4.12. (Frequent clients only) Did the loan contributed to children’s education? 1.

Yes 2. No

4.13. If yes, state how it

contributed___________________________________________

___________________________________________________

Part 5. Women’s Empowerment (Female respondents only)

4.1. Who makes decisions within the household concerning issues such as

sending children to school; buying food or clothes?

1. Husband only 2. Mostly husband 3. Husband and wife 4. Mostly wife

5. Wife only

5.2. Who decides taking loans?

1. Husband only 2. Mostly husband 3. Husband and wife 4. Mostly wife

5. Wife only

5.3. Who makes decisions on utilization of loans, what inputs to buy; and how to

sell products? 1. Husband only 2. Mostly husband 3. Husband and

wife 4. Mostly wife 5. Wife only

5.4. What do you do when you want to buy something for yourself or the

household?

1. You buy what you need because you have some money of your own

2. You always ask husband for money

3. You sometimes have money and sometimes ask husband

4. Other (specify) _____________________________________

5.5. Which of the following represents your role in the community?

1. You participate in community/kebele development efforts as committee

member

2. You participate in community development as member

3. You only attend meetings when invited

4. You never participate in community development efforts

5. Others (specify) ______________________________________

5.6. (For frequent clients only) Has your participation in the microfinance

improved your decision-making role in the household, business or

community? 1. Yes 2. No

5.7. If yes, state how it

improved_________________________________________

_______________________________________________

5.8. Is there any change in your business skills since your participation in the

microfinance? 1. Yes 2. No

5.9. If yes, state the changes and what caused

them____________________________________________

_______________________________________________

5.10. Do you think that loan taking contributed anything to your self-esteem? 1.

Yes 2. No

5.11. If yes, state how it

contributed_______________________________________

_______________________________________________

Part 6. Risk Management

6.1 Have you encountered any major risk that adversely affected your business

over the last two years?

1. Yes 1. No

6.2 If yes, what risk (s) have you faced?

1. Illness of household member

2. Death in the household

3. Theft of key assets

4. Dramatic price fluctuation

5. Matrimonial ceremony

6. Other (specify) _______________________

6.3 What damages were caused to your business by the risk?

__________________________________________________

___________________________________________________

6.4 What measures have you taken to solve the problem/how did you cope up

with the risk you faced? ______________

__________________________________________________

6.5 (For frequent clients only) How did the loan you received from Gasha help

you solve the Risk? _____________________________________

Annex 2

Summary of Focus Group Discussions

1. Client view of positive change/improvement as a result of participation in

microfinance programmes:

The participants said their major problems before their participation in the microfinance

programmes were shortage of food for the household, clothes particularly for children,

and shortage of resources to celebrate holidays and related occasions or commemorate

death of relatives.

They said additional incomes from activities related with the microfinance programmes

enabled them to buy enough grain (food), of what ever kind, to feed the household

sufficiently. The activities began or expanded with the loans mitigated the problem of

clothes for the children. Their pains during holidays and celebrations by the feeling of

inferior to neighbors is almost fading away as they can do what has been done at the

occasions, and they could make drinks and food at their homes as any body else.

2. Changes occurred after 1st, 2nd, 3rd etc loans

They said food is more or less available at home. They were not much worrying about

what to feed children. They have been creating assets with which they were making a

living. For instance, a woman said she was making areke with borrowed pots and

filtering utensils. But after first loan, she owned her own such utensils. The

participants who sell drinks and food said they purchased better food making and

serving utensils. After repaying loans, they have goods in their small shops, which

they said are sources much confidence and sense of self-sufficiency though they

didn’t had cash in such times.

3. Why aren’t the clients showing significant changes or moving to bigger

businesses

They said they are old women, some are widows. It is very difficult to think of bigger

businesses. They have never engaged in such businesses. Most of them are not educated.

They said they don't know how to manage bigger businesses. They spoke of fear to take

bigger risk.

On the other hand, some of the participants said they wanted to start bigger businesses.

But their group members are not allowing them to receive loans more than 2,000 birr.

That why they are still running very small businesses.

Annex 3

Summary of interview with Gasha Microfinance Institution staff

1. What criteria does Gasha Microfinance Institution use to select its clients?

Gasha Microfinance Institution provides microfinace services to the active or productive

poor. Active poor are those who have been engaged in micro-businesses or willing to get

engaged. The client must be an Ethiopian with permanent address in the kebele that the

MFI is operating. S/he must be in good health condition; must have good social

acceptance; be in productive age range (18-64); preferably a member of female headed

household or female household head; and should come up with feasible business project.

2. Why Does Gasha Microfinance Institution focus on women as clients?

Gashsa Microfinance Institution gives priority to women as they are disadvantaged in

socio-economic relations. The institution wants to give opportunities to women to realize

the potential.

3. How do you see women clients' repayment rates and their compliance to rules in comparison with men clients?

Women have been the most obedient clients. We do not exert any additional pressure on

women to repay loans like we do with men. They regularly attend group meetings. They

obey any rule when they are informed about it. That is why the institution is recruiting

more female staff members. They really comply to rules and regulations.

4. Financial self-sufficiency of Gasha Microfinance Institution is low. What are

the reasons? Financial self-sufficiency of the institution has been low because the efficiency of its

staff to execute activities is low; the institution targeted on poor (miss targeting); lack of

appropriate information; lack of skill to appraise loans and to follow up; and high

prevalence of diseases and increasing trend of death among staff members and clients.

Annex 4

Balance Sheet of Gasha Microfinance Institution

Assets F/Y 1998/99 2000 2001 2002 2003

Current assets Cash 1,685,431,29 3,074,129.08 4,076,816.00 4,368,787.00 3,768,140.45Loan 685,324,41 1,757,222.33 2,446,939.00 2,596,213.00 2,765,661.82Loan loss reserve (358,927.00) (453,724.00) Short-tern investment 2,000,000.00Interest receivable 1,181.21Stock 39,314.79Other short term assets 153,659,32 295,745.68 469,664.00 387,775.00 88,205.19Net fixed Assets 192,571.01 324,788.61 468,682.00 522,916.00 422,811.45Total Assets 2,716,986.03 5,451,885.70 7,421,967.00 7,421,967.00 9,085,314.93

Liabilities

Current liabilities Savings 386,536.09 748,366.78 1,281,008.00 1,418,743.00 2,110,068.63Creditors 398,555.56 512,267.25 577,328.00 486,030.00 244,655.74Long-term loan 1,021,158.78 2,258,754 2,857,516.00 2,765,218.00 4,349,243.71Total liabilities 1,806,250.43 3,519,387.60 4,715,852.00 4,669,991.00 6,703,968.08Net assets 910,735.60 1,932,498.10 2,387,322.00 2,751,976.00 2,381,246.85

Capital & reserves

Paid- up capital 200,000.00 200,000.00 213,100.00 217,400.00 217,800.00Donated capital 1,178,854.09 1,821,905.35 2,488,690.00 2,953,219.00 2,711,299.99

Profit &loss account (468,118.49) (89,407.25) (314,468.00) (418,643.00) (547,753.14)Total equity 910,735.60 1,932,498.10 2,387,322.00 2,751,976.00 2,381,346.85 Source: Financial Statement of Gasha MFI (1998-2003)

Annex 5

Income Statement of Gasha Microfinance Institution

Income F/Y 1998/99 2000 2001 2002 2003

Interest income from loan 87865.64 357718.04 535629.00 417525.11 541307.55

Interest on saving deposit &investment 143941.89 73842.45

Service charge 20289.19 53143.74 88106.00 144539.00 161765.49

Commission income on trust fund 15875.00 79143.71 17000.00 21165.00 28374.41

Other income 52808.57 141581.43 187453.00 143942.00 43642.24

Total income 176838.40 631586.92 828188.00 871113.00 848932.14 Expenses

Financial expense:

Interest on debt 6523.17

Interest paid on deposit 21968.42 52333.49 67445 43666 47097.86

Total financial expense 21968.42 52333.49 67445.00 43666.00 53621.03 Salary & benefit expense:

Salary expense 232141.15 344752.62 413915.41 468340.1 506258.32

Benefit expense 41818.11 53941.12 113087.59 229629.9 232458.92

Total salary & benefit expense 273959.26 398693.74 527003 697970 738717.24 Administrative & General expense 331181.14 186408.47 265228.99 307275.28 278914.61

Provision for land loss 0.00 33032.10 205102.98 135530 207890.61

Depreciation expense 17848.14 50526.27 77876.03 105314.72 117541.79

Total administrative & general expense 349029.21 269966.94 548208.00 548120 604347.01 Total expense 644956.89 720994.17 1142656.00 1289756 1396685.30 Loss/profit -468118.49 -89407.25 -314468.00 -418643 -547753.14 Source: Financial Statement of Gasha MFI (1998-2003)

Annex 6

Guidelines for an interview with ex-clients of Gasha MFI

1. Reasons for dropping out of the microfinance programmes

2. If major risks encountered

3. Possible solutions for the risks

4. Underwhat conditions the client could have continued as client

Declaration

I, the undersigned, declare that this thesis is my original work, has not been presented for

a degree in any other university and that all sources of material used for the thesis have

been duly acknowledged.

Name-------------------------------------------

Signature--------------------------------------

Place: Addis Ababa University

Date of submission: February, 2006

The thesis has been submitted for examination with my approval as a university advisor.

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February, 2006