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Microfinance in Ethiopia - mapping a way out of poverty

 

In a country where almost half of the population barely survives on less than a dollar a day, microcredit offers poor people a unique opportunity to engage in small businesses or improve their agricultural production. With the support of IFAD, microfinance institutions such as the Amhara Credit and Saving Institution (ACSI) extend small loans to poor people in rural areas to help them improve their incomes and overcome poverty.

 

Photo: Assefash Fikira opened a hotel and nightclub, using loans from ACSI. Her business provides employment for 12 people in the rural town of Woreta.

In the mountainous, sparsely populated Amhara region, rural people struggle to make a living. Displaced by famine or by the lack of economic opportunities, most of them have relocated into areas as poor as the ones they left, where they have no assets and no land to cultivate. The Amhara Credit and Saving Institution (ACSI), a microfinance institution, was established in 1995 to help the most destitute but active members of rural communities invest in a better future. With support from the International Fund for Agricultural Development (IFAD), ACSI provides much-needed financial services to poor rural people, enabling them to invest small sums of money in productive activities.

 

“I used to live in another region,” says Assefash Fikira, trader and owner of a hotel and nightclub. “When I came here with my husband, we had nothing. I made local beer and my parents helped us out a bit. Things started to change when I took out a loan from ACSI five years ago. “I borrowed 1,000 birr (about US$108) the first year to open a hotel. A year later I took out another loan, for 3,000 birr, and opened a nightclub. I bought a refrigerator, furniture and a sound system for my business. Later I opened a cosmetics shop, and with the extra income, I was able to pay for my parents’ house, which had been confiscated by the commercial bank because they were in arrears in repaying their loan.”

 

Assefash is one of ACSI’s clients in Woreta, a rural town where the financial institution established a sub-branch. “Most of our loans go to agricultural activities,” says Lakew Mitiku, coordinator of the sub-branch’s field workers. “But we also provide loans to set up small businesses. ACSI is not like a normal bank. Our objective is to help poor people in Amhara rise up out of poverty.”

 

Lending to poor people was unheard of in Ethiopia when ACSI began its activities in 1996. “We started in 6 of the 140 woredas (districts) in the region,” says Mekonnen Yelewemwosen, general manager of ACSI. “I couldn’t sleep at night, worrying that people would not repay. We didn’t know whether we would succeed. After all, it was the first time that poor people had access to loans and we had no idea how they would react. When the first repayments started coming in, I was thrilled. We had proved to the whole sector that poor people were bankable. All, without exception, paid back their loans.”

 

ACSI operates through 10 branches, 185 sub-branches and 11 microbanks — for those who have graduated from microfinance — and one head office. It reaches 1.2 million poor people and has 650,000 active borrowers. Interest rates vary from 10 to 18 per cent for agricultural and microenterprise loans. The smaller the loan, the higher the interest rate.

 

Demand for credit is large and growing

Fatima Hassan sells spices at the market in Tis Abay. Her business helped her improve her family’s nutrition, and she is now able to send her five children to school.

The demand for microfinance is still largely untapped. ACSI reaches just one third of the estimated 3 million people in need of microfinance services in Amhara, and most of Ethiopia’s microfinance institutions face the same challenge. Because of the crucial importance of rural financial services in the fight against poverty IFAD, works with the Government of Ethiopia to provide support for 17 microfinance institutions and nearly 2,000 rural savings and credit cooperatives (RUSACCOs) through the Rural Financial Intermediation Programme (RUFIP). The programme started in 2003 and has a duration of seven years. IFAD’s loan covered US$25.7 million of the total cost of US$88.7 million.

 

“Before RUFIP, these institutions were very small,” says Gedion Mekonnen, the programme’s monitoring and evaluation officer. “The programme provided them with credit, equipped them with vehicles, motorcycles and computers, and introduced industry best practices and compliance with international standards.”

 

“The IFAD-funded programme invested 140.0 million birr (US$15.2 million) into ACSI’s credit fund,” says Mekonnen Yelewemwosen. “The demand was so great that we grew much faster than was foreseen and used the money in only four years, instead of seven.” The impact of microfinance on rural people’s lives is so visible and impressive that the demand is growing exponentially every day. ACSI, like many other institutions, is looking for more sources of funding. “An apex organization that would concentrate NGO and donor funding would be very useful to the sector,” says Yelewmwosen. “We need to be able to access capital in a sustained manner. Clients’ savings are insufficient to cover credit needs.”

 

Adapting to local context and culture

Abebayehu Mekonnen, who formerly was hired by the day, took out a loan from ACSI six years ago to raise sheep. He bought a house and manages to send all of his 11 children to school. Two of them are at university.

To effectively reach poor people, ACSI has had to adapt to the local context. To be closer to its clients it sets up its sub-branches deep in rural areas and creates a six-member credit and savings committee in each village. The committee, composed of local leaders, respected community members and an ACSI employee, screens loan applications, giving priority to the poorest members of the community.

 

Since most poor people do not have collateral, ACSI requires individuals to form a group of five to seven people who follow up on one another’s progress and act as guarantors for one another. ACSI's staff guide them step by step in making a business plan, so that it is possible even for illiterate people to join the scheme.

 

In the Woreta sub-branch, four field workers follow 6,500 clients, travelling up to 35 km by public transportation or by bicycle. Every two weeks they meet with the clients, assess their progress and provide technical expertise and guidance when needed. They advise clients on financial management and diversification to maximize the success of their activities.

 

Economical, social and cultural impact

After more than ten years of hard work and two international excellence awards, ACSI is now the leading microfinance institution in Ethiopia. An impact study conducted by the Association of Ethiopian Microfinance Institutions (AEMFI) in 2007 estimated that the institution was responsible for substantial growth in agricultural gross domestic product (GDP) in the Amhara region. According to the study, by the eighth loan cycle clients are able to put poverty permanently behind them, but even by the fifth loan cycle they can significantly improve their living conditions.

 

Marrie Gessesse, single mother of eight children, has been an ACSI client for ten years. “I used to live in the hills nearby,” she says, “before I was relocated. I wanted to stay by the road so I took a loan to buy goats and rent a plot of land to build my house. With the profits I made from raising goats and with the help of another loan, I bought a plot of land to cultivate fruit and vegetables. After this initial investment, I was gradually able to improve my life. I bought corrugated iron for a more solid house and purchased the land on which I live. I sent my children to school, bought better clothes for my family and increased the quantity and quality of our meals. Later I bought a water pump for irrigation and now I rent more land for agricultural production.”

 

Economic growth brought another, perhaps more important, benefit to Marrie Gessesse. “No one used to consider me before. When they saw that I was becoming autonomous, people started to respect me. Now they have elected me member of the administrative council and the women’s association.”

ACSI follows each of its clients closely and records changes in people’s lives on a yearly basis. After each loan repayment field workers compile a questionnaire together with their clients. Financial sustainability is an important aspect of ACSI’s objectives, but ACSI’s staff are particularly proud of their institution’s impressive social impact.

Source: IFAD