GREAT LAND COLLEGE

POSTGRADUATE STUDIES

FACULTY OF BUSINESS AND ECONOMICS

THE ROLE OF MICROFINANCE INSTITUTIONS IN POVERTY REDUCTION IN BAKO

TIBE DISTRICT

A THESIS SUBMITTED TO POSTGRADUATE STUDIES OF GREAT LAND COLLEGE

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
MASTER DEGREE IN BUSINESS ADMINISTRATION (MBA)

BY: ABDUREHMAN KEDIR

ADVISOR: ADAMU TERFA(PhD)

AUGUST, 2021

NEKEMTE, ETHIOPIA
THE ROLE OF MICROFINANCE INSTITUTIONS IN POVERTY REDUCTION: THE
CASE OF BAKO TIBE DISTRICT, WEST SHEWA, OROMIA REGIONAL STATE,
ETHIOPIA.

A THESIS SUBMITTED TO THE FACULTY OF BUSINESS AND ECONOMICS,

DEPARTMENT OF MANAGEMENT, GREAT LAND COLLEGE IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR THE MASTER DEGREE IN
BUSINESS ADMINSTRATION (MBA).

BY: ABDUREHMAN KEDIR

ADVISOR: ADAMU TERFA(PhD)

JUNE, 2021

NEKEMTE, ETHIOPIA

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 Great Land College
Postgraduate Studies
P.O. Box: 420, Nekemte, Ethiopia.

Approval sheet

This is to certify that the thesis prepared by Abdurehman Kedir entitled The role of
Microfinance institutions in poverty reduction in Bako Tibe district; West showa zone,
Oromia regional state, Ethiopia and submitted for partial fulfillment of Master degree in
Business Administration [MBA] at Great Land College, is an original work and not submitted
earlier for any degree either at this College or any other college/University.

Submitted by:

_________________ ______________ ____________

I. Name of Student Signature Date
Approved by:

1.
2. ________________________ ______________ ___________
Name of internal examiner Signature Date
3. ____________________________ _____________ ____________
Name of external examiner Signature Date
4. ___________________________ ___________ _______________
Name of Dean College Signature Date

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 DECLARATION
I, Abdurehman Kedir, declare that this study entitled The role of microfinance institutions in
poverty reduction in Bako Tibe District is the outcome of my own effort and study and that all
sources of materials used for the study have been duly acknowledged. This study is my own
original work and has not been submitted for any degree or diploma in any other university or
college. It is offered for the partial fulfillment of Master degree in Business Administration
[MBA]

Name: Abdurehman Kedir

Signature: __________________

date: _____________________

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 ACKNOWLEDGEMENTS

In the name of Allah, the most gracious, and the most merciful above all, praise is due to Allah,
the lord of the world, who is worthily to be praised that he made it possible for this thesis to be
completed. My special thanks go to be my advisor Adamu Terfa (PhD) for his genuine,
concerted and invaluable advice for completion of this thesis. My special thanks also extended
to my lovely wife, my brother and my sister for ideal and financial support. Finally, my heart
thanks will go to specially the two my classmates’ they initiate me and also ideal support and
also my boyfriend who has photocopy and computer service center at Bako town for doing this
thesis.

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 LIST OF ACRONYMS

AEMFI - Association of Ethiopian Micro Finance Institution

FGD - Focus Group Discussion

GDI - Gender related Development Index

HDI - Human Development Index

HPI - Human Poverty Index

IMF - International Monterey Fund

KIIs - Key Informant Interview

MDG -Millennium Development Goal

MFIs - Microfinance Institutions

NBE - National Bank of Ethiopia

NGO -Non-Government Organization

PASDSP - Plan for Accelerated and Sustainable Development Program

PRSP - Poverty Reduction Strategy Paper

SFPI - Specialized Financial Promotion Institute

UN - United Nation

UNDP - United Nation of Development Program

WB - World Bank

WDR- World Development Repo

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 TABLE OF CONTENTS
Contents Page

s
Approval sheet.......................................................................................................................................i
DECLARATION................................................................................................................................ii
LIST OF ACRONYMS.......................................................................................................................iv
TABLE OF CONTENTS.....................................................................................................................v
LIST OF TABLES.............................................................................................................................vii
LIST OF FIGURE.............................................................................................................................viii
ABSTRACT......................................................................................................................................viii
CHAPTER ONE...................................................................................................................................1
INTRODUCTION............................................................................................................................1
1.1 Background of the Study....................................................................................................1
1.2 Statement of the Problem........................................................................................................2
1.2 Objective of the Study.......................................................................................................3
1.3 Researcher questions...............................................................................................................4
1.4 Significance of the study.........................................................................................................4
1.5 Scope and Limitation of the study...........................................................................................5
1.6 Organization of the study........................................................................................................5
CHAPTER TWO..................................................................................................................................6
REVIEW OF RELATED LITERATURE........................................................................................6
Introduction...................................................................................................................................6
2.1 Theoretical Literature Review.................................................................................................6
2.2 Micro-credit and Micro-finance..............................................................................................6
2.3 Microfinance Institutions (MFIs)............................................................................................7
2.4 Micro-finance Institutions in Ethiopia....................................................................................7
2.5 Impacts of Microfinance on household livelihood..................................................................9
2.6 Assessing MFI’s Microfinancing Scheme on Household Livelihood...................................10
2.7 Concepts and Definitions of Poverty.....................................................................................11
2.8 Overview of Poverty in Ethiopia...........................................................................................12
2.9 Assessment Levels Impacts can be assessed at different levels............................................13
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 2.10 Overview of Financial Sector & Credit...............................................................................13
2.11 Conceptual Framework.......................................................................................................15
CHAPTER THREE............................................................................................................................17
RESEARCH METHEDOLOGY....................................................................................................17
3.1 Description of Study Area.....................................................................................................17
3.2 Research Design....................................................................................................................17
3.3 Sample Design.......................................................................................................................19
3.4 Sampling Frame....................................................................................................................19
3.5 Sampling Size........................................................................................................................19
3.6 Methods of Data Collection..................................................................................................20
3.7 Methods of Data Analysis.....................................................................................................20
CHAPTER FOUR..............................................................................................................................21
DATA ANALYSIS AND INTERPRITATION.............................................................................21
INTRODUCTION.......................................................................................................................21
4.1 Demographical characteristics of the respondents................................................................21
4.1.5 Effects of microfinance on diet..........................................................................................24
4.2 Econometric Analysis...........................................................................................................30
4.3 Impacts of microfinance........................................................................................................32
4.4 The impacts of Microfinance intervention on household consumption expenditure............34
4.6 The impacts of microfinance on health care.........................................................................36
4.7 The impacts of MFIs on education........................................................................................38
4.8 Perception of sample clients..................................................................................................42
4.9 Major challenges of Microfinance program..........................................................................43
CHAPTER FIVE................................................................................................................................46
CONCLUSION AND RECOMMENDATION..............................................................................46
5.1 Conclusions...........................................................................................................................46
5.2 Recommendations.................................................................................................................47
REFERENCES................................................................................................................................49
Appendix I.......................................................................................................................................51

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 LIST OF TABLES

Table 1: Sample respondents by sex.......................................................................................................21

Table 2: Marital status of Respondents...................................................................................................22
Table 3: the number dependent on household.........................................................................................23
Table 4: The impact of MFIs on income after participation....................................................................23
Table 5: Trend of consumption expenditure of Respondents..................................................................25
Table 6: The respondent’s medical care...................................................................................................25
Table 7: Status of respondent’s educational attainment...........................................................................26
Table 8: Job opportunities of respondents................................................................................................27
Table 9: Saving mobilization of microfinance in the Study area.............................................................28
Table 10: Types of saving........................................................................................................................29
Table 11: Impacts of microfinance on women empowerment.................................................................30
Table 12: Profit regression for calculating propensity scores..................................................................31
Table 13: Summary of household income sorted by Microfinance intervention.....................................33
Table 14: The impacts of microfinance on household income using all matching method.....................34
Table 15: Summary of household consumption expenditure sorted by MFIs intervention.....................35
Table 16: The effect of microfinance on household consumption expenditure.......................................36
Table 17: Summary of household responsiveness for health care sorted by MFIs intervention.............37
Table 18: The effect of microfinance on health care................................................................................38
Table 19: Summary of the respondent’s educational attainment sorted by microfinance intervention. 39
Table 20: The impacts of Microfinance on Educational attainment........................................................40
Table 21: The impacts of Microfinance on Housing conditions..............................................................41
Table 22: The impacts of Microfinance on Employment generation.......................................................42

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 LIST OF FIGURE
Figure 1: Conceptual framework..............................................................................................................16

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 ABSTRACT

The services provided by microfinance institutions is desired to enable the poor to smoothen their
consumption, manage their risks better, build their assets gradually, develop their micro
enterprises, enhance their income earning capacity, and enjoy an improved quality of life.
Microfinance institutions, as mentioned above, are basically set up with the goal of poverty
reduction. Subsequently, in order to investigate the above premises, this study has undertaken
empirical evidence in Specialized Financial Promotion Institute taking a sample of 79 clients from
microfinance institutions which are found in Bako town, Busa Gonofa, Wasasa Microfinance,
Vision fund and Oromia Credit and saving share company to discern its contribution towards
poverty reduction. Consequently, the objective of this study is to find out the impact of microfinance
towards poverty with a particular reference to Specialized Financial Promotion Institute. With the
above objectives in mind, the research work employed questionnaires, key informants; focus group
discussions, and observations to obtain primary data. In addition, secondary sources of data have
also been collected from different literature and SFPI annual progress report. In deed the research
is both quantitative and qualitative by its nature. The contribution of Microfinance is analyzed
based on income, living condition, asset accumulation, saving, decision making power, self-esteem,
self-confidence, business management skills along with the strength and weakness of the institution
among others. The finding indicates that SFPI scheme has made positive contribution to the clients
in relation to observed variables. Nevertheless, significantly higher number of the clients
complained about the institutions high interest rate, too small loan size, repayment policy,
problematic group dynamics. Therefore, as a pointer to future endeavors, the current services of
SFPI need to amend the loan size and reduce the interest rate in order to resolve the issues at hand
and to fit the financial problem of the poor in the sector

Key Words: Microfinance Institutions, Microfinance, Microcredit, Poverty, Poverty Reduction

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 CHAPTER ONE

INTRODUCTION
1.1 Background of the Study

Micro-financing is a category of financial services targeted at individuals and small business that
lack access to conventional banking and related services. It has been practiced all over the world as
a tool to deliver a financial service to the poor with the objectives of attacking poverty and
improving the rural household livelihood. The main difference between microfinance and
conventional bank is the size of the transactions. Microfinance institution offer saving accounts,
small and short-term loans to people with few assets to use as collateral. Microfinance helps to
increase household’s income levels and improve their living conditions. (Idolor, et al.2012)

In Africa and other developing countries, micro finance is often viewed as a means of lifting people
out of poverty (Meyer, 2006). According to Anyanwu (2004) microfinance institutions (MFIs) are
regarded as the main source of funding micro enterprises with the aim to help in developing self-
employment opportunities. For instance, microfinance institution has emerged as an instrument to
expand financial service for rural and urban households and providing access to financial services
that leads to improvement in household.

Microfinance industry in Ethiopia has shown remarkable quantitative growth since 1990. By
lending loan, microfinance improved the living standard of people who reside in rural areas by
providing substantial help and facility to the ultra-poor families. MFI provide door to door micro
credit services to those poor families that have no collateral guarantees to produce and are not
capable of fulfilling the banking requirement for credit eligibility. Such families are able to create
their own assets by paying their microcredits in small installments out of their earnings made by
engaging themselves in small entrepreneur activities (Deribie, et al.2013).

As it is an important factor in improving the livelihood of rural households, there are now a
growing number of new microfinance institutions in Ethiopia and it was supervised by National
Bank of Ethiopia. The Ethiopian government has laid down a regulatory frame-work for the

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establishment of microfinance institutions by issuing proclamation No.40/1996 that provides for
the licensing and supervision of microfinance institutions. Since the issuance of this proclamation
in July, 1996, thirty-five microfinance institutions have been legally registered and delivering
microfinance service in the country which mobilized birr 28.4 billion in the saving deposit. Their
outstanding credit also went up 38.5 percent to reach Birr 37 billion. Their total asset also grew by
43.7 percent and reached Birr 56.3 billion at the end of December, 2017. All these indicators testify
the growing role of the institution in poverty reduction and wealth creation among low income
groups in both rural and urban areas (NBE, 3rd quarter, 2017). Among these microfinance
institutions, Oromia Credit and Saving Share Company (OCSSCO) and Busa Gonofa (BG)
microfinance institutions were the MFIs that established in 1997 making their Head office in Addis
Ababa. Since its establishment, OCSSCO and BG as independent microfinance institutions have
been operating in providing Credit and mobilizing savings from members, non-members,
associations and institutions. The general objective of the institutions was to alleviate poverty and
promote economic development through the provision of credit and saving service and with the
specific objectives of achieving household level food security in Oromia, increasing household’s
income and improving the overall economic and social conditions of rural households
(AEMFI,2000).

Hence, this study mainly focused on identifying the impacts of Oromia credit and Saving Share
Company and Busa Gonofa microfinance institution on household livelihood using household
survey data from Oromia region, West Shoa Zone in Bako tibe district.

1.2 Statement of the Problem

Microfinance industry has got the attention of academicians and practitioners as an innovative
method of fighting poverty. Rogaly (1997) argued that NGO’s have begun to implement micro
financing as an effective instrument of poverty reduction since 1990s. In Ethiopia also government
and NGO’s started to deliver financial resources to informal sectors. As result, micro financing has
been considered available tool to reach the poorest segment of the population (Bekele, 1996; and
Solomon 1996). In addition, the World Bank (2000) indicated that providing the poor access to
financial services is as one of the key poverty reduction instruments of international development
institutions. In any low income country, however, the prevailing operation of the formal financial
institutions is inefficient to provide sustainable credit facilities to the poor. Most of the
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requirements demanded by formal institutions for the purpose of lending which require physical
collateral worth three to four times the amount of their loans are beyond the capacity of the poor.

To solve those limitations, microfinance institutions have been developed. In line with this
premise, formal microfinance in Ethiopia has been started in 1994/5 as a potential tool to fill the
gap between financial institutions and needy people. In particular, the licensing and supervision of
microfinance institution proclamation No. 40/1996 encouraged the spread of microfinance
institutions (MFIs) in both rural and urban areas. As a result, there are around 35 active licensed
MFIs (NBE, 2016) who are providing microfinance service for approximately 2.4 million active
borrowers which is insignificant proportion compared with the demand. Many of these programs
use social mechanisms, such as group based lending, to reach the poor, particularly women, who
lack access to formal financial institution (World Bank, 1998). This group based lending approach
provides an innovative promising mechanism to provide credit to the poor with ultimate objectives
of poverty reduction. OCSSCO, which is one of the microfinance institutions, provides credit and
savings services in Oromia regional state by targeting resource poor people with ultimate
objectives of achieving household level food security, increasing household income and improving
the overall economic and social conditions of households in the region. The poor participates in
microfinance programs in the expectation that borrowing increases their income and sustain self -
employment. It is also considered as a strategy to increase income, improved saving, improved
nutrition, increase access to education, health and improve living standard of the poor and
ultimately, achieve the objective of poverty reduction. The assessment of the effect of microfinance
institutions is important to assess whether it achieves its objectives or not. However, few effect
assessment studies have been undertaken at OCSSCO level which is not enough as compared to the
outreach and size of the institution (OCSSCO). Though the program has been in place for the last
fourteen years; to the researcher’s knowledge there was no effect assessment that has been
undertaken on the performance of the program and its contribution to improve the living standards
of the poor in the city administration.

Thus, the study was initiated to contribute some information to the existing body of knowledge and
borrower’s performance improvement on the assessment of the roles of OCSSCO’s credit and
savings program on the Socio-economic conditions of selected clients in Bako Tibe district.

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1.2 Objective of the Study

1.2.1 General Objective of the Study

The general objective of this research was to analyze the role of MFIs on poverty reduction in Bako
Tibe district.

1.2.2 Specific Objectives of the study

1. To examine the role of micro finances institutions performance in terms of outreach in Bako
Tibe district.

2. To determine the role of microfinance institutions products on the economic status of the clients
in terms of income, saving and asset holdings at Bako Tibe district.

3. To investigate participants view regarding the strengths and limitations of micro-financial

institutions service provision in Bako Tibe district.

1.3 Researcher questions

1. What are the roles of micro finances performances in terms of outreach in Bako Tibe district?

2. What are role of microfinance institutions products of Bako Tibe district on the economic status
of the clients in terms of income, saving and asset holdings?

3.What are participants view regarding the strengths and limitations of micro-finance institutions
service provision in Bako Tibe district?

1.4 Significance of the study

The study had much significance that could be used for both parties for the households (borrower)
and for the MFIs (lender). The study contributed to the body of knowledge on deep understanding
of the contributions of microfinance Institutions (MFIs) in poverty reduction in Bako Tibe district
taking into consideration the objectives for its establishment and the factor that the government has
been emphasize on it as one of the important weapon for poverty reduction and ultimately poverty
alleviation in the country. This study was intended to shed light on the relationship between
microfinance services and poverty reduction particularly with the focus on the lives of Bako Tibe
district, those who involved with the MFIs and those who don’t involve with the MFIs at all. This
study also helps them to come out with the more convincing conclusion and then solution on the

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challenges facing the MFIs. The study would offer empirical evidence on the contribution of
microfinance services on poverty reduction and ultimately poverty alleviation in Bako Tibe district.

1.5 Scope and Limitation of the study

This thesis limited to Bako Tibe district West Showa Zone Oromia Region. The main reasons are
time, logistic and financial limitations. Besides, due to limited resources such as human, material
and financial the study is restricted to Microfinance institution only in Bako Tibe district.

1.6 Organization of the study

This thesis was organized under three chapters. The first chapter is concerned with the introductory
part including background, problem statement, and objective of the study, significance of the study,
scope of the study and organization of the study. The second chapter deals with literature review
which comprises the conceptual framework of the study area. Finally, chapter three emphases on
the methodology that will be used for data gathering, analysis and hypothesis.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

Introduction

This chapter focuses on reviewing both theoretical and empirical literature on the concept of the
impacts of microfinance on poverty reduction. The theoretical review focus on the construction of
theories based on the study and the empirical literature focuses on empirical evidence from
developed and developing countries in general and Ethiopia in particular.

2.1 Theoretical Literature Review

Microfinance is financial institutions that provide a broad range of financial services to low income
micro-enterprises and households. It is a form of financial development that has primarily focused
on alleviating poverty through providing financial service to the poor (Robinson, 2001).
Microfinance refers to the provision of financial service primarily savings, insurance and credit to
low income households that don’t have access to formal financial service. The Canadian
International Development Agency (CIDA) defines microfinance as a provision of a broad range of
financial services to poor, low income households and micro-enterprises usually lacking access to
conventional financial institutions (CIDA, 2012). Microfinance is the provision of broad range of
financial service such as deposits, loans, savings, payment service, Money transfers and insurance
to the low income households and their micro entrepreneurs who are excluded from financial
systems (ADB, 2010). It includes some main points such as returning in small-agreed installments,
periodical savings and meeting, group based lending, no collateral and loan security. The concept
of microfinance can be best captured as small, short and unsecured. It is the provision of small
loans that are paid within a short period of time, and is essentially used by low income individuals
and households who have few assets that can be used as collateral. The idea here is to enable the
poor to raise their income level and improve their standard of living. Hence, this is based on the
belief that the goals of microfinance have been poverty reduction (Ukeje, 2005).

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2.2 Micro-credit and Micro-finance

Microfinance and micro-credit are often used interchangeably. Hence it is important to highlight
the difference between them. Though it is true that they are similar in nature and tends to perform
similar function, obviously small part of microcredit is a subset of microfinance. The main
difference between these terms is about the range of services and targeted clients. For example,
ADB (2010) defines microfinance as the provision of a broad range of financial services such as
loans, deposits, payment services, money transfers and insurance to poor and low-income
households and micro-enterprises. In general, Microfinance is a broader term than micro-credit and
covers financial services that provide a greater scope of access for the poor. Microfinance also
include imparting entrepreneurial skills and training, along with advice on many matters for a
better living such as health, nutrition, educating children, and improving living conditions. Tolasa,
(2011) states that most people think of microfinance as providing small loans to entrepreneurs to
start small business. This is what is known as microcredit and forms a large part of what is
considered to be microfinance. However, as mentioned above, microfinance is the provision of a
broad range of financial service to the poor, including credit.

2.3 Microfinance Institutions (MFIs)

Microfinance institution is an organization, engaged in extending microcredit loans and other

financial and non-financial services to poor borrowers for income generating activities and self-
employment activities. This very broad definition includes a wide range of providers that vary in
their legal structure, mission, and methodology. However, all share the common characteristics of
providing financial services to clients who are poor and more vulnerable than traditional bank
clients (CGAP, 2010). Microfinance institution is usually not a part of formal banking industry or
government. It is usually referred to as a Non-Governmental organization (Dilayehu, 2010). Micro-
credit is a component of microfinance and it is the extension of small loans to entrepreneurs, who
are too poor to qualify for additional bank loans. Especially in developing countries, micro-credit
enables very poor people to engage in self-employment projects that generate income, thus
allowing them to improve the standard of living for themselves and their families (Meagher, 2002).

Microfinance institution is an organization, engaged in extending microcredit loans and other

financial service to poor borrowers for income generating and self-employment activities (Mawa,
2008).
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2.4 Micro-finance Institutions in Ethiopia

Microfinance institutions in Ethiopia are a recent phenomenon and the government efforts of
delivering financial services especially credit to accelerate socio-economic development in
Ethiopia may date back to the immediate post Italian period with the establishment of the ministry
of Agriculture in 1943 and Agricultural Bank of Ethiopia in 1945. The main objective of the bank
was to assist small land holders whose farms had been devastated during the Italian occupation
through loans to purchase agricultural inputs and repaired houses (Abebe, 2006) In Ethiopia,
though savings and credit programs were operated for a number of years by NGO and microfinance
institutions; the operation was for the first time undertaken by the market Town Program of the
World Bank. This Market town program was implemented jointly with the Development Bank of
Ethiopia and the Bureaus of Trade and Industry then called market towns in phase one and then
spread to all major towns of the country (Tsehay and Mengistu, 2002). Microfinance services were
introduced after the demise of the Derg regime following the policy of economic liberalization.
Microfinance is taken as a shift from government and NGOs subsidized credit programs to
financial services run by specialized financial institutions. With this shift some NGOs and
government microcredit programs were transformed to microfinance institutions (Irobi, 2008).
Microfinance institutions started proliferating following the issuance of proclamation No 40/1996
which regulated the business of microfinance in the country. The National Bank of Ethiopia, which
is the licensing authority, has since been issuing a number of guidelines that underpin the operation
of microfinance in the country (Teshay and Mengistu, 2006). The regulatory framework was put in
place as part of government’s effort to liberalize the financial sector and lay down an alternative
institutional framework to provide financial services mainly to the rural poor to boost agricultural
production enable food self-sufficiency and reduce poverty (Degefe, 2009).

Most of the microfinance institutions in the country are relatively young and they seem to replicate
each other instead of innovating their own approach. Their financial products are almost the same
with the exception of a few microfinance institutions that have recently started adding some new
products. The loan sizes of most of the microfinance institutions are too small that some of their
clients outgrow it very quickly. Some of the causes for high client drop out in both rural and urban
areas seem to be small loan size, lack of product diversification on the part of the MFIs, lack of
flexibility in approach among others. The Nation Bank of Ethiopia directive issued in

17
2006(MFI/18/2006) allows MFIs to provide larger loans to individuals using appropriate collateral,
subject to single borrower limit of 1% of their capital. On the bases of this framework, some MFIs
started extending relatively larger loans for working capital and for investment in cases where
government agencies like Micro and Small enterprise development agency are involved in the
recovery of loans through different linkage mechanisms. Relatively bigger amounts of working
capital and loans are extended to those who have established businesses or can offer collateral in
fixed asset form (Makanga, 2014). The potential demand for microcredit in Ethiopia is enormous.
However, there is very limited supply of financial services to the poor household (Wolday, 2007).
The major sources of loan or financial service in Ethiopia are; formal banks, Microfinance
Institutions, Cooperatives, NGOs which are involved in the delivery of financial services,
government projects and programs involved in providing loans, semi-formal finance (Iqub, Iddir,
Mahiber) and, informal finance (private money lender, traders supplier credits, friends, and
relatives). The conventional banking sector in Ethiopia has been too weak to serve the needs of
poor people due to limited branch and high collateral requirements. Moreover, the formal bank
sector considers the poor as credit risks (Haftu, et al. 2009).

The majority of the poor get access to financial services through the informal and semiformal
channels such as private money lenders, Iqub, Iddir, friends, relatives, traders, among other
(Wolday and Gberehiewot, 2006). The informal lenders such as money lenders, traders, friends and
relatives enforce loan contracts and their loan recovery rate high and the loan terms are flexible.
However, the interest rates are very high. The semi-formal lending institutions such as Iqub and
Iddir are the dominant and sustainable traditional institutions which meet the financial and social
needs of the poor. Iqub is the dominant form of saving and credit cooperatives in Ethiopia which is
popular in both urban and rural areas, Iqub is not a permanent club; it could be continued or
dissolved after its members have a turn (Wolday, 2007). The conventional banking sector in
Ethiopia has been too weak to serve the needs of poor people due to limited branch and high
collateral requirements. Moreover, the formal bank sector considers the poor as credit risks. As a
result, the Formal Bank of Ethiopia do not have mission of financing the poor in micro and small
Enterprise sector. Thus, delivering financial services to the poor requires financial systems that
reach the poor and an innovative targeting methodology and credit delivery mechanisms that helps
to identify and attract only the poor who can initiate and sustain productive use of loans. To sum
up, the delivery of financial services by MFIs in Ethiopia has been viewed as the strategy to secure
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food, poverty reduction, reduce un employment and thereby increasing their income, consumption,
and for instance it used as a tools of reducing poverty (WoldayAmha,2007).

2.5 Impacts of Microfinance on household livelihood

Microfinance schemes were initiated to different objectives. The most common mentioned
objectives include poverty alleviation and improving living standards, offering finance to the poor,
women’s empowerment, and the development of business sector as a means of achieving high
standard and for instance reducing poverty (Okibo and Makanga,2014). Microfinance is an
effective tool for poverty reduction since the financial services enable the poor and low income
households to take the advantage of economic opportunities to increase their living standards
through self-employment. Low income households need financial support. For instance, the
importance of microfinance has been increasing and many policy makers adopt microfinancing
policies for reaching financial service for the poor. Microfinance service is considered to be an
essential input to increase productivity and boosts income levels at household level and there by
improve their livelihood (paradhan, et al.2005). Microfinance facilitate and help the people to earn
money though microcredit which helps them to manage an expected risk, educate their children,
have better quality of life and to build asset and also to smooth their consumption level. In addition
to this, Microfinance is an effective instrument for lifting the poor above the level of poverty by
providing them self-employment opportunities and making them credit worthy and for instance,
microfinance is considered as the chemical through which the germ of poverty can be killed
(Seibel,2003). Hence as microfinance provide credit at lower cost than informal commercial money
lenders to the poor, the increasing number of microfinance practitioners around the globe is an
indication that microfinance sector can play an important role not only to help, to attain the
government’s policies on poverty reduction and improve the household livelihood.

2.6 Assessing MFI’s Microfinancing Scheme on Household Livelihood

Assessing microfinance impact has been the main concern of development specialists in order to
know whether or not providing financial services to the poor has improved the household
livelihood. The impact may be measured using indicators such as income, wealth, food security,
child nutrition, employment opportunity, quality of life, or gender relations. Khandker (2009)
argued that the immediate impact of having access to credit from a micro credit program is on

19
employment and income in which these may have impact on other outcomes such as consumption,
nutrition, contraceptive use, fertility and education. According to Meehan (2000), there are many
supporters of micro credit provision who would agree that well designed lending programs could
improve the income of the poor people. In line with this, Joanna Legerwood (1999) stated the three
broad categories of impacts of microfinance activities.

1. Economic impacts (business expansion, income, accumulation of wealth and consumption).

2. Socio-political or cultural impacts (changes in favor, changes from barter to monetized

economy, hope for changes in power, redistribution of assets, nutrition and education).

3. Personal impacts. According to Joanna legerwood (2002) an impact from one of these categories
can in itself cause an impact on one or more of the others. The poor participate in micro-credit
programs in the expectation that borrowing will increase their income and sustain self-employment.
Khandker (1999) argued as to participation in micro-credit programs does in fact reduce poverty in
terms of consumption and help increase income and employment on a sustained basis could be
measured directly. The benefits of program participation can also be measured indirectly, by
measuring changes in socio-economic outcomes. This implies that the effects of micro-credit
programs on participants can be measured in terms of consumption, nutrition, employment, net
worth, schooling, contraceptive use and fertility.

According to AIMS (2000), the purpose of an impact assessment is to answer the question of
whether a project leads to change that is different from what would have happened without the
intervention, or whether the program increases the probability of that change. In the context of the
rapid growth and evolution of microfinance industry, impact assessment is a critical to classify
whether or not the changes occur on the livelihood of the clients. Establishing impact is making a
credible case that the program led to the observed or stated changes, meaning that the changes are
more likely to occur with program participation than without program participation. It does not
imply that the changes always occur from program participation. Rather, it increases the probability
that the changes would be occurred. Hulme (2000) identified three elements of the framework for
the study of impacts. The first is the specification of levels at which impacts are assessed. The
second is the specification of the types of impact that are to be assessed. The third is models to be
used for the study.

20
2.7 Concepts and Definitions of Poverty

Traditionally, Poverty has been conceptualized in terms of income, with the poor defined as those
living below a given income level. But poverty has been increasingly recognized as a
multidimensional phenomenon that encompasses not simply low income, but also lack of assets,
skills, resources and the power to influence decisions that affect an individual’s daily life.
(WHO,2004). The complex and multidimensional nature of poverty makes it a challenge to
measure. For the sake of simplicity, an income based measure of poverty is most widely used, as it
permits comparisons between regions and countries. To calculate extreme poverty in an individual
country, the dollar a day measure is converted to local currency using the purchasing power parity
(PPP) exchange rate, based on relative prices of consumption goods in each country.

Based on such calculations, the World Bank estimated that 1.2 billion people were living in
extreme poverty in 2009, roughly 23.3 percent of the population of all low and middle-income
countries (Tolosa,2011). Poverty is more than just a lack of income. He argues that by increasing
the income of the poor, poverty is not necessarily alleviated. It depends on what the poor do with
this money, oftentimes it is gambled away or spent on alcohol, so focusing solely on increasing
incomes is not enough. The focus needs to be on helping the poor to sustain a specified level of

well-being by offering them a variety of financial services tailored to their needs so that their net
wealth and income security can be improved.

2.8 Overview of Poverty in Ethiopia

By any standard, Ethiopia is one of the poorest countries in the world. Poverty in Ethiopia can be
seen in a number of ways and this in fact, attributed to a multitude of interrelated factors. Bisrat
(2011) for example, has identified these factors as insufficient source of income, lack of asset/skill,
poor health status, poor educational level and backward attitude of people towards work. These
factors in one or another way have direct or indirect effect on the life standard of the people. For
example, lack of income results in reduction of expenditure pattern, poor health leads to being
unproductive, absence from work, less energetic, lack of education results in lack of skill,
helplessness and so on. Although these factors are believed to be universal, there are obviously
some differences between the causes, processes, and consequences of poverty among the urban and

21
rural societies. Roughly 29.6 per cent of the population lives below the national poverty line.
However, there are marked differences between rural and urban areas.

Poverty in Ethiopia is more pronounced in the rural areas as compared to the urban areas. The
situation worsened recently because of sharp increases in the prices of food and fertilizers on world
markets, which made it more difficult for poor households in Ethiopia. Most rural households live
on a daily per capita income of less than US$0.50. and they have less access to most essential
services. Most rural households are difficult to survive without recourse to seasonal or permanent
urban migration in search of wage employment (Abu, 2013).

2.9 Assessment Levels Impacts can be assessed at different levels.

According to Hulme (2000), the common units of assessment are the household, the enterprise or
the institutional environment within which agents operate. Khandker (1999) and Ledgerwood
(1999) stated that impact can be assessed at household, enterprise, individual and community
levels.

According to Yaron (1997), there are two major schools of thought that are prominent in impact
assessment of microfinance programs. The first one purely focuses on the organization or company
and its operation. This approach focuses on institutional outreach and its sustainability. The
assumption is that if both outreach and sustainability have been enhanced, then the intervention is
judged to have a beneficial impact as it has widened the financial market, which in turn extends the
choice of people looking for credit and saving services. The second approach is the one, which
focuses on the intended target groups or clients. This is the case that seeks to assess impact at
household, enterprise, individual and community levels. According to AIMS (2000), impact can be
occurring at household levels, enterprise, individual and community. At the household level,
microfinance contributes to net increase in household income, asset accumulation and labor
productivity. Income invested in assets such as saving and education increases household economic
security by making it possible to meet basic needs. This relationship clarifies paths of impact by
which microfinance interventions can contribute to the goals of poverty alleviation and economic
growth, and thus, households improve their economic security and accordingly, this paper deals
with impact assessment at house hold level in which microfinance service contributes to net
increase of house hold income, asset accumulation and labor productivity. To assess changes

22
within this relationship, impact can be assessed in the movement of household's livelihood toward
or away from greater economic security.

2.10 Overview of Financial Sector & Credit

Policies in Ethiopia Finance refers to the process by which markets deal with cash flows over time.
Financial markets make possible for individuals, partnerships, and governments to borrow and
lend. Institutions that perform this sort of market function, matching borrowers and lenders or
traders are called financial intermediaries such as banks, MFIs, credit and saving associations.
Financial sector can play a significant role in improving food security, alleviating poverty and
economic growth. However, the capacity of the conventional banking sector in Ethiopia has been
too weak to serve the need of the rural community. Access to institutional credit is very limited,
thus majority of the rural poor get access to financial services through the informal channels. The
demand for rural finance is met through the informal sector (Yohannis, 2007). Ebisa Deribe,
(2013) argued that the most effective tool of poverty reduction and achieving security in Ethiopia is
enhancing rural financial intermediation. The major sources of finance in Ethiopia are
conventional banks, insurance companies, cooperatives, government projects, NGOs, Semi-formal
and informal sectors and microfinance institutions. Recently, financial sector has been increasing
through both branch expansion and emergence of new private sectors and these financial
intermediaries can be broadly categorized as follows:

a) Conventional Banks and Insurance companies: These banks include Commercial Bank,
Development and Construction Bank, and Business Bank licensed and supervised by National
Bank of Ethiopia as per Proclamation No. 83/94. These banks and insurance companies are broadly
categorized into public banks and insurance companies and private banks and insurance companies.
Following the downfall of socialist regime, financial market liberalization was adopted. As a
result, several privately owned commercial banks and insurance companies were established
(Messele, 2002).

b) Government projects and NGOs: Many of these have initiated and implemented microcredit
activities as a tool to poverty reduction endeavors.

c) Semi-formal and Informal sectors: These sectors provide financial services outside of the direct
control of the state authorities. Informal sector includes revolving saving and credit associations,
23
moneylenders, friends, relatives, neighborhood, and whole sellers, Iqqub, Iddir and Mahaber.
These traditional structures are self-initiated organizations formed on the basis of social cohesion,
economic status and sometimes ethnic origin. They comprise similar socioeconomic status who
known each other well and have been living within the same locality for some time. According to
Dejene (1998), Iqqub is important source of finance for the poor household in Ethiopia.

Microfinance Institutions: The inability of conventional banks to address the financial demand of
the rural poor put the consensus that reached to design new strategies for delivering financial
services to the poor. The microfinance institutions mainly designed to provide rural banking
services and mobilizing small savings. Good practice in microfinance is based on the ability to
provide appropriate financial services to individuals and households that are otherwise excluded
from the financial system (Tolosa, 2011). Currently, there are 35 MFIs engaged in providing
microfinance credit and saving services to the poor in different parts of the country.

2.11 Conceptual Framework

A conceptual frame work is structured from a set of broad ideas and theories that help a researcher
to properly identify the problem they are looking at and frame their questions and find suitable
literature and it also used to give explanation of how the researcher perceives the relationship
between variables deemed to be important in the study (Muganda, 2004). The transmission through
which microfinance is expected to impact poverty is intricate. They involve inputs, outputs, and
outcome and this is related to the theory of change which explains the assumption that connects
causal relationship from policy to outcome. Thus figure 2.1 below shows the path way through
which MFIs offered to the household in the form of microcredit, micro-insurance, saving service,
training on how to utilize loan and the outcomes which leads to increase income, improved housing
condition, health care, nutrition, saving deposit and asset accumulation and all of this improvement
leads to poverty reduction

Micro-credit: - Microfinance credit access positively contributes to reduce poverty by providing

finance access to low income earners, less educated, and those in the informal sectors which helps
in expansion of business, acquisition of better residential places and acquisition of education,
health and improved welfare.

24
Saving service: - The amount of saving influence the amount of loan received from microfinance
which means, the high amount of loaned enables them to expand their business and for instance it
used to poverty reduction.

Micro-insurance: - Micro-insurance is one of the effective means of reducing the vulnerability of

the poor from impacts of theft, disease, disability, fire, and other hazards and it improves the living
standards of poor people and help them to come over poverty line and also help them to empower
themselves.

Training: - Since most of the customers of microfinance were in the informal employment, thus
the training provided by MFI enable the participants to develop their skills and talents as well as to
have knowledge on how to save. Therefore, Training enabled customers to save more than non-
participant (non-client) and led them to better usage of amount loaned by microfinance institution.

Figure 1: Conceptual framework

Micro credit

Saving service Poverty reduction

Micro insurance

Training

Source: survey own,2021

25
 CHAPTER THREE

RESEARCH METHEDOLOGY
Introduction
The aim of this section is to express the procedural structure used in attaining the declared purpose
of the survey. The main points discussed in this section are the research design and approach of the
study, data source and method of data collection. Sampling methods and explanation of the
alternative information gathering tools and technique.

3.1 Description of Study Area

The study conduct at Bako tibe district which is located at about 250 and 125 km from Addis
Ababa and Ambo respectively along the main road to the west direction of Ethiopia. It is bounded
by the Jima Rare and Jima Geneti in the North, Cellia and Ilu Galan District in the East and Gobu
Sayo and Gudeya Bila district in the West and Boneya Boshe district in South. The study area lies
at 9°6ꞌN Latitude and 37°9ꞌE Longitude. It has an altitude ranging from 1727 to 1778 meters above
sea level. The total area of the district is about 644.94 km2 (Wakene, 2001).

3.2 Research Design

The study was conducted by both quantitative and qualitative approach to collect the necessary
data. The use of both methods also ensures that the data was effectively interpreted and analyzed
using the statistical analysis, descriptive figures as well as the narrative.The Microfinance
institutions has a total of four branches of which four are found in Bako town and one is found
outside of Bako town, OCSSC is found at tibe town which is sub administrative town of the study
area. The rationale behind this is that first and for most as has already been mentioned time and

26
financial constraint has been encountered as a restraining factor to carry out the instruments on all
four branches of SFPI. In addition to resource constraint the Bako town branches were selected
because they have large numbers of urban clients with access to microfinance services and who
are actually using the services. Again it helps to incorporates urban area clients in four branches
which contribute for capturing some diversity in specific activities and achievements across
different branches. In analyzing the role of microfinance institutions on poverty reduction, focus
has been given to households which had access to and are using microfinance services from SFPI.
This population is given priority due to the needy of getting empirical evidence. In deed the total
size of the population is 99 consisting of both male and female clients who are permanent resident
in Bako town.

3.3 Sample Design

The study was use both random (probability) and non-random (non-probability) sampling method.
Non-random sampling technique is applied to collect data from the concerned government offices
in the district under study. Among non-probability sampling techniques, the researcher applies
purposive sampling techniques to select government officials that facilitate the sector in the district.
This study also will use random sampling tactic. It is good for this research to ensure the presence
of key subgroups within the sample. Stratified random sampling technique allows the population to
be stratified into a number of non-overlapping sub-populations or strata (departments); and sample
items (personnel) at tactical and operational level is select from each stratum (department).

3.4 Sampling Frame

The sampling frame consists of the list of households in the study areas which was generated
from the selected microfinance institutions (SFPI). The rationale behind this is that every client
will have equal chance of being nominated for the study which at the same time reduces biases
arising out of probability sampling.

3.5 Sampling Size

For various reasons such as time, cost and energy, census for all clients was impossible. Hence,
sampling technique was employed to select the sample population. Accordingly, 79 clients
from the total of 99 were selected through simple random sampling procedure. Based on this, the

27
researcher adopted a simple mathematical formula that suggested by Yemane Taro for determining
sample size.

n= N Where, N is the total SFPI clients in Bako branch

2
1+N (e) e is the error or confidence level

Using the total population of 99 and error margin of 0.05, the sample size was calculated as
follows.

n = 99/1+99(0.052 , n = 79

Once sample size is determined, the survey beneficiaries are randomly selected from the
population of SFPI service user. On the other hand, the participant of Key informant interviews
and FGDs were purposively selected. The selection criterion includes knowledge of micro-finance
issues and beneficiaries economic, social situations prior to SFPI services, or are currently using
SFPI services.

3.6 Methods of Data Collection

For the purpose of this study, questionnaire and semi-structured interview data collection tools
were used. To gather information from the respondents of the selected sample, the researchers was
developed questionnaire which was containing open and closed-ended questions. The
questionnaires were distributed by the researcher himself. The questionnaires were prepared in
English for the respondents. To check the clarity of the questionnaire, reliability and validity tests
will be conducted before distribution of the questionnaires.

3.7 Methods of Data Analysis

After collecting the data, both descriptive statistics and econometric tools were employed so as to
investigate the impact of credit on improving the life of the clients. Various statistical tools were
used to investigate the difference in welfare between the clients who have been stayed more than
two years in the program and fresh clients. A summary of statistics and tabulation of field data was
used to examine the impact of MFI’s intervention towards improving the welfare of the clients. The
cross tabulations could highlight differences in the mean values of the hypothesized impact
variables between frequent borrowers and their counter parts.
28
29
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRITATION

INTRODUCTION

This chapter presents and discusses the findings of the study received through data collected in
the field. This study aimed at examining the role of MFIs on poverty reduction in Bako Tibe
district. The data used for this study was collected from households of Bako Tibe district. The
collection of these data was done using questionnaire which was administered to respondents,
and it involved closed and open ended questions. It gives answer to the research question raised
before the research was conducted.

4.1 Demographical characteristics of the respondents

4.1.1 Gender of the respondents

The study consists of both men and women household head were interviewed for the study and it
was summarizing in the following table.

Table 1: Sample respondents by sex

Sex of the respondents

Male Female Total

57 22 79

Source: - Survey result, 2021

From the above table 4.1 we can consider that among 92 of respondents,47 are Male and 42 are
Females. These findings showed that, 52% of the respondents are female and 48% are male head.
This indicates that female household heads were more participated in microfinance than male
household head. This result confirms the theory that, microfinance institutions is generally
targeted to women empowerment and leads to poverty reduction and this is as a result of the fact
that they are very sympathetic to the welfare of their household members.

30
4.1.2 Marital Status of Respondents
In most case it is believed that those with more responsibilities engaged in many activities than
the others. Married people are assumed to have more responsibilities to their children which they
include school fees, medical fees, and clothes.

Table 2: Marital status of Respondents

Marital status Total Percent in average

Single 15 17

Married 40 44

Divorced 22 24

Widowed 15 17

Total 92 100

Source: - Survey result, 2021

This result shows that number of respondent were 92 where by 27 which constitute 17 percent of
the respondents were single, 40 which constitute 44 percent of the respondents were married and
the rest 15 and 17 respondents were divorced and Widowed respectively.

These result showed that the majority of respondents were married in both the clients and non-
clients of microfinance institutions. This could be attributed to the fact that married person were
more participate in business activities or income generating activities than other else since they
are more responsible for their families.

4.1.3 Number of Dependent

The number of dependents has impacts on household in improving their livelihood. Majority of the
respondents had dependents to support as a family that included mostly children and students who
go to school. The number of dependents featured as contributory factor to the need and utilization
of the loan from microfinance. This is due to the fact that, the bigger the number of dependents,
the greater the demands for the basic needs like food, clothing, shelter, and education.

31
The following table shows the number of dependent of the respondent households.

Table 3: the number dependent on household

Number of dependents Number of Respondents

0 20
1 23
2 22
3 18
Source: - Survey result, 2021

Table 4.3 shows the number of household dependents. The number of household dependents
ranges from 0 to 3. The average household dependents for clients and clients are about 2 and 1
respectively. Households those have dependent may un able to improve their livelihood even they
committed against poverty.

4.1.4 Impact of microfinance on Income

One of the immediate impacts of having access to credit from microfinance is on income. This
induced income may have impact on the other outcomes such as household consumption,
education attainment, and responsiveness for medical care etc. Since most of the respondents do
not keep records on their business activities, the income figures may not be accurate but the
trends of estimate yearly income of the respondents serve for the study.

Table 4: The impact of MFIs on income after participation

Respondents Trends of income Number of Respondents

Significantly increased 25

Increased 20

Remain the same 15

Decreased 14

Significantly decreased 8
Source: - Survey result, 2021

32
Table 4 indicate that out of total clients, 25 respondents reported that their overall level of income
has increased significantly since their participation in the program while 20 told as their income
has been increased. The respondents whose level of income has at least increased for the last years
are about 45. Form this result indicate that, the improvement in over level of income is more
pronounced for respondents.

From the respondents of sample who reported the increase in their level of income,45
reported that access to working capital from microfinance credit service help them to buy inputs,
able to purchase business assets, expand existing business for agricultural activities and petty
trade. On the other hand, from the sample of non-clients who reported the increment in their level
of income 22 of them reported as the cause of improvement in their income are good agricultural
seasons and petty trade from their own working capital. Out of the sample who reported that the
trend of their income was remained the same, crops failure, high number of household dependents,
illness or death of the family were reported as main problem.

Some of non-clients identified that lack of access to credit was the most significant reason for
the problems in their business activities. Therefore, the responsiveness achieved in relating with
income from program participants shows a clear indication that microfinance credit has enabled
the clients to generate disposable income that could be spent on better facilities which could
improve the living standard of the households concerned.

4.1.5 Effects of microfinance on diet

Having access to microfinance credit has also impact on household nutritional status. This
indicator is simply to capture the direction of change in type and quality of household diet. Since
the rural poor may not have records on their daily, monthly or yearly expenditure, type of meals
or quality of meals, information on their average yearly expenditure on consumption, their
responsiveness in nutritional status and trends of consumption expenditure were collected.
According to Teferi Zewdu (2000), the immediate impact of microfinance program is on income
and this induced income is expected to have an impact on another outcome like increase in
consumption expenditure that leads to better household diet and living condition. Thus the trend of
average yearly consumption expenditure of each respondent was collected. This is also used to
compare the consumption expenditure of clients and non-clients on household nutrition. To

33
understand this, the observed expenditure reported by respondents were used and it was indicated
in the following table.

Table 5: Trend of consumption expenditure of Respondents

The respondent’s Trends of Consumption expenditure Number of Respondents

Increased 50
Not increased 29
Source: - Survey result, 2021

Information on the trends of household diet and responsiveness of consumption expenditure

were also collected. Concerning consumption expenditure, it assumed that the improvement in
consumption expenditure leads to better household diet and living condition. This concept tells
us whether the status of household diet has been improved or not for the last years. It is obvious
that microfinance intervention is expected to support program participants in ensuring food
security which is the prime concern of all poor households.

The findings of this study also confirm this as 50 of sample reported as the trend of their
consumption expenditure has increased while only 29. Only 29 (36%) of respondents reported
as their type and quality of diet as well as their consumption expenditure have not been improved
over the last twelve months. These results indicate that more clients have enjoyed diet
improvements than non-clients. Program participants have more chance if improving their diet
in comparison to non- participants.

4.1.6 Impacts of microfinance on Health care

Being one of the dimensions of poverty, access to basic health services by an individual predicts
his/her level of poverty. In order to understand that respondents were asked to recall their monthly
average of medical expenditure and medical facilities. However, medical expenditure is based on
the number of members of households who are ill or injured. Since a number of members of
households who are ill or injured within a given year might be different, the responsiveness
of respondent’s demand for medical care is considered in the study.

34
Table 6: The respondent’s medical care

Status of medical service Total

Improved 75
Non-improved 17
Source: - Survey result, 2021

This result shows that 75 of sample respondents reported as their responsiveness toward access to
medical facilities has been improved. However only 17 (30%) of sample reported the trend that
their ability to get access to medical service has not been improved. This result clearly shows that
participating in microfinance service have improved their ability to respond to the demand for
medical care. The study finds difference in responsiveness of demand for medical care between
the two groups. Therefore, we can conclude that program participants have been benefited
from the micro financing scheme.

Educational attainment
Education is another dimension of poverty and therefore, educational attainment by an
individual shows her/his level on poverty. In order to identify the impacts of microfinance on
educational attainment, respondents were asked and information on educational attainment was
collected.

Table 7: Status of respondent’s educational attainment

Status of respondent’s educational attainment

Not improved 76

Improved 16

Total 92

Source: - Survey result, 2021

From table 4.7 we understand that, the total number of respondents were 92. This finding shows
that, 76 reported as their educational attainment was improved while 16 were reported as their
educational attainment was not improved. These findings show that majority of client respondents
35
had a better access to educational service while majority of respondents have access to
education was same as before. Midgley (2003), said that we can know the poverty status of an
individual by checking his/her educational attainment and better educational attainment of
respondents implies that there is decrease in the rate of poverty of individual where by loan they
receive leads to increase their income and this improvement of income can be used to take their
children to school.

Effects employment

The immediate positive impact of micro financing scheme is on employment generation. Type of
business activities and the status of respondent’s job opportunities were collected. The two
basictypes of business activities are farming and petty trade. Others include livestock
production, local food, drink preparation and this information on the types of business activity was
obtained through interview questions. Since the respondents are rural poor, agriculture is the basic
type of business activities for most of the respondents.

Table 8: Job opportunities of respondents

Status of respondent’s job opportunity Total

Improved

Non-Improved

37
Total

Source: - Survey data, 2021

From table 4.8 we can understand that, out of total sample 55 reported the trend that their
employment opportunities have been improved for the last twelve months. On the other hand,

36
only 37 respondents reported as there is no improvement in job opportunities. This implies that
micro financing services to the rural poor have positive impacts on employments.

Effects on savings

There are two types of savings: compulsory and voluntary. Compulsory saving is normally
enforced and starts simultaneously with the loan that is approved for individuals who are
program participants. Compulsory saving includes compulsory individual saving and
compulsory group saving. These types of savings are used as collateral. Compulsory individual
saving ranges from Birr 3 to 6 birr and Compulsory group saving is a saving of 10% from the
loan size.

On the other hand, voluntary individual saving is a saving that depends on the willingness of the
individual including clients and non- clients to save and withdraw at any time. Since 2014/15 the
annual saving of the selected sites is summarized as follows.

Table 9: Saving mobilization of microfinance in the Study area

Year Types of saving

Compulsory
Compulsory Compulsory group

OCSSCO BG OCSSCO BG OCSSCO BG

2015/16 13210 1183 68210 49698 19854 17421 169576
2016/17 16542 13754 71317 58651 31046 26541 217851
2017/18 18456 15321 90730 81365 39302 31326 276500
2018/19 29546 21659 120635 112353 45190 38145 367528
2020/21 38302 30654 147208 129541 102036 68745 516486
Source:-OCSSCO and BG MFIs of Bako branch, 2021

This table indicate that microfinance of Bako Tibe district gives different types of saving service
such as compulsory individual saving, group saving, center saving and voluntary saving. This all
types of saving have increased from year to year and it was pictorially explained as follow.

37
Out of the total sample respondents, the larger portions of clients have saving account in
comparison with non-clients for the last two years. The voluntary savings are in the form of saving
under BG and OCSSCO MFIs, Iqqub, Iddir and Mahaber. From table 4.11, it is observed that 133
(89%) of clients have voluntary saving account under the BG and OCSSCO MFIs micro
financing scheme. However, no one has reported as he/she has voluntary saving account under the
MFIs micro financing scheme. But it is observed that some of non-clients who have not been
taken under sample respondents have saving account under MFIs micro financing scheme in the
sample branches (see table 4.10).

Table 10: Types of saving

Types of saving Total

Saving in MFIs 56
Iqqub 14

Iddir 92

Mehaber 2

Source: - Survey results, 2021

This table 4.10 indicates that the sample respondents have saving accounts. The reasons for their
saving include loan repayment, to earn profit, to withdraw in case of urgent needs, to spend on
education and medical care expense and to improve their food security. The result shows that all
clients have developed saving habits. The difference of savings between the two groups suggests
that the program has brought and develops the habit of saving among the clients.

Impacts on women empowerment

This is to identify on how women clients have been empowered by their participation in the
microfinance program. Participation in microfinance program services expected to lead control
over resource on the part of women clients. Information that control and decide over the business
activities within the household was collected. Out of the total sample respondents, 20% of clients

38
and 29% of non-clients reported that; there is a practice of only husband making decisions in
household and this indicates that all of the decisions are dominated in the hands of husbands. On

the other hand, 85(64%) of clients and 154(62%) of non-clients’ household reported that both
husband and wife make decision in the household. 21(16%) clients and only 23(9%) of non-
clients reported that only wife is a decision maker in the business activities of household.
Therefore, there is significant impacts of microfinance on women empowerments in the study
area since the result show much difference between the decision making of client women and
non-clients (see table 4.11)

Table 11: Impacts of microfinance on women empowerment

Decision maker Total

Husband only 45

Husband & Wife 48

Wife only 7

Total 92

Source: - Survey Result, 2021

4.2 Econometric Analysis

4.2.1 Propensity score matching

Assessing impact at the household level requires adjustment to control for the difference between
frequent borrower (clients) and those who are looking for credit that taken as non-clients. Since
these two groups may have differences in observed characteristics and it may bias the result if we
use the whole non-participant of MFIs as a comparison group for those are participant, we must
find non-participant household from non-participant sample that observationally match with
participants. To do this or to make comparison of control with treatment (clients) group, the
researcher applied propensity score matching based on observed data. Propensity score matching
is one of the methods in impact evaluation which can better match control and treatment units
based on observed characteristics (Khandker, 2010). In the absence of baseline data, the model
39
found close matches from the control group to that of the intervention and compared them. There
is close socio-economic similarity between the beneficiary (client) and non-client (non-
beneficiaries) microfinance in district. In the course of the analysis, the variable which include
marital status, education (literacy), family size and age were used to match between the
household intervention and control groups.

The outcome variables that are being tested for change as a result of program intervention were
education status, health care, housing condition, consumption expenditure and household average
yearly income which are continuous variable. It is necessary to run the multicollinearity and
heteroscedasticity tests in most of economic related research studies. However, these tests were
not conducted in this study because of the fact the fact that heteroscedasticity error term has little
influence on the estimated intervention effect in propensity score matching (Williams,2009).
Since multicollinearity implies a linear relationship among some or all explanatory variables of
regression model, there was also no need to run multicollinearity tests in this study (Gujarati,
2004). To calculate propensity score, probit model was used where the outcome variable regressed
against the age, marital status, literacy, and family size. The results for the regression are shown
in the table 4.12 below.

Table 12: Profit regression for calculating propensity scores

Treat Coefficients Strd Errors Z P>z 95% of conf. Interval

Age -0.06433 0.0235894 -2.73 0.006 (-0.1105 -0.0181)

Gender -0.000193 0.1403297 -0.00 0.999 (-0.2751 0.2748)

Literacy 0.743248 0.2325331 3.20 0.001 ( 0.2874 1.1990)

Marriage 0.2802 0.1998559 1.40 0.161 (-0.1115 0.6719)

Household size -0.141248 0.0602331 -2.35 0.019 ( -0.2593 -0.0231)

Cons. 1.803185 0.9940804 1.81 0.070 (-0.1451 3.751)

Source: - Survey result, 2021

40
From the above output we can also see that all 382 observations in our data set were used in the
analysis. Higher age, more female and people having high family size are less likely to

participate in the microfinance. While marred and high educated were more likely to participate
in the microfinance as they were statistically significant.

The balancing property was satisfied and 133 of clients and 235 of non-clients were matched in
the calculated common support regions. The common support region was between 0.1021341
and 0.700113. This means that the highest propensity score was 0.700113 while the lowest was

0.1021341. The means propensity score was 0.35 which means the probability for the respondent
to participate in microfinance program is 35%. The estimated propensity score and the common
support are depicted in the appendix. The final number of blocks estimated was five. These
numbers of blocks ensure that the mean propensity score is not different for intervention and
control groups in each block. This information is used in the analysis as a basic for stratification.
The blocks of strata were used to satisfy the balancing property of the propensity score.

4.3 Impacts of microfinance

4.3.1 Impacts of microfinance on house hold yearly income

The impact of microfinance on household income depends on the duration in microfinance,
amount of loan received and the training on the loan utilization. The loans provided by
microfinance meets the capital requirement for new startups or expansion of existing business
activity and it meets requirements ongoing production activity which brings to house hold
income increment. Schuler and Hashemi (2011), used combining and comparing participants and
non-participants with residents of village without credit-programs in order to look at village effects
and also a membership duration variable is used to test the impact of credit programs on household
income whether it increases over time or not. In assigning scores to all respondents, the outcome
was summarized as it was depicted in table 4.13. The result shows those who participate in
microfinance had higher mean income of 2312.18ETB than those who did not participate in
microfinance service. However, this result might be explained through the existing difference
among independent variable, respondents participating in microfinance have high literacy rate,
marital status, more female compared to non-participate in microfinance and this result was
summarized in table 4.13

41
Table 13: Summary of household income sorted by Microfinance intervention

Treat=0

Variable Obs Mean Standard deviation Minimum Maximum

Income 249 7232.349 2562.444 3500 16255
Age 249 30.4578 5.6489 18 55
Gender 249 0.5422 0.4992 0 1
Literacy 249 0.3775 0.4857 0 1
Marriage 249 0.7148 0.4523 0 1
No of Dependent 249 6.5823 2.5782 2 12

Treat=1

Variable Obs Mean Standard deviation Minimum Maximum

Income 133 9544.534 3534 5600 24500
Age 133 32.2331 3.9769 20 46
Gender 133 0.5263 0.5011 0 1
Literacy 133 0.7518 0.4335 0 1
Marriage 133 0.8646 0.3434 0 1
No. of dependents 133 4.9172 2.0190 2 9
Source: - Survey result, 2021

Using the propensity score model, the observation under each of identified variables were
compared for the desired outcome. Following to this, the aggregate scores were then
incorporated in to the propensity score matching model to see the impact of microfinance service
on the targeted rural household. The 133 microfinance beneficiary were matched to 235 non
beneficiary (non-clients). The propensity scores are classified into intervals based on the range of
values. Each interval consists of treatment and non-treatment subjects on average, have
equivalent propensity scores. The difference between the outcomes of the treatment and control
groups are calculated to obtain average treatment effect. It is an average of outcomes of a treatment
per block weighted by the distribution of treated subjects across the blocks. For this study
stratification matching method was used for the interpretation of the results as it provides better
match compared to nearest neighbor and create intervals strata. According to Cochran, (1968),
42
using five strata or groping the sample into quantile will eliminate more than 90-95% of covariate
bias. In this study, the result generated by employing stratification approach indicate that, the
average yearly income of participant households was higher by 838.76 than the income of non-
participant and it was significant as t-values were greater than two. This shows that microfinance
enable to increase the average yearly income of beneficiary compared to no- beneficiary and
this results confirm the descriptive result explained before. The result of microfinance impacts on
household income using all matching method was presented in the appendix 2

Table 14: The impacts of microfinance on household income using all matching method

Source: - Survey result, 2021

4.4 The impacts of Microfinance intervention on household consumption expenditure

One of the outcomes to microfinance intervention is the change in household consumption

expenditure. In order to see the change in household consumption expenditure, the desired
outcome was summarized by microfinance intervention. As shown in Table 4.15 those household
who benefit from microfinance institution had higher household consumption expenditure than
non-participant as the mean consumption expenditure of beneficiary is higher by 0.4731 than
non-clients.

43
Table 15: Summary of household consumption expenditure sorted by MFIs intervention

Treat=0

Variable Obs Mean Standard deviation Minimum Maximum

Consumption exp. 249 0.4216 0.4948 0 1
Age 249 30.4578 5.6489 18 55
Gender 249 0.5422 0.4992 0 1
Literacy 249 0.3775 0.4857 0 1
Marriage 249 0.7148 0.4523 0 1
No of Dependent 249 6.5823 2.5782 2 12

Treat=1

Variable Obs Mean Standard deviation Minimum Maximum

Consumption exp. 133 0.8947 0.3080 0 1
Age 133 32.2331 3.9769 20 46
Gender 133 0.5263 0.5011 0 1
Literacy 133 0.7518 0.4335 0 1
Marriage 133 0.8646 0.3434 0 1
No. of dependents 133 4.9172 2.0190 2 9
Source: - Survey result, 2021

The impacts of microfinance on household consumption expenditure were also determined by

employing a technique that account for the matching variable. In this case, the impacts of
microfinance on household’s consumption expenditure were assessed where the information
gathered on the household consumption expenditure were entered into the propensity score
matching model and matched using different methods of matching; stratification. Radius, Kernel
and Nearest neighbor matching method and its result was summarized as follow.

44
Table 16: The effect of microfinance on household consumption expenditure

Matching method Treatment Control ATT Std. Error T

Nearest Neighbor 133 93 0.281 0.062 4.559
Stratification 133 235 0.279 0.018 22.412
Kernel 133 235 0.272 0.046 5.953
Radius 133 235 0.344 0.058 5.926
Source: - Survey result, 2021

For all of matching method, the t-statistics was greater than two hence showing significant
difference between the microfinance participant (clients) and non-participant respondents
following matching. The output generated by all types of matching is positive and also
significant which confirm the positive impacts of microfinance on household consumption
expenditure. By employing stratification matching method for interpretation, the household
consumption expenditure of participant was higher by 0.279 than non-participants. In this case
the matching of explanatory variables has decreased the household consumption expenditure by
0.194.

4.6 The impacts of microfinance on health care

Health is a critical deriver for growth in developing countries. Microfinance can influence health
outcomes indirectly by improving people’s economic status, or directly by offering health related
service. Many studies conducted on the impacts of microfinance on health care and found that
positive impacts of microfinance. In similar way, Leather and Dunford, (2010) found that
microfinance is related with better maternal health and nitration practice in Bolivia and Ghana. To
identify the impacts of microfinance institutions on the health care, the respondent’s
responsiveness for health care which is reflected by in ability to spend on medication or access to
health care facilities was entered into propensity score matching. Table 17 shows the summary of
household responsiveness for health care that sorted by microfinance intervention.

45
Table 17: Summary of household responsiveness for health care sorted by MFIs intervention

Treat=0

Variable Obs Mean Standard deviation Minimum Maximum

Health care 249 0.2972 0.4579 0 1
Age 249 30.4578 5.6489 18 55
Gender 249 0.5422 0.4992 0 1
Literacy 249 0.3775 0.4857 0 1
Marriage 249 0.7148 0.4523 0 1
No of Dependent 249 6.5823 2.5782 2 12
Treat=1

Variable Obs Mean Standard deviation Minimum Maximum

Health care 133 0.7067 0.4569 0 1
Age 133 32.2331 3.9769 20 46
Gender 133 0.5263 0.5011 0 1
Literacy 133 0.7518 0.4335 0 1
Marriage 133 0.8646 0.3434 0 1
No. of dependents 133 4.9172 2.0190 2 9

Source: - Survey result, 2021

Table 17 shows that, the mean of client’s responsiveness for health care was higher by 0.4011
than non-clients. This result indicate that microfinance have positive impact on the household
responsiveness for health care. That means, it improves the ability to spend for health care in
increasing their income. Different matching method was used to examine the impact of
microfinance on the respondent’s responsiveness for health care and the result was summarized
in table 18

46
Table 18: The effect of microfinance on health care

Source: - Survey result, 2021

This finding showed significant difference of health care status between participant(beneficiary)
and non-participant of microfinance as the t-statistics was greater than two for all matching
method. The output of the analysis still did confirm the positive impact of microfinance on
household care status, although the ration of participants’ household health care was higher by
0.273 than those who did not participate in microfinance using stratification matching method. The
result generated in all approach showed the positive and significant impact of micro finance on
household health care status.

4.7 The impacts of MFIs on education

Educations are among the areas in which microfinance is expected to have positive impacts. In
developing countries increased expenditure on education is necessary components of an effective
anti-poverty as it enhances people’s productivity in the informal rural economy. Education is
regarded as a primary driver of economic growth as well as an effective way out of poverty
(Cheng.F.2013). Thus many studies have been conducted assessing the impacts of microfinance on
education. According to Littlefied (2003), the first thing that poor people do when they

47
receive loans from microfinance is to invest in their children’s education and he found that
children tend to stay longer in schools when their family receives loans from microfinance
institutions. Khandker (2009) similarly found in Bangladesh that microfinance program increase
schooling and the contraceptive behavior of families. To examine the impacts of microfinance on
education the respondent’s perception to education status (trends) of their children was gathered
and entered to PSM model and matched using different method of matching. This result was
summarized in below Table 19

Table 19: Summary of the respondent’s educational attainment sorted by microfinance

intervention

Treat=0

Variable Obs Mean Standard deviation Minimum Maximum

Education attainment 249 0.3775 0.4857 0 1
Age 249 30.4578 5.6489 18 55
Gender 249 0.5422 0.4992 0 1
Literacy 249 0.3775 0.4857 0 1
Marriage 249 0.7148 0.4523 0 1
No of Dependent 249 6.5823 2.5782 2 12

Treat=1

Variable Obs Mean Standard deviation Minimum Maximum

Health care 133 0.7518 0.4335 0 1
Age 133 32.2331 3.9769 20 46
Gender 133 0.5263 0.5011 0 1
Literacy 133 0.7518 0.4335 0 1
Marriage 133 0.8646 0.3434 0 1
No. of dependents 133 4.9172 2.0190 2 9
Source: - Survey result, 2021

From table 19 we conclude that the ratio of children’s school enrolment of the participant
household is higher by 0.374 than those non-participant households. The impact of MFIs on
education was summarized below by using different matching method.
48
Table 20: The impacts of Microfinance on Educational attainment.

Source: - Survey result, 2021

The finding of the analysis showed a significance difference of educational attainment between the
beneficiary of microfinance and non-beneficiary as in all method of matching shows positive
impacts on educational attainments and the t-Statistic is greater than two. Stratification method,
when assessed the school enrolment of the respondents, the ratio of children’s school enrolment
of microfinance beneficiaries was higher by 0.149 than those non-participate in microfinance
institutions. The result generated by all types of matching method was statistically Significant
and this indicate that microfinance have positive impact on children’s school enrolment which
confirm the descriptive result.

The impacts of microfinance on housing condition

Housing is an important or basic asset for households. The assumption is that household may
have better housing after getting loan from microfinance. If households have access to capital
through loans, they will invest it in income generating activities and this increase their income
which enable them to have better housing or enable them to improve their housing conditions. In
order to understand the impacts of microfinance on household hosing condition, the respondent’s
perception of their housing condition was asked and the impact was examined using PSM,
model. To do these different types of matching method was applied and the result was summarized
in the.

49
Table 21: The impacts of Microfinance on Housing conditions

Source: - Survey result, 2021

This finding, reveal that, there is a significant difference of housing conditions between the
microfinance clients and non-participant respondents which indicate that microfinance in the study
district have positive impact on the improving housing condition of its clients as compared with
non-participants. The result generated by Stratification matching method also indicate that, the
ratio of household having improved house were higher by 0.181 than non-clients. Dereje
Getachew, (2017) found that the loans from microfinance have positive effect on the household
housing condition.

The impacts of microfinance on employment generation

The other, immediate impacts of micro financing scheme are on employment generation. In
order to understand these trends of employment opportunities and the type of business activities
that the respondents engaged in were collected. Farming and petty trade are the most types of
business activities that most the respondent participates in and others include livestock
production, local food and drink preparation and retail trading. Since most of the respondents
were rural poor, agriculture is the basic types of business activities for most of the respondents.
Poor household participant in microfinance programs in the expectation that borrowing increase
their income and sustain self-employment. It is expected that enterprise can benefit from
microfinance program by improving access to their capital, which helps them to expand their

50
business and this can increase production, profit and create job opportunities to their household and
community. To determine the impacts of microfinance on employment generation, PSM,
model was used and different method of matching method was used. The results of this findings
were shown in the Table 22

Table 22: The impacts of Microfinance on Employment generation

Source: - Survey result, 2021

The difference in employment opportunities between microfinance client respondents and non-
participant household was significant since the t-statistic was greater than two as it was revealed by
all matching approach and the result is positive and significant in all case. Furthermore, participant
household are more employed by a degree of 0.181 as it was generated by stratification
matching approach. The intervention of microfinance contributed to improved employment
through increasing income and sustains self-employment. Similar study conducted by Daba Moti,
(2003) also found that microfinance has positive impact on employment generation and it
plays an important role in reducing poverty. The study conducted by Dereje Getachew, (2017) also
indicate that microfinance scheme have positive impact on employment generation for its clients.

4.8 Perception of sample clients

Perceptions of clients with microfinance scheme in the sample branch were also collected to
show the direction of change about the program. The perceptions are in the relating with benefits
received from the program, their satisfaction and dissatisfaction about the program and

51
recommendations. From major benefits of the clients, the perception of clients regarding the
benefits they receive from the program were collected on income increase, house improvement,
household diet, access to education, access to medical care, employment opportunities and Saving
habits. In line with this the result generated from descriptive and econometric shows that
microfinance enabled to improve the livelihood of the clients’ respondents compared to the non-
clients and this indicate that microfinance of the sample branch enable to improve the household’s
livelihood in the study area. Satisfaction/Dissatisfaction of clients about the program was collected
using open questions and majority of the clients satisfied with appropriate time of loan
disbursement, appropriate time of loan repayment, appropriate interest rate. However, they
dissatisfied with training on how to utilize loans which make as the household not diverse the
loans to non-income generating activities and helps them to earn profit, loan size and the loan term
of one year. Clients attitude to continue or stay in the program were also collected and majority of
the clients gave their opinion to continue in with the program and some of them reported to not
continue with the program because of insufficient loan size, conflict among members, and
shortage of loan length as the major reasons of not continue with the program.

4.9 Major challenges of Microfinance program

There are major non-client poor household looking for microfinance service in the stay area and
this indicate that Microfinance of the sample branch is at its infant stage requiring expansion of
its activities to reach its objectives. Microfinance of Bako branch like MFIs in Ethiopia faces the
challenges of expanding its operation in order to assure finance service to large number of the poor
and it has been countered with the following major problems.

1. Poor infrastructure: - Microfinance of the sample branch is focusing on the delivery of

financial services to the poor households and areas where there hardly exists means of
transportation, Postal service and formal banks. Very poor road network and transport facilities
have limited the markets. The absence of such infrastructure makes difficult the delivery of
financial services or monitoring or follow up clients in loan utilization in rural areas.

2. Drought and natural disasters: The frequent drought in the region affects loan repayments.
Actually the registered arrears of microfinance are mainly the result of the drought.

52
Although the microfinance institutions in the sample study has the objective to reach the rural
poor, the regulatory frame work and limited research affect financial product development in
various ways. The major problems are described as follows.

a) Lending methodology: The lending methodology is a group based and pear pressure. The
group based criteria affect the development of new financial products, which need individual
instead of group collateral. Considering center size, some people who are looking for credit from
the program have faced a problem of center criteria. The criterion needs 8 to 10 groups’ members.
Since the rural poor are sparsely settled over the area, it is difficult to form a center where the
members may not trust and follow up each other.

b) Loan term: The loan term as per the regulation is maximum of one year, this affects the
business activities which need more than one year.

c) Insufficient loan size: The average loan size of 6000 loan ceiling the development of financial
products with the loan size needed above the ceiling. The insufficiency of loan size makes the
borrowers to divert the loan from more income generating activities.

d) Absence of market research and weak diversification: The absence of market research and
skills for financial product development has undermined the role of marketing. Weak
diversification of loan is also considered as one problem in diversifying business activities.
Much of microfinance’s loan in the sample study goes to agricultural activities, which are based on
weather conditions, which cause crop failure and yield reduction.

e) High lending interest rate: The lending interest rate which has been fixed at 12.5% has been
unattractive. Some of the clients argued the interest rate as it high. Arguing high interest rate
discourages the program participants from continuing with the program

3. Lack of Sufficient loan able fund: BG and OCSSCO lack financial resource and argue the
attention of donors and other financial resource and therefore it is difficult for microfinance to
fulfill the loan demand of the entire region. It is also difficult to meet its loan capital
requirements from local commercial sources and saving mobilized and covers all costs from
interest charges.

53
4. Lack of investment capital: -This is a problem related with building capacity. These include
lack of funds to build office at branch levels, lack of staff training, lack of building computerized
management information system and lack of means of transport.

54
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1 Conclusions

Microfinance is being practical all over the world as one of the major strategies being used to
reduce poverty through the delivery of financial service such as credit, saving, insurance, training
which enable to improve household’s livelihood. Currently, provisions of credit and saving
mobilization are one of the major strategies to alleviate poverty especially in developing countries
such as Ethiopia. To meet this end, OCSSCO and BG microfinance institutions were established
and operate in different regions and also in Bako Tibe district.

The objective of this study was to identify the role of MFIs on poverty reduction. To do this, it
tried to examine the impact of the program on socio-economic activities of the households using
non-clients as control group and clients as treatment group, which is used in comparison of the
change of their living standards of the two groups by using propensity score matching.

The study found out that, program intervention leads to change that is different from that would
have happened without the intervention which was summarized as follows Microfinance leads to
improvement in income as the descriptive result indicate that 94.5% of the clients reported as
their average yearly income has been increased and the result generated by Propensity score
matching also indicate the significance difference of the house hold average yearly income which
means the average yearly income of the clients was higher than non-clients. The program
intervention enabled to increase the client’s consumption expenditure which leads to better
household diet and living conditions and the result indicate the consumption expenditures of
the beneficiary households in comparison to no-clients (non-beneficiary households). The
clients responsive to medical care have been increased because of program intervention as the
result showed that 95% of the client respondent’s trends of responsive toward medical care were
increased. The study also found difference in responsiveness of demand for medical care between
the two groups.

55
Microfinance program improves job opportunities by enabled to create new business or expanding
the existing business which leads to increase employment opportunities of the clients. The result
generated by PSM also indicate that microfinance have positive impacts on employment
opportunities.

The program has brought and develops the habit of saving among the clients. It extends people
who are looking for saving service and enabled them to increase their deposit. There is a
significance difference of children’s school enrolment between clients of microfinance and
non-clients which confirm that microfinance have positive impact on children’s school enrolment.
Microfinance improve women decision making in business activity or others activity in household.
Therefore, all the result obtained through different methods confirm that microfinance of the
sample study has improved the household’s livelihood and hence H1hypothesi was accepted and
H0 was rejected.

5.2 Recommendations

The findings of this study are important to implicate policies recommendation for the effective
expansion of microfinance institution in Bako Tibe district. Hence this study draws the following
policy implication to expand microfinance institution in the Bako Tibe district. As microfinance
intervention have had positive impact on the client’s income, Consumption expenditure, access to
education, Medical care, employment generation, Savings and housing conditions strengthening
and expanding the existing company in the district would be appropriate economic policy. The
information obtained during interview indicate as the numbers of non-client respondents are
looking for the program service which means microfinance in the district is at its infant stage to
meet the need of the poor. Shortage of loanable fund is considered as one of the obstacle to reach a
large number of people. Therefore, the company has to work hard to reach a large number of poor
people over a long term through: -mobilizing savings from the public having clear and
accountable owner ship structure and governance, interest rate that enables profitability and
leverage equity to access capital market with regional government and NGOs, and looking for
donor agents.

56
Savings have been mobilized from clients and non-clients. However, saving mobilize
from non-clients is too weak or unsatisfactory. Therefore, the company has to work hard to
promote saving habit through offering attractive returns take small deposit, doorstep services,
etc. in such a way that company can reach large numbers of poor people looking for credit.
The company should be accompanying in providing training to the poor in their business
activities including the importance of credit, loan utilization, market situation, and saving
mobilization. These help the clients in proper use of loans for intended purposes which could
reduce diversion of loan for non-income generating activities and help them to repay
their loans which make also the company sustainable.

Since most of the business activities of the clients are time sensitive, loan issue at needed
time reduce diversion of loan from intended purposes and helps the borrowers to use the loan
properly for their intended purpose.

It is observed that some of the sample clients diverted their loans to non-intended purpose or
non-income generating activities. Therefore, adequate advising and training are required for
the clients. Credit the poor without collateral must follow community participatory to follow
up each other in loan utilization. Avoid failure to understand the local culture, practices, and
client perspective are key to understanding the nature of risk, response to shocks and reduce
vulnerability.

57
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Belay Assefa. 2001. "Best Practices in Microfinance. Lessons to Ethiopia." In: Zaid Negash et
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 Appendix I

QUESTIONAIRES

GREAT LAND COLLEGE

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

MBA PROGRAM

Dear respondents,

This is a questionnaire that intended to ‘The role of microfinance on poverty reduction in the
case of Bako Tibe district’. The information you provide is totally sought for academic purpose
and shall be kept strictly confidential. Please feel free to share your comments and experiences
regarding the credit you receiving if you were a client from OCSSCO or BG microfinance
institutions. So, your genuine, honest and timely response is vital for accomplishment of this
study on time. Therefore, I kindly ask you to give your response to each items/questions
carefully.

Sincerely

Abdurrahman Kedir

60
Part I. Background the respondents

1. Sex of the respondent a) Male b) Female

2. Marital status: a) Single b) Married c) Divorced d) Widowed

3. Age of the respondents. A. 18-25 B. 26-30 C. 31-40 D. 51-60 E. > 60s

4. Educational back ground of the respondents A. No formal education B. Primary

C. High School D. Diploma E. Degree F. MA/MSc G. PhD

5. What is your household size? ________

6. What is the total number of dependents who are school age children or old enough? _______

Part II. Information on household income

1. What is your average yearly income? ______

2. What is the trends of your over all income after two or three years? a) Significantly increase
b) Increase c) Same d) Decrease e) Significantly decreased

3. What is the trend of your overall consumption expenditure after three or two years?

a) Increased b) Not increase

4. What is the trend (responsiveness) of your demand for medical care?

a) Increased b) Not increased

5. What is your current status for educational service/ your children’s school enrollment?

a) Improved b) Not improved

6. What is the trend of your employment opportunities? a) Improved (better) b) Not improved
(worse)

7. What is your housing condition? a) Improved b) Not Improved

8. Which types of saving you engaged in? a) Saving in microfinance b) Iqub c) Idir d)Mehaber

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9. Who are the decision makers in household head?

a) Husband only b) Husband and Wife c) Wife only

Part III General Information of microfinance role on poverty reduction in the district

9. How many members does your group have? _______________________________________

10. Do you monitor whether a member of your group uses the loan for the intended purposes or

Not? _________________________________________________________________

11. What is the advantage and disadvantage of group lending?

_____________________________________________________________________________

12. What is your overall opinion (perceptions) about the program?

______________________________________________________________________________
______________________________________________________________________________

13. Please suggest if any means of more appropriateness for the program
______________________________________________________________________________

14. During your participation period, what have been the major constraints in operating
your business?
______________________________________________________________________________
______________________________________________________________________________

15. Do you think that you will continue in the program? ___________________

Please reason out why you stay and leave the program
______________________________________________________________________________
______________________________________________________________________________

16. What is the major challenge faced to reach credit for all poor looking for microfinance

Service________________________________________________________________________
______________________________________________________________________________
______

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