Empirical Evidence on MF and MSEs

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This chapter presents the setting for the study. It focuses on the economic activities, the economic structure and growth trends, and the context of women owned MSEs development in the country. In addition to these, financial sector development and the poverty profile of the country is highlighted in the section.
The Ethiopian economy depends mainly on agriculture and agriculture-related sectors. Agricultural products serve as raw materials for industries and MSEs as well as for consummation. About 83% of the population depends on agriculture employment, livelihoods and exchanges. Ethiopia pursues an agricultural led industrialization strategy to industrialize the current agricultural dominated economy by tapping land, labour and water resources. Agriculture contributes to 90% of export earnings for the country (FAO, 2011, p. 10). According to the National Bank of Ethiopia‘s 2011 report, Ethiopia‘s continued growth rate is partly due to improvements in the agriculture sector. In the fiscal year 2010/11, Ethiopia‘s real GDP growth was 11.4%, a moderate increase from the previous year‘s growth of 10.4%. The agriculture sector grew by 9% while the industry and the service sectors grew by 15% and 12.5% respectively; agriculture and allied activities accounted for 41% of GDP while the industry and services for 13.4% and 45.6% respectively. In terms of the annual economic growth rate, agriculture contributed to 4.7, industry to 1.5 and service to 5.3% to the 11.4% real GDP growth in 2010/11. Agriculture is the largest employer, foreign exchange source, and raw material supplier to domestic industries including MSEs).
Ethiopia has initiated broader and major economic reforms after 1991. According to the Ministry of Finance and Economic Development (MoFED) annual report of 2017, the government designed and implemented four consecutive medium term development plans after 1991. The first development plan focused on Sustainable Development and Poverty Reduction Programme (SDPR). It was pursued during 2002/2003-2004/2005. The achievements of this plan served as the basis for the second phase plan, the plan for Accelerated and Sustainable Development to End Poverty (PASDEP). According to the Ministry of Finance and Economic Development (MOFED) annual report of 2010, on average 11% economic growth was registered during this plan period. The third and last medium term plan was the Growth and Transformation Plan I (GTP I), which took place in the years 2010/2011-2014/2015. It was initiated to continue the developments of the previous development plan periods. The document envisaged two-focus areas: maintaining fast economic growth and realizing better results in all sectors. The GTP I reconfirmed that social sector and puts children, youth and women at the centre of government‘s strong commitment to the on the development agenda. The fourth is the Growth and Transformation Plan II, which is under implementation from 2016 – 2020. It is the continuation of the activities and objectives in GTP I. Ethiopia‘s economy has shown impressive results and is one of the fastest growing economies. However, the contributions of these results for women including their enterprises in particular and MSEs sector in general is not empirically investigated and documented.
Regarding the MSEs sector and the situation of women-owned MSEs in Ethiopia, a lot of research and assessment is needed. The Central Statistical Authority (CSA) survey, in May 1997, showed that there are 584,913 micro and 2,731 small enterprise operators in manufacturing industries, which absorb 739,898 employees from the labour force. As indicated in the Report of the National Bank of Ethiopia (National Bank of Ethiopia, 2011, p. 23), the five-year Growth and Transformation Plan I (GTP I) envisaged creating a total of three million MSEs in its implementation period. According to the Ministry of Urban Development and Construction (MoUDC), about 51,983 MSEs were established in 2010/11 and these MSEs together created an employment opportunity for 541,883 people. The total loan received from micro finance institutions was Birr 983,000,000. Even though, the centre increase in number, the study conducted in six big cities in the country. Wolday & Kifle (2012) indicate that there is stated policy targets and the outcome on the ground (Wolday & Kifle, 2012, p. 38). According to the same study, besides the low level of growth of MSEs in the country, lack of capital, lack of business premises and uncertainty of markets remain major constraints to expanding existing MSEs as well as encouraging new entries. Scholars suggest that concrete and coordinated regulatory and institutional support is needed for creating an enabling environment for MSEs to proliferate.
In terms of adequate contribution to the economy, the capacity of the MSEs sector is very small. On average, MSEs employ two workers (includes the owner and a worker), and earn Birr 1,300 (equivalent to USD 48). Sole proprietors operated 82% of the available MSEs. From total employment, family members accounted for 60%. Apprentices accounted for a large proportion of MSEs work force. On average, the capital of MSEs is Birr 3,528 (USD 129), a yearly production value of Birr 2,300 (USD
84) and an annual surplus of Birr 1,300 (USD 48). In the MSEs sector, women-owned MSEs represent up to 30% of all MSEs in Ethiopia (Kipnis, 2013, p. 6). Zewde & Associates (2002), argue that in Ethiopia, gender-specific, the choice of economic activities and the engagement remains constraints to women participants (Zewde & Associates, 2002, p. 5). Women in Ethiopia are confined to economic activities that are less productive and profitable. Ringheim, Sines & Teller (2009) argue that women are 85% less likely to be employed than men; only one in five women earn a cash income over which women have control (Ringheim, Sines & Teller, 2009, p. 111). In Ethiopia, the status of women may vary in different cultures (Debsu, 2009, p. 15).

Situation of the financial sector in Ethiopia

Regarding the situation of the financial sector in Ethiopia, the government initiated a new regulatory framework (NBE, 2011, p. 10). The financial sector includes formal, semi-formal and informal in Ethiopia (IFC, 2014, p. 25).
According to the National Bank Ethiopia (NBE) Report (2011), the formal sector included the commercial and development banks (private and public) (NBE, 2011, p. 76). Expansion of banking branches in Ethiopia is related to access to and outreach to more clients in terms of geographical proximity. Ethiopia lacks access to basic, financial services. This is largely because commercial banks do not serve the poor and rural residents. In Ethiopia, currently, a bank branch serves over 82,000 people. The condition for loans in the banking sector excludes the poor who do not have the resources for collateral.
The microfinance sector was formalized in 1996 by ―Proclamation for licensing and supervision of microfinance institutions No 40/1996.‖ Microfinance sector is growing fast in Ethiopia and were strictly regulated. The number of micro finance institutions in Ethiopia is currently 31 (NBE, 2011, p. 8). The microfinance sector is comparatively becoming large and its collective loan balance constitutes nearly 10% of the volume. Their total capital and assets reached Birr 2,900,000,000 (USD 106, 071, 690) and Birr 10,200,000,000 (USD 373, 079, 737), registering 24% and 27.6% annual growth. Their credit extension is at Birr 7,000,000,000 (USD 256, 035, 113) that grows at 20% per year. Microfinance institutions mobilized deposits of Birr 3,800,000,000 (USD 138, 990, 490) which showed an increase of 42% over the previous year. These developments show the trend of MFIs and their potentials to mobilize finance for income generating activities, start-ups and asset building initiatives interventions. MFIs largely serve low-income groups. The four microfinance institutions operating in Addis Ababa and that were selected for this study together account for 87.4% of total capital, 93.5% of savings, 90.4% of credit and 90.8% of assets (Togba, 2012, p. 473).
MFIs in Ethiopia serve diverse clients, with ACSI, for instance reaching over 650,000 borrowers and on average over 20,000 clients. The sector is reserved only for Ethiopian nationals, in order to liberate microfinance institutions from dependence on donor funding, and to lead them to commercial alertness. Considering the poverty situation, the economic structure of Ethiopia and the limited access of the bank sector to the poor, the microfinance sector is young and in outreach and needs much work to address the gap of finance supply. Provision of microfinance services to the overall population and poor is 2% and 5% respectively. Active borrowers and savers are empowered in context of the national poverty line. The penetration is 3% for credits and 5% for savings (Togba, 2012, p. 473).

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Microfinance policies and legal environment in Ethiopia

Per the microfinance business proclamation issued in 1996 and amended in 2009, the National Bank of Ethiopia is the authorized organ to regulate, supervise, issue and revoke licences for MFIs. As the proclamation states, the main purpose of MFIs shall be to collect deposits and extend credit to farmers and entrepreneurs. MFIs may engage in accepting both voluntary and compulsory savings. Also demand and time deposits as well as credit extension to rural and urban farmers and MSEs entrepreneurs.
Currently, minimum capital to commence microfinance institutions has increased from birr 200,000 (around $7,315) to birr 2,000,000 (around $73,153) to minimize cash shortage and to increase loan delivery service. Moreover, Ethiopian shareholders can establish microfinance institutions such that the amount of shares held by a person is determined by the National Bank. In addition, microfinance institutions can legally accept deposits from the public to diversify sources of funds for micro-financing business. The fertile legal environment promotes growth and enhances competition among microfinance institutions.
The regulatory framework on the maximum loan size that MFIs can lend to an individual borrower has been quite relaxed. It accommodates clients demands who can manage a loan size beyond the ceiling of Birr 5000 (roughly US$ 183). Microfinance Institutions can lend to an individual borrower a loan size equal to 0.5% of their capital and such lending cannot to exceed 20% of the preceding year‘s disbursement. This has greatly helped MFIs to accommodate the demands of successful clients. Microfinance institutions that meet criteria set by the National Bank of Ethiopia have the chance to re-licence their institutions to develop as a bank, or to another type of financial institution in accordance with the relevant law. Nevertheless, the National Bank may require them to continue providing micro-financing services as part of their operations.
One of the seven pillars of the Ethiopian five year Growth and Development plan, GTP I and GTP II (MoFED, 2010, p. 27) is empowering women and youth and ensuring their benefits of financial and non-financial support for these group of entrepreneurs. The plans focus on addressing multidimensional problems faced by women, including financial service provision, to engage potentially poor women in economic activities.


According to the Constitution of Federal Democratic Republic of Ethiopia ratified in 1995, Ethiopia is administratively sub-divided into nine regional states and two city administrations (Addis Ababa and Dire Dawa). Formation of the regional state is mainly based on the settlement, language and willingness of the people to live together in one administration (―Federal Democratic Republic of Ethiopian Constitution,‖ 1995, p. 59). According to the Constitution of 1995, the Ethiopian regime pursues decentralized regional structures and political empowerment of regional states to decide on their regional issues in line with the national policy framework. The 2007 Population and Housing Census data (projected for the current year) shows that there are significant variations in the distribution of population by regions – the largest Oromia Region, followed by Amhara and SNNP regions. The lowest proportion was in Harari region.
The population of Ethiopia grows by 2.6% annually while the population growth rate varies from region to region. The highest annual growth rate was registered in the period 1994 – 2007. The urban population growth rate is higher than the rural; the average rate at country level for urban population growth is 3.6%. The population growth for Addis Ababa is 4.8%; and the dependency ratio is 40.8%.
The population below the poverty line stands at 30.4% in rural and 25.7% in urban areas in 2012 (MoFED, 2012, p. 8) and this has improved, according to government reports, to 19.6% in 2017 (MoFED, 2017, p. 45). Agriculture is the primary source of employment, income generated from diversified sources and involve in allied activities of rural households (Enquobahrie, 2004, p. 1). The rural-urban linkage is weak in Ethiopia and urban poverty is exaggerated partly by this weak linkage and partly by the high rate of population growth in urban areas. Rural-urban migration, unemployment, lack of income and weak urban service delivery and weak governance frameworks are also to blame. Residents in urban areas lack of access basic services and infrastructure to meet their basic needs, leading to high living and utility costs, low per capita household income and high dependent ratio worsening the poverty of the residents in the city. MSEs as business development policy is prioritized by government as a tool for tackling the problems of the poor and expanding job opportunities for them, including policies of implementation.


The study was conducted in Addis Ababa, the location for many international organizations and the seat of the diplomatic core of Africa, home to the headquarters of the African Union and the UN-ECA. The city is structured into ten sub-cities each with respective local government administration. According to the projection from the 1997 CSA data, the population of the city was 2,738,248, out of which the male population was 1,304,518 (47.6%) and the female population was 1,433,730 (52.4%). On average, the population growth is 2.1% and the dependency ratio was about 38% in 2001 (MoFED, 2017, p. 16) and this growth rate doubled in 2017 with an average growth rate of 4.8% (MoUDC, 2017, p. 37).
In Addis Ababa, the percentage of the economically active population, that is, the total population above 15 years old is 62.3% in 1996. The total unemployment rate in the city was 27.9%, out of which 38.3% were females and 18.4% were males. The labour force and employment in Addis Ababa was that 75% in the formal sector while the rest (25%) was in the informal sector. Major sectors that employ most of the labour force in the city were the service sector (73%) and industry (25.5%) and urban agriculture constituting 1.5%. The literacy rate of the male population is higher compared to the female population. Male educational attainment in tertiary education is 36.2% and 28.86% for females (CSA, 1996, p. 59). After 18 years in 2014, the unemployment rate for females was 33.7%, out of the overall unemployment rate of 27.8% (IFC, 2014, p. 37). This situation was relatively unchanged in 2016, which was 33.2% (MoFED, 2017, p. 49).
This chapter presents the research setting: namely the context of Ethiopia in general and Addis Ababa in particular. The presentation provides relevant information concerning administrative structure, population size, economic structure, development strategy and the poverty situation of the country as a setting to assess the status of MSEs and the participation of MSEs owners in terms of gender and other socio-economic variations. In regard to this, women-owned SMEs and access of these enterprises to financial sector services in the country are presented.

Chapter One  Introduction
1.1. Background of the Study
1.2. Statement of the Problem
1.3. Objectives of the Study
1.4. Research Questions of the Study AND Hypotheses
1.5. Conceptual Framework of Impact of Microfinance Service
1.6. Contributions of Business Development Services
1.7. Addressing Exclusion and Promoting Approaches to Inclusion
1.8. Characteristics of Effective MicroFinance Institutions
1.9. Towards the Analytical Framework of this Study
Chapter Two  Review of Related Literature
2.1. Introduction and Conceptual Framing of the Study
2.2. Empirical Evidence on MF and MSEs
2.3. The Effect of Gender Prejudices on Women-owned MSEs
2.4. The Role of Women-owned MSEs in Economic Development
2.5. Characteristics of Effective MSEs
2.6. Constraints and Challenges TO Micro and Small Enterprises
Chapter Three  The Research Setting and Methodology
3.1. The Ethiopian Economy and the MSEs Sector
3.2. Poverty, Government Structures and Population Size in Ethiopia
3.3. Description and Justification of the Study Site
3.4. The Study Design and Approach
3.5. Sample Frame and Sampling Techniques
3.6. Data Source, Types, Instruments and Procedures of Data Collection
3.7. Methods of Data analysis
3.8. Model Specification and Definition of Variables
3.9. Ethical considerations
Chapter Four  Data Results and Discussion
4.1. Qualitative Data Analysis on Microfinance Services
4.2. Descriptive Data Analysis
4.3. Non-parametric Test Results
4.4. Regression Data Result Analysis and Discussion
Chapter Five  Key Finding, Conclusion and Recommendations
5.1. Introduction
5.2. Socio-demographic, Household and Business Characteristics
5.3. The Research Objectives and Findings
5.4. Suggestions and Recommendations
5.5. Area for Further Study

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