Market Structure and Performance of Microfinance Institutions in Ethiopia

Abstract

Microfinance business, developed over the last 30 years, came to picture to provide credit service to the poor and low-income clients. It also works towards inculcating the culture of saving whereby clients manage to accumulate asset in the form of cash and in kind for investment, among others. The research employed secondary and some sort of primary data for the period 2005-2010 where the study focused mainly on market structure and performances of Ethiopian MFIs. Market concentration analysis has been made using concentration ratio (the four largest MFIs) and HHI on the basis of active borrowers and loan portfolio. The study also used the best and widely used performance indicators namely depth of outreach, breadth of outreach, deposit loan portfolio ratio, gender sensitivity, Return on Asset (ROA), Return on Equity (ROE), portfolio asset ratio, operating expense ratio, cost per borrower, active borrowers per loan officer, portfolio quality, and debt to equity ratio. The findings of the study indicated that the Ethiopian microfinance industry is booming though the rate of growth of outreach started declining steadily during the last three years. The loan balance per borrower /GNI per capita of Ethiopian MFIs shows that the sector is poor performer in reaching the poorer as they extend larger loans than the MBB benchmark. The largest four MFIs enjoyed substantially higher growth as compared to Ethiopian MFIs as a whole and the market structure suffers from high market concentration during earlier years and has shown remarkable improvement and become moderate starting from 2009. The average of six years under consideration (2005-2010) is also considered to be moderate. The Ethiopian MFIs in general and top four in particular are less gender sensitive as compared to African average. Despite this, the microfinance industry in Ethiopia recorded remarkable performances in terms of profitability, efficiency and productivity indicators when compared to African industry standard and MBB benchmark. However, the quality of portfolio is less and debt to equity ratio shows that Ethiopian MFIs have less access to commercial sources as compared to that of African MFIs. The Findings of the study are beneficial for regulatory authorities, policy makers and practitioners for necessary consideration so as to enhance the competitiveness of the sector.