ST.

MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES

MBA PROGRAM

ASSESSMENT OF OPERATIONAL PERFORMANCE OF MEKLIT

MICROFINANCE INSTITUTION SHARE COMPANY IN ADDIS
ABABA, ETHIOPIA

BY

AYTENSIFU YEHUALASHET

JUNE 2014

ADDIS ABABA, ETHIOPIA

ASSESSMENT OF OPERATIONAL PERFORMANCE OF MEKLIT
MICROFINANCE INSTITUTION SHARE COMPANY IN ADDIS
ABABA, ETHIOPIA

BY

AYTENSIFU YEHUALASHET

A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY, SCHOOL OF

GRADUATE STUDIESIN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTEROF BUSINESS
ADMINISTRATION

JUNE 2014

ADDIS ABABA, ETHIOPIA

 ST. MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
MBA PROGRAM

ASSESSMENT OF OPERATIONAL PERFORMANCE OF MEKLIT

MICROFINANCE INSTITUTION SHARE COMPANY IN ADDIS ABABA,
ETHIOPIA

BY

AYTENSIFU YEHUALASHET

APPROVED BY BOARD OF EXAMINERS

___________________________________ _________________
Dean, Graduate studies Signature
___________________________________ _________________
Advisor Signature
_________________________________ ___________________
External Examiner Signature
__________________________________ ___________________
Internal Examiner Signature
 TABLE OF CONTENTS

Acknowledgment…………………………………………………………..………………...i
Declaration…………………………………………………………………………………..ii
Endorsement………………………………………………………………………………..iii
List of Tables ……………………...…………………………….…………………………iv
List of Figures ……………………..…………………………………………………….….v
List of Abbreviations ………………………………………………….…………………...vi
Abstract………………………………………………………………...……….…………vii

CHAPTER ONE
INTRODUCTION 1
1.1 Background of the Study 1
1.2 Background of the Organization 2
1.3 Statements of the Problem 3
1.4 Basic Research Questions 5
1.5 Objective of the Study 5
1.6 Definitions of Terms.......................................................................................................5
1.7 Significance of the Study 6
1.8 Limitation of the Study 6
1.9 Scope of the Study 6

CHAPTER TWO
REVIEW OF RELATED LITERATURE 8
2.1 Concepts and Definitions of Microfinance Institutions (MFIs) 8
2.2 The Rise and Characteristics of Microfinance...............................................................10
2.3 Development of MFIs in Ethiopia..................................................................................10
2.4 Contribution of MFIs on Poverty Reduction..................................................................11
2.5 MMFI Loan Size and Duration………………………………………………………...12
2.6 Operational Performance of MFIs..................................................................................13
2.6.1 Repayment Performance........................................................................................13
 2.6.1.1 Credit Policy....................................................................................................14
2.6.1.2 Gender and repayment ...................................................................................14
2.6.1.3 Repayment Performance in Group Lending....................................................15
2.6.1.4 Three C’s of Microcredit.................................................................................16
2.6.1.5 Loan Products Characteristics.........................................................................16
2.6.1.6 Client Screening...............................................................................................17
2.6.1.7 Client Visit………………………………………………………...…………17
2.6.1.8 Loan Default………………………………………………………...….……18
2.6.1.9 Real Incidences of Defaults in Microfinance..................................................18
2.6.2 Client Retention Performance………………………………..........................…….21
2.6.3 Outreach Performance……………………………………………........…………..22
2.6.4 Empirical Evidence……………………………………………………………….23

CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY …………………..…………………26
3.1 Research Design……………………………………………………………………….26
3.2 Population, Sampling Techniques, and Sample Size……………………………….…27
3.2.1 Population …………………………………………………………..…………27
3.2.2 Sample Size……………………………………………………………………27
3.2.3 Sampling Techniques…………………………………………………………..28
3.3 Source of Data and Tools of Data Collection…………………………………….....…29
3.3.1 Source of Data……………………………………….…………….………..….....29
3.3.1.1 Primary Data source………………………………….………….……..….…29
3.3.1.2 Secondary Data Source……………………………………….………..….…29
3.3.2 Tools of Data Collection…………………………….………………………….….30
3.3.2.1 Questionnaire…………………….……………….………………….…...….30
3.3.2.2 Interview……………………………………………………………………..30
3.4 Procedures of Data Collection………………………………………….…………..….30
3.5 Methods of Data Analysis ………………………………..……………………………30
3.6 Reliability Test…………………………………………………………………………31
3.7 Ethical Consideration………………………………………………….……………….33

CHAPTER FOUR
RESULTS AND DISCUSSION ……………………………………………………..…..34
4.1 Characteristics of the Respondents ………………………………………………..…..34
4.2 Analysis of operational performance of MMFI ……………………..………..…...…..36
4.2.1 Repayment Performance……………………………………………….……..……36
4.2.3 Retention Performance………………………………...……………..……………45
4.2.4 Outreach performance…………………………………………………...…………52

CHAPTER FIVE
SUMMARIES, CONCLUSIONS, AND RECOMMENDATIONS OF MAJOR
FINDING …………………………………………………………………………………56
5.1 Summary of Major Findings……..………………………………………………….…56
5.2 Conclusion………………………………………………………………………….….58
5.2.1 Repayment Performance…..…………………………………………………..58
5.2.2 Client Retention Performance…………...……………………………………..59
5.2.3 Outreach Performance………………...…………………………………….…60
5.3 Recommendations ………………………………………………………………..……60

Bibliography……………………………………………………………………………....63
Appendix A: Questionnaires………………………………………………………………69
Appendix B: Interview questions……………………………………………………….…73
 ACKNOWLEDGEMENTS

First of all, I thank the almighty God for giving me the encouragement and patience to
complete my work. This time would not have been easy for me without the help of God. I
would like to show my appreciation to my advisor Dr. Matiwos Ensermu for his advice and
direction throughout this thesis. Without his assistance and guidance this study would not
have been completed at least, at its present form. I would like to thank Ato Muluadam
Alemu, Mokonnen Abebe, Derese Endashaw, and Melkamu Adamu for their valuable
support and suggestions. I would like to extend my thanks to all Meklit Microfinance
Institution S.C staff members at the head office for their cooperation in facilitating data
collection. My wife Kebebush Nigussie, I say thank you for your unconditional love,
support, endless encouragement and moral support you gave me throughout this period.
This work would not have been possible without your support and contributions.

i
 DECLARATION

I, the undersigned\, declare that this thesis is my original work, prepared under the
guidance of my advisor (Matiwos Ensermu). All sources of materials used for the thesis
have been duly acknowledged. I further confirm that the thesis has not been submitted
either in part or in full to any other higher learning institution for the purpose of earning
any degree.

Aytenfisu Yehualashet ________________________

St. Mary’s University, Addis Ababa June, 2014

ii
 ENDORSEMENT

This thesis has been submitted to St. Mary’s University, School of Graduate Studies for
examination with my approval as a University advisor.

Matiwos Ensermu ______________________

St. Mary’s University, Addis Ababa June, 2014

iii
 LIST OF TABLES

Table 1: Loan cycle, size, and term………………………………………………………..12

Table 2: Past due loan.………………………...…………………………………………...20
Table 3: Reliability test result...…………………………………...……………………….32
Table 4: Background information of respondents...………………………...……………..34
Table 5: Number of borrower in loan activity during the year………….……….………...35
Table 6: Repayment performance …………………………………………………………33
Table 7: Other Repayment performance ………….……..……………..………………….39
Table 8: Repayment rate………..………..…………………………..…………….………41
Table 9: Repayment Rate, Percentage of arrears, and PAR> 30 days in relation to
gender……………………………………………………………………………………....42
Table 10: Portfolio At Risk greater than 30 days………………………………………….44
Table 11: PAR>30 days plan and performance comparison………………………………45
Table 12: Loan cycle of respondents….…………………..…………….………………...45
Table 13: Repayment Rate ad PAR>30 days with loan category………………………….46
Table 14: Retention performance …………………………………..……………….……47
Table 15: Interest rate..............……………………...……………………………………50
Table 16: Retention rate... ………………………...……………………………………….51
Table 17: Client promotion……………………...…………….………………….………..52
Table 18: Growth in number of active clients ...…………………………………..………53
Table 19: Plan performance in terms of active clients……………………………..…...….54

iv
 LIST OF FIGURES
Figure 1: Client Dropout…………………………………………………………………...22
Figure 2: Schematic Representation of the Decision Process of the Reliability Test……...32
Figure 3: Repayment and arrears in relation to gender issue...…………………………….43
Figure 4: Promotion………………………………………………………………………..53

v
 LIST OF ABBREVIATIONS

Abbreviation Description
MF Microfinance
MFIs Microfinance Institutions
MMFI Mkelit Microfinance Institution
NBE National Bank of Ethiopia
AEMFI Association of Ethiopian Microfinance Institution
CGAP Consulting Group to Asset poor
PAR Portfolio At Risk

vi
 Abstract
The study was conducted in Meklit Microfinance Institution. The main objective of the study was to
assess the operational performance of Meklit Microfinance Institution. It has made use of primary
and secondary data sources and 85 clients were selected through stratified and simple random
sampling. The data was analyzed by making use of simple descriptive statistical tools. The study
discloses that most clients have borrowed on an individual loan base for trade, and non-trade or
consumption that reveals as Meklit Microfinance Institution seems to give much emphasis on
individual lending. Sample respondents agreed for the effective loan utilization that can be assured
through regular supervision by the lender to control the use of loan for unintended purpose. The
survey result reveals that incentives have not been given to clients who have paid back their loan
exactly on the due date instead they are treated equally with late payers. The survey result indicates
that the amount of loan given to clients is inadequate to run their business that liable them for
double loan from other formal and non-formal financial sources. Most respondents indicated that
the collateral requested for individual business loan is very difficult to fulfill particularly for the
poor individuals. The analysis on the four consecutive years’ data shows that Meklit’s repayment
rate was below 97% signaling the existence of poor repayment performance and high loan default.
The study reveals that the portfolio at risk for more than 30 days were above 10% up to the end of
2011/2012 fiscal year that implies the risk of uncollectible is significant for both past due loans and
loans not due but contaminated. In the study the contribution of women borrowers in arrear was
found to be less than men except in the last two years (2011/2012 and 2012/2013) that shows
women’s participation in microfinance as a guarantee for better repayment performance and
longer relationship. The study has identified inadequate loan size, lack of supervision, collateral
problem, and lack of training, high interest rate, absence of special arrangement for reasonable
late payment, office location, and poor customer handling as factors that discourages borrowers
not to be permanent clients. Finally, it is recommended that to enhance the pertinent challenges
and promote a smooth relationship between Meklit and its clients; a pooled effort is needed from
all concerned stakeholders. Particularly, Meklit shall pay special attention to reduce clients’
dropout and address more clients by using different promotional mechanisms. In order to improve
the repayment performance in Meklit and to exactly decide to use individual or group lending,
further research that employs a blend of advanced statistical techniques with more samples need to
be conducted.

Key words: performance, repayment, loan default, permanent client, and Client dropout

vii
 CHAPTER ONE

INTRODUCTION

This chapter deals with the introductory part of the study that covers background of the
study, statements of the problem, basic research questions, objectives of the study,
significance of the study , limitation of the study, scope of the study, and definitions of
terms,

1.1Background of the Study

Microfinance refers to the provision of financial services to the poor people or low income
individuals who have no access to banking or other financial services (Brau, 2004). Access
to credit could help the poor to improve their small business and in the long run break the
vicious circle of poverty (Ibid, 2004). Therefore, there is a strong demand for credit among
poor people. One major problem is that they often lack collateral, and the result is that the
formal financial sector does not normally provide the credit that the poor demand
(Gebremichael, 2010). The formal commercial banks believe that the small and frequently
repeated loans demanded by the poor people are too risky and has too low potential
profitability. Commercial banks lack personal background information of their customers,
in terms of their activities and characteristics. Due of this, they are unable to monitor how
the loans are being used by customers in relation to the intended objectives. Therefore,
poor people often have access only to the informal financial market, which have better
information about their customers and provide credit facility at very high interest rates
(Felix, 2011).

Godquin (2004) pointed out that, the extent of repayment of loan is a good performance
indicator of microfinance institutions. According to the author (Ibid, 2004) any loan not
collected on the agreed due date is considered as an arrear, and the seriousness of the
arrears is determined by the intention of the client not to pay. Therefore, to identify the
seriousness of uncollected loans and take an appropriate action, all arrears should be
classified by their ages.

Retaining clients is another sign of good performance as it increases the profits of a firm
which facilitates further investments leading to outreach (Waterfield, 2006). The more
1
productive customers are retained; the lower the acquisition costs and the higher the
productivity of loans (Islam, 2007).

The sustainability of MFIs is very important for efficient provision of financial services,
because they are essential ingredients in the development processes of a country. But
microfinance institutions face unique challenges because they must achieve to avail
financial services to the poor and cover their costs (Rani, 2012). To tackle the problems and
achieve the required goal, an efficient operation of the microfinance industry might be a
necessary condition for the well-functioning of microfinance institutions in the long run in
meeting the objectives of serving the poor and make the operation sustainable (Islam,
2007).

Due to lack of asset to be used as collateral, many poor people in different parts of Ethiopia
did not get credit access from formal banks (Letaneh, 2009). Therefore, to solve this
problem, the government of Ethiopia took the initiative to establish a regulatory framework
in order to facilitate sound development of the microfinance industry. Accordingly,
proclamation No. 40/1996 was enacted to provide for the licensing and supervision of the
business of microfinance by empowering National Bank of Ethiopia (NBE) to license and
supervise them (Arsyad, 2005).

To serve the poor MFIs should sustain both in operational and financial (Brau, 2004).
There are many problems that affect the performance of MFIs. Due to credit policy, follow
up, and poor promotion MFIs face considerable problems of loan default, client dropout,
and limited number of clients served by the institutions (Breth, 1999; Brau, 2004; Berry,
2010; Godquin, 2004; and Dackauskaite, 2009).

1.2 Background of the Organization

This study is focusing on the assessment of operational performance of Meklit

Microfinance Institution (MMFI). MMFI is one of the MFIs established as a share
company in accordance with proclamation No. 40/1996 to provide efficient financial and
related support services to its customers (MMFI, 2012). The institution acquired its legal
personality and started its operations on February16th, 2000 in Addis Ababa. The institute
provides financial services for customers with the age range of 18 to 70. According, to the
2
operation manual of the institution updated in April 2012, MMFI will always strive to
increase the percentage of women clients to about 70%. Based on the prevailing conditions,
the institution arranges its priority in a manner that is advantageous to women clients.
These include giving priority to women applicants; targeting women dominated sub-sectors
of the economy (MMFI, 2012).
MMFI focuses mainly on financial services relevant to the needs of its clients. Credit is the
main financial service provided by the institution in the form of group business loan,
individual business loan, and individual consumption loan to clients. Clients are required to
use this financial asset and pay it back with interest and service charges (MMFI, 2012).

1.3 Statements of the Problem

In Ethiopia, the formal base of MFIs has been laid by the issuance of proclamation No.
40/1996. The proclamation has established the licensing and supervision of MFIs as share
companies with the objectives of providing financial services for low income society which
are not included in the formal banking sectors. This is because due to collateral
requirements the poor could not have access to loan services from commercial banks.
Hence, by providing loan to the marginalized groups, MFIs are expected to provide loan
services and to make profit for their continued existence (Wolday, 2005).

The primary objective of MFIs is to provide financial services to the poor in order to
mitigate financial constraints and help to alleviate poverty. Each MFI tries to maximize its
repayment performance, serving more able poor clients, and tries to retain them for a long
period of time. Some of the indicators of effective MFIs are the loan repayment
performance of the borrowers, client retention performance, and outreach performance
(Godquin, 2004). High repayment rate give benefits both to the MFI and the borrowers. If
there is high repayment rate, the relationship between the MFI and their clients will be
healthy. High repayment rate helps to obtain the next higher amount of loan and other
financial services. In contrast, if there is low repayment rate, both the borrowers and the
MFI will be affected. In this case the borrowers will not be able to obtain the next higher
loans and the lenders will also lose their clients (Ibid, 2004).

There are factors positively influencing loan repayment rates in the MFIs. The main factors
on the lender’s side are high-frequency of collections, tight controls, a good management of

3
information system, loan officer incentives and good follow up (Breth, 1999). The author,
added that the size of loan, the interest rate charged by the lender, the timing of loan
disbursement, gender, and the education level of the client have also an effect on
repayment performance (Jemal, 2003).

Client retention is also another problem because high client exit/dropout rate increase the
operation and administrative cost of screening and monitoring clients (Karim, and Osada,
1998). The new clients also tend to take smaller loans thus bringing lower profits. When
there is high dropout rate, it is difficult to attract new clients and increase the value and
importance of client retention. This can be an obstacle to achieve the operational
performance of microfinance institution especially breadth of outreach and sustainability.

Hence, timely collection of loan is seen as a primary duty of the lenders as it helps to
maximize their profit in which the clients are also encouraged to improve their business
through paying back their debts. Retaining customers for a long period of time is also
another aspect of operational performance that strengthens the financial capacity of the
institution to bring on board many poor clients, and help them to benefit from the service.
These together can increase the number of beneficiaries who can benefit from microfinance
services.

However, failure of timely collection of loan from clients is the problem area of
microfinance institutions as this affects both the institutions and the clients in the sense that
the institutions are unable to get back their loan and expand their business by creating new
clients and that client’s will misuse loans and their business will be no more effective.

Some institutions do not provide the necessary training related to the project and this
results in failure of the clients in their business due to lack of awareness about the business
to be undertaken and this in turn directly affects the institution.

It is also agreed that some MFIs are not effective enough in retaining their clients for a long
period of time due to their poor customer handling service and inefficient loaning system.
This result in the gradual withdrawal of the clients which directly affects the institution’s
operating performance. Losing clients and replacing them by new ones in turn incurs the
institution operation cost by way of screening, training, and follow up of new clients with
small loan size.
4
Research outputs indicated that, much time and effort are exerted on studying about social
performance, financial performance, and level of poverty of MF clients (Wolday, 2001;
Janson, 2003; Nathan, 2013; Warue, 2012; Brau, 2004; and Arsyad, 2005). But, there were
no much study is emphasized on operational performance of MFI especially in relation to
repayment performance, client retention performance, and growth in number of active
clients. Moreover, there was no empirical research conducted in MMFI regarding the
aforementioned issues. Observable evidence and annual reports of MMFI showed that there
is an experience of considerable problems regarding to uncollectable loans, client
withdrawal, a decreased number of active clients (MMFI, 2013).

In view of this, the researcher is interested to assess the real operational performance of
MMFI with respect to repayment, retention and number of clients served by the institution.

1.4 Basic Research Questions

To address the problems discussed above the research questions were formulated as
follows:
1. How efficient is the repayment performance of the institution?
2. How successful is the service in retaining the clients?
3. How effective is the institution in serving more clients?

1.5 Objective of the Study

The main objective of this research is to assess the operational performance of MMFI;
more specifically the research has the following specific objectives.
1. To assess the repayment performance of the institution,

2. To evaluate the institution’s retention performance, and

3. To see the effectiveness of outreach performance (serving more clients)

1.6 Significance of the Study

The study might be helpful for Microfinance Institutions including Meklit Microfinance
Institution regarding to mitigating operation performance problems. It may also be helpful to
other researchers as baseline information for further study of this area. More importantly, is
supposed to assist policy makers for understanding of issues in MF operation.

5
1.7 Limitation of the Study

It is not denied that any research paper from its initiation to completion perhaps encounter a
limitation. Besides, some of the limitations that face in the preparation of this research thesis
were time constraint together with in school course and job assignment, the respondents
understanding of filling the questionnaire was not satisfactory. To keep quality of the research
data, assigning experienced data collectors with reasonable payment under the close
supervision of the researcher was a must. This has resulted a major problem in organizing the
whole research paper.

1.8 Scope of the Study

There are many factors affecting operational performance and sustainability of MFIs that
includes repayment performance, client retention performance, outreach, policy support, social
performance, and the use of innovative features. But due to financial problems and time
constraint, this study covers the repayment, retention, and breadth of outreach (number of
clients served) aspects of MMFI. To have current information the research focuses on active
borrowers of the institution in Addis Ababa. Moreover, the income level, family status, and
other detail assets of the borrowers were not included in the study.

1.9 Definitions of Terms

Microfinance: a type of banking service that is provided to unemployed or low-income
individuals or groups who would otherwise have no other means of gaining financial
services.

Collateral: a personal guarantee, guarantees from peers, or asset pledged by a borrower
to secure a loan, which can be repossessed in the case of default.

Group lending: lending mechanism which allows a group of individuals - often called
a solidarity group - to provide collateral or loan guarantee through a group repayment
pledge.

Individual Lending: single client lending where repayment relies solely on the
individual.

Microfinance Institution: an institution that provides financial services to the poor.

Active Clients: the number of clients with loans outstanding on any given date.

Default: failure to make timely payment of interest or principal on a loan, or to
otherwise comply with the terms of a loan.
6

Delinquent: something that has been made payable and is overdue and unpaid.

Disbursement: the actual transfer of financial resources or cash to borrowers that
should be repaid back to the lender.

Portfolio at Risk > 30 days: the value of all loans outstanding that have one or more
instalments of principal past due more than 30 days. This includes the entire unpaid
principal balance, including both the past due and future instalments, but not accrued
interest. It does not include loans that have been restructured or rescheduled.

Number of Active Borrowers: the number of individual who currently have an
outstanding loan balance with the institution.

Number of Active Clients: number of individuals who are active borrowers and/or
savers with the institution.

Sustainability: sustainability is the ability of a microcredit program to maintain its
operations and continue to provide service to its customers or clients.

Outstanding loan: is the past due and due loan not repaid by borrowers or it is the
loan in the hands of borrowers.

7
 CHAPTER TWO
REVIEW OF RELATED LITERATURE

This chapter reviews the work of other researchers relating to microfinance performance
surrounding repayment, retention, and outreach performance.

2.1 Concepts and Definitions of Microfinance Institutions (MFIs)

Microfinance refers to the provision of financial services to low-income clients, including

the self-employed (Hardy, 2003). Financial services of MFIs include savings and credit.
However, some offer payment and insurance services, (Ibid, 2003). Theoretically,
microfinance encompasses any financial service used by the needy, including those they
access in the informal economy, such as loan from a village money lender (Ibid, 2003). In
practice however, the term is usually only used to refer institutions and enterprises whose
goals include both profitability and reduction of the poverty of their clients. Microfinance
services are needed everywhere, including the developed world (Islam, 2007).

Poor households were typically excluded from the formal banking system due to lack of
collateral, to overcome this problem the ideas of microfinance institutions have generated
as much hope for alleviating poverty in low-income countries (Hulme & Arun, 2009).
Thus, microfinance promises both to combat poverty and to develop the institutional
capacity of financial systems through finding ways to cost-effectively lend money to poor
households.

Microfinance business Proclamation No. 626/2009 of Ethiopia also defines microfinance

business as “the provision of financial services like accepting savings, extending credit,
drawing and accepting drafts payable, providing money transfer services and others”.

According to Ledgerwood, (1999), most people understand or think microfinance as being

microcredit i.e. lending small amounts of money to the poor. But, microfinance provides a
service other than microcredit, which includes insurance and saving (the most important for
the poor); whereas microcredit is a component of microfinance that provides small loans to
entrepreneurs (who are too poor and who didn’t qualify for formal bank loans). Microcredit
enables very poor people to engage in self-employment projects that generate income
(Islam, 2007).
8
The concept of microfinance also helps to resolve some of the problems that usually close
out the poor from the financial market; information asymmetries, low-potential profitability
and lack of portfolio diversification (CGAP, 2009). The problem of information
asymmetries is solved by group lending assuming that, the one who sees as risky is
excluded from the group, and peer pressure also used as an incentive to repay on time
(Islam, 2007). Therefore, the group as a whole is responsible for each other’s actions.

2.2 The Rise and Characteristics of Microfinance

According to Bateman, (2011), the microfinance movement began with the work of Dr.
Muhammad Yunus in Bangladesh in the late 1970s. In the midst of a country-wide famine,
he began an experiment by making small loans to poor families in neighboring villages in
an effort to break their cycle of poverty. Yunus was successful in his experiment and
receiving timely repayment and observing significant changes in the quality of life for his
loan recipients (Brau, 2004).

Due to his inability to a self-finance for the expansion of the project, Yunus asked
government support in order to establish a financial institution. As a result, with the
integration of the government and the individual the Grameen Bank was established. The
focus area of the bank was on the very poor and it lent only to low income households.

In line with this the work of Yunus work spread rapidly to other low income countries and
most early microfinance institutions (MFIs), including Yunus’s own iconic Grameen Bank,
relied on funding from government and international donors, justified by MFI claims that
they were reducing poverty, unemployment and deficiency (Hossain, 1998).

Microfinance is available through microfinance institutions, which range from small non-
profit organizations to larger banks (Brooks, 2013). Among the services offered by MFIs
are small loans as well as help obtaining insurance for a variety of needs, such as death,
illness or loss or property. In order to keep their services running, microfinance institutions
typically charge significantly higher interest rates than those on a formal bank loan.

Microfinance gives access to financial and non-financial services to low income people,
who wish to access money for starting or developing an income generation activity (Breth,
1999). The individual loans and savings of the poor clients are small. Microfinance as a

9
 discipline has created financial products and services that together have enables to become
clients of a banking intermediary (Nathan, 2013).

Characteristic Description
Client profile  Low income and poor households
 Employed in the informal sector or self employed
 Lacks traditional collateral
 Interlinked household and microenterprise activities
 Predominantly women
Lending technology  Group or individual loans
 Simple and minimal documentation
 Cash flow and character based
Loan portfolio  Working capital, short term loans, repeat loans
 Clients mostly women
Collateral  Collateral substitutes e.g. group lending, joint liability, peer
pressure, public repayments, compulsory savings
 Nontraditional forms e.g. household items
Culture/ideology  Poverty reduction
 Provision of social services e.g. skills training, nutrition,
health, basic literacy
Source: (Nathan, 2013)

2.3 Development of MFIs in Ethiopia

In most Western or developed countries, it's relatively easy to obtain credit through large
banks or money lending institutions (Wolday 2000). On the contrary, in the least developed
countries including Ethiopia the poorer section of the community do not access to formal
financial sectors due to collateral, bureaucratic and lengthy process and procedures of loan
providing systems (Ibid 2000). In addition, formal banks prefer high income clients and
large loans because of considering loan demand by the poor as unattractive and
unprofitable (Wolday 2001).

The establishment of sustainable microfinance institutions that reach a large number of

rural and urban poor, who are not served by the conventional financial institutions (such as

10
the Commercial Banks), has been a prime component of the new development strategy of
Ethiopia (Leteneh 2009). Although the development of microfinance institutions in
Ethiopia started very recently, the industry has shown a remarkable growth in terms of
outreach, particularly in number of clients (Wolday 2000).

By considering benefits and challenges faced by the poor communities; the Ethiopian
government had established microfinance Institutions (MFIs) by the licensing and
supervision of the business of microfinance institutions (MFIs) in July1996, through Proc.
No. 40/1996 with the objectives of providing a legal framework that brings monetary and
financial policies, and a legal framework for the promotion of MFIs (Wolday 2000). The
proclamation allows MFIs to undertake both financial and non-financial activities.

As it is indicated in AEMFI report, (2010), in Ethiopia there are 31 licensed Microfinance

institutions providing financial services for rural and urban clients in different parts of the
country. Among all, twenty (64.5%) MFIs are in Addis Ababa.

2.4 Contribution of MFIs on Poverty Reduction

Financial services allow poor people to save and borrow money so that they can maintain a
consistent level of consumption without selling off income producing assets (Weiss, et al,
2003). Microfinance can also provide an opportunity for expanding or pursuing new
business opportunities that allow poor people to increase or diversify the sources of their
income.

Weiss, et al, (2003), concluded that micro finance increases the self-confidence of the poor
by meeting their emergency requirements, ensuring need based and timely credits and
making the poor capable of savings. In their study, they also show the credibility of
microfinance in health related issues in a positive manner. It has been postulated that by
making policy towards income generation and enhancement, ultimately to eradicating
poverty alone can improve the health status through better, timely and easy access of health
care.

Jansson, (2003), concluded that microfinance is the most important resource to provide
loans and other basic financial services and to increase the employment rate, productivity
and earning capacity. Jansson state that it will impact the people’s lives through removing

11
 poverty, and improving living standards such as health, education, food and other social
impacts.

2.5 MMFI Loan Size Duration

Table 1: Loan cycle, size, and term in MMFI

S Group Business Loan Individual Business Consumption Loan

/ Loan
N Loan Term Loan
Size
Loan cycle

Loan cycle

Loan cycle
(Months)

(Months)
Size (in (Mont Size
Term

Term
(birr)
Loan

birr) hs) (in birr)

1st 500-4,000 12 All 3,000- 12 1st 500- 12

100,000 4,000
to 36
2nd 5,000 12 2nd 4,001- 18
8,000
3rd 6,000 12 3rd 8,001- 24
25,000
4th 7,000 24
5th 8,000 24
6th 9,000 24
7th 10,000 24
8th 11,000 24
Source: MMFI (2012)

A. Group Business Loan

As MMFI (2012) stated, this is a loan which is delivered to clients which run the businesses
pertaining to production, services and retailing activities. It is delivered with group
methodology with a member’s number ranging from 3-5. This loan is usually delivered for
low income people running small and microenterprises. The loan and interest is paid on
monthly bases. The interest rate for business group loan is 19% and with the maximum
loan term of 24 months).
12
B. Individual Business Loan
It is clearly indicated in the institution’s operation manual MMFI (2012), this loan is
delivered to clients having business license and certificate of personal property (mainly
fixed assets), and running their business in urban areas. In addition, clients should have
sufficient collateral; a salaried person can be used as collateral for the loan amount up to
birr 25,000.00. But a client who wants to lend greater than birr 25,000, is required to have
certificate of personal fixed asset (only building) as collateral and has to be blocked with
appropriate responsible authority.
C. Consumption Loan
According to MMFI (2012), this is a loan for wage earners and salaried civil servants.
Clients should be working in an organization on full time bases and have served for at
least one year. The client is also obliged to bring letter of guarantee from his office. The
letter that comes from their organization the letter has to pledge that the organization would
be holding securable in case the borrower failed to settle its obligations. Salaried individual
guarantee is valid for only up to birr 25,000 loan. Employees of any legal organization can
borrow more than birr 25,000 (but not greater than 100, 000) by presenting certificate of
immovable personal property as collateral.

2.6 Operational Performance of MFIs

Yitay (2011), discuss that poor client will use MFIs just as long as the gains to them exceed
the costs. For the beneficiaries, good performance means repeated use as long as gains
exceed the costs. If they did not expect to gain, then they would not repay debts, borrow
more than once, nor hold deposits through time. Repeated use of services implies MFIs
have improved the welfare of their poor clients.

2.6.1 Repayment Performance

Operational performance of MFIs mainly is mainly related with repayment performance
that refers to the total loans paid on time as stated in the loan agreement contract (Jansson,
2003). As a lending institution, MFI is a risky business because it offers credit to the poor
people without asset collateral and the repayment of loans cannot be fully guaranteed.
However, the repayment rate is the most important performance indicator of MFI (Ibid,
2003). Jansson (2003), emphasizes repayment performance of MFI is mainly focused on
group based lending or group liability because group based lending has an advantage in
13
minimizing the loan default compared to an individual loan. Other studies also emphasize
the role of joint liability in group lending, peer selection, peer monitoring, and peer
enforcement are important factors in minimizing loan default (Letaneh 2009; Arsyad,
2005). Lending that uses; peer selection, peer monitoring, dynamic incentives, regular
repayment schedules, and social collateral can maintain high repayment rates.

According to Nawi and Shariff (2013), however, not all MFIs offer credit based on group-
lending because group-lending is not suitable for entrepreneurs who can expand their
businesses faster and require more capital. Group-lending is also not suitable for some
people when they can produce need personal guarantee and require more flexible loan
conditions. Due to the above unique conditions individual lending is used as another
lending methodology of microfinance as long as they have specific asset or personal
guarantee as collateral. Since, there is no peer enforcement in the case of individual
lending; the lending institutions should have intense follow-up so as to have a good
repayment performance (Aryad, 2005).

2.6.1.1 Credit Policy

A credit policy spells out guidelines which are followed in extending credit to clients
including the procedures for recovering loans in arrears. It is important because of its
impact on client retention and outreach strategies adopted by MFIs (Mulumba, 2011). A
stringent credit policy turns away potential clients and slows the loan portfolio growth
which lowers client retention whereas a liberal credit policy attracts slow paying customers
and increases the arrears rate (Berry, 2010). Therefore, a good credit policy is one which
strikes a balance between client retention and defection to facilitate outreach.

2.6.1.2 Gender and repayment

Studies show that women consistently outperform men in terms of repayment. For instance,
Felix (2011), report that in its initial phase the Grameen Bank included men as customers.
However, the bank decided to move over to a nearly full concentration on women due to
repayment problems related to male customers. In an empirical investigation, Hossain
(1988) reports that in Bangladesh 81 percent of women encountered no repayment
problems compared to 74 percent of men. Similarly, from Malawi, Hulme (1991) reports
that 92 percent of women pay on time, compared to 83 percent for men, and Gibbson and

14
Kasim (1991) find that in Malaysia 95 percent of women repay their loans compared to 72
percent of the men.

2.6.1.3 Repayment Performance in Group Lending

A common characteristic of group lending is that the group obtains the loan under joint
liability, so each member is made responsible for repayment of credits of his/her peers.
Joint liability, the threat of losing access to future credit, provokes members to perform
various functions, including screening of loan applicants, monitoring the individual
borrower‘s efforts, fortunes and shocks, and enforcing repayment of their peers’ loan
(Zeller, 1996).

In group-lending programs, the functions of screening, monitoring and the enforcement of

repayment are to a large extent, transferred from lender (MFI) to group members. In
addition, groups may also have a comparative advantage in enforcement of credit
repayment. Group members can potentially employ social sanctions or even seize physical
collateral from the defaulter (Besley and Coate 1995). Moreover, group members appear to
be in a better position to assess the reason for default and to offer insurance services to
members who are experiencing shock that are beyond their control (Zeller 1996).

Despite all the above-mentioned benefits, group lending is not without its problems. There
are several factors that may undermine the repayment performance in group lending. Zeller
(1996), discusses that since the risk of credit default by an individual is shared by his or her
peers, a member may choose a riskier project compared to that in the case of individual
contract, and may count on other members to repay his or her credit (i.e. adverse selection
of risky projects). The study further notes that repayment incentives for a good borrower
will vanish under joint liability, when he or she expects that significant number of peers
will default.

Reikne (1996), assessed the factors that lead to the failure of group based lending system in
urban areas and went on to the extent recommending an individual credit system for a
better credit repayment. According to him presence of high geographical mobility, low
attachment to specific neighborhoods and peer groups consisting of competitors are the
factors that frustrate the solidarity of groups in urban areas, and hence group lending is
more applicable to the rural environment than to urban society.

15
2.6.1.4 Three C’s of Microcredit
Most literatures describe three “Cs” that should be observed to reduce default when
providing microcredit: character, capacity, and capital (Njeru, 2012). The author describes
the three “Cs” as follows: the first “C” is character that refers to the way a person has
handled past debt obligations. Paying regard to character includes determining the
borrower‘s credit history and personal background, honesty, and reliability to pay credit
debts, the second aspect is considering a borrower‘s capacity involves determining how
much debt he or she can handle comfortably by analyzing income streams and identifying
any legal obligations that could interfere with repayment, and the last is about capital; this
refers to a borrower‘s current available assets, such as real estate, savings, or investments
that could be used to repay debt if income is unavailable.

2.6.1.5 Loan Products Characteristics

According to Ledgerwood, (2013), loans are structured based on client demand,
capabilities of the provider, and risk management requirements. As different researchers
pointed out, the core components of a loan are loan size, loan term, repayment terms,
lending methodology, and collateral or security.

Loan size: loan sizes vary depending on need and can increase over time based on client
needs, debt capacity, and credit history; loans should not increase simply as a function of
continued borrowing. The loan size can determines the length of time the loan is intended
to be outstanding; loans are usually designed to be repaid in periodic installments over the
loan term or at the end as a lump sum, ideally matched to the borrowers’ cash flows (Ibid,
2013).

The length of time the loan is intended to be outstanding determines the time and frequency
of repayments. Frequent repayments serve to reduce credit risk but on the contrary it can
increase the transaction costs and may make loans less accessible for borrowers in remote
areas or those with infrequent cash flows. In general, depending on how, when, and where
payments are made, the risk of default may increase if the borrower is not able to manage
larger installments or a final lump sum. Therefore, it is important to restructure loan
products as per clients need and capacity to pay that meets client needs and provided in a
safe and transparent manner.

16
 Loan collateral or security is another issue of credit product characteristic. Clients of MFIs
earn low income and often have minimal assets to pledge for loans; property, land,
machinery, and other capital assets are often not available. Because of this, group guarantee
substitutes collateral. To minimize the risk of loan, saving, specifically compulsory saving
is used as alternative collateral (Brau, 2004). Practically MFIs require clients to hold a
balance (usually stated as a percentage of the loan) in compulsory savings (or as
contributions to group funds) for first and subsequent loans. Compulsory savings differ
from voluntary savings in that they are not generally available for withdrawal while a loan
is outstanding. In this way compulsory savings act as a form of collateral.
2.6.1.6 Client Screening
Screening clients to ensure that they have the willingness and ability to repay a loan is the
first step of limiting credit risk. As Felix, (2010), pointed out in analyzing client
creditworthiness, microfinance institutions typically use the five C’s client screening
summarized below.

Character An indication of the applicant’s willingness to repay and ability to run the
enterprise
Capacity Whether the cash flow of the business (or household) can serve loan
repayments
Capital Assets and liabilities of the business and/or household
Collateral Access to an asset that the applicant is willing to cede in case of non-
payment, or a guarantee by a respected person to repay a loan in default
Conditions A business plan that considers the level of competition and the market for
the product or service, and the legal and economic environment

2.6.1.7 Client Visit

As Jemal (2003), discusses frequent visits help to ensure that the client is able and willing
to repay the loan. Frequent visits also allow the loan officer to understand his or her clients’
cash flows and the appropriateness of the loan (amount, term, frequency of payments, and
so forth). Moreover, client visit contribute to developing mutual respect between the client
and the loan officer as they learn to appreciate and understand each other’s commitment to
their work, which can lead to stronger relationships that benefit both the clients and lenders

17
(Ibid 2003). However, more frequent client visits lead to additional costs that need to be
considered.

2.6.1.8 Loan Default

According to Njeru, (2012) the most common reasons for the existence of defaults are the
following: if the MFI is not serious on loan repayment, the borrowers are not willing to
repay their loan. The MFI staffs are not responsible to shareholders to make a profit;
clients’ lives are often full of unpredictable crises, such as illness or death in the family; if
loans are too large for the cash needs of the business, extra funds may go toward personal
use; and if loans are given without the proper evaluation of the business.

In order to achieve self-sufficiency, reducing default rate is very crucial for any MFIs.
MFIs can take a number of actions to reduce default rate or the amount of arrears. Stigliz
and Weiss (1981), writes about some strategies for preventing or reducing default.
According to them, giving training to the clients prior to the disbursement of each loan and
financial incentives for the loan officers can be used to lower the default rates.

In addition, quick follow-up visits right after a missed payment and the formation of
strong solidarity groups are also key to preventing high default rate. Limiting
geographic scope reduces time and money wasted traveling from the office to clients’
businesses. If loan officers have a specific geographic region, they can visit clients more
often and it helps to develop relationships in their neighborhoods.
\

2.5.1.9 Real Incidences of Defaults in Microfinance

According to Njeru (2012), it can be concluded that the MFIs are only concerned about
extending financing without much effort being made to provide any form of post
disbursement supervision. As reported by Njeru (2012), post-disbursement supervision is
highly relevant in ensuring the success of microfinance loan due to the fact that around 80
percent of the clients of microfinance are in lower level of education or illiterate, especially
women. Furthermore, around 82 per cent of these clients had no business experience before
joining the microfinance program, while the rest 18 per cent had some basic business
experiences.

Generally, the MFIs provide loan without any technical assistance except for some briefing
of around five to ten minutes to the recipients. It should be emphasized that the technical
18
assistance is just as important and should complement the financial assistance in ensuring
the success of the business project (Nawi and Shariff, 2013).

According to Samuel (2011), another reason for loan default in microfinance is focusing on
extending lending or financing without much effort being done to provide any form of
post-disbursement supervision. Post-disbursement supervision is highly relevant in
ensuring the success of microfinance business due to the fact that most microfinance clients
are illiterate. Moreover, they have little or no business experience before joining the
microfinance program.

Generally repayment performance of microfinance institution could be evaluated in terms

of collection capacity and portfolio risk. In this regard, repayment rate and portfolio at risk
(PAR) are the best measures of repayment performance (Arsyad, 2005).

A. Repayment Rate
According to Arsyad (2005), repayment rate measures the amount of payment received
with respect to the amount due. It also measures the rate of loan recovery and indicates
recovery performance, but it does not indicate the quality of the portfolio. But, this doesn’t
mean that repayment rate is not useful, it is a good measure in monitoring repayment
performance over time. In addition, it is useful for projecting future cash flows, because it
indicates what percentage of the amount due can be expected to be received, based on past
experience. According to Godquin (2004), repayment Rate is calculated as the amount paid
(minus any prepayments) divided by the sum of the amounts due plus the amounts past
due. This ratio has fallen out of favor among microfinance practitioners because it hides a
looming arrears problem. Repayment rate less than 97 percent shows poor performance in
collecting the loan as per maturity period (Ibid, 2004).

B. Portfolio at Risk (PAR)

According to Arsyad (2005), the most widely used measure of portfolio quality in the
microfinance industry is Portfolio at Risk (PAR), which measures the portion of the loan
portfolio “contaminated loan” by arrears as a percentage of the total portfolio. It is easily
understandable, does not understate risk, and is comparable across institutions. A
microenterprise loan is typically considered to be at risk if a payment on it is more than 30
19
 days late (PAR30). This rule is much stricter than what is practiced among commercial banks,
but it is justified given the lack of bankable collateral in microfinance.

The ratio shows the portion of the portfolio that is “contaminated loan” by arrears and therefore
at risk of not being repaid. The ratio also indicates that, the older the delinquency, the less
likely that the loan will be repaid. In general, any PAR30 exceeding 10% should be cause for
concern, because unlike commercial loans, most microfinance loans are not supported by
collateral (Warue, 2012). Portfolio at risk estimates total risk to the portfolio by considering
the total value of loans which have payments in arrears instead of only the value of the
payments as noted above because, the entire loan is assumed at risk if a client has late or
missed scheduled payments. Warue (2012) discussed that, PAR is a more realistic measure of
the threat to the overall portfolio that indicates how MFI is efficient in making collections.
Therefore, the higher the PAR indicates low repayment rates, as indication of inefficient
microfinance institution.
Table 2: Past due loan
S/N Arrears Years with uncollected loan balance
(in days) 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013

1 1-30
14,843.80 17,212.10 27,379.16 47,083.26 12,753.95
2 31-60
15,368.79 39,207.86 12,816.63 12,918.88 20,180.08
3 61-90
19,188.76 28,383.09 4,442.58 29,872.28 12,013.56
4 91-180
101,669.41 87,240.82 1,591,439.38 16,483.36 42,975.37
5 181-365
125,246.64 200,598.08 160,320.85 76,591.56 74,911.87
6 >365
949,574.12 1,075,199.88 1,641,096.65 1,494,988.68 76,339.82
Total
1,225,891.52 1,447,841.83 3,437,495.25 1,677,938.02 239,174.65
Source: MMFI (2013)
20
2.6.2 Client Retention Performance
Client retention refers to the maintenance of continuous trading relationships with clients
for a substantial period of time. The substantial time exceeding five years is regarded as a
successful effort of client retention (Mulumba, 2011). Retaining clients increases the
profits of a firm which facilitates further investments leading to expansion, because when
clients are retained for longer period of time the acquisition costs of the microfinance
institution are lowered in the long run which means that client retention is related to the
profitability of a firm.

The more productive clients are retained the lower the acquisition costs and the higher the
productivity of loans and outreach involving the mobilization of new clients than
recovering stuck loans as dictated by the credit policy. The efforts followed by MFI to
retain clients are reflected in the commitment of management and staff to offer excellent
client services which yields satisfaction and trust through communication. Client retention
is more than giving a client what they want but it involves exceeding their expectations
which makes them to become loyal advocates for the MFI (Ambe, 2009).

The number of clients leaving every month and its effect on the sustainability and outreach
gives the general view of the exit situation in the microfinance institution; however, it is
important to understand the patterns and influences of client drop out (Dackauskaite, 2009).
Thus, an important characteristic of exit client is the number of consecutive loan cycles
he/she participated in before exiting. Maximambali et al., (1999), noted that longer
relationship is beneficial for both the client and the lending institution implying that the
microfinance institution should focus on the attraction and retention of the client group that
tend to stay longer (Ibid, 1999).

21
Figure 1: Client dropout
Client dropout

1200

1000

800
Axis Title

600

400

200

0
2008/2009 2009/2010 2010/2011 2011/2012 2012/2013
Male 311 380 277 452 520
Female 175 292 302 235 400
Total 486 672 1092 687 920

Source: MMFI (2013)

Client retention (and its complement, client desertion) have significant wide ranging
implications for an institution.

The retention ratio measures the degree to which the MFI is trying to retain its existing loan
clients through repeat loans. According to Berry (2010), there is no standard rate for client
retention rather it is measured based on annual plan for dropout. The MFIs annual plan
should incorporate the number of clients who will exit from the institution (Ibid, 2010).
According to Mulumba (2011), a retention rate more than 85% is considered as good
performance. Most MFIs experienced increased dropout rates because of management
problems, clients’ business condition, and loan default due to improper loan utilization
(Hossain, 1988; Hulme and Arun, 2009; Islam, 2007; and Mulumba, 2011).

2.6.3 Outreach Performance

Outreach is defined as the ability of MFI to provide high quality financial services to a
large number of clients. The indicators of outreach performance are the number of clients,
percentage of female clients, the amount of savings deposits, the value of the outstanding
loan portfolio, etc (Yitay 2011). Outreach performance requires microfinance institutions to
22
reach a large public, and to have a significant and increasing volume of activities (savings,
credit, insurance, etc.).
Nawi and Shariff, (2013), on their study confirms the fact that increasing the number of
borrowers per MFI would lower the average operating cost and would raise total operating
costs less than proportionately with the number of borrowers. This is a clear indication for
an increasing the number of borrowers per field officer would raise the sustainability
indicators in financial and operational self-sustainability.

They have also indicated on their finding that increasing the number of borrowers per field
officer seems to be the most promising way to reduce costs, especially in group-based
delivery methods. This would not hurt repayment despite a likely lightening of the
monitoring. Therefore, the number of active borrowers influences the operational and
financial sustainability of microfinance institutions positively according to this finding.

Breadth (number of clients served) matters because of budget constraints; the wants and
needs of the poor exceed the resources earmarked for them.

Self-sustainable organizations with wide breadth may reach as many of the very poor as
poverty-oriented organizations with narrow breadth (Dackauskaite, 2009). According to
CGAP (2009), the best measurement of outreach (breadth or number of clients served) is
the number of clients or accounts that are active at a given point in time.

A. Growth in Number of Active MF Clients

Measures the ability of the MFI to expand its operations through increases in its active
clients referring to those with outstanding MF loans with the institution; the higher this
ratio the better it indicates the efforts of the MFI.

B. Percent of women borrowers

This ratio indicates how gender sensitive the institution is in its provision of financial
services

23
2.6.4 Empirical Evidence

Abreham (2002) studied on the loan repayment and its determinants in small-scale
enterprise financing in Ethiopia around Zeway area. He found that other sources of income,
education, and work experience related economic activities before the loan are enhancing
loan repayment. While extended loan repayment period is influence the repayment
performance negatively.

Retta (2000, cited in Abafit, 2003) studied loan repayment performance of women fuel
wood carriers in Addis Ababa. His finding is frequency of loan, supervision, suitability of
repayment period and other income sources are found to encourage repayment hence
reduce the probability of loan default. While educational level is negatively related to loan
repayment.

Bhatt and Tang (2002) studied the determinants of loan repayment in microcredit evidence
from programs in Kenya. Their study showed that women has low repayment rate because
some women entrepreneur in the study might have been engaged in high risk and low
return activities. Godquin (2004) also examined the microfinance repayment performance
in Bangladesh. His result is female borrowers did not proven to have a significant better
repayment performance. The size of loan and the age of the borrower showed the negative
impact on the repayment performance. On the contrast, Abreham (2002) showed in his
study male borrowers are the undermining factors for repayment.

Zeller (1996) analyzed the determinants of repayment performance of credit groups in

Madagascar. His finding is groups with higher level of social cohesion have a better
repayment rate. Moreover, the programs that provide saving service to their members have
a significantly higher repayment rate. Olagunju and Adeyemo (2007) and Oke et.al. (2007)
also analyzed the determinants of repayment decision among small holder farmers in
southwestern Nigeria. The result showed that the number of visits made by loan officers to
the borrowers, higher level of education, and time of loan disbursement would have a better
repayment performance. Moreover, having access to business related information and
providing training to the clients are increasing the loan repayment rate of the borrowers.

Though the availability of literatures on performance and sustainability of Ethiopian

microfinance industry is limited, studies by Kereta in (2007) and Ejigu in (2009) are
24
significantly promising. Kereta (2007) conducted a study on outreach and financial
performance analysis of MFIs in Ethiopia, his findings shows that, with regard to outreach
angle MFIs outreach shown an average increment of 22.9 percent in the period from 2003
to 2007. But their reach to the disadvantages particularly to women is limited to 38.4
percent.

As mentioned above, various studies were conducted on the determinants of loan

repayment performance in different countries. Most of these studies were focused on the
credit associated with agricultural activities and they identified the socio-economic factors
that affect the loan repayment rate of rural household. However, in the literature review
nothing was indicated about the factor influencing the loan repayment performance of
urban borrowers. Thus, this research could focus on the borrowers who made various types
of business in urban area.

25
 CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
Introduction
This chapter deals with the overall research design and methodology. Accordingly, the
research design, population, sample size, sampling technique, methods of data analysis,
data collection procedure, type of data, and tools of data collection are presented with their
order.

3.1 Research Design

A research design is an advance planning of the methods to be used and the arrangement of
conditions for collection and analysis of data in a manner that fits the research objective
and it provide the blueprint for the collection, measurement and analysis of data (Kothari,
2004).

Research design is needed because it facilitates the smoothing of the various research
operations, thereby making research as efficient as possible yielding maximum information
with minimum expenditure of effort, time and money. As Kothari (2004) explained,
research design stands for advance planning of the methods to be adopted for collecting the
relevant data and the techniques to be used in their analysis, keeping in view the objective
of the research and the availability of time and money.

According to Mouton (1998), the Choice of the research design depends on the objectives
of the study, the availability of data sources, the cost of obtaining the data, and availability
of time. In view of this, the study employed a descriptive survey method to assess
operational performance of MMFI. The research aimed to collect data on the factors
affecting the operational performance of MMFI in Addis Ababa, Ethiopia. According to
Oso and Onen (2005), descriptive design is a process of collecting data in order to answer
questions concerning the current status of the subject in the study. The authors explained
that descriptive research design is used when the data collected describes persons,
organizations, settings or phenomena. This approach has been selected as an appropriate
for the study, because it captures data to provide in clear information about the factors
affecting the operation performance of MMFI in Addis Ababa.

26
3.2 Population, Sampling Techniques, and Sample Size
3.2.1 Population

According to Swanson and Holton (2005), population’ refers to the total of items about
which information is desired. The population can be finite or infinite. The population is
said to be finite if it consists of a fixed number of elements so that it is possible to
enumerate it in its totality. The symbol ‘N’ is generally used to indicate how many
elements (or items) are there in case of a finite population. The total number of target
population undertaken for this study was 566 active borrowers of MMFI in Addis Ababa
and around the capital city..

3.2.2 Sample Size

The primary function of sampling strategy is to identify the target population of the study
which enables to determine the sample size (Kothari, 2004). According to Singh, (2006),
sampling is the process of obtaining information about an entire population by examining
only a part of it. The author further stated that sample should be truly representative of
population characteristics without any bias.
Nasiurma (2000) pointed out, that the size of sample should optimum, neither be
excessively large, nor too small because an optimum sample is one which fulfills the
requirements of representativeness. While deciding the size of sample, researcher must
determine the desired precision and an acceptable confidence level for the estimate.

Technically, the size of the sample depends upon the precision the researcher desires in
estimating the population parameter at a particular confidence level. According to
Nasiurma, (2000), the sample size of the population is computed using the formula;

Where, n=sample size, N=population, C=Coefficient of variation (0.5), and e= level of

precision (0.05) and this has been proportionally distributed to each stratum based on the
required total sample size. Therefore, the sample size (n) was found to be 85 respondents.

27
The sample size for this study was drawn from the population of MMFI which constitute a
total active borrower of 566. Among the total population (566 borrowers), 85 borrowers
were taken as a sample for the study.

3.2.3 Sampling Techniques

It is a plan for obtaining a sample from a given population. It refers to the technique or the
procedure the researcher would adopt in selecting items for the sample. The researcher
used stratified sampling technique. According to Saunders, et al, (2009), a stratified sample
is a sampling technique that enables to obtain a representative sample. Under stratified
sampling the population is divided into several sub-populations that are individually more
homogeneous than the total population or strata. Since each stratum is more homogeneous
than the total target population, better representation or estimation of a whole can be
obtained.
This enables the researcher to get more precise estimates for each stratum and by
estimating more accurately each of the component parts. Simple random sampling was
used to select the sample from each stratum. Simple random sampling refers to a sampling
method that has the following properties (Ibid, 2009).

The population consists of N objects.

The sample consists of n objects.

All possible samples of n objects are equally likely to occur.
An important benefit of simple random sampling is that it allows researchers to use
statistical methods to analyze sample results (Ibid, 2009). The researcher used the lottery
method to obtain a simple random sample. Each of the N population members was assigned
a unique number. The numbers are placed in a bowl and thoroughly mixed. Then, the
researcher selects n numbers. Population members having the selected numbers were
included in the sample.

28
S/N Loan category Total borrowers Sample size
1 Group business loan 206 206*85/566=31
2 Individual business loan 246 246*85/566=37
3 Individual consumption loan 113 113*85/566=17

Total 566 85

Accordingly, Eighty five questionnaires were distributed to respondents and all were
returned. In addition to borrowers, for triangulation purpose interview was conducted with
loan officers, branch managers and operation manager. The data was analyzed (with the
help of SPSS version 20 and Excel) and presented using descriptive statistics such as
percentages, tables, charts, and graphs.

3.3 Source of Data and Tools of Data Collection

3.3.1 Source of Data

Applying more than one data sources and collection methods helps to substantiate findings
in the study (Saunders, et al, 2009). Accordingly the researcher employed both primary and
secondary data sources.

3.3.1.1 Primary Data source

Primary data are those which are collected fresh and for the first time and thus happen to be
original in character (Kothari, 2004). Primary data was collected through questionnaire that
solicits ideas related to the research problem from respondents. The questions sought to
address the research objective and question related to the study. In addition to
questionnaires designed and distributed to sample respondents an interview was conducted
with branch loan officers and branch managers, and operation manager at the head office
level.

3.3.1.2 Secondary Data Source

The secondary data is collected from review of MMFI operation manual, five year annual
operation reports, and borrower’s profile. In addition, relevant research literature, such as
books, brochures, articles, and research outputs are used as additional secondary source.

29
3.3.2 Tools of Data Collection
3.3.2.1 Questionnaire
This method of data collection is quite popular, particularly in case of big studies.
Questionnaires were prepared translated in to Amharic language and distributed to sample
respondents with the help of two experienced data collectors. Through this method the
relevant data has been collected from sample respondents.

3.3.2.2 Interview
According to Swanson and Holton (2005), the interview method of collecting data involves
presentation of oral stimuli and reply in terms of oral responses. This method can be used
through personal interviews and, if possible, through telephone interviews. To collect clear
and relevant data the researcher used personal or face-to-face interview, because face-to-
face interview method enables the interviewer asking questions for more clarification as the
situation may permit to ask. The qualitative data was collected through face-to-face
interview with branch loan officers, branch managers, and operation manager at the head
office level.

3.4 Procedures of Data Collection

Respondents were identified, and in line with research question, and study objective
respondents are asked through questionnaire and interview. First respondents were
identified and the required data that addresses the research questions and objectives were
collected through questionnaire and interview. Questionnaires were distributed to
respondents and the relevant data were collected with the help of assistant data collectors
but they are closely supervised by the researcher. The interview with MMFI officials was
administered only by the researcher. After all the relevant data were collected, the
information summarized and analyzed with the help of excel and SPSS version 20.

3.5 Methods of Data Analysis

Data analysis is the application of reasoning to understand the data that have been gathered
from respondents and the appropriate analytical technique of the analysis mainly
determined by the characteristics of the research design and the nature of the data gathered
(Sapsford and Jupp, 2006). The data (quantitative and qualitative) gathered from sample
active borrowers were organized, tabulated and presented using tables, graphs and charts
30
with the help of excel and SPSS version 20. The qualitative data obtained through
interview was also interpreted in combination with the data secured by questionnaire.
Finally annual financial report showing outstanding loan balance, delinquent loan, number
of new and exit client were used to supplement or counter check the analysis through
interview and questionnaire.

3.6 Reliability Test

Reliability refers to the capacity of a measure to produce consistent results. Cronbach’s

alpha, is probably the most commonly used test for scale reliability (Donna, 2010)). There
are several ways to calculate reliability. But, the most commonly accepted measure in
business research is internal consistency reliability using Cronbachs alpha. Bryman (2008)
notes that to assure the reliability (repeatability) of quantitative data, Cronbach’s Alpha can
be used to the critical value of 0.70. As a step forward to enhance the quality of this thesis,
reliability analysis was conducted to each variable of the instrument under the summative
response scale excluding questions related to demographic characteristics of respondents.

Following Vanderstoep and Johnston (2009), the reliability measure for the dependability
of the instrument to test for what it was designed to test was examined through the
calculation of Cronbach’s alpha coefficients. The acceptable scale suggested on Cronbach’s
alpha coefficient of construct is 0.6 (Bryman, 2008) while a scale of 0.70 is preferable
(Swanson and Holton, 2005). In this research it is assumed that, if the test obtains the value
of 0.65, it means the items in the model are understood by most of the respondents. On the
other hand, if the findings are far from the expected value of 0.65, the respondents have
different perceptions toward each item of the domain. The following diagrammatic
presentation is sketched by the researcher as a guide to the decision process for answering
problems about reliability analysis of the instruments in this thesis.

31
Fig. 2.Schematic representation of the decision process of the reliability test

Are Chronbach’s Alpha

No False
greater than 0.60 for all

Yes
Are Chronbach’s Alpha
No True with caution
greater than 0.65 for all
factors?
Yes

True

Source: Bryman, (2008)

Based on the diagrammatic presentation sketched above, the decision process regarding the
reliability test of the instruments planned to be used in the study has been done by
distributing the questionnaire to 40 respondents during the pre-test stage. As indicated in
table 3 bellow, the internal consistency reliabilities for each of the scales is calculated.
Hence, the result shows an alpha coefficient (r=0.820) is a clear indication of strong item
covariance and suggests that the sampling domain in this study has adequately been
captured. Besides, the result makes sure that the instruments are consistent and dependable
that offers the authorization to proceed with the remaining tasks.
Table 3. Reliability Statistics Result

Cronbach's Alpha Cronbach's Alpha Based on Standardized No. of Items

Items
0.692 .720 24
Source: calculated by the researcher (2014)
According to Sunders, et.al. (2009), validity is the soundness or rationality; whether the
results be in reality about what they become visible to be or the degree to which results
obtained from the analysis of the data actually represents the phenomenon under study. The
validity of data gathering instrument is confirmed by the capacity and willingness of the

32
respondents to provide the information requested. In order to make the questionnaires
valid, relevant and objective to the problem; it was properly commented by the advisor,
and it also tested on available respondents, and based on the issues which were not properly
clear by the respondents were corrected and refined.
Finally, the refined version of the questionnaires were printed, duplicated and dispatched to
the respondents.

3.7 Ethical Consideration

This study carefully adheres to the ethical principles with respect to the data collection and
used in the study. First, revisiting the literature all the ideas and concepts taken from other
scholars are acknowledged. In addition, the data obtained through questionnaire from
borrowers of Meklit Microfinance Institution remain confidential as stated on the
questionnaire. Moreover, the information secured through an interview with the
institution’s officials and staff was only used for the purpose of the study and the recording
or the written notes will not pass to the third party at any circumstances.

33
 CHAPTER FOUR
RESULTS AND DISCUSSION
INTRODUCTION
In the preceding chapters, an attempt has been made to assess the basic theoretical debates,
conceptual and empirical findings that are supposed to serve as stepping stones for the
analysis. In line with this, this chapter presents the presentation, analysis and interpretation
of the data gathered from the sample respondents. It is organized in to three parts. Part one
analyses the repayment performance of Meklit Microfinance Institution (MMFI). Part two
examines client retention performance in terms of dropout and possible problems for
dropout. Part three reviews the outreach performance in terms of number of clients served,
and women participation. In each part, the data obtained through questionnaire and
interviews were interpreted in combination.
4.1 Characteristics of the Respondents
Table 4: Background information of respondents
Item Number Percent
Sex 1 Male 46 54.1
2 Female 39 45.9
Total 85 100.0
Level of Education 1 Basic education 20 23.52
2 Elementary education 22 25.88
3 Secondary education 15 17.65
4 TVET or diploma 15 17.65
5 First degree 12 14.12
6 Above First degree 1 1.18
Total 85 100.00
Source: own compiled from questionnaire response
4.1.1 Sex
Table 4 above: shows that 54.1% (46) of respondents are male and 45.88% (39) of
respondents are female. This indicates that men and women respondents in the sample are
relatively close in number.

34
4.1.2 Education

Table 4 above shows that the clients are of varying educational background. Nearly 50%
have below secondary level education, 25.88% (22) elementary education, 20(23.52%)
beginners’ education, 17.65% (15) secondary education, 17.65% (15) college level diploma
education, 14.12% (13) first degree, and 1.18%% (1) have postgraduate level of education.
Table 4, shows most of the clients have below TVET level education. This implied that
borrowers would not understand well the loan agreement and other business issues.
Table 5: Number of borrowers in activity during the year
Years Group Individual Individual
Total
Business Loan Business Loan Consumption Loan
No.
2008/2009 130 647 313 1090
% 12% 59% 29% 100%
No.
2009/2010 140 591 226 957
% 15% 62% 24% 100%
No.
2010/2011 138 644 167 949
% 15% 68% 18% 100%
No.
2011/2012 125 359 165 649
% 19% 55% 25% 100%
No.
2012/2013 118 246 165 529
% 22% 47% 31% 100%
Source: MMFI (2013)

Table 5 shows that number of active borrowers in MMFI are more in individual business
loan. Except the last year (2012/2013) above 50% of borrowers are borrowed in individual
business loan lending system. In all five years data above the highest number of borrowers
are individual business borrower. On the other hand the numbers of borrower in individual
consumption loan are next to individual business loan borrowers. The least number of
borrowers are found in group business borrowers. This shows that the institution is inclined
more on individual loan especially business loan.

An interview conducted with branch managers and operation manager also supported this
fact. As learnt from the discussion with managers in the interview, there is a tendency
towards favoring lending to individual rather than to groups. The reason for this is that the
35
 group loan size is not satisfactory and group collateral tends to be risky. Individuals are
also inclined to favor individual borrowing as they do not want to shoulder the blame for
which they are not responsible.

With the continuation of interview and loan contract documentation, it was learned that,
MMFI requires immovable fixed asset (building) as collateral of individual business loan,
and a salaried person for individual consumption loan. The institution lends consumption
loan for only individuals working in any legal organization with a salaried base. As far as
the clients of microfinance are low income households, they may not be able to fulfill
collateral requirement to participate in individual business loan. Hence, the clients who are
unable to field the required collateral, they may leave the institution (unable to shift from
group to individual). Moreover, the institution will incurred more cost to screen and follow
up new clients, and it can be left with limited number of clients for long period of time.

4.2 Analysis on the operational performance of MMFI

4.2.1 Repayment Performance
Scale: 5= Strongly Agree, 4= Agree, 3=Neutral, 2= Disagree, and 1 Strongly Disagree
Table 6: repayment issues
N Item Agreement Level
o. 5 4 3 2 1 Total

1 Spending the borrowed loan for the No. 11 33 5 28 8 85

intended purpose properly. % 12.9 38.8 5.9 32.9 9.4 100
2 On time repayment is an incentive to No. 8 22 10 35 10 85
get the next higher loan size. % 9.4 25.9 11.8 41.2 11.8 100
3 After the loan is disbursed loan No. 7 15 10 38 15 85
officers follow up or supervise % 8.2 17.6 11.7 44.7 17.6 100
clients business regularly.
4 Before the signing of loan contract, No. 6 24 12 35 8 85
the lender (MMFI) confirms the % 7.1 28.2 14.1 41.2 9.4 100
feasibility of clients business.
Source: primary data
6.1 Loan utilization (table 6 item 1)
As it is indicated in table 6, 38.8% (33) and 11(12.9%) of respondents are agree and
strongly agree respectively that the borrowed money is spending properly for the intended
36
purpose. On the other hand 32.9% (28) and 9.4% (8) of respondents are disagree and
strongly disagree respectively with the issue of proper loan utilization for the intended
purpose. The rest 5.9% (5) of respondents remain neutral. The majority of respondents
responded that they were used the loan properly for the intended purpose as they plan.
Interview responses from managers and loan officers were indicated that, there are
borrowers who didn’t utilize the loan as per the signed contract instead they are found
using the loan for other purposes (personal communication, 2014). This can be evidenced
by respondents too, because about 42.30% (32.9%+9.4%) of respondents are agree with
improper use of loan. This indicated that, clients who are not utilize the loan properly for
the intended purpose will face a bankruptcy, as a result the loan might not be repaid on
time. Thus, the lending institution incurs operating cost to recover the loan in terms of extra
follow up and court fees. Moreover, other borrowers might follow the defaulter.

6.2 Repayment incentives (table 6 item 2)

Concerning the issue of repayment incentives (item 2), 41.2% (35) of respondents disagree,
11.8% (10) of respondents strongly disagree, 25.9% (22) of respondents agree, 9.4% (8) of
respondents strongly agree, and 11.8% (10) of respondents are neutral. The result showed
that MMFI didn’t acknowledge borrowers who have paid their loan repayment on the due
date. The interview response of operation manager and branch managers also shares
respondents’ response of disagreement on repayment incentives (personal communication,
2014). According to interviewed manager’s response, MMFI believed that repayment on
the due date doesn’t lead to any incentive for borrowers rather it is their responsibility to
repay the money back on due date. Moreover, the officials (managers) added that any
borrower who failed to pay the loan exceeding three months is not allowed to borrow next.
This implies that the institution is employed a stringent collection policy.

6.3 Follow up or post-loan supervision (table 6 item 3)

As it is shown from the table 6 (item 3) respondents were asked whether or not they are
supervised regularly by loan officers. In this regard 44.7% (38) of respondents disagree,
17.6% (15) of respondents strongly disagree, 17.6% of respondents agree, and 8.2% (7) of
respondents strongly agree with the issue of post-loan supervision. The rest 11.7% (15) of
respondents have no positive or negative agreement on post-loan supervision. The
majorities of respondents are not happy or agree with the intensity of supervision carried

37
out by the lending institution. This shows that once the loan is disbursed, clients are not
supervised in regarding to loan utilization with business effectiveness. In contrast,
interview conducted with branch managers and operation manager reveal that client’s
business and loan utilization is supervised and checked by loan officers as often as
possible. In addition to loan officers individual business loan clients having birr 25,000 and
above outstanding balance is supervised by branch manager and operation manager. This
indicates the institution gave more attention especially for higher loan size.

6.4 Checking client’s business feasibility/pre-loan supervision (table 6 item 4)

Concerning the issue of pre-loan supervision (item 4), over 50% (43) of respondents
expressed their dissatisfaction they are not happy about the supervision before the loan is
approved and disbursed taken by the lending institution. It is of course essential to check
the type and feasibility of clients business before the loan is approved and disbursed;
because clients may run another business or request overstated loan size. The interview
with branch managers discovered that, pre-loan supervision is a necessary condition for
loan approval and disbursement. This is an indication of information gap between the
institution and the clients or borrowers. This can indicate again poor relationship among
them.

38
Table 7: Other repayment performance issues
No. Item Frequency Percent
1 Yes 17 20.0
Have you got training from
1 2 No 68 80.0
Meklit MFI?
Total 85 100.0
1 Yes 21 24.7
Do you borrow from other
2 2 No 64 75.3
institution (s)?
Total 85 100.0
Other MFIs 16 18.8
Family or friends 3 3.5
If your answer is yes from which Informal money lenders 2 2.4
3
institution (s) you borrowed? Total 21 24.7
System 64 75.3
Other MFIs 16 18.8
Yes 29 34.2
Does the repayment period
4 No 56 65.8
suitable to respond on time?
Total 85 100.0
Repayment on Schedule 30 35.3

5 What is your repayment status? Repayment in arrears 55 64.7

Total 85 100.0
Business not profitable 26 31

Loan used for household

expenses 18 21
What is the main reason that
Sold on credit 13 15
6 prohibits you from loan
repayment? Loss of asset 3 4

Not in arrears 25 29

Total 85 100.0
Source: Primary source

39
7.1 Training (table7 item 1)

Table 7 shows 80% (68) of the respondents have not taken any training from the lender
concerning how to run their business and how to utilize the loan only 20% (17) of
respondents verify they had training. This situation confirmed that a lose link between
MMFI and the borrowers in terms of proper loan utilization, effectiveness of clients or
borrowers business, repayment on the due date, service expansion; because it is not fair for
80% of respondents borrowed without at least basic training. The interview with branch
managers also verified that, less attention is given for client training (personal
communication, 2014).

7.2 Double loan (table7 item 2)

Table 7, item 2: shows 24.7% (21) of respondents borrowed additional loan from other
financial sources, which means the loan size of MMFI doesn’t satisfy some of its clients.
75.3% (64) of respondents have no loan from any financial sources other than MMFI. An
interview with branch managers revealed that there is no formal way of check borrowers
whether they had debt from other financial institutions. Borrowers filled the form prepared
by the institution, and the information they gave considered as correct. But it can be
understood borrowers hide information or fill false information.

7.3 Sources of double loan (table7 item 3)

As indicated in table 7 of item 3: 24.7% (21) of respondents borrowed from MMFI with
having loan balance from other lending institution. From the 24.7% (21) of respondents
who have borrowed loan from other lending institutions 18.8% (16) of respondents
borrowed from other MFIs, 3.5% (3) borrowed from their family or friends, another 2.24%
(2) of respondents borrowed additional money from any informal lenders. This confirms
that the different lending institutions do not exchange information among themselves to
defer double loans.

7.4 Repayment period suitability (table7 item 4)

According to table 7 above, 65.8% (56) of the respondents feel that the repayment period
set by MMFI was not suitable, while 34.2 % (29) thought the period was adequate. The
data obtained through interview revealed that the institution uses monthly installment base
for all loans and the institution believed that borrowers have monthly cash flow to settle

40
 their monthly repayments. Since the data from respondents and from officials through
interview contradicted each other, the suitability of repayment period needs additional
survey to reconcile the clients’ need and management intention.

7.5 Repayment Status (table7 item 5)

It was found that 64.7% (55) of borrowers had their repayments in arrears, and 35.3% (30)
of respondents had repayment on schedule. The findings therefore indicate that the majority
of borrowers were in arrears as far as loan repayment was concerned.

7.6 Default reason (table7 item 6)

Responses from Some 31% (26) of the borrowers in arrears, the reason why their loan
repayment was in arrears was because business was not profitable, while 21% (18) said
they used the loan for household expenses hence unable to repay the loan on schedule.
Further, 15% (13) of borrowers sold on credit and were not able to make repayments on
time, 4% (3) lost their assets and 29% (25) of the respondents indicated they were not in
arrears. This implies that the business status of borrowers and effective loan utilization
needs close follow up by the lender.

Table 8: Repayment rate

Years Total Amount Amount Amount due Amount Repayment
received prepaid past due rate
1,225,891.52 80%
2008/2009 1,680,588.57 552,900.00 180,912.00
2009/2010 2,898,609.96 232,811.53 1,894,362.08 1,447,841.83 80%
2010/2011 6,271,173.37 4,581,615 3,437,495 78%
2011/2012 3,943,591.76 284,116.18 2,528,855.76 1,677,938.02 87%
2012/2013 1,901,302.69 818,667.41 878,138.80 239,174.65 97%
Source: MMFI (2013)

As discussed in the literature part, repayment rate measures the amount of payment
received with respect to the amount due (Godquin, 2004). It is a good measure in
monitoring repayment performance over time. In addition, it is useful for projecting future
cash flows, because it indicates what percentage of the amount due can be expected to be
received, based on past experience.

41
 Repayment rate less than 97% is a sign of poor repayment performance and high loan
default (Ibid, 2004). Table 8, above shows repayment rate of MMFI in 2008/2009 and
2009/2010 was 80% respectively, 78% in 2010/2011, and 87% in 2011/2012. At the end of
2012/20134 reached to 97%.
As the result indicated above the repayment performance of MMFI was not satisfactory
Godquin (2004), stated that repayment rate less than 95% shows poor collection
performance. In view of this the institution repayment performance for four consecutive
years was inefficient, but it showed an improvement in the last year 2012/2013.
Table 9: Repayment Rate, Percentage of arrears, and PAR>30 days in relation to gender
Total
S/N Description/Item Male Female

16,695,266.35
1 Total Amount Received (A) 10,206,384.92 6,488,881.43

1,888,495.12
2 Prepayment (B) 1,086,661.51 801,833.61

10,063,883.36
3 Amount due and paid (C) 6,228,054.75 3,835,828.61

Amount due but not paid /past 8,028,341.27

4 due/ (D) 6,180,981.01 1,847,360.26
82%
5 Repayment Rate= A-B/C+D 73% 98.9%
Percentage of arrears (past
6 due) 77% 23%

Total portfolio with arrears >30 7,591,085.55

7 days 5,409,900.81 2,181,184.74

Total outstanding Gross 38,064,281.22

8 Portfolio 23,482,417.96 14,581,863.26

9 PAR>30 days 23% 15%

Source: MMFI (2013)
As it can be observed from table 9 above, the repayment rate of Male borrowers is 73%
whereas repayment rate of women borrowers is 98.9% this implies that women borrowers
repay their loan on tine or on due better than their counter parts. Empirical studies show
that women borrowers perform better in relation to loan repayment (Felix, 2011, and
Hossain, 1998). Due to repayment problems related to male customers some MFIs decided

42
to move over to a nearly full concentration on women borrowers (Hulme, and Kasim,
1991). The percentage of arrears or default loans of women borrowers is 23%, where as
male borrowers take 77% of the defaulted loan. This implies that the defaulted loans are
more in male borrowers than women borrowers. The risk of portfolio in women borrowers
is less than male borrowers. Because the table 9 above shows PAR>30 days is 15% for
women borrowers and 23% for male borrowers. This indicated that women borrowers are
less risky than male borrowers in relation to arrears and risk of loan not to be collected.
Figure 3: Repayment and arrears in relation to gender issues

Repayment rate and loan default in relation to gender

120%

100%

80%
Rate

60%

40%

20%

0%
Percentage of arrears
Repayment Rate PAR>30 days
(past due)
Male 73% 77% 23%
Female 99% 23% 15%

Source: MMFI (2013)

The graph above shows the higher repayment rate the lesser default loan and risk in women
borrowers. On the other hand the higher the loan default and risk uncollectible, the lesser
the repayment rate.

43
 Table 10: Portfolio At Risk Greater than 30 days
Description Years
2008/2009 2009/2010 2010/2011 2011/2012 2012/2013
Outstanding with arrears
>30 days 1,371,087.03 1,640,969.98 2,258,826.87 1,696,030.37 624,171.30
Total outstanding loan
6,298,928.69 6,482,030.18 8,792,521.32 7,961,660.42 8,529,140.61
PAR>30 days 22% 25% 26% 21% 7%
Outstanding with aging of arrears (>30 days)
31-60 days Amt.
75,433.21 104,936.88 42,530.45 34,484.16 192,096.37
PAR 1% 2% 0% 0% 2%
61-90 days Amt.
60,977.83 74,217.99 13,110.01 59,676.43 51,330.83
PAR 1% 1% 0% 1% 1%
91-180 Amt.
days 133,085.80 126,642.70 357,101.84 19,108.49 122,965.63
PAR 2% 2% 4% 0% 1%
181-365 Amt.
days 151,716.07 259,972.76 204,987.92 87,772.61 175,563.98
PAR
2% 4% 2% 1% 2%
>365 days Amt.
949,574.12 1,075,199.65 1,641,096.65 1,494,988.68 82,214.49
PAR 15% 17% 19% 19% 1%
PAR >90 days 20% 23% 25% 20% 4%
Source: MMFI (2013)

The ratio in table 9 shows, the percentage of loan at risk which is not being paid, or it
shows the risk of not to be repaid. According to the above data the PAR>30 days was 20%
in 2008/2009 and 2011/2012, it was 23% in 2009/2010, 25% in 2010/2011, and in
2012/2013 the PAR>30 was 7%.

This implies that risk of loan not to be collected is high, but the institution’s report in
2012/2013 shows that the risk is significantly minimized. This situation improves
repayment performance and enhances financial capacity. Table 9 also indicates there was
better repayment performance of the same year (2012/2013).

44
 Table 11: PAR >30 days plan and performance comparison
S Description Year
/ 2008/ 2009/ 2010/ 2011/ 2012/ Commutative
N 2009 2010 2011 2012 2013
1 Plan 13% 12.3% 12% 11% 5.2% 11%
2 Actual 22% 25% 26% 21% 7% 20%
3 Difference
9% 12.7% 14% 10% 1.8% 9%
Source: MMFI (2013)
According to Table_ the plan for risk loan not to be collected was 11% whereas the
performance is 20%; the risk increased by 9% instead of decreasing or at least keeping the
plan. This shows that the performance of MMFI in relation to PAR> 30 days was very
poor. Because the risk of loan not to be collected is higher than what was planned.
4.2.3 Retention Performance
Table 12: Loan cycle
How many times you borrow from Meklit MFI? Frequency Percent
First 34 40.0
Second 33 38.8
Third 10 11.8
Fourth 4 4.7
More than fourth 4 4.7
Total 85 100.0
Source: primary data
As it can be observed from the table 10, 40% (34) of respondents are borrowed for the first
time and 38.8% (33) have got their second loan. The table also shows 11.8% (10) of
respondents are in the third cycle, 4.7% (4) of the respondents are reached to fourth cycle,
and the other 4.7% (4) are borrowed more than four times. Here it can be concluded that
the majority of the respondents are new or first time borrowers. New clients need more
follow up and smooth relationship. Furthermore, the loan size granted for new borrower is
relatively small; the income generated from small loan size has no significant contribution
to cover follow up, screening, and recruitment, cost of new clients.

45
Table 13 Repayment Rate and PAR>30 days in Loan Category

[Commulative data (2008/2009-2012/2013 or
 2001. -
 2005 .)]

S/N Description Group business Individual Individual Total

loan business loan consumption
loan
1 Total Amount Received
(A) 6,060,381.69 7,245,745.60 3,389,139.07 16,695,266.35
2
Prepayment (B) 685,523.73 819,606.88 383,364.51 1,888,495.12
3
Amount due and paid (C) 3,653,189.66 4,367,725.38 2,042,968.32 10,063,883.36
4 Amount due but not paid
/past due/ (D) 3,164,287.88 3,234,300.11 1,629,753.28 8,028,341.27
5 Repayment Rate= A-
B/C+D 79% 85% 82% 82%
6 Total portfolio with
arrears >30 days 2,755,564.05 3,294,531.13 1,540,990.37 7,591,085.55
7 Total outstanding Gross
Portfolio 11,317,334.08 19,019,898.05 7,727,049.09
8
PAR>30 days 24% 17% 20%
Source: MMFI (2013)

As it can be observed from table_ above the repayment rate of individual business loan is 85%,
whereas the repayment rate of individual consumption loan and group business loan is 82% and
79% respectively. From this it can be deduced that there is a tendency of high repayment rate in
individual loan than group loan. As Reikne (1996) assessed, the factors that lead to the failure
of group based lending system for a better credit repayment. Reikne suggested that group
lending system is not advisable for urban loan but it is applicable in rural lending. Due to the
fact that the low repayment rate in group loan, MMFI concentrating more on individual lending
system.

In relation to PAR>30 days, table_ shows low percentage of portfolio at risk in individual loans
(17% in individual business loan and 20% in individual consumption loan) than group loan
(PAR>30 days is 24% in group loan). This implied that the risk of loan not to be collected is
less in individual loan compared to group loan.

46
 Key: 5= Strongly Agree, 4= Agree, 3= Neutral, 2= Disagree, and 1= Strongly Disagree
Table 14: Retention Performance
Item Agreement Level
N 5 4 3 2 1 Total
o.
1 Meklit Microfinance Institution No. 3 48 9 22 3 85
lending system is based on
paying history and capacity of % 3.5 56.5 10.6 25.9 3.5
the borrower. 100

2 The customer handling of the No. 2 15 9 48 11 85

institution encourages for
repeated loan. % 2.4 17.6 10.6 56.5 12.9 100

3 Borrowers received the No. 5 55 7 14 4 85

requested and approved loan
with a short period of time. % 5.9 64.7 8.2 16.5 4.7 100

4 The location of the lender’s No. 10 12 8 40 15 85

office is convenient that can
easily found and reached. % 11.8 14.1 9.4 47.1 17.6 100

5 Meklit Microfinance Institution No. 2 15 1 49 18

85
is willing to arrange extra time
for late payments with free of % 2.4 17.6 1.2 57.6 21.2
penalty for reliable and
acceptable default risk. 100

6 The loan size granted by the No. 11 15 7 27 25 85

institution is adequate to meet
borrowers need. % 12.9 17.6 8.2 31.7 29.4 100

7 I plan to use Meklit No. 15 20 30 15 5 85

Microfinance Institution’s
services again in the future % 17.6 23.5 35.2 17.6 5.88
5 3 9 5 100

8 I will recommend Meklit No. 12 22 15 27 9 85

Microfinance Institution’s
services to others % 14.1 25.9 17.6 31.8 10.6 100

9 The collateral or security No. 12 24 5 28 16 85

requested by the lender
(MMFI) is fair. % 14.1 28.2 5.9 32.9 18.8 100

Source: primary data

47
11.1. Repayment history and payment capacity of borrower (table 11, item 1)
Table 11, item 1 depicts 56 % (48) of respondents agree, 25.9% (22)of respondents
disagree on the issue that MMFI lending system is not based on repayment history and
paying capacity, 3.5% of respondents strongly agree, 3.5% (3) and strongly disagree
respectively, and 10.6% (9) of respondents are silent on the issue of considering borrower
paying history and capacity. Majority of the respondents agreed that MMFI lending system
is not considering paying history and capacity of borrowers. This shows that the repayment
history and paying capacity of borrowers have no impact on lending system of MMFI.

11.2 The customer handling practice of the institution (table 11, item 2)

Concerning the customer treatment issues table, item 2, 56.5%, (48) and 12.9% (11) of
respondents are disagree and strongly disagree respectively on the institution’s customer
handling practice. On the other hand 17.6% (15), and 2.4% (2) of respondents are agree and
strongly agree respectively with good customer service practice of the institution, the rest
10.6% (9) of respondents have no agreement or disagreement. The data indicated that, the
majority of respondents are not convenient with the service provided by MMFI. In contrast
the interview with operation manager and loan officers indicated that the institution is
striving for better customer (personal communication, 2014). They added also training is
provided every year for operational staffs to build up their customer handling capacity.

11.3 Loan waiting time until disbursement (table 11, item 3)

Regarding to item 3, of the total respondents, 64.7% (55) agree, 16.5% (14) disagree, 5.9%
(5)strongly agree, 4.7% (4) strongly disagree, and 8.2% (7) of respondents are indifferent
on the issue that on fast loan disbursement. The majority of respondents are agreed for fast
loan disbursement. This indicated that the lender is efficient in loan process and
disbursement.

11.4 Office proximity (table 11, item 4)

In relation to office location item 4, 47.1%, (40) and 17.6% (15) of respondents disagree
and strongly disagree respectively on office proximity. The other wing of 14.1%, (12) and
11.8% (10) of respondents agree and strongly agree respectively on the same issue. 9.4%
(8) of respondents have no showed their agreement or disagreement on the issue of office
location suitability. From the result we can conclude that the location MMFI office is not

48
convenient for borrowers to get the service with the shortest time and minimum cost. This
may force clients to look other microfinance institutions of better office location or service
that saves the time and cost. During an interview the institution’s officials also believed the
office location is not confortable for service efficiency, but due to lack of financial resource
the institution limited the number offices. Thus, clients have got the service from those
distant branches. Moreover, both loan disbursement and collection takes place in the office
makes the situation serious.

11.5 Late payment arrangement (table 11, item 5)

Regarding to extra time arrangement for late payers item 5, 57.6%, (49) and 21.2% (18) of
respondents disagree and strongly disagree respectively, 17.6%, (15) and 2.4% (2) of
respondents agree and strongly agree respectively, and 1.2% (1) of respondents not decide
their level of agreement. From the table regarding extra time arrangement, it can be
deduced that the institution is not flexible for the treatment of late payment even with
efficient evidence for default attached with.

11.6 Loan size (table 11, item 6)

With regard to loan size (item 6), 31.7% (27) of respondents disagree, 29.4% (25) of
respondents strongly disagree, 17.6% (15) of respondents agree, and 12.9% (11) of
respondents strongly agree with the issue of loan size. The rest 8.2% (7) respondents are
indifferent of the issue. It was evident that most of the respondents are claimed that the loan
size of MMFI is not enough for the intended purpose. Interviewed officials of MMFI
replied that some borrowers’ especially in group lending repeatedly asked the institution to
increase the loan size. But due to financial capacity of the institution and experience of loan
default, no solution has been given regarding the issue of loan size.
11.7 Decision about future loan repeat (table 11, item 7)
Table 11, issue number 7 shows 35.29% (30) of respondents are not express their plan
either to use or not to use, 17.65% (15) and 5.88% (5) of respondents are disagree and
strongly disagree for next service from MMFI, 23.53% and 17.65% (15) of respondents are
agree and strongly agree to repeat using the service of MMFI. Thus, it can be deduced that
most of the respondents are not sure to plan using the service of MMFI in the future, they
lacks full confidence to decide future reputation.

49
11.8 Service recommendation to others (table 11, item 8)
Table 12 of item 8 represents, 31.8% (27) and 10.6% (9) of respondents are disagree and
strongly disagree respectively with the issue of recommending MMFI’s service to other.
On the other hand 25.9% (22) and 14.1% (12) of respondents are agree and strongly agree
respectively to recommend the service for others, whereas 17.6% (15) of respondents are
skip from expressing their level of agreement concerning service recommendation to other
users. The result shows that the majority of respondents are not satisfied with the service
they have accordingly they are not willing to recommend other individuals to use the
institution’s product or service.
11.9 Fairness of collateral requirement (table 11, item 9)
Table 11 of the last issue (item 9) also shows 32.9% (28) and 18.8% (16) of respondents
are disagree and strongly disagree respectively with the fairness of collateral requested by
the institution. On the other hand 28.2% (240 and 14.1% (12) of respondents are agreed
and strongly agree respectively that the collateral requirement is fair. The other 5.9% (5) of
respondents are neutral. This implied that the collateral requested by MMFI is not fairly
supported by most of respondents. Meaning the collateral requirement is far from
borrowers’ capacity to fulfill and borrow the loan.

Officials of the institution were also interviewed for the fairness of collateral requirement.
They explained that many customers face a problem to full fill collateral requirement for
individual business and consumption loan of above 25,000. This is due to absence of other
enforcement mechanisms to secure loan repayment of individual loan. The result found
from both sides showed that unfair collateral is requested by MMFI.

Table 15 Interest rate

How do you evaluate the interest rate of Number Percent
Meklit?
Low 2 2.4
Moderate 27 31.8
High 56 65.9
Total 85 100.0
Source: Primary data (2014)

50
According to table 12, 65.9% (56) of respondents believed the interest rate is high, 31.8%
(27) of respondents believed that the interest rate of MMFI is moderate, and 2.4% (2) of
respondents evaluate the interest rate as low. Since the majority of respondents claimed
with high interest rate, it can be revealed that the interest rate of the institution may weaken
financial strength of borrowers. Thus, it may lead to client’s dropout from the institution.
Table 16: Retention of rate
Years Sex Active New Active client (D)=B+C Retention
client (end) client (Beginning) rate
(A) (B) (C) (E)=A/D
2008/2009 Male 924 720 515 1,235 75%
Female 661 518 318 836 79%
Total 1,585 1,238 833 2,071 77%
2009/2010 Male 956 924 412 1,336 72%
Female 719 661 350 1,011 71%
Total 1,675 1,585 762 2,347 71%
2010/2011 Male 1,024 956 345 1,301 79%
Female 684 719 267 986 69%
Total 1,708 1,675 612 2,287 75%
2011/2012 Male 1,092 1,024 520 1,544 71%
Female 1,079 684 630 1,314 82%
Total 2,171 1,708 1,150 2,858 76%
2012/2013 Male 1,172 1,092 600 1,692 69%
Female 1,199 1,079 520 1,599 75%
Total 2,371 2,171 1,120 3,291 72%
Source: MMFI (2013)
The result in table 13 shows that the retention rate of MMFI during five consecutive years
is on average 74%. It implies MMFI retention rate is not in a good position that needs due
attention, with in this range the retention rate of women borrowers is better than that of
men. This indicated that participating women borrower has a positive advantage for longer
relationship and better loan repayment too. The table also shows retention rate of MMFI is
decreased year to year; i.e. 77% in 2008/2009, 71% in 2009/2010, 75% in 2010/2011, 76%
in 2011/2012, and 72% in 2012/2013. From 2008/2009-2010/2011 the retention rate of
women was greater than men. The result shows that there is less client retention rate in
MMFI and women clients retained more.

51
4.2.4 Outreach performance
Table 17: Client promotion (how clients join MMFI for the first time)
Through which means you join Meklit Microfinance Number Percent
Institution (MMFI) for the first time?
From friend 44 51.8
From notice or ads 13 15.3
From Kebele notice 5 5.9
From the institution, during different meetings 9 10.6
Others 14 16.5
Total 85 100.0
Source: Primary data
Table 14 shows 51.8% (44) of respondents join the institution through information from
their friends, 15.3% (13) of respondents from notice announced by the institution, 10.6%
(9) of respondents through mobilization by the institution’s staffs during public meetings or
events, 5.9% of respondents from kebele notice board, and 16.5% (14) of respondents from
other sources like by chance walking around the office of MMFI, from transport users in
the bus and/or taxi. According to the result shown in table 14 most of the respondents have
got information about the institution and its service by their own effort. Thus, it can be
understood that the lender’s effort about promoting the institution and the service provided
by the institution is very limited. The limited mobilization system hinders the service in
addressing many users (the service may not reach to many customers).

As indicated in the literature of chapter two breadth of outreach performance is measured

by growth in number of active clients. According to the secondary data gathered from
MMFI in five consecutive years’ operation plan and performance (actual) operation report
presented below shows less promotion effort is recorded by MMFI.

52
Figure 4: Promotion

Promotion
Axis Title

from notice through

From friend Kebele notice Others
MMFI meeting
Number 44 13 5 9 14
Percent 51.80% 15.30% 5.90% 10.60% 16.50%

Table 18: Growth in number of active clients

Year and Sex Ending Active Beginning Difference Growth in No
Client Active (C=A-B) Of Active Clients
(A) Client (D=C/B*100)
(B)
Year Sex Number percentage
2008/2009 Male 924 720 204 16%
Female 661 518 143 12%
Total 1,585 1,238 347 28%
2009/2010 Male 956 924 32 2%
Female 719 661 58 4%
Total 1,675 1,585 90 6%
Male 1024 956 68 4%
2010/2011 Female 684 719 -35 -2%
Total 1,708 1,675 33 2%
Male 1092 1024 68 4%
2011/2012 Female 1079 684 395 23%
Total 2,171 1,708 463 27%
Male 1172 1092 80 4%
2012/2013 Female 1199 1079 120 6%
Total 2,371 2,171 200 9%
Source: MMFI (2013)

53
 As it can be seen from the table 15 above, the growth in number of active clients was
decreased. Accordingly, in 2008/2009 active clients were grown by 28%, and 27% in
2011/2012, whereas, the remaining three years the growth of active clients were less than
10% (6% in 2009/2010. 2% in 2010/2011, and 9% in 2012/2013). Even though the number
of active client growth was very slow, MMFI was relatively better in female number of
clients than men. Because in 2009/2010, female client growth rate exceed by 2% than men,
in 2011/2012 and 2012/2013 exceeding by 19% and 2% respectively. So it can be
concluded that the aggregate number of active clients served by MMFI are limited. Hence,
the institution, operation policy needs to be revised in a manner that helps to serve more
clients.

Table 19: Plan performance in terms of active client

Year Plan Achievement Difference Achievement
(A) (B) (C=A-B) in percentage
(D=B/A*100)
Sex Number percentage
2008/2009 Male 3397 924 2473 27%
Female 2442 661 1781 27%
Total 5840 1,585 4255 27%
2009/2010 Male 3416 956 2460 28%
Female 2181 719 1462 33%
Total 5597 1,675 3922 30%
Male 3252 1024 2228 31%
2010/2011 Female 2181 684 1497 31%
Total 5416 1,708 3708 32%
Male 2594 1092 1502 42%
2011/2012 Female 1501 1079 422 72%
Total 4063 2,171 1892 53%
Male 2475 1172 1303 47%
2012/2013 Female 1485 1199 286 81%
Total 3960 2,371 1589 60%
Source: MMFI (2013)

54
As it can be observed from table 16, most of the time MMFI achieves below 50% of the
plan. The table shows 27% of achievement in 2008/2009, 30% of achievement in
2009/2010, and 32% of achievement in 2010/2011. The table also shows better
achievement in the last two years in relative to the previous years, it was 53% of plan
achievement in 2011/2012 and 60% of achievement in 2012/2013. On the other hand
MMFI has been achieved better in female clients than men especially in the year of
2011/2010 and 2012/2012, the achievement in those years was 72% and 81% respectively.
So, it can be deduced that MMFI gave more attention for female clients, but the total
achievement in terms of addressing more clients is not encouraging, and the plan also
seems very ambitious. However, the MMFI official’s interview response regarding this
issue shows the plan was not unachievable but financial constraint inhibits the
achievement.

55
 CHAPTER FIVE
SUMMARIES, CONCLUSIONS, AND RECOMMENDATIONS OF
MAJOR FINDINGS
Introduction
The primary and secondary data has been discussed in the preceding chapter. This chapter
deals with the summary conclusion, and possible recommendations based on the findings.

5.1 Summary of Major Findings

The study was conducted at (MMFI). The main objective of the study was to assess
operational performance of MMFI in Addis Ababa Ethiopia. The study has made use of
both primary and secondary data sources. A total of 85 sample borrowers were selected
through stratified and simple random sampling and data was analyzed by making use of
descriptive statistical tools. The main findings of the study are summarized below:

 The majority of respondents have below TVET level education.

 MMFI inclined more on individual loan especially business loan.

 More than half of the respondents (51.7%) indicated that they often use the loan for
the intended purpose, but the interview result indicated that there is misuse of loan
among clients. The finding also revealed that borrowers are not supervised regularly
as planned after the loan is disbursed.

 Concerning the issue of repayment incentives, the finding shows that MMFI didn’t
acknowledge borrowers who have paid their loan repayment on the due date. The
only difference between late payers and non-defaulters made by MMFI is that
excluding the defaulters of exceeding three months from getting the next loan cycle.

 Majority of respondents found that their loan has been given with no pre-loan
supervision. Moreover, the supervision after the loan is disbursed was poor.

 Concerning the training issue, majority (80%) of the respondents has not taken any
training from the lender concerning how to run their business and loan utilization.

56
 Out of the total sample respondents, 24.7% of respondents borrowed additional loan
from other financial sources, and 75.3% of respondents have no loan from any
financial sources other than MMFI. The data shows that there is a trend for having
extra loan from other lending institution. An interview with branch managers
revealed that there is no formal way of checking borrowers whether they had debt
from other financial institutions. Borrowers filled the form prepared by the
institution, and the information they gave considered as correct. But, it can be
understood borrowers hide information or fill false information.

 Out of 85 respondents, 75.3% of them have no loan from other lending intuitions
while the remaining respondents are found with double loan. What makes the
problem more systematic is, MMFI has no mechanism or system designed to
identify double loan.

 Concerning loan default (arrear), the study shows that the majority of borrowers
were in arrears as far as loan repayment was concerned. It is also found that the
major reasons for not paying on due date are unprofitable business and improper
use of loan (loan used for household expenses).

 The repayment performance of MMFI was found to be below the average for four
consecutive years (2008/2009 to 2011/2012). But, in 2012/2013 fiscal year it was
improved above average. It is also found that the portfolio at risk was high, in line
with repayment performance with PAR>30 days (highly improved) in 2012/2013.
Furthermore, the finding revealed that the percentage of women borrower is lower
than men defaulter.

 It was found that the defaulted loans were more sever in male borrowers than
women borrowers.

 Less risk of portfolio was found in women borrowers than male borrowers

 The customer handling system of MMFI is found disheartened by most of the

respondents (69.4) %.

 There were low achievement in relation to PAR>30 days. The performance of

PAR>30 was decreased by 9%.
57
  Better repayment rate was found in individual loan than group loan

 This implied that the risk of loan not to be collected is less in individual loan
compared to group loan.

 The majority of respondents (70.6%) have indicated their agreement that MMFI is
fast to disburse loan to borrower who fulfill all the requirements.
 In relation to office location most of the respondents (64.7%) are not comfortable
since the location of MMFI office is not easily accessible whenever they need.
 With regard to loan size, it was evident that most respondents (61.1%) claimed that
the loan size of MMFI is not enough to facilitate and make a return from borrowers
business. In addition, the result also shows that above 50% of respondents has no
plan to repeat their next loan in the future. Moreover, most of the respondents are
not willing to recommend the service of MMFI to others they may know.
 The study reveals that 51.7% of respondents confirmed that the collateral required
for individual loan is not fair.
 Due to lack of promotional activities, more than half (51.8%) of the respondents
have joined to MMFI via the information they have gotten from their friends
signaling that the institution lacks effort with regard to its outreach programs.

 The tendency in terms of increasing number of active clients in the last five years
shows a reverse trend. Even though the number of active client growth was very
slow, compared with men clients, the growth of women clients is relatively better
than men. The plan achievement in relation to number of active clients was found
to be unsatisfactory; with low plan achievement. The finding revealed that the
major obstacle for low achievement was financial constraint.

5.2 Conclusion
In line with the main findings summarized above, the following conclusions are forwarded.

5.2.1 Repayment Performance

The majority of respondents revealed that, repayment made exactly on the due date doesn’t
add any value for their next loan size or any other incentives. MMFI treats both early and
late payers equally. This situation discourages borrowers who have good repayment

58
performance, and it may lead the borrower to loan default. Pre-loan supervision is also very
important for over all repayment and business performance. As the outcome showed, some
respondents borrow additional loan from other formal and non-formal financial sources.
Currently there is no formal and systematic means of identifying double loan borrowers.

Repayment rate less than 97% is a sign of poor repayment performance and high loan
default. Accordingly, the repayment rate of MMFI was below 97% for four consecutive
years (from 2008/2009 to 2011/2012). On the 5th year (2012/2013) it was 97%, it showed
improvement for every year but with a decreasing rate. Poor repayment performance leads
to loan in arrears that can be measured with portfolio at risk (PAR). Within low repayment
performance in MMFI women repayment performance is better than their counter parts.
Moreover, MMFI the findings indicated that, relatively have good repayment performance
in individual loan than group loan.

The study reveals that the portfolio at risk for more than 30 days were above 10% up to the
end of year 2011/2012. This implies that the risk of uncollectable loan is significant for
both past due loans and loans not due but contaminated. But at the end of 2012/2013, the
portfolio risk was found to be 7% (the risk being not to be paid) that shows improvement.
The risk of loan not to be collected is less in women borrowers than men borrowers.

The result of this study concluded that inadequate supervision of borrowers by the MMFI
staff on loan utilization and loan repayment lead to default of repayments. Supervision is an
important aspect since it induces borrowers to be committed. On training of borrowers
before receiving of loans from MMFI, it was concluded that training is important in giving
borrowers skills in business management, savings and in book keeping. At the same time
the study concluded that borrowers who did not receive any training before receiving loans
from MMFI defaulted in repayments since they were unable to increase their earnings. As
the study also reveals that majority of respondents are below TVET level of education. This
shows that they should be supported with supervision and training.

5.2.2 Client Retention Performance

Client retention is another performance issue in microfinance. Client dropout is an urgent
problem within the microfinance industry. It creates costs for the microfinance institution,
as it has to recruit, screen and train new clients and undermines the prospects to become

59
sustainable and to achieve deeper outreach. From client perspective dropout increase
transaction costs and reduces the possibilities to derive benefit that continuous participation
in MMFI could bring. A high dropout rate is also detrimental for the microfinance as a
poverty alleviation tool since it questions the ability of microfinance to serve the poor and
meet their requirements and needs.
The study shows that most respondents are new and second time borrowers. This indicates
that the clients did not have more repeated loan in MMFI. This means most of the
borrowers of MMFI are first time borrowers. Small loan size is granted for new clients.
This is not enough for efficient operation clients business. As a result clients forced either
to have additional loan from other MFIs or decide to exit from MMFI. In addition to small
loan size absence of supervision and advice by the lender have a contributing effect on
clients dropout or low client retention rate. Collateral, high interest rate, distant office
location, and poor customer handling discouraged borrowers to repeat the loan.

5.2.3 Outreach Performance

The location MMFI office is not convenient for borrowers to get the service with the
shortest time and minimum cost. This may discourage clients to join in MMFI. Due to
inconvenient office location individual who seek services from MMFI might look other
microfinance institutions of better office location that saves their time and cost. Moreover,
both loan disbursement and collection takes place in the office makes the situation sever.
The collateral requirement demanded by MMFI is difficult to fulfill by borrowers. In
MMFI individual loan above birr 25,000 requires immovable fixes asset collateral. This is
too difficult for MF borrowers. This situation prohibits borrowers from coming to MMFI,
instead they starts to find other MFIs that require reasonable collateral to fulfill their credit
demand.

Absence of loan default and presence of high client exit weakens the financial capacity of
MMFI. Due to this the institution didn’t serve more able poor clients as per the plan.
Because the information gathered via interview indicated that one of the problems of poor
performance was lack of financial capacity to expand the service and to reach clients. The
collateral policy and low repayment also reduces outreach performance. The survey result
also showed that less effort was exerted for promotion. Moreover, the growth rate of active
clients exhibits a decreasing rate in each of the five year (from 2008/2009 to 2012/2013).

60
5.3 Recommendations

Based on the empirical results of the study, the following feasible recommendations and
policy implications are forwarded. They are deemed to be used by different stakeholders
who are keen to harness the operational performance of MFIs including MMFI and other
similar financial institutions that operates in the country to reach the marginalized section
of the society for poverty alleviation.

MMFI repayment rate was found to be below the expected rate, this can hinder the loan
recycle, retaining clients, and expansion service. Individual lending repayment
performance is supported by literature to be high for urban borrowers. The institution
tends to practice more in providing credit facility to individuals than group. But the
repayment performance of individual and group lending needs further research. In order to
improve the operational performance in relation to repayment, client retention, and
outreach (number of clients) performance, MMFI should consider the following:

 Before the loan is approved, the feasibility of client’s business should be evaluated,
because the client may request inappropriate loan size, may engage in illegal
business that harm the society or it might be an incorrect business plan. Therefore,
it is recommended that the pre-loan supervision is not only to approve or restrict, or
reject the loan, but also to give business advice. After the loan has been disbursed it
must be supervised regularly, and accordingly it should be taken appropriate
corrective action. Moreover, the institution should keep record profile of
supervision to identify the clients that are doing well based on their repayment
performance.

 To encourage good repayment performance, MMFI shall provide incentive

packages for borrowers who have good performance record like grace period,
increased loan size, fast next loan approval and disbursement.

 Short term trainings can help to improve repayment performance. Therefore, MMFI
should offer regular trainings that could help clients to properly manage/utilize and
keep records on the loan they have borrowed.

 Borrower who have loan balance before they came to MMFI might be a problem of
loan default mainly because their financial capacity might be weak to repay double

61
 loans. To solve this problem MMFI in collaboration with other similar institutions
should try to design systems to identify borrowers who have loan from other
microfinance institutions.

 Retaining clients’ needs due attention before anything else, because other issues can
be addressed with the presence of clients. MMFI should pay special attention to
minimize clients’ dropout. In order to retain the clients, MMFI should revise the
loan size policy in line with the financial capacity of the institution and legal frame
work of microfinance institutions by substantiating the decision with results from
further research.

 Clients as customers need special treatment according to their need. To do so the

institution should assure to have the right staff at the right position. Continuous
customer handling training should be given to staffs especially operational
employees. Respect and incentive in relation to good repayment performance
narrows the gap that should be developed as an organizational culture.

 The institution should give attention for office location in terms of proximity to
borrowers as a long term plan, but for the short term MMFI shall follow outdoor
collection policy to share client’s compliant regarding long distance.

 Finally, MMFI should address more clients by using different promotional

mechanisms.

62
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 APPENDEX A
St. Mary’s University
School of Graduate Studies (SGS)
Questionnaires to be filled by clients/borrowers

Dear Respondent,

The main objective of this questionnaire is to gather data that help the researcher in
conducting a research on “Assessment of Operational Performance of Meklit
Microfinance Institution in Addis Ababa, Ethiopia”. Hence the researcher would like to
request you to fill in this questionnaire. Your genuine response will significantly contribute
to the success of the study. Please note that all your responses will only be used for
academic purpose and the data will be treated at most confidential.

The researcher would appreciate your cooperation in advance.

Note:

Please note that there is no need to write your name

I. Background Information
Please indicate your answers by putting a tick mark (
) in the box, write for blank spaces.
1.Sex: 1. Male  2. Female 
2. Education Level:
1 Basic education 
1. Elementary school 
2. Secondary school 
3. Certificate (TVET) or diploma 
4. 1st degree and above 
5. Above first degree 
3. To which loan category do you belong?
1. Group business loan 
2. Individual business loan 
3. Individual consumption loan 

69
 4.For which round do you get borrowing currently?

1. 1st round 
2. 2nd round 
3.3rd round 
4.4th round 
5. More than 4th round
II. Questions concerning assessment of operational performance of Meklit
microfinance Please indicate your answers by putting a tick mark (
) in the box.

5. How do you join Meklit microfinance institution?

1. from friend 
2. from notice or advertisement 
3. From Kebele notice 
4. from the institution, during different meetings 
Please put a tick mark in the box () to show your level of agreement with each statement
about loan repayment performance.

Scale:1 = Strongly Disagree 2 = Disagree, 3= not sure, 4 = Agree, and 5= Strongly Agree

No Statement 1 2 3 4 5
6 Spending the borrowed loan for the intended purpose properly. 1 2 3 4 5
7 On time repayment is an incentive to get the next higher loan size. 1 2 3 4 5
8 After the loan is disbursed loan officers follow up or supervise 1 2 3 4 5
clients business regularly.
9 Before the signing of loan contract, the lender (MMFI) confirms 1 2 3 4 5
the feasibility of clients business.

10. Have you taken any training that enables you for better utilization of loan?
1. Yes 
2. No 
Please put a tick mark in the box () to show your level of agreement with each statement
about client retention performance.

70
Scale: 1 = Strongly Disagree 2 = Disagree, 3= Neutral, 4 = Agree, and 5= Strongly
Agree

No. Statement 1 2 3 4 5
11 Meklit gave loans according to the paying history and capacity of 1 2 3 4 5
the borrower.
12 The customer handling of the institution encourages for repeated 1 2 3 4 5
loan.
13 Borrowers received the requested and approved loan with a short 1 2 3 4 5
period of time.
14 The location of the lender’s office is convenient that can easily 1 2 3 4 5
found and reached.
15 Meklit willing to arrange extra time for late payments with free of 1 2 3 4 5
penalty for reliable and acceptable default risk.
16 The loan size granted by the institution is adequate to meet 1 2 3 4 5
borrowers need.
19 I plan to use Meklit Microfinance Institution’s services again in 1 2 3 4 5
the future
20 I will recommend Meklit Microfinance Institution’s services to 1 2 3 4 5
others
21 The collateral or security requested by the lender (MMFI) 1 2 3 4 5
considers borrowers capacity.

22. My overall level of satisfaction with Meklit Microfinance Institution is:

1. Strongly Dissatisfied 
2. Dissatisfied
3. Neutral 
4. Satisfied
5. Strongly
23. Is repayment period suitable for you?
1. Yes 
2. No 
24. What is the Status of the Loan?
71
 1. Repayment on Schedule
2. Repayment in arrears
25. Why loans are in arrears?
1. Business not profitable 
2. Loan used for household expenses 
3. Sold on credit 
4. Loss of asset 
5. Not in arrears 
26. Do you borrow from other sources for various purposes?
1. Yes 
2. No 
27. If yes, from where do you borrow?
1. Borrow from other Microfinance institutions 
2. Borrow from family or friends 
3. Borrow from informal money lenders 
4. Borrow from formal banks 
5. Others (please specify)________________
28. How do you evaluate the interest rate of the institution?
1. Low 
2. Moderate 
3. High 
Please give your answer by writing for the following open ended questions.
29. What problems did you face other than mentioned above?
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
30. What do you suggest that enhance the Meklit microfinance operation to satisfy your
need?
--------------------------------------------------------------------------------------------------------------

I Thank You

72
 APPENDEX B
St. Mary’s University
School of Graduate Studies (SGS)
Interview Questions
The main objective of this interview is to gather data that help me as a student researcher in
conducting a research on “Assessment of Operational Performance of Meklit Microfinance
Institution in Addis Ababa, Ethiopia”. Hence I would like thank you for your willingness to
conduct this interview. Since the information that you release is used only for academic
purpose, I assure that, your response will be treated at most confidential.

1. What type of loan product (group of loan product) is offered by your

institution?
2. Which type loan more interested by borrowers?
3. What challenges you face in your lending methodology?
4. What mechanisms used by the institution in selecting the borrowers?
5. Does the institution provide training for the clients before the loan is disbursed?
6. What do you suggest to increase the clients retention rate of your institution?
7. How do you supervise loan utilization?
8. What type of guarantee is required for:
 Group business loan
 Individual business loan
 Consumption loan
9. What mechanisms are used to motivate your staffs?
10. How successful is your institution in terms of:
 Serving more new clients
 Participating women borrower
11. What strategy you use to get clients?

73