Micro-Finance Institutions in Ethiopia: Issues of Portfolio Risk, Institutional Arrangements and governance

Abstract

The paper looks at the portfolio risk and resource allocation implications of the region-based nature of MFIs, implications of some regulatory restrictions in place on the expansion and viability of MFIs, and on availability of small enterprise, finance, and some governance issues. While there are good reasons for establishing regional MFIs, the regional nature limits their ability to reduce credit and liquidity risks by diversifying away idiosyncratic risks in connection with their loan portfolio and sources of fiancé. There is unduly high dependence on interest income; MFIs need to diversity to non-lending services.  Although MFIs were hoped to fill the financing gap to micro and small borrowers, the regulatory limits on loan size and term to maturity and MFIs preference for small, short-term loans tend to pre-empt this.  The system of governance in place in most MFIs is weak: Individual commitment and dedication aside, neither shareholders nor board members nor management seem to have appropriate incentives. The composition (qualification mix, business experience, etc) of MFI boards also needs to be reconsidered.