THE CREDIT PROVISION AND THE PROBLEM OF ITS ( LOAN )REPAYMENT IN SMFI (CASE OF HAWASSA TOWN) A senior essay

submitted to the Department of economics of Hawassa University in partial fulfillment of the Requirements for the Bachelor of arts Degree in economics

By Tigist Dancho Kamiso Advisor Hussen .M

June 2011

Hawassa.Ethiopia

ACKNOWLEDEGMENTS First of all . ipraise my lord ,because he guides me and great thans for his peace and for all support that he gave me to comelete my sevir essay paper with out obstacles, above all with out his guided and peace I know that I cant finsh this paper. Next, My sincere appreciation goes to ato Hussien M for his patied follour up , useful and intimate advices, Guidance and constructive criticism with which enabled me to produce or in preparation of this senior essay paper. I express my heart felt gratitude to SMFA, especially for ato Geleta . G who has contributed in giving relevant materials to make the writing of this study possible. I also thank all the librations in social liberary of Hawassa unversty. Who helped me supplying different referent materials. Finally, iwould like to take this opportunity to express my genuine apprection and heart felt thanks to my family for educating me and for educating me and for their unfailing support during the preparation. Of this paper.

Acronmy

SNNPR

south nation nationalities & p people region

MFI micro finace institution SMFI sidama micro finace institution LDCS less Development country

N G OS non government organization IDA international development Association MTDP Market Towns development project

NBE national bank of ethiopea DBE development bank Ethiopia Cbe commercial bank of Ethiopia ILO international labour organization AEMFI Association of Ethiopia micro finace institution

TABLE OF CONTENT

Acknowledgement ---------------------------------------------------page Acronyms ------------------------------------------------------------Table of contents-----------------------------------------------------Chapter one 1. Introduction 1.1 Background of the study 1.2 Statement of the problem 1.3 Objective of study 1.3.1 general cobjective 1.3.2 specfic 1.4 significant of study 1.5 scop /delimitation of the study 1.6 Research methodology 1.6.1 data type and source 1.6.2 method of data collection 1.6.3 method of data analysis and 1.6.4 chapter two 2 literature Review 2.1 theritical literature review 2.11 defination and origion of micro finance institutions (MFIS) 2.12 the need for micro finace 2.13 the role of micro finace in economic development 2.14 micro financing in Ethiopia 2.15 informal financial institution interpertation

2.1.5.1 definition of the informal secter 2.1.5.2 money lenders 2.1.5.3 Iqqub 2.1.5.4 IDIR 2.1.5.5 size of informal financial Market in Ethiopia 2.1.6 the role of informal sector 2.1.7 similarities and difference between formal and informal financial secter 2.1.7.1 similarity and vlinkage 2.1.7.2 Differences 2.1.8 credic provision 2.1.8.1 loan disbursement procedures 2.1.8.2 vloan repayment 2.1.8.3 repayment performance in group lending 2.1.9 factors that influence the loan repayment improvement 2.2 empirical literature review 2.2.1 general issue about micro finace institutions 2.2.2 micro finace in the African economy

Chapter one 1. introduction 1.1 Back ground of the study The credit delivery intervention to advance cdevelopment in the third world countries was very limited especially until 1960 s and 70 s in Ethiopia. However the initati continued with the experience and expertise shared from the developed countries In this refard the Europeans had tried to pass their formr African and asian Colonies. The emphasis of all the financial services was on availing agricultural credit to farmers for investment and in put to promote agricultural production. The same approach to agricalteral development credit was promoted in our country Agood example is that the establishment of agricultural Bank of Ethiopia in 1970(AEMFI, 2005), Regard delivering of financial services to institutional credit was very limited in our country. Because of this limited acess the majority of the poor get financial services from informal source money lenders. Merchants. Friends and relatives etc the formal financial source have not been not interested in deliver credit to the poor section requires innovative fargeting design and mechanism of credit delivery that helps to identify and target only the poor who can take the initative and sustain productive use of loan. Currently about 23 micro finance instiations were established in Ethiopia and providing credit for different member of the society in order to sustain their life sidama credit and saving instiution is one of the micro financing institutions in Ethiopia and given alicense by the nation bank of ethiopea to operate as am fi in july 1998, with amission to provide, financial services to the economically active both in the rular and urban vwho have no access to the conventional banks. The institutional had agrass out stan ding loan port folio of over birr 74.949.472, 60 at the end of june 2009 and slightly over 32392 active borrowers out ofs which 26% is female borrowers the institution makes predominantly

agricultural loans using group lending Method through the zonal net work of branch office of the 21 district woredas(SMFI Annual report.)

1.2 STATEMENT OF THE PROBLEM The importance of crdit in acountry like Ethiopia characterized by scarecity of financial capital is very significant. As faral the requirement for credit concerned, the concerned, the demand of the rural poo is very great because credit enable the poor not only to buy in put and machineries for their family activity but also to create the capacity to educate their children and to play for transportation. Medical service etc how ever, these opportunity is not available for the large majority of people and the greater part of otheir demand fors credit is covered by ninformal financial sector in which the supply of affordable credit is considered to one of the factor for the low productivity and poverity in the rular sectors . this calls for government action to increase the the supply of legitimate institution cridt Delivering credit service is considered by other convetional banks and by the public at large , as ultitude and offering ccredit to thbe poor with good repayment rate? Thus the problem of loan repayment become factors might be vinternal and external environment including natural disasters and market failure, cvthe research problem needs asolution in the fractional or theoretical world. It is assume d that this study will invastegate the imbalance cvb/n the disburse ment and repayment rate and the other problem if occered finaly the stady will focus on the crudit provision and the problem of its (loan)repayment based on the following questions this research stady has answerd at the end - How wiil the loan disbursed to the indviduil and the group? - how clients are selected? - what is the guarantee butilt in the system to secure repayments? - what efforts are done to change mainly to breake dependency the forget beneficiaries? - what are the maine resoins for default falure in repayment? syndrome of

1.3 OBJECTIVE OF THE STUDY 1.3.1GENERAL OBJECTIVES The general objective of the paper is to assess the credit provision and the problem of its (loan)repayment besides to investigate whether the institutional program has meet its objective or not to see its strengths and workable solutions to the problem encountered

1.3.2 SPECITIC OBJECTIVES - To assess effectiveness of collateral substitutes - To identify the factors that lead to failure of loan repayment -to observe in which activity the clients are benefiting with the loan - To show the disbursement of loan among possible uses users - To analyze whether the customers (clients) repay the loan to the lender according to the time schedwe properly - to examine whether the institution is following an appropriate criteria to select the clients 1.4 SIGNIFICANCE OF THE STUDY Micro financing scheme have significant contribution in generating in come and providing employment opportunities to the jobless and poor people. In addition to this they are expected to have additional benefit of improving saving. Nutrition and better access to health care and educational services. This required success in activities business of borrowers that results in efficient loan repayed due to limited research in this area. This study is concerned with micro finacing scheme under SMFI in Hawassa town , will provideessential information of the success and failure of the clients this vwill help the concerned bodies and fund supplying institution how they assist MFI and finally, to provide relevant information to group individuals and even to institution for further research. 1.5 Scope Delimitation of the study

The study will carry out in hwassa zurial woreda . it is one of the twenty one woredas of sidama zone. SMFI Hwassa sub-branch has both rural and urban clients this study will focus on urban clients of Hawassa sub-Branch especially in hawassas town who have been served over 2002 up to 2009, the study focuses mainly on the credit provision and its loan repayment. 1.6 RESERCH METHODOLOGY In this study the type of data will be both primary data and secondary data will be used the primary data will be collected from face to face interview of the selected sample clients using redesigned questionnaire through distribution to respondent. The questionnaire will be prepared I such away it could lead to provide information about loan repayment . personal dertails, income and wealth employment, saving and others in addition to this clients would ask about their recommendation about the service secondary data will obtain from head office and sub-branch reports of SMFI and related literature from internet , both quantitative and qualitative data will be wed in this study. 1.6.2 METHOD OF DATA COLLECTION Out of urban clients in SMFI Hawassa sub-Branch a sample of 45 clients would take and will be interviewed face to face. Sample clients would take and will be interviewed face to face samples client will use frequent and log time user of service this kind of approach leads to see reasonable change result after micro finance intervention. For comparision purpose some first time users will also include in the sample sratified sampling method will used because there are hetrogenous population in the observation. To make think easy classify the sample client in the three strata based on their income then take 15 sample from each group that means from higher income. And lower income group in order to include the Representative of the whole population. 1.6.3 METHOD OF DATA ANALYSIS AND INTERPRTATION The method used fordata analysis is descriptive statistics including mean. Percentage and tabulation in order to compare and interpreft based on respondets report as per de designed questionnaire by compiling primary data in the form of table percentage about loan repayment, personal details , income and wealth , employement, saving and other before ands after loan.

CHAPTER TWO 2. Literature Review 2.1 Theoritical Literature Review This cpart of the Research deals with the the review of related literature which is relevant to the topic under investigation 2.11 DEFINITION AND ORIGIN OF OF MICRO FINANCE INSTITUTION (MFIS)

The micro- credit idea was innovated by Drmohammed Yunus who was ateacher in economics at Chittagong university and the vmicro finance scheme was started as avillage credit society in December 1976 in Jobra- Bangladish. At first credit arrangement were made with one of the near by banks and the economic programmer of the chittagon buniversty under the ledership of DR.Mohammed yunus who was later the founder of Grameen bank(k.g karmakar, 1999). The world grammen means abangali worda for poor and the bank is the first established bank through out bangla deshis , it also become amodes for many MFIS through out the world. When we come to the definition many outhors define the micro finace as follows. Johanson and rogaley(1997) define micro-finance as the provision of financial services to the poor involving sma deposit and loans MFIS use peer maintain and joint liability structure to overcome cthe screening , Maintaining and enforcement problem commonly encounted by femal lending institutions (sinha, 1998). Micro finance institution are often defined interms of the following bcharacterstics:1. Targating the poor (especially poor women) 2. Promoting small business 3. Buliding capacity of the poor 4. Extended small loans with out collaterals

5. Combining credit with saving and 6. Changing the commercial interest rates Micro finace institutions are often innovative& flexible in their design & implimantation (dejene 1998). 2.2 The need for Micro finance The formal financial institution played little role in financing development efforts in the rural poor especially interms of distance. In addition , the rural poor cant fulfill b banking requirements to get loans. The requirement for collateral and intrinsic banking procedures are in most case very difficult for the poor to deal with . the volume of loan demanded by small farmers is not

appealing to banks such loans difficult to manage and their processing not finaciall feasible. Dejene ( 2003 ) argues in his study on the economic importance of the informal institutions. In ethiopea that the poor are often marginalized in the formal credit markets. This can be explained partly in termes of the following factors . 1. Lack of collateral, which makes lending to the poor arisky veature 2. Transaction cost of leding to and borrowing by the poor is often high and 3. Unity loss fronal from repayment ishigher for the poor as compared to the rich So the poor dont have access to the formal financial sources , lack of access to institutional credit is one of crucial factors impending peasant agricultural production in particular and rural development in general. There fore, my area of study , i.e SMFI is intended to over come such perblem through provision of financial services to the economically active e poor both in the rular and urban areas who have no access to the conventional banks. And in addition to this the institution has the objective of Providing credit and savings to as many rural poor as po ssble Give priority to to women in the prvistion of financial services. 2.13 the role of Micro fi nanice in economic development Micro finace have significant in economic development also considered as atool for socio economic development in the economy. Thbe following are the main role of moicrofinace in\ economic development y y y y Pkoverty alleviation by financing needs of low income house holds Promotin g integrated rural development Developing rural micro enterprise General income and providing employment opportunities to the jobless and poor people. y Improving saving , natrtion and better access to health care and educational services.

Developing emerging economies and economic growth. 2.14 Micro financing in Ethiopia

Poverty is the main challenge , and afundamental issue of economic development in ethiopea. The solutions to poverty are multifacxeted as are its causes many argue that an in adequate supply of credit can production negatively. As tried to point out earlier , the formal financing sector has faild to reach the majority of the rural as well as urban poor . this has forced the poor to turn to the informal and semiformal financial sources. How ever, credit from such sources is not only inadequate, but also exploitative and costly Although provision of credit and tools has since long been parachase of agricultural in puts and tools has ince long been practiced in ethipia credit schemes targeted of the urban or rural poor were non existent until recently. Since the 1970s , how ever , some NGOS have been providing credit to rural house holds in some part of the country, side by side with activites like delivering relief and development service (MFDR,2001). Wide scale micro financing begin in 19 90 , following the credit agreouent signed between the Ethiopian government and the international development Association(IDA). The credit program was on urban micro financing scheme that claimed at financing the market towns development project (MTDP). Whose actual operations begun in 1994 ( mengistu 1997) since micro credit delivery and saving mobilization in Ethiopia are being carried out by NGOS government departments co operatives and other in a segmented and in consistent way , the governments and other in a fragment and in consistent way, the government took the sound development of the microfinance industry. Accordingly, proclamation no 40/1996 was enacted to provide for the licensing and super vision of the business of micro financing by empowering the national bank of Ethiopia (WBE) to license and superwise them.(MFDR 2000) in case of SMFI. In 1996 the prevailing national policy frame work regarding the micro finance provision under went drastic changes.proclamation no.40/1996 of the licensing and supervision of micro finance institutions was passed in 1996. This requires all credit and sayings activities run by various institutions to be stream lined under the financial sector low and regulations and become legal entities. This laid the foundations for the birth of sidama MFI. Which has got its license from the national bank of Ethiopia in July 1998?

A. micro financing experience A lthough providing credit to rural agricultural house holds for purchase of agricultural in puts and tools has been practiced by the countries major state owned banks including development bank of Ethiopia (CBE)and the commercial bank of etheiopia (CBE), cridt schemes targeted at the urbal poor were non existent until re years whene NGOS started providing credit to poor house holds income parts of the country . it was abvious that this gap needed to be bridged with anew approach and initiatives started to flourish to this send. In the 1990s in 1990. On urban micro finacing scheme was initiated on anatioal scale with accredit agreement signed between international development Association ( IDA). The credit. Scheme aimed at finacing the market towns. Development project. Planned to improve infrastructure.Towns considered market and service center for the agricultural hinter land and to activate poverity problems unselected urban areas of the country through employment of enervation and income enhancement. B The pilot credit scheme The credit scheme was first planned to be implemented by the agricultural and industirial development and small scale industries development agents, how ever following change of environment in 1992 the responsibility of the latter which was dissolved as result was transfeed to regional trade and industry bereau. Because of the un favourable environment that prevailed in the country during the early 1994. Concerning the study area of SMFI, the institution is evolved from the sidama rular womens credit and pilot program in the Bansa woreda sidama development started the program with financial assistance from irish aid . the goal then was to empower women by providing access to credit and saving service given tha lack of access to ownership and controldevelopment of resource their hause hold. C THE CREDIT DELIVERY MODES The model heavily drafts on the experience orameen bank. Targeting beneficiaries is based on the stipulations of the credit agreement signed between in and the government.The agreement stipulates that at least 50 % of the beneficiates be women and house hold with amanting income

of not exceeding birr 50 how ever, the latter criterion had to be changed because of the devaluation that holds with minting in come below birr 100 or 200 ( depending on the situation inspecfic taken or region) were also include in to the scheme. The responsibility of screening, promoting , organization and licensing Micro enterprise erectors in co- operatives consisisting of members not excesing 30, rests with reginal( with their respective zones and Woredas). Trade and industry bereau. The bureau has to prepare business plans for every member of th co- operatives. The DBE then extends loans to those organized accordingly. Individual borrowers are required to deposit 10% of loans received as part of credit guarantee and saving schemes . the maximum v loan size grew from birr 1000 at the beginning to birr 5000 for loans above birr 200 co-operatives mmembership is required for eligibility and additional apprcisal technique is used by the organizers 2.1.5 informal financial institutions 2.5.1 Definition of the informal sector Before going to the descriptions and discussions about the informal sector which is one form or another linked to the issues of micro finance, it will be better first to define what does of mean by informal sector. The informal sector was defined in varies forms and ways by different writers as well as organizations, carrying various forms of interpretation. Since its identification in 1970 following studies in accra, Ghana by exit and hart and in Kenya by the international labor organizations, for the purpose of this study. How ever, the generalized definition given by Gerald mier (1995:146.77). is used and it as follows informal activist are the way of doing things characerised by Ease of entry Reliance on indigenous resources Forming ownership of enterprise Labo intensive and adopted technologies Skill acquired out sides the formal school system and

Unregulated and competitive markets.

Although the participants in informal financial activities called be stretched form an individual Marketing occasional loan or accepting deposit ffor state keeping the communing obsence and acknowledge market progress are money lenders friends and relatives and traditional arrangement such as iqqub and idirs 2.5.2 MONEY LENDERS The two major forms of informal finance that attract attention in Ethiopia are lqqub and idir. They derive their importance from their capacity to meet the participants social needs in addition to their significance cvinterms of saving mobilization and risk insurance. Although money lenders have been the only source of loans until the turn of the 20 th scentury in the country in the country they have been held with disdawn and contempt by the society. Religious organization , and government and regarded as usurious ( Dejene , 1993). Consequently they carry out their activities under cover and secrecy for example no information on financial dealing are divulged neither on the rare of interst they charge nor on the volume of translation they undertake (dejene . 19 93) 1.5.3 IQQUB Iqqub is an Ethiopian name for ROSCA. It s origin is traced back to the period of the Italian occupation of 1936-41 during which people hold to find their way out of war c, insecurity and intricacies of urbanization and to have amedium through which the could save money and raise resources (pank hwst and endrears, 1958. Alemayehu. 1969 Dejene 1993), as is the case with RoSCAS in many developed countries iqqubs involves nomogenous groups constitud by members either from the same work place or some ethnic backs round or some precession or some neighbor hood (Dejene , 19931,)iqqubs are not limited by leves of income or wealth nor residence they are found in both rural and urban areas. In addition to confining that iqqubs Make economic sense , they are good starfing for saving mobilization in rural areas and characterize by timeliness, flexibility

self discriplene and collective action , Dejene Managed to come up with interesting findings , they include steady economic growth () market ecnomy And employment contribution to iqqub involves increased transaction cost large size iqqub is strongly related with banking system( example depositing iqqube mony with banks). Economic importance and formalization of iqqub importance with its size, participative in morethan one cycle is common 2.5.3 IDIR Inder is also one of the forms of informal finance in Ethiopia . though mainly want for the burial of the dead when first started during the Italian occupation of 1936 -41 , it is asked of insurance scheme . that gohes beyond the burial of the dead to assist the bereaved financially & material. In general, Idir members have aso been obsewed to participate in development programs such as road constriction. School construction and public utilities ( Dejene, 1993) 2.5.4 SIZE OF INFORMAL FINANCIAL MARKET IN ETHIPIA Because of the multiplicity and secrecy that surround & cover the operations of the informal financial markets, it is near to impossible to measure the volume of financial transactions under taken by the different market operation. However it could be postulated that it is abig cnot bigger than than the formal financial institutions in the country 2.1.6 THE ROLE OF INFORMAL SECTOR It is in evitable that informal economic activities play some what crucial role in the economies of the developing and employment. ( todaro) in this regard has indicated the role of the informal sector by pointing that the important role that informal sector plays in providing in come corporative for the poor is no longer open debate( todaro 1995: 253) he emphasized the importance of the informal sector interms of supporiting his argument with studied made by by ILO, which indicates that the formal sector must be able to generate employment at every high rate of at least 10% per amum to creat apportunity on the urban areas. This means out put must grow at an even faster rate since employment in the formal sector increased less than proportionally in reaction to out put, then he said this sort of growth seems unlikely in view of

cure nt trends, and the under of the informal sector to absorb, more labour will continue unless other solutions to urban unemployment problem are provided. He also summarized the over oll significance of the non formal economic activites by saying,the informal sector has demonstrate its ability to generate employed and income for the urban labor force(todaro, 1995 253) He also expressed the importance of this sector by explaining its linkage with raral and urban sector of an economy. Informal sector is linked with the rural sector in tha it allows excess labor to escape formal rural poverty and under employment , although under living and working and working condition and incomes that are not much latter. 2.1.7 SIMILARITIES AND DIFFERENCES BETWEEN FORMAL AND INFORMAL FINANCIAL SECTER 2.7.1 SIMILARITY AND LINKAGE Both the formal and informal sector played cacrucial role to serve income low section of of the societies by providing financial service in oreder to sustain their life so far , Although the financial flow between informal and formal sector are restricted because credit market remains highly fragmented so each sector serves only distinct group of society. Financial resource allocations there fore, of there fore inefficient because there is limited chance of mobilizing financial resources from one market to another. Each financial sector has its own advantages , the formal sector has the capacity of providing large amount of tunds to non formal or informal sector borrowers how ever, it is reluctant to provide loans to the informa sector because it involves with transaction costs and problem of screening and enforcement are immense , for efficient utilization of financial resource w/c are very scare in developing country like Ethiopia the need for linking the two sector is conciderable since there is asubstantial benefit inmaking use of the advantage of both sector for the better 2.1.7/2 Differences

The main difference of the two sector are laid in the legal graund by theat means licensed or not as serve institution by government. Formal financial sectors are those that are governed, supervised regulated and licensed by the government and in contradistinction to those that are intermediations that taxes place out side the countrys banking and financial institution , informal one. By cso/Molsa (1997) informal sector is defined as house hold type establishments and activities which are mainly engaged market production, not registered companies or cooperatives have no full written book of account have no less than ten(10) persons engaged in the activity and no license. 2.1.8 CREDIT PROVISLON The rural poor of Ethiopia have low income which leads to have investment on formal and non formal activities which in turan lead to low productivity and income lack of finance is one of the b ottlenecks is impending production peroductivity and income of rural house holds. Access to institutional credit is very limited in Ethiopia. So the majority of the rural poor access financial services through informal channels, money lenders and others ( tesfaye , 1993), So that credit needs in rural Ethiopia area venormous crdit are required for purchase of seeds, fertilizer farm tools and implements, a nd others these credit needs are associated with production, women and men also need credit for purchase of input and working capital requirements for their income generating activities there are olso cases in point when clients need credit for commotion to bridge the gap of food shortage, Borrowers als need credit to purchase products from the community. Then in which manner the loan disbursed for those who need accredit largely and adequately in order to satisty their need , in this regard the many micro financing institution have their own procedures to provide credit services to their customers 2.1.8.1 LOAN DISBURSENENT PRODUCTION As copied from Bangladesh, grammen bank , micro finance has some form for all micro financing institutions operating in Ethiopia, the credit delivery modality to clients in through solidarity groups formed by group members with help of peasant associations representatives, local elders and loan afficers of the micro financing institutions .

Some form of individual lending procedures has stated in few MFIS in addition to group lending methodology loan distribution is made through branch offices of each MFIS. In most MFIS. Clients are obliged to corve to the branch office before distributes are going to be carried out from computation of different formats like center and group by laws, individual loan requisitions form socio economic data of b orrowers loan approval form and loan contracts that should be done at branch or and sub-branch office (mergo, 2003). 2.1.8.2 LOAN REPAYMENT The financial institutions are able to recover loans on schedule only when the repayment capacity of the borrowers equal or exceeds debit service, which consists of principal and interest due for payments borrowers a able to reply their loans on time with out suffering hardship only whene their repayment capacity equal or exceeds the debit service due accordingre to thbe loan contract these simple self evident relation ship define the role that credit plays indevelopment and influence that fate to expand the trendier of MFIS( Amina, 1999) the relation ship b/n the borrowers and leders is important the more distance the lender is from the borrower the less controls well the lender have over the repayment of the credit monitoring and control over the repayment of the credit, borrowers operation is essential , an analysis of the borrowers total credit capacity over aperiod to structure repayment accordingly and to evaluate the borrowers character and intent with respect of loan use and repayment (Amina, 1999) 2.1.8.3 REPAYMENT PERFORMANCE IN GROUP LENDING Common characterstic of group leading is that the group obtains the loan lender joint liability so each member is made responsible for repayment of loans of his or her peers. Joint liability , but possibly more so , the treat of loosing access to future credit incites members to perfom various finction including screening of loan applicants, monitoring the individual borrowers efforts , fortgunes and shocks and enforcing repayement of their peers.(loan, zeller, 1996), Zeller ( 1996) argues that probably the most important rationale for group lending is the information and mainataing advantages that group based finance institutions at the commune level have compared to individual contracts between aba nk and borrower group member get mportant information like repatation. indebtedness and asset ownership of the loan applicants at alower cost. They can also easy monitor indvitual efforts made toward ensuring repaymen , in

addition, group members can potentially enforcement of loan repayment . Group member can potentially employ social sa nction or even seize physical collateral from the defaulter. 2.1.9 FACTTORS THAT INFLUNCE THE LOAN REPAYMENT IMPROVEMENT I) loan size Von pischxes (1991 ), as sited in gemal (2004) noted that efficient loan sizes fit borrowers repayment capacity and stimulate enterprise if amount of loan released is enough for the purpose intended it will have appositive impact of the borrowers capacity to repay . if on the other hand , can handle, it will be more of aburden that help , there by understand repayment rates of MFIS II) CREDIT TEROMS Approrite credit terms result in workable loan Aworkable loan does not have to be renegotiated as aresult of the borrowers inablitiy to repay. Appropriate credit terms are essential to insuring that aloan is good business for the lender . the term of aloan to its financial maturity should insure that principal and interest are covered during the ful life of the asset and be consistent with the constraints imposed on the lender by thes capital structure , incloding the term, structuere of his liabilities (Aminia , 1999) III. timelines of loan Release If aloan is disbursed in time it is unlikely will be diverted to non intended purpose Jahonson and Rogaly (1997) noted that time lines of loan disbursement is import ant when loans are used for seasonal activities, they argued that complicated appraisal and approva procedures, which might delay disbursement, influence aprogram of seasonal loans for clients. Further they noted that this could in turn worsen the prospects of repayment by diverting loan to non intended purpose these problem tend to be common and dominanit among clients ,hence vfinancial institution are requited to control and plan so that timing for cash disbursement are carried at the time of actual demand to minimize the risk of diverting it for other uses and recovery be timed to coincide with harvest season when the borrowers have mony. IV loan officers Relation with clients

The establishment of good relation ship between loan officer and should at tempt to put in place. Close proximity of loan officers helps to build trust and contidence among clients , this in turn has significant pastive impact on sustainability as it assists in improving repayment rate and keeping staff travel cost and time low ( Gemechu, 2002) 2 . 2 Empirical literature review 2.2.1 General issue About micro finace Institutions There are numerous reasons for this counting studies of m icro and small enterprises the previous study of small scale enterprise has indicate more than 50 definitions in 75 countries (ILO, 1987, Getachew and podmo . 2005). It indicates that the importance of micro finance institution in contributing to job creation out but growth and sastanable development is now widely accepted in developing and developed countries, their development can deepen in the manufacturing sector and faster competitiveness. It can also helps achive more equitable distribution of benefits of economic growth. Uneven income distribution, with this advantage of micro and small enterprise, there fore, can reduce unemployment and help asz aseed bed for development of medium and large scale enterprises in the urban setting ,( Getachew & podma. 2001) Several studies have raised more or less identical issues regarding the role that is plaed by the non\ formals economic activities particularly those that are under taken in the African context. For example astudy on the informal sector in Africa by ILO has indicated that this sector which plays significant role in urban area as wells as rural areas of African countries account for 60% of the urban later force in most African countries by producing goods & service that conform with the need of thes population (ilo 1994:1) Another study by dessing , 1990 also indicated the paramount significant of micro- enterprise, which are part and parcel of the informal economic activities by saying that these enterprise with account for asizeable part of the economy play an essential role in sub southern Africa in providing

means of inelihood and employment opportunities for large number of non agricultural population (Dessing , 1990). 2.2.2 microfinance in the African economy is characterized by the presence of alarge segment of people engaged in the informal ecnomy ecnomy . accordingly, the informal economy. Is comprised of I. II. informal employment with out secure contracts, benefits etc.. informal employment in informal enterprises(small unregistered or un incorporated enterprises including employers, employees, own account operator and unpaid fancily woneers in formal enterprise III. informal employement out side of informal enterprise including domestic workers , temporary causal or partime workers etc.. the informal economy employs alarge share of the economically active population in cafrica. It employes 72 precents of the nnon- agricultural employment in sub sahara Africa and 48 percent ins north Africa. One the formal sectors ( public and private sector) to absorb the growing labor force. For example. In Tanzania out of 700.000 people vwho enter in to the lab or market annually, only ab out 40.000 can expepet to be employed in the fomal economy ( ILO ,2004), A ccording to some studies ( chen,m. et, Al 2002), over c80 pere cent new jobscreated in Africa is informal ecnomy. The unavailability of statistical data makes if difficult for providing acomprehensive profile of micro and small entehrprise in sub saharral Africa how ever, some enterprises (MSES) ARE often characterized by very small scale operations, vuse of low technology . low start up and working capital , low business (maragerial)skills . low level of productivity and icnomic and weak linkages to the formal ecnomy () capt,J,1995

Questionnaire Design The purpose of these questionnaires is to collect data for aresearch project titled credit provition and the problem of its (loan) repayment in sideman m icro finance institution, this is an independent research conducted in SMFI client by the university graduating student . the finding of the research is to show the problem and recommendation as well as providing asenior essay. Please respond by providing ashort answer and for putting atick mark (3) in the box of your chice thank you in advance for your understandin g and cooperation. Part I personal information 1.sex Age 2. Martial status male < 18 Married Single 3. Educational level illiterate 1-4 female 18-25 Divorced unduated 5-8 9-10 above 12 25-30 30-50 > 50

11- 12 4. Number of dependences Part II loan use

1. From whene does become the member of the organization?-------------How much was the amount you b orrowed for the first time ?------------2. What to do you borrowed the mony?-----------3. How many times dd you borrow?--------------4. Amount borrowed for the last time I < 1000 birr Ii 1000 - birr iii 3000- 5000 birr v. > 10,000

iv 5000-10,000 birr

5. What was the value of your asset before loan? I < 1000 birr Ii 1000 2000 birr iii 2000- 9000 birr iv > 4000 birr

6. What is the value of your assets after loan ? I < 1000 birr Ii 1001- 2000 birr iii 2001 -3000 birr iv 3001- 4000 birr V > 4001

7. What was the type of b usiness you were engaged in before participating in credit and saving service? I agro busine Ii petty trade Iii Food & local drink preparation Iv Manufaching 8. v hand craft vi service shop

other specify -------

How many years have engaged in this business ?

9. How many years have you used cridet facilities benefit----10. Which month is sutaible to take credit for your business? 11. Was there any delay in loan provision? 1, yes 11.1 if 2. No yes what was its effect

12. what is your opinion to wards loan size? 1,enough 2. Not enough 3. More than enough

13 do you use the loan according to loan agreement? 1. Yes 2. No

Part iii cvloan repayment 1. What is your repayment period? I I weekly Ii monthly iii Quarterly (every 3 month ) iv annually v. other speily

2. Do you pay the loan on time 1.Yes 2. No

2. if no , what do you think are the main repayment proble? 3. what do you say about repayment period?

1, convenint

2. Not convenint

3.1 if not convenint how do you prefer to repay the loan/ 4 do you pay interest rate 1. yes 4.1 if yes , how much precent 4.2 what do you say about interst rate 1 high 2.medium 3. 4.low fair 2. No

5. did you asked to provide collateral when you are give the loan? 1, yes 2. No

5.1 if yes specify the collateral type 6 did you think that yo ha ve benefited from the service/ 1. yes 2. No

2. 6.1 if no why not?----7. Did have difficulty in repaying your loan? 1. Yes 2. No

If yes what were the causes for the difficulty in repayed -------------8. What is your suggestion for improvement about over all credit and saving of SMFI

Chapter three 3. Method of analysis and presention of data 4. In this chapter we have tried to see th operation of SMFI especially on credit provision and its / loan repayment and other related issue becauses the credit provision and repayment are complementary to each other ( ie the activity of credit is not possible with out repayment). 3.1 the major service Delivered by SMFI as the information obtained from SMFI in the year 2008 , currently , financial services that has been deliverd by the vinstitution are y y y credit extension saving mobilization local money transeter

from these services , the credit extension and saving mobilization has been given largely and extensively in the zone since the institution started its operation finally the institution is also engaged in local money transfer only same de velopment organization in the zone even if there is ahigh demand on individual basis. 3.2 social occupation and demographic condition of clients of SMFI in this subsection

we will try tos look the major occupation of clients of SMFI both male and female. Participants in come generating activity taking loan from the institution. This helps to know in which sector the client are engaged and finacing activities take place mohammed mortuza (1993) argued , microfinance is meant for poor women one of the study conducted in Bangladesh on Grmman Bank (GB) showed that more than 91 % of the borrowers were women, the grammen bank seeks to improve both the economic and the social status of rural women by enabling them to recognized as a contributing and productive member of the family and which will provide them with say in family matters. Gramman bank statistics further show that disbursements level of loans to women have increased at va higher rate than for men and that is because of discipline and repayment records of female borrowers are better than those of male loaners. Experience also shows that women exhibit agreater bias towards the family unil in distributing their new income, preferring to improve hause hold living standards interms of improved nutrition sanitation and education of children . When we see the real condition of our country as well as the clients of SMFI, most often males are dominating as of house holds and administering the house on the bcontry , females have been given the inferior position in this respect and they are taken as a house lives According to the data obtained from SMFI , in the year 2006 and 2007 the total nnember of served credit clients were 18213 and 32 392 respectively , from this number the percentage of female clients accounted for only 19 % and 26 % respectively even if the the institution entertain fargeting principle based on priorties to women clients . Occupation describes the main hvelihood of the clients , the major income generating activites that the clients the cliens of smfi of SMFI engaged as the data 2007 are agriculture , petty trade , hand crafts service giving and others.

3.3

characteristics of sample espondents table number of respondents by age group and sex age sex male Below 20 21-25 26-30 31-35 36-40 41-45 Total 24 2 5 3 6 4 4 14 female 0 2 2 4 3 3 38 2 7 5 10 7 7 total

Of the total respondets 24 (63.16) are male while the remaining 14 (36.845) are females . these results indicate that the program beneficiaries are largely males . these also show that the participatin of female in economic development is low . the reason for this is that mostly females are considered as ahouse wife and their duty is only bearing child . the meanage of the respondets are 34 years , which shows that SMFIFS clients are economically active group of the society and the I nstituation focused on geneder issue

Table 2 distribution of respondets by educational level Level of education Non literate G rade 1-4 Grade 5-8 Grade 9- 12 Above grade 12 3 12 12 1 31.6 31.6 2.6 Total 38 100 100 65.8 Number of respondets 10 Percent (%) 26.3 7.9 34.2

Source own survey As it is indicated in table 2 abmove more than 65.8% of sample respondents are completed grade 5 or above. This indicate that majority of sample respondets are literal and they can kept there financial records properly Table 3 number of respondets by family size Family size 1-4 5-8 9- 12 Total Number of respondents 13 18 7 38 % 34.2 47.4 18.4 100 Sourece : own sarvy (2011)

The table 3 above shows the number of family size with in the house hold according to this table the average dependent family size is about 5-8 which shows the SMFI credit provision focused on to improve life of dependant or large family

Table 4 distribution of beneficiaries of marital status

Family size Married Un married ( single) midowed Divorced Total

Number of respondents 30 1 2 5 38

% 78.9% 2.6% 5.3 13.2 100

Source own survery (2011) The table 4 above gives details of the marital status of the selected sample beneficiaries . it is clear from the table that (78.9%) of the beneficiaries. Were married and followed by the 13.2% were divorced, 5.3 % weres widowed and 2.6 % were unmarried which show that SMFI Focused on large family size. 3.4 trend in come of clients show that the income of the poor is not sufficient to cover their daily needs and people by nature have atendency of hiding their income level . the following table shows the data related on the income level of clients. Table 5 Average monthely income of clients before and after taking credit from SMFI Income range Before involved aprograne in % 100-200 201-400 401 600 601- 800 801-1000  1000 total 39.5% 28.94 % 15.78 % 10.52 % 3.53% After involved aprogram % 15.79 34 21 23.68 15.79 7.89 2.63 100% 100 %

Source own survey (2011) The table shows that the month average income of the client after taking credit and before beig the client of SMFI . as the table indicates that the monthly average income before the client taking credit as followes 39.5 of client have average monthly income which is found between 100-200 and 28 .9 % , 15 . 78 % 10 .52 & 3.53% of client s have tota average income which is found between 201- 400, 600 601 800 and 801 1000 respectvely.

While the monthely average income which is found between 100 -200 and 34.21%, 23.68 % 15.79 % and 2.63% of cients have their income which is found between 201400, 401 600,601- 800 801-1000 and greater than 1000 respectively. Whene we compare the clients average monthly after they involve in credit between 100 -200 before aprogram were 39% of client but after aprogram they are 15.79 % this the decrements of the percentage from 39.5 % to 15.79 % shows that the improvements of clients income after taking the credit for working capital because the difference of (39.5 15 .79) % 23 .7 % of clients shift s from the low level of income which is 100 200 to the other higher income level.. The other important issue raised here is the majority of the clients ( 73.68%)ha ve average monthely income which is found between 201-800 after taking credit . how ever it is only 55.24% before the credit , these percentage also increased to 9.43 % after being client in the instruction so we can conclude that relatively the clients have abetter improvement after joining the credit service. Some clients are not successful once but vafter taking more than one times further in order to conceder the sustainability of clients in the situation it is better to see their credit cgyycle , which shows how many times the clients were served in the institutional.

Table 6 the credit cycle of clients Credit cycle 1st 2nd 3rd 4th 5th frequency 10 13 10 4 percntage 26.32 % 34.21 26.32 10.32 2.63

 5th total

0 38

0 100

Source own survey (2011 ) From the total respondents 26.63 % of the clients were taking the credit for the first time , 34.21 % of the second , 26.32 % of third , 10.56 % for the forth and 2.63 % for the 5th time , if abrrower gets access to credit in regular bases he may acuare more experiences on the institution s rule & regulations hence could efficiency utilize the loan for intended purpose. So the sustainability is the institution has appositive impact on the loan repayment capacity of the borrowers because borrowers will stay with the institution only who the repay their loan oon time. Concerning the income generally activity, one of the main objectives of SMFI is to enhance a sense of owner ship and increase their commitment to repaying loans. So it is important to recognize whether newly started business by credit or those who were alredy having their business are benefiting mre. Table 7 . the indication of the beneficiary operation.

Operation AREADY EXISTED New business total

Frequacy 23 15 38

% age agreed 60 40 100

Source own survy (2011) According to the majorty of response (60%) clients successful on the activity which alredy engage before joinin credit service rather newly developed one which 40 % of respondents agreed . hre clients present as areson for theior success(sustainable of activity) they have experience about how to operation at large rather than newly started ones. 3,5 CREDIT PROVIDING SYSTEM MANY micro financing institutions methodologies generally includes some specific

product design issues Aprimary means of differentiating one methodology from another

is in the choce of the product and services provided and the manner in which provision is made. As the credit provision is the primary objective of many micro financing institutions ,

we consider the operation of SMFI, in this regarding , how the crdit is provided and what is the creitean clients . in this regard , how the credit is provided and wwhat is the criteria client should fulfill to be selected and the procedure in which the institation follows to select clients 4. 5.1 Group lending Methodology In SMFI in order to obtain credit serices , the voluntary group organizing and relatively the same age group. The main aim of group formation for the institution is to remove the main entry barriers to these who with no alist collateral. Limited literacy. Weak technical knowledge and narrow prior money manegemnt experience.s The advantage of the grup is that they are formed each year permitting elimination of land risk, they are smoller and can be managed easily for crdit disbursement and collection. These groups colled be the basis for development and collection these group could be the basis for development of futer sustainable saving and credit schems of community basid micro finace institution. According to the data from SMFI in the year 2008 in the group lending methodology the over all average loan size is around 200 birr , the minimum and maximum loan size is birr 300 and 10,000 birr respectively with 99.3 recovery rate The important issue raised here is how the institutional recover 99.3% repayment rate generally there are many factor which may increase the repayment rate such as the efficient loan size , sustainability of repayment period , source of in come of borrowers and the likes , how ever , with practical point of view , the group lending methodology has more advvanteges for the institution rather than the group member default or lending methodology because whether the group member default or not the institution recovery its amount of disbursement with the cost of group

member , so the main reason for the higher rate of repayment is the group lending system . 3.5.2 individual lending methodology Under theis methodology , client are usually individual working in the informal sector who needs working captal and credit for purchase of productive asset. Most micro financial requires alalysis some sort of collateral or co-signatories , detailed financial analysis and project are often include with the loan application. Documentation is requerd including aloan contract , details of clients from sighned by co- signer and his personal information and legal deed to assets pledged and clients has made the purchase specified in the loan contract SMFI also need some sort of collateral requirements to after the loan for aparticular individuals. The minimum and maximum loan size in their regard is 10.000 birr and 30,0000 birr respectively.

CRITERIA AND PROCEDURE OF CLIENT SELECTION In the credit provision system the other issue be yond the method of disbursement is the requirement fulfilled on the side of customer be served in any microfinance institution, in the case of SMFI , some of the criteria should be fulfilled for the loan clients to have aservice from the institution are:

    

The age of the person be in between 18-60 yeards old Have no debt from private. Government and / or any organization Has holding national identity card from local government Honest with good behavior and socially accepted in the society of the area. Previous knowledge and experience in income generating activities

Nconcerning the procedure of selection in SMFI careful selection and proper screening is made for the group by the credit and saving committee of each keble then the selected clients appear before the people for approval . after the approvals of aareful selectiobn, orientation is given based on objective strategies policies group, and center formation.

3.6 COLLATERRAL REQUIRMENT SMFI uses individual guaranty system and group guaranty system . individual should bring quaranty for their credit as it v is similar elses were like commercial bank , the institution may decide the kinds types and size of guaranty on the other hand , the main collateral , which is familiar , is group guaranty , group guaranty is to mean that if one client defaults then the remaing individual in the group pay all the out standing balance Thearea that small number of people live there fore for group SMFI accept group guaranty while for individual loan we require material collateral or cosignatories , if groupmembers fail to make repayment for him/her and under take to follow up with the members immediately. Table 8 number of respondents by loan size and purpose of loan Purpose of loan Food and local drink preparation seling injera commodity trade cattle rearing cattle breading house rent wood work metal work other Total 3 2 1 2 2 1 2 1 1 3 3 3 1 1 2 2 1 2 1 1 -1 1 1 6 1 1 4 8 4 4 4 2 5 Bellow 1000 1001-2000 2001-3000 Above 3000 total

Source own survey (2011) As indicated in the above table , about 39 % of respondents are in the group of 1001 - 2000 birr to receive and minimum loan size 250 birr while maximum loan per respondets. Almost all the respondents reported that the loan sizes were enough and they had been

borrowing consider their own capacity look credit for other business such as metal work. Wood work , etc which shows that SMFI clients decide their business type treely with consent.

Table 9 the asset of Respondets before & after the credit The value of assets Before loan No of respondents Less than 1000 1001 2000 2001 -3000 6 18 11 % 15. 79% 47.37 28.95 5.26 After loan No of respondents 2 10 13 13 5.26% 26.32% 34.21 34.21 %

More than 4000 2

Source primary data (2011) own survey (2011) The above table shows that 15.79% of the value of the respondents asset before loan is less than 1000 , 47.37% % of respondents value of asset is between 1001- 2000 birr and 28.95 % of respondents have the value their asset between 2001-3000 birr and 5.26 more than 400 birr before they take loan from the institution. On the other hand , the respondents . value of asset after loan will be increased dramatically . 5.26% rtespondents values of asset is less than 1000 birr and 26 .33, 34.21 and 34,21 % of respondets value of asset lies between 1001 -2000 birr 2001- 3000 birr and more than 4000 birr 3.7 LOAN UTILIZATION REPAYMENT PEOBLEMS AND OTHER RELATED PROBLEMSIS Loan diversion related problems Table 10 number of respondets by loan use on per intended purpose. response No Yes Total Number of respondents 27 11 38 % 71 29 100

Proper loan utilization and good repayment condtion are important for clients to get next loan and for an institution for sustainability loan utilization out side the purpose intended to well create problem during repayment period. In the survey. 11(29%) of the respondents expreced as they were using the fund according to their violated the pre intended purpose , they mentioned the following reason for diversion of loan use other use other than intendedpurposes  Expenditure for sudden health problem  To undertake additional business  Change intial business due to market less  High family size  Such diversion of loan from the pre intended purpose ( business ) could have potential to reduce repayment rate unfortunately, sub branchs urban crdit repayment was 98% on average for five years up to October 31 .2009 (SMFI awassa sub branch report, 2007), this indicates that the need of regular and close supervistion by sub branch of staff members regarding the activities of the clients. Loan delivery time related problems Table 11 ? the problem of the business related to time Loan delay No of respondents % Effect on business Losson market Item ( supply become expensive) Yes No 19 19 50 50 4(21%) 11(58%) 2(10.5%) 1(5.25) 1(5.25 ) Plan disorder No Inefficient problem

Source primary data (2011) own survey (2011) Regarding timeliness of the loan granting , about 19(50%) of the respondets reported that thet SMFIS loan delivery was not timely of thei group , mor than 38 % said that loan dealy created problem of input supply to their business while 21 % and 10 % mentioned the problem of less of market & plan disorder respctvely.

INTEREST RATE PROBLEM Table : Awareness about interest and opinion about the rate

Pay interst Yes No

No of respondents 36 0 2

Opi nion about interst high moderate) 8 low 1 Not knon Total 6 -

94.7 21 5.3 100

Total

38

21(55%) 8(21%)

1(2.6%)

8(21%)

38

Source primary data (2011) own survey (2011) According to this survey , almost all respondents (94.7% of them) know they have been play interst but they did not know how much they are paying except few beneficiaries who responds as the institution has been chared 15 % of interest

on loan . 2( 5.3%) sample respondents do not know whether they are paying interst or not , the question that should be raised here is how much interst they had repayment including mothly saving , pro ncipal and interest as told by staff members of the sub branch according to their repayment period. Since the beneficiaries did not have achace to know amount of saving , principal and interests separately , they though as if interst rate were high . this calls for the need of traing to clients regarding owareness to ward credit and saving program of the institution. Clients opinion about interst rate should 21( 525 .4%)of them consider the rate is high Lending methodology Related Problem The majority of the respondedents have complied that pricple or client screening problem due to lack of careful attention during clint selection un productive client include ins the grup. Usually those clients found to be late repayers and even defaulters those clients who donot pay their obligation on the time push toward the time for next disbursement for the rest of the group members. Thus group lending method reted

by those who pay their obligation on time. This suggests that an institution should develop appropriate methodology during power & capital According to branch manager and sub branch workers arguments , there is lack of institutions capacity in terms of skilled experienced human power, transportations facilities , office and office equipment , training (ongob )etc all these problems hoder the customers and to give adue attention during the client selection.  Absence of Market According to the datas obtained from smfi, almost all that means more than 85 % of the responendets explained that absence of market as serious problem to wards low income earnings of their business

 Saving related problems According to the data obtained from SMFI. More than 76% of the respondets reported that as they only save contribution and center saving of 20 birr per month each. This was because their monthly income from credit induced business did not enable them to save how ever , some respondents revelaed as they continud in other institutions indicated they could save more than compulsory saving in the form of personal voluntary saving and should work in this respect so much . since saving voluntary also make depositor to earn interest and to use it when need arises eqqub it is a form of informal finance in ethiopia. Few respondets also complained about possibility of timely with drawal of saving they had before . this could discorage their saving need so SMFIS has better to work in this regard to facilitate saving with drawing process as the clients want Table 12 number of sample respondents by their response on the service benfit Benfit from the service Yes No total No of respondents 36 2 38 % 94.7% 5.3% 100%

Source own survey (2011) Despite the aforementioned problem 36 (94.7%) sample respondets explained as they have benefited from provision of credit and saving service of SMFI in Hawassa town. CHAPTER FOR Conclusion and recommendations 4.1 conclisions the main objective of SMFI is improving the economic situation of low income

productive poor people through increased access to lending and saving service including micro