Financial Sustainability and Outreach of Microfinance Institutions in Ethiopia: Does Organizational Form Matter?

37 Pages Posted: 8 Jul 2013

See all articles by Gashaw Tadesse Abate

Gashaw Tadesse Abate

University of Trento; European Research Institute on Cooperative & Social Enterprises (EURICSE)

Carlo Borzaga

University of Trento; European Research Institute on Cooperative & Social Enterprises (EURICSE)

Kindie Getnet

International Water Management Institute (IWMI)

Date Written: July 2, 2013

Abstract

Growing commercialization and competition in microfinance drives the focus of micro lenders from outreach per se to achieving financial sustainability in serving the poor. Such a goal can conflict with the traditional social mission of microfinance – outreach to the poor. In places where credit markets are inefficient, attaining financial sustainability while serving the poor depends largely on the ability of lenders to overcome the costs of market contracts and constraints. Such ability of cost containment often varies by lending terms and organizational forms. Using disaggregated data of microfinance providers in Ethiopia, we compared financial cooperatives and specialized or non-bank microfinance institutions on their outreach, financial performance and ability to achieve financial self-sufficiency together with outreach to the poor. The results show that nonbank microfinance providers perform relatively well in terms of breadth and depth of outreach, but face higher cost, which creates tension between outreach and financial sustainability. In contrast, there exists a positive complementarity between outreach and financial viability for financial cooperatives. On average, financially self-sufficient cooperatives lend small size loans and serve larger proportions of women borrowers, implying a greater depth of outreach together with achieving financial sustainability.

While non-bank microfinance providers do better in expanding outreach, based on the findings, financial cooperatives better contain their costs, balance social and economic goals and enable the microfinance industry to fulfill its full promise – serving the poor on cost-covering basis.

Keywords: Financial cooperatives, Non-bank microfinance institutions, Financial sustainability, Outreach, Trade-off, Sub-Saharan Africa, Ethiopia

JEL Classification: Q12, Q13, Q16

Suggested Citation

Abate, Gashaw Tadesse and Borzaga, Carlo and Getnet, Kindie, Financial Sustainability and Outreach of Microfinance Institutions in Ethiopia: Does Organizational Form Matter? (July 2, 2013). Euricse Working Paper No. 56 | 13. Available at SSRN: https://ssrn.com/abstract=2288627 or http://dx.doi.org/10.2139/ssrn.2288627

Gashaw Tadesse Abate (Contact Author)

University of Trento ( email )

Via Giuseppe Verdi 26
Trento, Trento 38152
Italy

European Research Institute on Cooperative & Social Enterprises (EURICSE) ( email )

Via S. Giovanni 36
38122 Trento (TN)
Italy

Carlo Borzaga

University of Trento ( email )

Via Giuseppe Verdi 26
Trento, Trento 38152
Italy

European Research Institute on Cooperative & Social Enterprises (EURICSE) ( email )

Via S. Giovanni 36
38122 Trento (TN)
Italy

Kindie Getnet

International Water Management Institute (IWMI) ( email )

Addis Ababa
Ethiopia

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