Regulating Microfinance in Ethiopia: Making it More Effective

Date Published: 
Apr 2005
Gobezie, G.

How can microfinance be made more effective through regulation?

This paper presents the regulatory and supervision framework of the microfinance industry in Ethiopia. It states that the formal microfinance in Ethiopia started in 1994-95 by Government's proclamation to legally authorize microfinance institutions (MFIs) to:

  • Accept deposits from the general public;
  • Draw and accept drafts;
  • Manage funds for the microfinancing businesses.

The regulatory framework was revised by the National Bank of Ethiopia (NBE) and it:

  • Raised the loan size ceiling for individual borrowers upto 0.5% of the MFI's capital;
  • Increased the repayment periods on loans from one year to two years;
  • Removed the interest rate ceiling on credit by the NBE;
  • Set the minimum paid-up capital requirement for the MFIs at a relatively low amount of US $23,000.

The paper recommends that there is a need to:

  • Gain new insights from foreign banks and also control indirect foreign ownership;
  • Encourage entry of more MFIs to provide the poor in choosing the best option;
  • Remove interest rate ceiling on savings to improve savings mobilization in remote rural areas;
  • Improve the participation of women in accessing services of the MFIs by appropriate capacity building mechanisms for MFIs;
  • Increase education about microfinance in Ethiopia to garner support of policymakers for these initiatives.

The paper concludes that though the regulations have created an enabling environment for the healthy operation of the microfinance industry, yet there still is room for improvement and that needs to be taken into consideration.