Over the past two decades, the microfinance sector in Ethiopia has been expanding its financial services outreaches to meet the needs of the underserved society. As the industry continues to grow, what stands out as crucial situation is the intensive transformation of their current limited offering that basically constitutes of small loans on limited scale basis to the poor and emerging small entrepreneurs, to the provision of more sophisticated financial services to micro-entrepreneurs and small businesses, including more flexible loan products with an increased outreaches, and personal development training that shall help their clients effectively mitigate the daily adversities they face.
However, MFIs take deposits subject to certain regulatory limitations. Consequently, today, the challenge facing MFIs is self-sufficiency. So, MFIs are forced to borrow from commercial banks to get the necessary scale and outreach in making microfinance a self-sufficient and, thus, long-term solution for the alleviation of poverty.
Thus, Awash Bank develops to offer new custom-tailored products and services which are supposed to meet the ever-changing needs of the MFIs industry, after assessing the needs of these institutions. These products and related services include deposit accounts, lending, salary solutions, agency banking partnerships, etc. which can either be offered individually or as product packages.
2. Loans and Advances, and Related Services Proposed For MFIs by Awash Bank
2.1. Loans and Advances for Micro Financial Institutions
- To bridge the gap or the imbalance between deposit and loan requests sustainably, one of the alternative sources of finance to resort to is bank loans.
- Awash Bank has proposed loans and advances that are tailored to the needs of MFIs.
2.1.1. Loan to MFIs under Credit Risk-Sharing Guarantee Schemes
- Due to limited institutional capacity to mobilize savings and insufficient collateral to borrow from banks, MFIs face challenges constraining outreach and growth of MFIs so as to source funds for on-lending to their clients.
- As the result, Awash Bank in cooperation with USAID’s Development Credit Authority (DCA), provide credit risk sharing guarantee facilities in order to further incentivize the mobilization of funds to the Microfinance Sector from banks.
- The collateral requirement for MIFs reduced or eliminated as the result of the guarantee.
- By reducing the potential credit risks to banks which may occur due to lack of collaterals, credit risk sharing guarantee helps to expand access to capital by MFIs and to catalyze sustainable MFI relationships with formal financial sector actors, thereby increasing the availability of credit to micro and small enterprises.
3. Benefits of the Product to MFIs
3.1. Benefits to Micro Finance Institutions (MFIs)
- Easy requirements:Requirements for MFI to get a loan are simplified and easy to be fulfilled.
- Reaching a new segment of clients with additional funds
- Flexible Access funding and repayment arrangement
- Decrease operating costs of obtaining funds
- Overcome regulatory constraints of deposit taking
- Expand its operations and increase profitability
- Access to expertize
3.2. To the Community
- Helps unbanked community to get access to formal financial services
- Increase income of households and solve unemployment problems.
- Improves saving cultures and living standard of the community.
- Helps to eradicate poverty.
4. Target Customers
- Target customers for a proposed term loans and related services are Microfinance institutions (MFIs) which are registered and legally operating in Ethiopia.
5. Mechanics of MFIs Loan
- The MFIs applying for a loan shall secure and fulfill all legal documents, and express their commitment (undertake obligation) to deposit and use other services of the Bank.
- Required documents by the Bank shall be ensured or fulfilled before any application will be received.
- Once the eligibility requirements are ascertained and all conditions are met, the Credit Policy of the Bank will be applied in processing and approval of the loans.
- The approval may be for a lump sum disbursement or for a credit limit that the MFIs will draw over a period of time on phase by phase bases.
6. Rationale for Offering Deposit Products for MFI Clients
- MFIs look for loans and deposit that best address their needs under these conditions.
- The Bank may consider the features and benefits that can maximize the productivity, and experience the optimum combination of products and services, custom-tailored to the MFIs business needs.
- There is big deposit market potential for the Bank in MFIs.