PERFORMANCE ANALYSIS OF MICROFINANCE INSTITUTION

AND ITS SUSTAINABILITY AND OUTREACH (CASE STUDY IN

HURUTA TOWN,OROMIA ,ETHIOPIA)

SUBMITTED BY:
Gena Beshir
ID NO 120615

ADVISOR: DR ABDI DHFERA (-----

RESEARCH PROPOSAL SUBMITTED FOR PARTIAL FULFILLMENT OF
RESEARCH PROJECT REQUIREMENT FOR MBA DEGREE IN MANAGEMENT

Prepared By: Gena Beshir

Advisor: Dr Abdi
HARAMBEE UNIVERSITY
COLLAGE OF BUSSINESS AND ECONOMICS
DEPARTMENT MBA MASTERS PROGRAM

MARCH, 2021
ADAMA, ETHIOPIA

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DECLARATION
This is to certify that we carried out this proposal work on topic in titled ‘’ performance
analysis of microfinance institution and its sustainability and outreach (case study in Huruta Town

Oromia ,Ethiopia)’’ under my supervision. This work is original in nature and suitable for
submission and for award of MBA masters program.
Reasearcher’s
Name:_______________________________________
Signature:____________________________________
Date:________________________________________

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 Acknowledgment
First of all I would like to praise Allah the almighty who helped me in every direction while I
am preparing this proposal research.
Secondly I would like to express my deepest gratitude to Dr. Abdi for his great advice and
insightful comment and offering me useful hints through this proposal preparation.

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 Table of Contents
Acknowledgement...................................................................................................................III
Acronyms................................................................................................................................IX
CHAPTER ONE........................................................................................................................1
1. INTRODUCTION.................................................................................................................1
1.1 BACK GROUND OF THE STUDY...............................................................................1
1.2 Statement of the problem.................................................................................................2
1.3.1 Specific objectives of the study...........................................................................3
1.4 Research Question...........................................................................................................3
1.5 Significance of the study.............................................................................................3
1.6 Scope of the study............................................................................................................4
1.7 Limitation of the study.....................................................................................................4
Chapter Two..............................................................................................................................5
2. Literature Review..................................................................................................................5
2.1 Definition and conceptual frame work............................................................................5
2.1.1. Definition.................................................................................................................5
2.1.2 Conceptual Framework.............................................................................................5
2.2 The Emergence /development/of MFIS...........................................................................7
2.3 Sustainability...................................................................................................................7
2.3.1. Out reach..................................................................................................................8
2.3.2 Empirical Evidence...................................................................................................8
Chapter three............................................................................................................................10
3.RESEARCH METHODOLOGY.........................................................................................10
3.4 Method of sampling.......................................................................................................11
3.5 Data Collection Methods...............................................................................................12
3.6 Method of Data analysis................................................................................................12
References 15

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Acronyms
CBE- Commercial Bank of Ethiopia
BDE- Development Bank of Ethiopia
MFIS- Micro finance Institutions
OCSSCO-= Oromia credit and saving share company
RUFRP- Rural financial Report paper
ORS- Oromia Regional State
NGOs- NON –Governmental organizations

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 CHAPTER ONE
INTRODUCTION
1.1 BACK GROUND OF THE STUDY
Poverty is a common problem of almost all developing countries. As a result their main and
immediate objective is to strive to break the vicious cycle of poverty and to reduce the
magnitude and extent of poverty. In this regard, the microfinance institutions recently gain
more and more acceptance. Currently, these institutions play a very vital role in global
poverty reduction debates microfinance could be a powerful strategy or instrument among
several others for alleviating poverty in Ethiopia.
Ethiopia is one of the poorest countries in the world characterized by low per capita income
and highest population pressure. The prevalence of poverty has been a common phenomenon
in the Ethiopian society. Although the agricultural sector which is the mainstay of Ethiopian
economy, is inadequate to feed the growing population. The 1997 world development report
of the world Bank put Ethiopia second from the last comparing it with 133 countries of the
world based on per capital income which is %100. Nearly 47% the rural populations are
living below the poverty line compare to 33% in the urban areas (RUFRP, 2001).
Consequently few recent ideas have generated as much hope for alleviating poverty in low
income countries as the idea of microfinance. Microfinance promised both combating
poverty and developing the institutional capacity of financial systems through finding ways
to cost effectively lending money to poor households and it exploits new contractual
structures organizational forms. This reduces the riskiness and costs of making small
uncollateralized loans also demonstrated that even poor households can save in substantial
qualities (Morduch, 2000).
Therefore microfinance is chosen as one of the most efficient instrument to promote
economic development and to fight poverty in poor countries. Numerous micro finance
institutions (MFIS) all over the world have proven that financial services can be offered on
sustainable cases with high outreach. Around the world microfinance institutions are
increasing seen as the new jobs creator (41-Bagdacti and Bruntrup, 2005).
Similarly by considering the importance of MFIS, the government of Ethiopia recognized
and supported money innovative microfinance operation. Then new microfinance
technologies have been developing in Ethiopia since past decade that has lowered the cost of
lending to entrepreneur and households with limited means to alleviate the deep-rooted
poverty. This improved income and consumption level of the majority.

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The microfinance institution share company currently operated in Huruta town was
investigated in this study.
1.2 statement of the problem
In many of developing countries microfinance institutions are accept rightfully as the most
important means in alleviating poverty and improving the standard of the poor.
Recognizing this, the government of Ethiopia encourages these institutions by giving legal
entities and facilitating a conducive environment to ensure their sustainability and outreach
performance continuously. Despite their contributions in addressing the problem of the poor
and implementing their activities, they may face difficulties, which may hinder their
performance so it may hinder the poverty alleviating activities of the poor.
This study will be attempted to deal with that whether the specific problems done by
previous study on Ethiopia case are really the problem in Huruta Town.
To what extent the problem is faces and also to assess other factors that haven’t taken
consideration that will be the study such as production and market places problem
cooperative problem will be assess.
The question is therefore, how to promote the MFI in Huruta Town identifying their key
constraints that have been and are bottle necks to the development of the sector and what
should be done to address these constraints and put the sector in the rapid growth path, is the
facial point of this paper.
1.3 The General objective of the study
The general objective of the study is to analyze the performance of microfinance institution
by considering the sustainability and outreach of the institution in economic activities in
Huruta town to improve the living standard of the people.
1.3.1 Specific objectives of the study
Also the study is designed to have the following specific objectives.
 To look at the microfinance institution’s sustainability and outreach to the poor
people.
 To analyze the contributions of microfinance in poverty alleviation and to know the
beneficiary from microfinance.
 To identify challenges faced by microfinance institutions not to operate efficiently.
 Finally to suggest what should be done to solve the problem of the sector.

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1.4 Research Question
Also the study is designed to have the following research question
 How To look the microfinance institution’s sustainability and outreach to the poor
people.
 How analyze the contributions of microfinance in poverty alleviation and how to
know the beneficiary from microfinance.
 What challenges faced by microfinance institutions not to operate efficiently.
 What should be done to solve the problem of the sector.

1.5 Significance of the study

The result of this study is important for microfinance institutions and for concerned
governmental bodies in
- identifying the different problems that face microfinance institutions in Huruta town
and propose the problem to the concerned governmental bodies to search solutions for
the problem.
- After studying the share of the sector in improving the income level of the poor
people and reducing unemployment in the town propose such benefits of the sector to
the concerned governmental bodies to give considerable attention to the expansion of
the sector.
-It will have a great value for those who want to undertake further study on related topic
- Give suggestion for those who engaged in the activity how they can solve some minor
problems by themselves.
1.6 Scope of the study
The research will be limit the performance of microfinance institution with respect to
sustainability and outreach in Huruta town. This is because microfinance is chosen us one of
the most efficient instrument to promote economic development and to fight poverty in poor
society.

1.7 Limitation of the study

This study has certain research limitations

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 In short the limitations of the study were:
- Lack of time
- Shortage of materials

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 CHAPTER TWO
LITERATURE REVIEW
In this part attempt is made to review global findings as well as the research work in the
content of Ethiopia pertaining to MFIS
2.1 Definition
Microfinance institutions are among the formal financial institutions targeting the poor both
in urban and rural areas and providing microfinance service (kebede et al. 2002).
Microfinance is referred to as “a small scale financial service rendered to the rural and urban
poor, provides credit for self-employment and small business and includes saving and
technical assistance” (shete.1999).
2.1.1. Emperical Literature Review
Poverty is the major problem in most developing economies. In these economies it is argued
that among others, absence of access to credit is presumed to be the cause for the failure of
the poor to come out of poverty. Meeting the gap between demand and supply of credit in the
formal financial institutions frontier has been challenging (Vonpischke, 1991).
In fact, the gap is not aroused merely because shortage of loan able fund to the poor, rather it
arises because it is for the formal financial institutions to lend to the poor. Lending to the
poor involves high transaction cost and risks associated with in formation asymmetries and
moral hazards (Stiglitz and Weiss, 1981).
Nevertheless, in several developing economies governments have intervened through
introduction micro-finance institutions to minimize the gap and then allow the poor to access
credits. There are different arguments concerning how to evaluate the performance of micro-
finance institutions. Meyer (2002), citing from zeller indicated that there is what is called
“critical micro finance triangle” that we need to look at to evaluate micro finance institutions
based on their objective. Here the concerns of the triangle represents out reach to poor
financial sustainability and well fare impact (IBID).
Out reach at glance means the number of clients served, but Meyer (2002) noted that out
reach is multidimensional concept. In order to measure out reach we need to look in to
different dimensions. The first is simply the number of persons now served that were
previously denied access to formal financial services usually these persons will be the poor
because they con not provide the collateral required for accessing formal loans are perceived
as being too risky to serve and impose high transaction costs on financial instructions
because of the small size of their financial activities and transaction women often face greater

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problems than men in accessing financial services. So number of women served is measured
as another criterion. Although difficult to measure depth of poverty is concern because the
poorest of the poor face the greates access problem. Some measure of depth of out reach is
need to evaluate how well MFIS reach the very poor (IBID).
Finally the variety of financial services provided is the criterion because it has been shown
that the poor demand and their welfare will be improved if efficient and secure savings,
insurance remittance transfer and other services are provided in addition to the loans that the
predominant concern of policy makers (Navajas et al; 2000).
Rural income fluctuates form season to season in response to whether shocks and related
agricultural activities. Due to the risk affecting income level and consumption poor rural
households in developing countries demand access to financial services to help stabilize
income and consumption.(zeller.etal.1997).
Since from house earn income from different sources. It is important to aggregate from the
different sources and include the different factors responsible for income generation. The
major sources of income are crops and live stock production which are affected by
environmental factors such as soil, rainfall and temperature (kebede et.al 2000).
Also wage income which is affected by institutional factors such as labor market, labor
mobility, wage policy etc is another source of income. Institutional factors play key roles in
terms of finance, markets and research and extensions services, which affect innovation and
technologies both introduction and business sector with ultimate impact on the utilization of
credit received from microfinance institutions. (IBID)
Another key factor determining the house hold income is micro business or small scale
enterprise which provide alternative of complementary job opportunities for both women and
men in rural and urban areas. The role of microfinance institutions is considerable in creating
access to financial services to enable income generation activities by engaging in small scale
enterprises and use of production technologies to increases house hold income (IBID)
2.2 The Emergence /Development /of MFIs
The majority of poor in developing countries are experienced with the vicious circle of
poverty and unable to accumulate substantial savings. This in fact calls for the need of
external finance to break away the circle. Hyunhal (1993) described that the predominance of
informal finance which is exploitative calls for rescuing small scale borrowers from the
power of rapacious under in the informal sector by providing formal finance at reasonable
rates and charges(HYunhal,1993)

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Hence macro-credit and saving programs have been emerged us antipoverty instrument in
many low income countries. Making credit available and provision of saving services helps
the poor to accumulate capital and essential to alleviate poverty and promote economic
development.
This helps borrowers to smooth their consumption if they incur income losses due to
production failure (Sinha,1996. Khandker et al, 1995).
Banks in developing countries can serve only 20% of the population (Emerta, 2003). In
addition in the rural areas the interest rate charged by the informal lenders are high in
habiting the growth of small producers (khandker, 1995).
As a result microfinance is introduced as a powerful development tool (Emerta, 2003).
2.3 Sustainability
Refers to “the ability of a program to continually carry out activities and services in pursuit
of its objectives” (khandker et.al, 1995). As cited by different contributors, sustainability is a
signal both to program beneficiaries.
There are always gaps between the areas of formal sector financial institutions and the
traditional or informal forms of financing. As a result, many economically active poor are
marginalized. It is micro finance that usually fills the gaps. For instance a lot of unemployed
labor get job when they are provided with credit for income generation activities. It also
creates entrepreneurial culture among the community which is a big implication for income
generation (Binyam, 2002).
2.3.1. Out reach
The other means of evaluating the performance of micro finance institutions is outreach.
Outreach concerns with the quality of services provided that is the extent to which services
meet the needs of the target group (Lemlem, 2006).
Yoron and Jacob suggested that micro financing institutions seek to broaden their client base
down words to the extreme poor or simply outwards with their clients will have to look more
closely at their clients behavior and delivered new products and services that respond to the
differing need new products that respond to the differing needs of the various clients.
Microfinance credit institutions which target the poor, may have to operate in risky agro
climate areas in order to reach their target population.
The need to do some may reduce the financial viability of these institutions. It is possible to
deepen outreach by reducing the denomination of financial services and serving even poorer

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clients. Effective outreach is in habited by factors which are specific to agricultural and to
rural economy (Robison 2000).
2.3.2 Empirical Evidence
Different studies in different disciplines used different approaches to assess impact of MFIS
(Berhanu, 1999). From his study of micro finance credit and poverty alleviation in Ethiopia
identified that more than 70% of the respondents under his study reported the positive
contribution to wards employment creation income generation improved access to health and
educational facilities as well as house hold nutrition
Tsehoy and Mengistu (2002) conclude that the credit and saving institutions intervention
among poor women in Ethiopia has made some positive effects that made a difference on the
socio-economic empowerment of women clients (Tsehay and Mengistu, 2002)
RUFRP (2001), show that the sustainability and loan recovery depends on weather
conditions, which in turn affect the level of the income of the borrower
2.3.3 Conceptual framework
Financial efficiency is assessed employing two financial outputs: financial revenue and gross
loan portfolio. Gross loan portfolio, that indicates the total loan outstanding of the MFI and
revenue generation, which is generated from the loan portfolio constitute financial outputs.
Inputs are same in both cases: asset size of MFIs, personnel employed and costs per borrower
(Berger and Humphrey, 1997).
The analysis is run under seven input-output combinations; to measure over-all relative
efficiency (model consisting of all four outputs and three inputs), relative financial efficiency
(two financial outputs and three inputs), relative social efficiency (two social outputs and
three inputs), relative efficiency in loan portfolio (loan portfolio and three inputs), relative
efficiency in revenue generation (financial revenue and three inputs), relative effi- inputs)
and relative efficiency in supporting women ciency in the focus of poor (poor clients and
three (women clients and three inputs).

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 Chapter Three
Research Methodology
3.1 Description of the study area
The study will be conducted on the performance analysis of microfinance institution and its
sustainability and outreach (case study in Huruta Town,Oromia ,Ethiopia) which is found in
Huruta town 164 km from Addis abeba. and 39 km from Zone capital Asela
Locality of Huruta Towm

Population

The Huruta town with the leading population has population of 42,852 for the year 2000
E.C CSA and total number of male 23,818 and 19,034 female in the total 2 kebele of town.

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3.2 Research design
The study will use both primary and secondary data and descriptive study design will be
select for the research proposal due to it is concerns with conditions of relationships that
exist and processes that are going on.
3.3 Types and sources of data
The study will gatheres from two sources of information. It is both from primary and
secondary sources.
Primary sources: - These include the cultural information received from individuals directly
concerning the problems for the study that is from the operators engaged in MFIS. The
primary data was collected through schedule interviews questionnaire carefully us designed
for the purpose of the study. In addition it creates direct communication between researcher
and the respondents and make the information gathered more reliable and accurate.
The interviews method was conducted by the researcher to the concerned governmental
bodies. The researcher used unstructured personal interview method. The aim of this
interview is in order to get full information about the microfinance institution in Huruta town
and also to know how much the concerned governmental bodies are aware of the problems of
micro and small enterprises and actions they are taking to solve the problems.
Secondary sources:- these include all types of published and unpublished materials about
micro finance institutions. The sources were gathered from reports, business plans. Annual
planning’s, books and the cities MFIS development strategy. The sources also gathered from
different previous research on related topics. The use of these secondary sources is in order to
strengthen the information required and propose necessary suggestions for the problems.
3.4 Method Of Sampling
The data were collect from those who engage in micro finance instituitions. The sampling
technique which the research uses to collect the primary data will be simple random
sampling.
3.5 Data Collection Methods
The data we will be collects from the following three data collection techniques namely
questionnaires, interview and observation will be uses to collect the lrequire quantitative,
and qualitative data.

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3.6 Method of Data Analaysis
The necessary information will be both from primary and secondary data secondary data. The
proposal use descriptive method of data analysis using both quantitative and qualitative means of
analysis.
3.7 Ethical Consideration
In doing this research there is an ethical responsibility to do the work honestly and with
integrity which is applied to all stages of the research process and applied to the researcher
who undertake the research, and the respondents who provide with the necessary data.
Ethical conduct should be reflected in conducting investigation, providing the data, analyzing
the data, interpreting the results, and suggesting alternative solutions.

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 3.7. Work plan schedule

Time plan
Activity No Dec Jan Feb Ma Apr MAY Jun Jul
v r
Title 

Problem 

Literature 

Proposal writing 

Proposal 
submission
Proposal 
Presentation
Question  
Data collection   
Analysis 
Thesis 
submission
Thesis Defense 

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 4.1 .Budget plan

N Description Unit Quantity Unit Total cost

o measurement cost
1 Transportation Birr 700 700
2 Flash Pcs 1 10.00 210.00
3 Paper Dast 2 321.00 642.00
4 Pen Pcs 10 10.00 100.00
5 Ruler Pcs 1 50.00 50.00
6 Binder Pcs 1 300.00 300.00
7 Interview Pcs 93 100.00 9300.00
8 Contingency (10%) 1,110.00
Total 12,412.00

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 References
 Adams D.W.(1988) “The conundrum of successful credit projects in floundering
rural financial markets.”
 Al-Baqdaetiand Bruntr up (2002). “New jobs creator”.
 Berhanu Degifie and Thomas Yeuholau work (2000) “MFIS in Ethiopia”.
 Berhanu lakew (1999) micro enterprise credit and poverty alleviation in Ethiopia.
 Binyam. (2002). Implication for income generation.
 Dhaba Moti “The impact of micro financing on poverty reduction” Addis Ababa
University Ethiopia, 2003.
 Emerta, (2003) “Powerfull development tool”.
 Hyunhal. (1993).Providing formal Finance at Reasonable rates.
 Kebede et.al (2002). Providing microfinance service.
 Khandker. s. r et al “Grameen Bank: performance and sustain ability”
 Lemlem. (2006) target group.
 Meyer D.W (2002). Critical Micro-finance triangle.
 Morduch (2000). “Substaintial qualities.”
 Navajas et al. (2000). Predominant concern of policy makers.
 Robinson (2000). “Agricultural and rural economy”
 Stiglitz and Weiss (1981). Costs and risks Associated with information asymmetries
and moral hazards.
 Shete(1999) “Saving and technical assistance”.
 Tesfaye Aregawi. FBBE: “Microfinance issues of impact assessment and rural
finance intermediation in Ethiopia”. June 26, 2000.
 Zever.etal (1997). Income and consumption

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