Revisiting the Regulatory and Supervision Framework of the Microfinance Industry in Ethiopia: Report No. 13

This study discusses the progress made in the regulatory and supervision framework of the microfinance industry in Ethiopia. It discusses in detail:

• The financial system and microfinance;
• The structure of the microfinancial system;
• Regulation and supervision;
• Regulatory and supervision issues for microfinance.

The study concludes that:

• Ethiopia has made progress towards creating the enabling legal and policy environment for establishing sustainable microfinance institutions (MFIs);
• It has simplified the process of licensing a microfinance business;
• There is a lack of competition in the market;
• The licensing of MFIs in the form of share companies has created ownership and governance problems;
• The group lending and peer-monitoring model functions well at the early stages, but its usefulness declines as clients mature.

The study recommends that there is a need to:

• Encourage competition;
• Investigate ways for improving the governance and management of microfinance businesses;
• Lift or increase the ceiling on loans and repayment;
• Reduce dependence on the group-lending method and allow successful clients with their own collaterals to take up loans without making the whole group liable for their actions;
• Build The National Bank of Ethiopia's capacity to supervise and regulate the microfinance sector;
• Find ways to increase the participation of donors and NGOs.