International Journal of Accounting and Financial Management Research (IJAFMR) ISSN 2249-6882 Vol.

3, Issue 1, Mar 2013, 157-176 TJPRC Pvt. Ltd.

CREDIT PROVISION AND SAVINGS MOBILIZATION OF MICROFINANCE INSTITUTIONS IN ETHIOPIA A Study of Microfinance Institutions in South Nations, Nationalities, and Peoples Regional State (SNNPRS)
K. RAMA MOHANA RAO1 & TAMRAT LUDEGO FITAMO2
1

Department of Commerce and Management Studies, Andhra University, Visakhapatnam, Andhra Pradesh. India
2

A Research Scholar in Andhra University, Department of Commerce and Management Studies, Visakhapatnam, Andhra Pradesh. India

ABSTRACT
Microfinance is a strategy to address the financial needs of the poor and underprivileged sections of the society. The need for microfinance is seriously felt in all the developing countries and more so in Ethiopia. This paper examines the issues related to credit provision and savings mobilization by microfinance institutions in South Nations, Nationalities, and Peoples regional state of Ethiopia. The objective of the study is to analyze the relationship between credit provided and savings mobilized and their trend during 2007 2011. The study found out that the institutions have different backgrounds with respect to the major outreach measures. The policies and programs in relation to credit provision as well as savings mobilization among the three institutions are dissimilar. The findings of the study are useful to the respective institutions and policy makers to promote microfinance objectively in the region and to strengthen the institutions.

KEYWORDS: Microfinance, Outreach, Sustainability, Credit Provision, Savings Mobilization INTRODUCTION

Microfinance is a set of tools, approaches and strategies which have grown up around addressing the financial needs of the poor people; people who dont have ready access to mainstream financial services and who are thus financially excluded; and people who are subjected to the often exploitive conditions of fringe financial services such as pawnbrokers, loan sharks, and payday lenders, (Burkett 2003). Microfinance covers the provision of a range of financial services to low income households, including loans, savings, money transfers and insurance, (Honohan and Beck 2007). For reporting purposes, CGAP, the consortium of microfinance donors, counts loans as microfinance if their average outstanding balance is not above US$5000 for Eastern Europe and NIS; $2000 for Latin America and the Caribbean; $1500 for the Middle East, North Africa, global and other projects; and $1,000 for Sub-Saharan Africa, Asia, and the Pacific. For savings services, an appropriate cut-off might be one third or one quarter of the loan. In Ethiopia, microfinance came to inexistence in 1996 after currently ruling regime, Ethiopian Peoples Democratic Republic Front, took over the power from the military regime as a means to speed up economic development. At its inception four microfinance institutions owned by government were established. The number has risen to thirty one microfinance institutions with 433 branches and 598 sub branches by end of 2011. Studies estimate that this figure serves between 10-25% of the total microfinance demand in the country. Most of them are owned by non government organizations (NGOs). According to MF Transparancy (2011) the institutions have extended total credit of 6.9 billion ETB to 2,470,641 active borrowers. However, the coverage so far achieved is very insignificant relative to the existing demand

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for such microfinance credit and related services. It is only 2% of the total population and 5% of the poor has been reached by the institutions since their inception (MFTransparancy 2011).

REVIEW OF RELATED LITERATURE

The issue of microfinance institutions has been the subject of interest for many researchers. The studies basically focused on credit provision, savings mobilization, sustainability, and outreach. In the context of microfinance institutions, credit provision refers to lending (creating access to credit service) money to borrowers either in long - term or short term bases whereby the borrower is required to repay the principal and the interest, if any, to the lender as per their agreement. Credit is a borrowed fund with specified term for repayment (Ledgerwood, 1999).The major issues raised in connection to credit provision are: loan size, loan term, interest rate, and grace period. Loan size is one of indicator of the depth and width of outreach in microfinance institutions. As loan size increases to the level that it attracts the well to do (those with relatively better economic status), MFIs may not be able to reach the active poor. (Okumu 2007), states that an alternative to directly targeting low- income clients is to use design features that promote self exclusion of the better offs. One such design feature is the use of small loans. Richer people are less likely to be interested in accessing small loans. Loan term (credit term) is the duration for which the loan stays outstanding. The length of the duration and the pattern of repayment are the other factors that should be considered by MFIs. Most MFIs clients business is seasonal particularly those engaged in agricultural activities earn income in a particular periods of a year and need credit when their agricultural activities is about to start to purchase farm inputs. Therefore, matching the period of credit extension with the clients peak business periods and collection pattern during the clients earn income from their business is very essential both for the clients and the institutions. According to (Ledgerwood 1999) loans should be based on the cash patterns of borrowers and designed as much as possible to enable the client to repay the loan without undue hardship. This helps the MFI avoid potential losses and encourages clients both to manage their funds prudently and to build up an asset base. Tamrat F. (2012), states that provision of loans by MFIs should match with the schedule of revenue activities of their clients. If loans are provided during the period when their clients business activities are low, the loans could be used for the purpose other than the specified business which might be unproductive and it would be difficult for the client to repay it back. Not only the loan provision but also the loan collection schedule of MFIs should be in line with the period when their clients could have profits from their business (not at start of their business or at the time when the profit is used for other purposes.) Through with appropriate matching of the loan provision and collection schedules with the clients business activities and profit schedule, it is possible to reduce the default and delinquency risk of loans. Interest rate is the price attached to the loans of MFIs. The major revenue source of MFIs comes from the interest charged on the loans extended to clients. Interest rate has double edge effect. On one hand, if higher interest rate is charged, it may create angry customers. That means, the demand for the institutions credit product may decline. On the other hand, if lower interest is charged, the institutions become less profitable and will not be able to survive (sustainability will be under question). According to (Ledgerwood 1999), a balance must be reached between what clients can afford and what the lending organization needs to earn to cover all of its costs. The higher the interest rate that client cannot afford, the greater is the risk of default and delinquency on the loan repayment. On the contrary, the lower the interest rate to cover costs and expenses of the institution, the higher will be the risk of sustainability. Savings mobilization is a systematic process of collecting and managing money (cash and noncash items) from individuals, groups and organizations whereby the depositor can withdraw the amount of the savings together with the interest, if any, as per the agreement between the depositor and the institution (the one who collects the savings). Savings"

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are cash or physical products set aside for future uses (Phil Bartle, 2007). According to (Brian B. and Janette K. 2012), savings mobilization is demand driven activity aimed at clients who wish to save by using financial instruments. Savings are the residual capital remaining after an entrepreneur has paid household living expenses and business operating expenses. Because of the fungible nature of the household economic portfolio, savings can be easily shifted between the household and enterprise (Stephen F. Gudz, 1999). The allocation of disposable income is a portfolio decision with various alternative options. Voluntary savings can take the form of cash, institutional or in-kind savings. Institutional savings include deposits in formal (e.g., banks), semiformal (e.g., cooperatives) and informal (e.g., Rotating Savings and Credit Associations/RoSCAs) financial institutions. Inkind savings include savings in grain, animals, gold, land, raw material, finished goods and construction material. The line between savings, investment and consumption is not always easy to draw. For example, construction material can either be stored or sold when cash is required, or used as an investment in the family's housing. Another allocation for disposable income is on-lending it to relatives or friends for either economic or non-economic returns (the latter referring to social reciprocity), (Michael F. Alfred H. Sylvia W., 1999) Studies indicate that savings were the forgotten half of rural finances (Robinson, 2001). Policy makers and bankers in many parts of developing world have been taught to believe that the poor dont save, cannot save, and do not trust financial institutions, and prefer non-financial forms of savings. In the earlier period, micro finance programs were not effective in mobilizing saving deposits and showed little interest in this regard. (Ledgerwood 1999), mentioned two major reasons for these. The first one is the mistaken belief that the poor cannot save, and the second one is due to regulatory constraint of license to mobilize deposits. Recent microfinance experience shows that even poor households would deposit their surplus in MFIs provided that they get attractive interest rate, convenience /location (priority and accessibility), security (the safety of the saving option), and ease of withdrawal. Okumu (2007) states that relative to commercial sources of financing, savings of microfinance institutions are cheap sources of funds. This cheap source is lent at less lending interest rate to borrowers thus attracts demand for credit which in other words means increased outreach and revenue. Increase in revenue eventually increases profitability of the institutions, keeping operating expenses constant. Increased profitability leads in to increased sustainability. Therefore, there is positive relationship between savings and both outreach and sustainability. Nearly a period of fifteen years is over ever since the introduction of microfinance institutions in Ethiopia. There has not been any study carried out on the institutions regarding outreach measures taking them all together except few studies on individual MFIs. Therefore, it is necessary to evaluate in-depth the direction of movement of the microfinance institutions with regard to credit provision and savings mobilization. This paper brings the following research question to inquiry: (1) How well the institutions have been performing with regard to the number of borrowers, amount of credit, and amount of savings? (2) Is there relationship between credit provided and savings mobilized? Hypotheses of the Study Ho = there is no relationship between credit provided and savings mobilized. Ha = there is relationship between credit provided and savings mobilized. Ho = the trend of credit provision and savings mobilization is increasing.

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Ha = the trend of credit provision and savings mobilization is not increasing. Objectives of the Study are Study the relationship between credit provided and savings mobilize; and Analyze the trend of change both in terms of credit provision and savings mobilization.

METHODOLOGY
Quantitative Secondary data has been used for the study. The data was obtained from the financial statements of the institutions, their web sites, and other related websites. Quantitative methods of analyses such as: measures of central tendency and measures of dispersion have been used to evaluate the level of closeness and variability of the values of credit provided and savings mobilized. Correlation analysis has been carried out to study the degree of relationship between credit provided as an independent variable and savings mobilized as a dependent variable. Predictive models have also been designed using simple regression analysis. The trend analysis has been done using Least Squares Method. The Trend of Credit Provision and Savings Mobilization The performance of the selected microfinance institutions in credit provision as well as savings mobilization is analyzed based on the financial data during the period 2007 to 2011. The performance of credit provision is analyzed by taking in to consideration the trend in credit provision and the number of active clients. Savings mobilization is studied by analyzing the performance trend during the study period of the selected microfinance institutions. Credit Provision in Monetary Terms Omo Microfinance Institution: The trend of credit provision of the institution from 2007 2011 is depicted in Table 1 Table 1: Credit Provided, Changes from Year to Year, and Percentage Change Credit Provided Change from (In EBR) Year to Year 2007 164,309,359 244,631,922 2008 408,941,281 -67,125,496 2009 341,815,785 122,007,224 2010 463,823,009 71,805,577 2011 535,628,586 1,914,518,020 Total Source: the institutions financial records Year Percentage Change 149 -16.58 35.70 15.50

As indicated in the table the total amount of credit provided by the institution over the last five years was 1,914,518,020EBR. The mean amount was = 1,914,518,020/5 = 382,903,604EBR. The variance (2) = (164,309,359 -382,903,604)2 + (408,941,281-382,903,604)2 + (341,815,785 - 382,903,604)2 +
(

463,823,009 - 382,903,604)2 5

+(

535,628,586 -382,903,604)2

= 1.6004496744156180e+16 EBR = 1.6004496744156181016 The standard deviation () = Coefficient of variation = = = 126,508,880 100=33%

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Average amount of credit provided per borrower = the total credit provided The total number of clients = 1,914,518,020 = 6,733EBR 284,340

Sidama Microfinance Institution: Table 2 shows the amount of credit provided by Sidama microfinance institution, changes from year to year, and percentage change during the study period. Table 2: Credit Provided, Changes from Year to Year, and Percentage Change Credit Change from Percentage Provided Year to Year Change 19,708,500 2007 17,097,200 -2,611,300 -13.25 2008 23,754,900 6,657,700 38.94 2009 41,393,650 17,638,750 74.25 2010 62,536,900 21,143,250 51.10 2011 Total 164,491,150 Source: the institutions financial records Year It can be inferred from the table that The mean amount of credit of the institution = 164,491,150/5 = 32,898,230EBR. The variance (2) = (19,708,500 - 32,898,230)2 + (17,097,200 - 32,898,230)2 + (23,754,900 - 32,898,230)2 + (41,393,650 - 32,898,230)2 + (62,536,900 - 32,898,230)2 5 Standard deviation () = = 17,075,508EBR = 2.91573E+14 = 2.915729734580641014 EBR

Coefficient of variation = standard deviation100 = 17,075,508 100= 52% Mean 32,898,230

Average amount of credit provided per borrower = = the total credit provided = 164,491,150 = 5,622 EBR The total number of clients 29,262

Wisdom Microfinance Institution: Table 3 shows the credit provision trend of the institution during the period under study. Table 3: Credit Provided, Changes from Year to Year, and Percentage Change Credit Change Converted Provided from Year in to EBR (in USD) to Year 2007 6,634,537 59,087,186 2008 8,479,338 94,495,439 35,408,253 2009 7,567,759 95,667,069 1,171,630 2010 6,639,614 109,332,532 13,665,463 2011 6,735,330 115,815,346 6,482,814 Total 36,056,578 474,397,572 Source: the institutions financial records Year The data presented in the table indicates that: The total amount of loan provided by the institution during the last five year was 474,397,572EBR as indicated in the above table. Percentage Change 60 1.24 14.28 5.93

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The mean amount = 474,397,572/5 =94,879,514EBR The variance (2) = (59,087,186-94,879,514)2 + (94,495,439- 94,879,514)2 + (95,667,069- 94,879,514)2 + (109,332,532-

94,879,514)2 + (115,815,346- 94,879,514)2 =3.85811E+14 = 3.858111014 5 Standard deviation () = = 19,642,084EBR

Coefficient of variation = standard deviation100 = 19,642,084100= 21% Mean 94,879,514

Average amount of credit provided per borrower = = the total credit provided The total number of clients = 474,397,572 =1,848EBR 256,664

Credit Provision in Terms of Number of Active Clients This part presents the number of clients of the institutions in each year of the study period, changes from year to year, and percentage change. Table 4, 5, and 6 represents the active clients of Omo, Sidama, and Wisdam MFIs respectively Table 4: Number of Active Clients, Changes from Year to Year, and Percentage Change No. of Active Change from % Clients Year to Year Change 40,975 2007 55,599 14,624 35.7 2008 53,012 -2,587 -4.65 2009 62,302 9,290 17.5 2010 72,452 10,150 16.3 2011 Total 284,340 Source: the institutions financial records Year Table 5: Number of Active Clients, Changes from Year to Year, and Percentage Change No. of Active Change from Borrowers Year to Year 3,310 2007 2,808 -502 2008 3,757 949 2009 8,371 4614 2010 11,016 2645 2011 Total 29,262 Source: the institutions financial records Year % Change -15.17 25.26 122.81 24.00

Table 6: Number of Active Clients, Changes from Year to Year, and Percentage Change No. of Active Change from Borrowers Year to Year 48,168 2007 56,735 8,567 2008 56,302 -433 2009 46,721 -9,581 2010 48,738 2,017 2011 Total 256,664 Source: www.mixmarket.org Year Percentage Change 1.78 -0.76 -17 4.31

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DISCUSSIONS
The average credit provided over the study period by Omo MFI was 382,903,604 EBR. The total variance around the mean was 1.6004496744156181016EBR with standard deviation of 126,508,880EBR. On average the institution has been providing 6,733EBR per borrower. The Performance from 2007 to 2009 was a bit fluctuating i.e. there was ups and downs; however, from 2009 onwards the trend was almost linearly increasing. This may be due to the governments attention on the formation of small scale enterprise associations in the country which mainly depend on microfinance institutions loans. As the coefficient of variation (33%) indicates that the trend of credit provision of Omo microfinance institution is relatively stable (its variability is less) compared to Sidama microfinance institution with 52% coefficient of variation but it is greater than Wisdom microfinance institution having coefficient of variation at 21%. High variability or fluctuating trend of credit provision might not be recommendable; however, high variability due to rapid increase from year to year (under manageable limit) is good. Sidama MFI, on average, has been providing 32,898,230 EBR credit per year with standard deviation of 17,075,508 EBR and coefficient of variation of 52% during the study period. The average credit provided per borrower during the study period was 5,622 EBR which is less than the average credit provided by Omo MFI that amounts 6,733EBR and greater than Wisdom MFI having 1,848EBR per borrower for the same period. This may indicate that Sidama microfinance institutions strategy is to reach as many borrowers as possible with small loan size relative to Omo MFI but its outreach in terms of depth is limited compared to Wisdom MFI. In other words, the extent of Sidama MFI in reaching the poor is less compared to Wisdom MFI. This is because; whenever the size of a loan goes smaller and smaller its ability to attract the better off (those with better economic status) become lesser and lesser. According to Mark Schreiner (1999), the most common proxy for depth is loan size. Asad K. Ghalib (2011) referred two major studies pertaining to Association for Social Advancement (ASA) and Grameen Bank that strongly suggest that microfinance works better for the poorest than the less-poor. Both organisations established their own programmes to reach the hardcore poor. Neither involves grain handouts, but they offer very small loans with flexible repayment schedules. There is no internationally accepted standard of loan size for MFIs. According to the study carried out on MFIs in Africa by AnneLucie, et.al (2006) the average loan size per borrower was $307 ($400 for Central Africa, $175 for Eastern Africa, $468 for Indian Ocean, $427 for Southern Africa, $406 for West Africa) The level of variability of credit provided by Wisdom MFI is the least one compared to the other two institutions in the study as evidenced by the institutions coefficient of variation, 21%. This is because; the rate of increase in the credit provided from year to year during the study period is not significantly high enough relative to the other two institutions. However, compared to the other two institutions, Wisdom MFI has demonstrated nearly continuous increase from year to year. The average loan size per borrower, 1,848EBR, of Wisdom MFI is very small relative to the other two institutions under study. The reason can either be due to less validity of the data source or the actual practice that the institution is following. If the institution is actually providing such small loan size to its borrowers relative to its industry competitors, it might be appreciable as it is doing well in covering as many poor borrowers as possible. However, the institutions cost per transaction would go up which in turn affects profitability and then sustainability. On top of that, the institution might not match the loan size demand for borrowers business which in turn may push clients to competitors. Besides, there might be high rate of default and delinquency if the loan does not match with the loan size requirement of the clients business. That is, the clients might not use their full business capacity which eventually leads to less profitability and increased rate of default and delinquency.

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The loan might also be diverted to purposes other than the intended use if it does not match to the clients business loan size demand. According to Fitamo L. Tamrat (2012) besides the loan term, MFIs should also give due attention to the loan size they offer to their clients. It is better to design the loan products on the bases of the clients business scale, the type of business the clients are running and expected credit risk associated with the potential clients or group of clients (solidarity group) business nature. According to Ledgerwood (1999), the appropriate loan amount is dependent on the purpose of the loan and the ability of the client to repay the loan (debt capacity.) While determining the debt capacity of potential clients, it is necessary to consider their cash flow as well as the degree of risk associated with cash flow and other claims that may come before repayment of a loan to MFI. Savings Mobilization and Its Relation to Credit Provision: this section focuses on the trend of the savings mobilization and its relation with credit provided over the last five years (2007 2011) by the institutions. Savings Trend of Omo Microfinance Institution and Its Relationship with Credit Provision Table 7 shows the yearly savings, changes in savings, and percentage change of Omo MFI for the last five consecutive years (2007 - 2011). Table 7: Savings, Changes in Savings, and Percentage Change Yearly Savings Changes in Savings from Year to Year 25,921,341 44,494,346 42,284,978 141,844,642 Percentage Change 47 55 34 84

Year

55,180,799 2007 81,102,140 2008 2009 125,596,486 2010 167,881,464 2011 309,726,106 Total 739,486,995 Source: the institutions financial records

As it is indicated in the table, the total amount of savings of the institution over the last five years was 739,486,995 EBR The mean amount = 739,486,995/5 = 147,897,399ETB; The variance (2) =

(55,180,799-147,897,399)2 + (81,102,140- 147,897,399)2 + (125,596,486- 147,897,399)2 + (167,881,464- 147,897,399)2 + (309,726,106- 147,897,399)2 5 Standard deviation () = = 89,602,677EBR; = 8.02864E+15 EBR = 8.02864 1015 EBR;

Coefficient of variation = standard deviation100 = 89,602,677100 = 61% Mean 147,897,399 = 739,486,995

The ratio of savings to credit of the institution =Total savings of the institution Total credit of the institution 1,914,518,020 = 38.63%

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The correlation between credit provided and savings mobilized together with least squares method for trend analysis is presented in table 8 and succeeding calculations. Table 8: Correlation between Credit Provided (X) and Savings Mobilized (Y) N= 5
Tim e /yea r (t) 1 2 3 4 5 t= 15

t2 1 4 9 16 25

X 164,309,359 408,941,281 341,815,785 463,823,009 535,628,586 X= 1,914,518,02 0

Xt 164,309,359 817882562 1025447355 1855292036 2678142930 Xt=6,541,0 74,242

X2 2.69976E+16 1.67233E+17 1.16838E+17 2.15132E+17 2.86898E+17 X2 = 8.13098E+17

Y 55,180,799 81,102,140 125,596,486 167,881,464 309,726,106 Y= 739,486,995

Yt 55,180,799 162204280 376789458 671525856 1548630530 Yt=2,814,3 30,923

Y2 3.04492E+15 6.57756E+15 1.57745E+16 2.81842E+16 9.59303E+16 Y2 =1.49511E+1 7

XY 9.06672E+15 3.3166E+16 4.29309E+16 7.78673E+16 1.65898E+17 XY =3.28929E+1 7

Source: computed from the credit and savings tables above Correlation coefficient(r) = NXY (X)(Y)

5(3.28929E+17) (1,914,518,020739,486,995) = 0.81

The Coefficient of Determination for the above correlation coefficient is the square of coefficient of correlation. Coefficient of determination (r2) = 0.812 = 0.6561 =65.61%. This means that 65.61% of the variation in the dependent variable (savings) is explained by the independent variable (credit provided). The rest 34.39% is due to others, other than credit provided. The Simple Regression Analysis of the above data for Credit Provided (X) and Savings collected (Y) where credit provided is independent variable and savings collected (this holds true particularly with compulsory savings) is dependent variable in the form of linear equation Y = a +bX is as follows: The two normal equations Y = Na +bX XY = aX +bX2 Where: N is number of pairs of values of the two variables a is constant (y intercept) b is the slope of the equations Substituting the values in the equations 739,486,995 =5a +1,914,518,020b 3.28929 1017 = 1,914,518,020a +8.13098 1017 b Multiplying equation (i) by 424696446, we will get 3.140571017 = 2123482230a +8.13098 1017b . (iii) . (i) .. (ii) ... (i) . (ii)

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3.28929 1017 = 1,914,518,020a + 8.13098 1017b -1.4872 1016 = 208964210a a = -71,170,082 Substituting the value of a in equation (i) we get the value of b 739,486,995 = 5 -71,170,082 + 1,914,518,020b 739,486,995 = -355850410 + 1,914,518,020b b =0.572.Thus, the required regression equation of Y on X is given by: Y = -71,170,082 + 0.572X

..(iv)

Based on the data, the value of Y (savings) for different values of X (credit provided) can be predicted. For example, the expected value of savings for 2013 will be 330,323,396.1EBR, if credit provided is estimated at 701,911,675EBR as per the above regression model. It is calculated hereunder. Y = -71,170,082 +0.572 701,911,675= 330,323,396EBR Trend Analysis Using Least Squares Method This method gives a formula for getting the straight line that will best fit the data. Under this method a mathematical relationship is established between the time factort and the variable X .The equation of a straight line is expressed as: X = a +bt Where X the calculated or estimated value of the trend of credit provided; a the intercept of X; b the amount by which the slope of the trend line rises or falls; t- the number of units of time each given year lies away from the origin. Using the following formula the trend equation for credit provision is: a = (X)(t2) (t)(Xt) = (1,914,518,02055) (15)( 6,541,074,242) = 143,647,549 n(t2) (t) 5(55) (15)2

b = n(Xt) (t)(X) =5(6,541,074,242) (15)( 1,914,518,020) = 79752018 n(t2) (t)2 5(55) - 152

Therefore, the trend equation of credit provision of the institution is: X=143,647,549+ 79752018t; it is rising or increasing trend at 79752018EBR per year. For instance, estimated v alue of credit provided for period seven (2013) is = 143,647,549+ 79752018 (7) = 701,911,675EBR. In the same way as it is done above, the trend equation Using Least Squares Method for savings mobilization of the institution in the form Y = a +bt is: a = (Y)(t2) (t)(Yt) = (739,486,995)(55) (15)( 2,814,330,923) = -30,863,582 n(t2) (t)2 5(55) - 152

b = n(Yt) (t)(Y) = 5(2,814,330,923) (15)( 739,486,995) = 59,586,994 n(t2) (t)2 5(55) -152

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Therefore, the trend equation of savings mobilization of the institutions is: Y = -30,863,582 + 59,586,994t; it is rising or increasing trend at 59,586,994 EBR per year. For instance, estimated value of savings mobilized for period seven (2013) is = -30,863,582+ 59,586,994 (7) = 386,245,376 Savings Trend and Its Relationship with Credit Provision of Sidama Microfinance Institution: the data related to savings of Sidama MFI is presented in table 9. Table 9: Amount of Savings, Changes in Savings, and Percentage Change Yearly Savings Changes in Savings from Year to Year 23,684 1,434,185 11,328,894 1,637,437 Percentage Change

Year

77,861 2007 101,545 30.42 2008 1,535,730 1412.37 2009 737.69 2010 12,864,624 12.73 2011 14,502,061 Total 29,081,821 Source: the institutions financial records From the table it is apparent that the total savings of the institution for the last five years (2007 -2011) was 29,081,821EBR; the mean savings was 29,081,821/5 = 5,816,364; the variance (2) = (77,861-5,816,364)2 + (101,545- 5,816,364)2 + (1,535,730- 5,816,364)2 + (12,864,624- 5,816,364)2 + (14,502,061- 5,816,364)2 5

=4.18065E+13 EBR = 4.180651013

Standard deviation () =

6,465,798EBR

Coefficient of variation = standard deviation100 = 6,465,798100 = 111% Mean 5,816,364 The ratio of savings to credit of the institution =Total savings of the institution = = 29,081,821 Total credit of the institution 164,491,150

17.68%

The correlation between credit provided and savings mobilized together with least squares method for trend analysis is presented in table 10 and succeeding calculations. Table 10: Correlation between Credit Provided (X) and Savings Collected (Y) N= 5 Time /Year (t) 1 2 3 4 5 t2 X2 Y2 6062335321 10311387025 2.35847E+12 1.65499E+14 2.1031E+14 Y2 =3.78183E+1 4

tX

Y 77,861 101,545 1,535,730 12,864,624 14,502,061 Y= 2,90,81,821

tY 77,861 203090 4607190 51458496 72510305 tY =128,856, 942

XY 1.53452E+12 1.73614E+12 3.64811E+13 5.32514E+14 9.06914E+14 XY =1.47918E+ 15

1 19708500 19708500 3.88425E+14 4 17097200 34194440 2.92314E+14 9 23754900 71264700 5.64295E+14 16 41393650 165574600 1.71343E+15 25 62536900 312684500 3.91086E+15 X= t tX = t = 2 X2 = = 16449115 6.03 108 15 6.86933E+15 55 0 Source: computed from the credit and savings tables above Correlation coefficient (r) = NXY (X)(Y)

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=5(1.47918E+15) (16449115029081821) = 0 .95 Coefficient of Determination (r ) = 0.95 = 0.9025 = 90.25%. This means that 90.25%. of the variation in the dependent variable (savings) is explained by the independent variable (credit provided). The rest 9.75% is due to others, other than credit provided. On the same way as above the Simple Regression Analysis of the above data for Credit Provided (X) and Savings collected (Y) is: Substituting the values in the equations 29081821 =5a +164491150b 1.479181015 = 164491150a +6.869331015b Multiplying equation (i) by 41761091, we get 1.214491015 = 208805455a +6.869331015 b 1.479181015 = 164491150a + 6.869331015b -2.6469 1014= 44314305a a = -5,973,014 Substituting the value of a in equation (i) we get the value of b 29081821 =5a +164491150b 29081821 = -29865070 + 164491150b b =0.358359. Thus, the required regression equation of Y on X is given by: Y = -5,973,014+ 0.358359X Now, we can predict the value of Y (savings) for different values of X (credit provided). For example, we can predict the value of savings for 2013 if credit provided will be estimated at 76,708,850 EBR as follows: Y = -5,973,014+0.358359 76,708,850 = 21,516,293EBR In the same way as it is done above, using Least Squares Method the trend equation for credit provision of the institution in the form X= a + bt is: a = (x)(t2) (t)(tx) = (16449115055) (15)(6.03108) = 40,265EBR n(t2) (t) n(t2) (t)2 5(55) (15)2 5(55) - 152 b = n(tx) (t)(x) =5(6.03108) (15)(164491150) = 10,952,655EBR .. (iii) ..... (iv) .. (i) .. (ii)
2 2

Hence, the trend equation of credit provision of the institution is: X= 40,265 + 10,952,655t; it is rising or increasing trend at 10, 952, 655EBR per year. For instance, estimated value of credit provided for period seven (2013) is = 40,265 + 10,952,655(7) = 76,708,850 EBR.

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In the same way as it is done above, the trend equation using the Least Squares Method for savings mobilization of the institution in the form Y= a + bt is: a = (y)(t2) (t)(ty) = (29081821)(55) (15)(128856942) = -6,667,080 n(t2) (t)2 5(55) - 152

b = n(ty) (t)(y) = 5(128,856,942) (15)( 2,90,81,821) = 4161148 n(t2) (t)2 5(55) -152

Therefore, the trend equation of savings mobilization of the institutions is: Y = -6,667,080 + 4161148t; it is rising or increasing trend at 4161148 EBR per year. For example, estimated value of savings mobilized for period seven (2013) is = -6667080 + 4161148(7) = 22,460,956 Savings Trend and its Relationship with Credit Provision of Wisdom Microfinance Institution: the details of year wise savings mobilized by Wisdom MFI are shown in table 11. Table 11: Savings, Changes in Savings, and Percentage Change Yearly Savings Yearly Savings in USD in EBR 40,848 363,792 2007 59,153 659,213 2008 50,245 635,167 2009 49,031 807,364 2010 52,564 903,848 2011 Total 251,841 3,369,384 Source: www.mixmarket.org Year Changes in Savings from Year to Year 295,421 -24,046 172,197 96,484 Percentage Change 81 -3.6 27 12

The data shown in the table indicates that: The total amount of savings of the institution for the last five years was 3,369,384EBR. the mean savings was 3,369,384/5 = 673,877 EBR. the variance (2) = (363,792-673,877)2 + (659,213- 673,877)2 + (635,167- 673,877)2 + (807,364- 673,877)2 + (903,848- 673,877)2 5 standard deviation () = = 183,615EBR = 33,714,328,846 EBR.

coefficient of variation = standard deviation100 = 183615100 = 27% Mean 673,877

the ratio of savings to credit of the institution =Total savings of the institution = Total credit of the institution = 3,369,384 = 0.7% 474,397,572 The correlation between credit provided and savings mobilized together with least squares method for trend

analysis is presented in table 12 and succeeding calculations.

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Table 12: Correlation between Credit Provided (X) and Savings Collected (Y) N= 5
Time /Year (t) 1 2 3 4 5 t =15 t2 1 4 9 16 25 t2 = 55 X 59,087,186 94,495,439 95,667,069 109,332,532 115,815,346 X= 474,397,572 Xt 59,087,186 188990878 287001207 437330128 579076730 Xt= 1,551,486,129 X2 3.4913E+15 8.92939E+15 9.15219E+15 1.19536E+16 1.34132E+16 X2 = 4.69397E+16 Y 363,792 659,213 635,167 807,364 903,848 Y= 3,369,384 Yt 363,792 1318426 1905501 3229456 4519240 Yt =11,336,415 Y2 1.32345E+11 4.34562E+11 4.03437E+11 6.51837E+11 8.16941E+11 Y2 =2.43912E+12 XY 2.14954E+13 6.22926E+13 6.07646E+13 8.82712E+13 1.04679E+14 XY = 3.37503E+14

Source: computed from the credit and savings tables above Correlation coefficient (r) = NXY (X)(Y)

= 5(3.37503E+14)(474,397,5723,369,384) =0.99 Coefficient of Determination (r ) = 0.99 = 0.9801= 98%. This means that 98% of the variation in the dependent variable (savings) is explained by the independent variable (credit provided). The rest 2% is due to others, other than credit provided On the same way as above the Simple Regression Analysis of the above data for Credit Provided (X) and Savings collected (Y) is: Substituting the values in the equations 3,369,384 =5a +474,397,572b 3.37503 1014 = 474,397,572a +4.69397 1016b Multiplying equation (i) by 98945911, we get 3.33387E+14= 494729555a +4.69397 1016b 3.37503 1014 = 474,397,572a +4.69397 1016b -4.116 1012 = 20331983a a = -202,439 Substituting the value of a in equation (ii) we get the value of b 3.37503 1014 = 474,397,572-202,439 +4.69397 1016b = 3.37503 1014 = -9.60366E+13 + 4.69397 1016b = 4.34E+14 =4.69397 1016b b = 0.0092361. Thus, the required regression equation of Y on X is given by: Y = -202,439+0.0092361X Now, we can predict the value of Y (savings) for different values of X (credit provided). For example, we can predict the value of savings for 2013 if credit provided will be estimated at 146,196,878EBR as follows: ..... (iii) ....... (iv) .. (i) .. (ii)
2 2

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Y = -202,439+0.0092361146,196,878 = 1,147,850EBR In the same way as it is done above, the trend equation using the Least Squares Method for credit provision in the form X= a + bt is: a = (x)(t2) (t)(tx) = (474,397,57255) (15)( 1,551,486,129) = 56,391,491 n(t2) (t) b = n(tx) (t)(x) = n(t2) (t)2 5(55) (15)2 5(1,551,486,129) (15)( 474,397,572) = 12,829,341 5(55) - 152

The trend equation of credit provision of the institution is therefore: X= 56,391,491+ 12,829,341t; it is rising or increasing trend at 12,829,341EBR per year. For instance, estimated value of credit provision for period seven (2013) is = 56,391,491+ 12,829,341 (7) = 146,196,878EBR. In the same way as it is done above, the trend equation using the Least Squares Method for savings mobilization of the institution in the form Y = a + bt is: a = (y)(t2) (t)(ty) = (3,369,384)(55) (15)( 11,336,415) = 305398 n(t2) (t)2 5(55) - 152

b = n(ty) (t)(y) = 5(11336415) (15)(3,369,384) = 122826 n(t2) (t)2 5(55) -152

The trend equation of savings mobilization of the institutions is therefore: Y = 305398+ 122826t; it is rising or increasing trend at 122826 EBR per year. For instance, estimated value of savings mobilization for period seven (2013) is = 305398+ 122826(7) = 1165180 EBR

DISCUSSIONS
The savings of Omo MFI has been steadily increasing from year to year in similar way as that of the credit provision of the institution. This might be due to the aggressive promotion done by the government of Ethiopia to mobilize savings during the period. Ethiopian government is carrying out awareness creation activities to enhance the savings habit of the public. The peak in savings of 2011 could be the result of this effort. The ratio of savings to credit of Omo MFI is 38.63%, which shows that the institutions effort to cover its credit provision by the savings collected is very high compared to the other two institutions under this study. This is one major factor for sustainability of the financial institutions particularly for microfinance institutions. Moreover, as opposed to regular banks, clients of microfinance institutions do not have reliable collateral to secure credit; therefore savings are considered as one of the major elements to secure microfinance institutions loans. From this point of view, the institution is securing its credit in a better way compared to the other two institutions in the study. The correlation coefficient, 0.81, shows that there is high degree of relationship between the two variables, credit provided and savings collected. This can be due to compulsory savings that the institution collects during credit provision from each borrower. The credit provided is independent variable whereas savings mobilized is dependent variable because whenever there is credit extension, there is savings collected from the borrower. Therefore, there is high tie /link between these two variables as it is demonstrated by the correlation coefficient.

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It is apparent that Sidama MFIs ability to cover its credit provision using savings collected is 17.68% which is better than Wisdom microfinance institution having only 0.7% but still less than Omo microfinance institution with the ratio of 38.63%. The coefficient of variation of savings of the institution (111%) is the greatest of the institutions under this study. This does not mean that the institutions savings mobilization shows highest fluctuation from year to year rather it is due to the rapid increase in the savings in the last two years of the study period. As per the correlation coefficient of the institution (0. 95), it seems that there is strong relationship between the credit provided and savings mobilized. Compared to the two other institutions in the study, Sidama MFI stands in the middle of the road with regard to connecting credit provided and savings mobilised. That means, it is better than Omo MFI with 0.81 coefficient of correlation but worse than Wisdom MFI having correlation coefficient of 0.99. Savings of Wisdom MFI follows almost similar fashion with the credit provision of the institution. In general, the variability of the savings mobilization of the institution as evidenced by its coefficient of variation of 27% is the least one compared to the other two institutions in the study. This is because; the savings did not show high fluctuations within the study period even though the amount of savings relative to the amount of credit provided is very small as evidenced by its savings to credit provided ratio, 0.7%. This implies that the institutions ability to cover its credit provided by the savings collected is the least one compared to the other two institutions. This might be a yellow flag from the point of view of securing the institutions loan outstanding. The correlation coefficient, 0.99, between credit provided and savings collected of the institution, shows that there is high degree (almost perfect) relationship between the two variables. The ratio of savings collected to credit provided of the institution as calculated above is very small compared to the other two institutions under this study. This does not mean that there is no or less relationship between the variables as correlation coefficient depends on the relationship between the variables not of their magnitude. Hypotheses Testing Test of Hypothesis 1: There is no relationship between credit provided and savings mobilized. The correlation coefficients do not support the null hypothesis. The relationship between credit provided and savings mobilized is positive and highly significant for Wisdom and Sidama MFIs and significant for Omo MFI having 0.99, 0.95, and 0.81 coefficients of correlation respectively. According to Krishnaswamy O. and Reddy O. (2010), significant relationship exists only when the coefficient of correlation is more than 0.7 (when coefficient of correlation is 0.9 or more the relationship between dependent and independent variables is highly significant.) Therefore, the null (Ho) hypothesis is rejected and the alternative hypothesis with the above explanations is accepted. Test of Hypothesis 2: The trend of credit provision and savings mobilization is increasing. The trends of both credit provided and savings mobilized are increasing as it is evidenced by the Least Squares method trend calculation done in the analysis part above. Therefore, the null hypothesis is accepted as it is supported by empirical findings.

CONCLUSIONS AND RECOMMENDATIONS

Omo microfinance institution has been growing steadily in all the outreach measures from 2008 onwards with sharp increase in savings in the year 2011. The overall trend observed from the year 2008 onwards is almost organic growth in all interrelated variables (credit, number of clients, and savings). The institution has been extending large loan

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size compared to the other two institutions under this study as evidenced by its total loan to total borrowers ratio. This shows that the institution is working more on width of outreach than depth compared to the other two institutions which may attract the well- to- do individuals leading to disregard the poor. The average loan size of Omo microfinance institution is the greatest relative to the other two institutions in the study. It may negatively affect the depth of outreach, reaching the poor. As increase in loan size attracts the well - to do, it may put away the poor from the service. Therefore, care must be given from this point of view. Of course, increase in loan size decreases operating expenses which in turn results in better profit. As the primary role of the institution might not be profit making rather poverty alleviation, a tradeoff between depth and width of outreach would be better approach. The institutions savings are growing rapidly; however, it needs proper management attention in utilizing and controlling it. Sidama microfinance institution has been demonstrating very sharp increase in both the credit provision and savings mobilization in the last three years (2009 - 2011) of the study period. Relative to the last three years, its performance in the preceding two years (2007 and 2008) can be considered as inadequate. It implies that the institution had made certain strategic change in the last three years of the study period that enabled it to achieve such outstanding performance particularly on savings. The link between the institutions savings and its credit provided is also in the middle of the road compared to the other two institutions as it is evidenced by its coefficient of correlation. In other words, credit provided of the institution is leading the savings better than Omo MFI but less than Wisdom MFI. With regard to variability of credit provided and savings mobilized by the institution within the study period, it has been observed that there is highest variability as indicated by its coefficient of variation compared to the other two institutions. This can be due to sharp increase particularly in the savings of the institution during the last two years of the study period. Sidama MFI has been doing well during the last two years of the study period both in terms of credit provision and savings mobilization. Therefore, it would be better for the institution to strength the current trend. The link between the credit provided and savings mobilized is in the middle of the road as it is observed from the coefficient of correlation. This shows that the institution has been relatively doing better than Omo MFI but less than Wisdom MFI in connecting the two variables. In other words, compulsory savings which are collected during the credit provision has direct relationship with level or amount of credit provided. If the link /coefficient of correlation of these two variables is weak, that shows there is less effort to collect the compulsory savings. It may need attention from this angle. Wisdom MFI is the best in targeting the poor or best in depth of outreach. The institutions average loan size is smallest of all compared to the other two institutions in the study that enables the institution to reach the poor as the loan size does not attract the well to do. On top of that, there is less variability in the credit provided and savings mobilized; in other words, there is less fluctuation in the two variables from year to year during the study period as it is evidenced by the coefficient of variation in the analysis part. However, the ratio of savings to the credit extended is the least one compared to the other two institutions in the study. This has certain negative implication in securing the institutions loan outstanding and having loanable fund. From the correlation coefficient calculated in the analysis part it is apparent that the institutions credit and savings are highly correlated even though the ratio of savings to credit extended is the least one compared to the other two institutions. This is because; correlation coefficient shows the degree of relationship between the two variables rather than their magnitude. Even though the institution is doing very well in reaching the poor, care must be given to matching the loan size with clients business size. On top of that, lesser loan size may increase the operating expenses which in turn affect profitability. Therefore, it needs working to arrive at a balance between profitability and reaching the poor. The institution should give due attention to savings mobilization as its savings to credit ratio is the least one

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compared to the other two institutions in the study. As clients of microfinance institutions have relatively inadequate base to secure credit extended compared to regular banks, giving due attention to savings mobilization is essential.

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