The Cradle of Mankind: Helping Microfinance Bloom in Ethiopia

Microfinance Insights
Nov. 1, 2008
By Philip Berber

In 2001 Philip Berber left his “for profit” job and joined his wife Donna in the pursuit of “social profit.” Together they started A Glimmer of Hope, a foundation run like a business with the goal of helping the people of Ethiopia. Today, their foundation works with the top MFIs in the country, and in October 2008, made a US$2m commitment to funding microloans in Ethiopia as part of the Clinton Global Initiative.

In 1984-85, Ethiopia experienced a cataclysmic famine that affected over 8 million people and killed one million. I recall watching the situation play out on television, and that imagery has remained with me over the past two decades. The Ethiopian situation has improved since then, but there is still widespread poverty, and very little private sector business development. When my wife and I started our foundation seven years ago, we knew we wanted to focus on this country and its people in an impactful and sustainable way.

We began by investing in the basic societal building blocks that were so lacking throughout Ethiopia and by establishing partnerships with indigenous development organizations and non-governmental organizations(NGOs). Over the next few years, we implemented hundreds of water and sanitation schemes (benefiting over a million people) and a large number of health care, education and veterinary facilities. The impact of these projects was immediate and profound and we could clearly see the difference they were making in the lives of some of the poorest people in the world. We are always looking for ways to innovate and extend our reach and, given this philosophy, moving into microfinance became a natural progression for us as part of a broader integrated approach to development. <

Demand for Credit

From our experience, the most effective way to help the poor break the cycle of poverty is to give them the opportunity to create sustainable income. To do that, they need access to credit. In Ethiopia alone, there is a demand of some 30 million people for microcredit. Most of these people have no collateral and therefore, do not qualify for mainstream finance. Their financial woes can be blamed, in part, on the current land tenure system, which stipulates that all property belongs to the state. Farmers own their animals, their produce and any improvements they have made to the property (e.g., structures), but they do not have a stake in the land itself. This makes it difficult to qualify for a loan from a traditional bank.

As the rural population has grown—about 85% of Ethiopia’s population (about 80 million) is classified as rural—the plots have been redistributed becoming smaller and smaller in an ever increasing number of hands. This makes it hard for farmers to produce enough to feed their families let alone generate a profit against which they can borrow.

Ethiopia currently has 29 registered microfinance institutions (MFIs) serving the rural poor with small branch offices in the remotest of communities. The two biggest are DECSI of the Tigray region and ASCI of the Amhara region. Both are registered on the Forbes “Top 50 MFIs” list (No. 6 and No. 31 respectively) and they are the only two sub-Saharan African organizations to appear on the list.

The top four MFIs in Ethiopia all have loan portfolios of US$100m or more and serve approximately 95% of the 1.82 million borrowers. A Glimmer of Hope works with all four: DECSI, ASCI, OCSSCO (Oromiya Region) and OMFI (Southern Region). These organizations have a number of things in common including:

- Repayment rates above 96%

- Interest rates from 12% to 15% (far below traditional lenders)

- A profound commitment to targeting the poorest of the poor and women borrowers

- A wide mix of services to their clients

- Strong internal businesses models allowing loan officers to service between 300 and 800 clients each.

They all also have deep roots in their communities. To date, there have been few long-term impact studies on microfinance in Ethiopia, but ASCI recently completed a comprehensive Impact Assessment study that analyzes the impact of their microfinance program at the enterprise, individual, household and community level.

Based on their results, they have found that microfinance creates new generations of savvy business owners in addition to increasing household income, food security, education and savings. The report also found that in areas where microloans were prevalent, there was a marked reduction in problematic child labor practices whereby children were kept out of school to work.

Focus Areas

Ethiopia remains a predominantly agricultural country but it is almost completely dependent on rainfall, which is inadequate, unpredictable and uneven in its distribution. As a result, large segments of the population are exposed to extreme levels of poverty and even food crises, as was the case yet again this year in Ethiopia and many other countries across the continent.

Following a successful pilot in 2005, we dedicated our funding to income generation projects, several of which worked to tackle the farmers’ dependence on weather and rain for their livelihood. We invested in capital projects such as hand-dug wells, check dams, river diversions and off-take diversions to provide sustainable sources of water for irrigation, and mobilized loans for farmers – men and women – living around those projects so they could purchase small motorized pumps, treadle pumps, drip kits, barrels, fertilizers and high value crop seeds such as tomatoes and garlic. We also funded loans (average loan size of US$300) to marginalized women to start small and medium enterprises SMEs) such as retailing, restaurants, baking, textiles and manufacturing, and also for agriculture related activities such as dairy and honey production and cattle fattening. The effects have been heartening.

An Opportunity for Donors

Microfinance gives philanthropists and donors alike an opportunity to leverage their investment, create scalability and develop economic sustainability. Investors reach an everrâ?expanding number of beneficiaries as their donations are continually reinvested after being recovered in the form of loan repayments. And, for every dollar donated to a microcredit scheme, additional dollars are created in the form of income.

At this year’s Clinton Global Initiative conference in New York, A Glimmer of Hope announced a new commitment to provide US$2 million in loan capital for microloans in 2009 of which we have already raised $800,000 and plan to fund the balance from the foundation’s endowment.

We now know microfinance will continue to play an important role in our work in Ethiopia. We believe combining it with our humanitarian programs in a synergistic form of development and poverty relief will result in truly sustainable impact.