The role of microfinance institutions has been said to encompass a wide range of economic existence. Their ability to ensure socio-economic equity through a number of activities less-reachable by mainstream financial services has come to be a veritable anchor for the emphasis of such lovable institutions in developing countries like Ethiopia. Yes, the role of microfinance institutions in stimulating economic growth through improvements in the livelihoods of the poor is a wider one.
A very good example of this is the case of Sidama Bank, among others. In an exclusive interview with The Ethiopian Herald, Sidama Bank Chief Executive Officer Tadesse Hatiya stated that converting microfinance into banks is of paramount importance in further reaching out to the unreached, as opposed to some sorts of rumor fluff, like ‘when they are promoted to banks, institutions do highly marginalize the farming community on the ground.’
As to the Chief Executive Officer, changing the status of microfinance institutions to bank level would help increase the capacity of financial institutions to do much more in due course of addressing a number of beneficiaries in terms of loan release and providing customers with quality financial service with the required quantity as well.
He said, “It is obvious that microfinance institutions have been converted into banks upon fulfilling all the parameters the law requires. Like the case of other microfinance institutions, Sidama Bank has come from a microfinance entity by fulfilling all the necessities on July 1, 2022.” He said, “It is obvious that micro finance institutions have been converted into banks upon fulfilling all the parameters the law requires so. Like the case of other microfinance institutions, Sidama Bank has come from a microfinance entity by fulfilling all the necessities in July 1, 2022.”
According to Tadesse, the bank has been employing all sorts of digital advancements, like core banking technology, digital know-how, ATMs, mobile banking, and tell-birr apps, so that it can provide customers with a digital banking system.
He further said that the main objective of setting up a formal bank from microfinance institutions is to increase the capacity of loan release, address many customers at a time, increase the financial volume to be disbursed, and provide customers with a quality financial overhaul too.
As to him, the process of converting or transforming microfinance institutions into banks is significantly useful in increasing the customer base, improving the quality of service, changing the system of working from manual to fully digital and improving the turn-around time for loan applications
He said, “The factors to a very great extent that have facilitated the microfinance institutions, which are now in the formal banking business, in their transformation efforts to formal banking include the ability to optimize business volume, operating through efficient digital systems and processes, as well as boosting effective balancing of high and low risk business.”
Responding to the question revolving around the challenges compromising the banking system, he said, “Ethiopia doesn’t have its own core banking system except for some locally operating apps. This results in foreign currency impositions as core banking pay soars year after year following the licensing fee, upgrading fee, etc. To your surprise, our neighbor, Kenya sells various software to Ethiopia.”
The transformation of microfinance institutions to formal banking has faced shortcomings such as, he said, high costs of operation, unscrupulous microfinance institutions’ capacity to serve society, inadequate regulatory and loan management systems, and poor customer care, among others.
However, these circumstances are now being well addressed as banks are working together to avoid threats and illegitimate working scenarios, he added.
Sidama Bank was born to Sidama Microfinance and has been rendering financial services since its inception, July 1, 2022. It is working in close collaboration with 32 local banks and even with others from overseas, he added.
He further opined that there is mixed evidence of its net benefits and very limited work on its contribution to financial intermediation and economic growth, despite the global recognition and popularity of microfinance. Yes, he added, microfinance matters have been playing a decisive role in boosting financial sector development and economic growth.
The expansion of microfinance sectors and even converting them to banks has been contributing a lot to rural as well as urban development. Hence, rural development is an improvement of the living standards of the low-income population living in rural areas on a self sustaining basis through transforming the socio-spatial structure of their productive activities.
Since farmers require seedlings, fertilizer, pesticides, and farm implements, empowering them is needed to address the micro nature of most of their enterprises and the often slim margins. Economic growth in the agricultural sector had long been recognized as a precondition to overall economic growth and poverty reduction, he added.
He said, “They equally need empowerment to provide rural infrastructure and substitutes for amenities that the government has yet to provide. Microfinance banking is the provision of a broad range of financial services, such as deposits, loans, money transfers, and insurance, to poor and low-income households and their microenterprises at an affordable cost. It is a system of financial intermediation that addresses the multi-faceted challenges of rural dwellers and low-income households and is arguably adapted to their situation and needs.”
As to him, microfinance is an extremely effective anti-poverty tool! There is therefore an important linkage between access to financial services (financial inclusion) and poverty alleviation. Changing microfinance into a banking system has also served as a driver or an essential instrument of financial inclusion in many countries. It is important to reiterate that, according to the established chain of relationships, microfinance is one of the best options available for national poverty reduction.
Indeed, sustainable economic development in a country like ours cannot be achieved without rural transformation and the empowerment of the teeming rural dwellers, he added.
Banks coming from microfinance are therefore strategically positioned to expand the financial frontier and stimulate the exploitation and development of economic opportunities in the informal sector through the provision of traditional and even non-traditional banking services such as technical and managerial assistance, sale of output and input purchase financing, machinery and equipment leasing, and community development financing, as to him.
The government should recognize that to achieve sustainable economic development, resources must be channeled towards the financial empowerment of the dwellers in rural areas and urban slums, improve the standard of living of the economically active poor, catalyze rural transformation, and foster the growth of small and medium enterprises, he stated.
These banks are, he said therefore, the cornerstone in the promotion of rural development through financial inclusion and financial literacy, deposit mobilization and credit delivery to finance microenterprises, boosting small-scale enterprises/agriculture by financing them or by acting as channels for on-lending funds to beneficiaries, generating employment and promoting entrepreneurship, providing skill and facilitating the federal government’s national poverty eradication program.
They also facilitate economic development by providing ancillary capacity building to micro-enterprises in areas such as record keeping and small business management; collection of money or proceeds of banking instruments on behalf of their customers through correspondent banks; provision of payment services such as salary, gratuity and pension for the staff of micro-enterprises and various tiers of government; provision of loan disbursement services for the delivery of credit program of government agencies, groups and individuals for poverty alleviation on non-recourse basis; provision of ancillary banking services to their customers such as domestic remittance of funds and safe custody; and investment of surplus microfinance funds in suitable instruments including placing funds with correspondent banks and in treasury bills, among others.
Measures such as boosting agricultural production and taking appropriate steps to enhance per capita income are equally important in boosting the country’s economic growth, although microfinance loans are relevant in the growth process in Ethiopia. Hence, microfinance institutions should be well nurtured to improve consumption in the short run, while the long-term goal should be to improve investment and other capital accumulation across the nation.
BY MENGESHA AMARE
THE ETHIOPIAN HERALD TUESDAY 7 MAY 2024
