Research Journal of Finance and Accounting www.iiste.

org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.9, No.9, 2018

Loan Disbursement and Collection of Microfinance Institutions in

Bale Zone
Geremew Teshome1 Semeneh Bessie2
1.Technical and Vocational Training College, Goba Town, Bale Robe, Ethiopia
2.Madda Wabu University, Ethiopia P0-Box: 138 Bale Robe, Ethiopia

Abstract
Microfinance institutions (MFIs) in Ethiopia are considered as one of the crucial policy instruments. Even
though they have shown a remarkable growth in outreach and performance in the last 20 years, still they are
unable to meet the ever growing demand for loan and insurance service owing to the current loan disbursement
and collection constraints in the study area. Despite its importance of such types of study was not investigated in
the study area. The objective of this study was therefore to assess the loan disbursement and collection
performances of microfinance institutions in Bale zone. Data was collected from 340 randomly selected
households. Questionnaire and interviews were used to collect data from respondents. Purposive and stratified
random sampling techniques were used to select the required sample size of sample officials and clients,
respectively. Secondary data was also employed from three fiscal periods, 2005-2007 E.C. The study found that
there was improvement on the loan disbursement and collection of the financial institutions. However, women
participation in the study area was found to be significant. Based on the findings the study recommends that the
MFIs along with other stakeholders should be encouraged to solve the loan disbursement problems of clients,
improve loan size and extend the credit period and reduce the interest rates charged on loans.
Keywords: Microfinance, Loan Disbursement, Trend analysis, Bale zone

INTRODUCTION
Initially, the goal of most MFIs is to alleviate poverty by targeting clients who previously had no access to
formal financial services. To a large extent, MFIs around the globe have succeeded in meeting this goal; indeed,
it is safe to predict that the more MFIs are there, the more poor people will be able to invest in income-
generating activities, accumulate savings, put their families on a more secure financial footing and generally
improve their lives (Kristin, 2009).
Undoubtedly, microfinance institutions are improving the every-day life for millions of people around the
world, and it has in the latest years been fronted as the “silver bullet” in alleviating poverty (Karnani, 2008).
However, being self-sustainable is a major challenge in the industry and many of the MFIs are depending on
donors (Mersland et al., 2008a). Providing small financial services involve high transaction costs in terms of
screening, monitoring and administrative costs (Hulme et al., 1996). MFIs seeking financial sustainable
operations have to charge high interest rates to cover the extra costs providing small loan amounts (CGAP,
2009c), which are far from being competitive against interest rates in commercial banks. The average cost of
credit in developing countries is still much higher than in developed countries. Yet, what is more important than
being competitive is that poor and low income people would benefit from a less expensive credit. Gonzalez
(2007) reported that operational costs represent about 2/3 of charges to borrowers. Since operational costs are the
largest component of interest rates, attention should be emphasized towards identifying their drivers and
quantifying them in order to improve efficiency in MFIs.
Statement of the Problem
The Microfinance industry, along with all the players in it, is quickly changing. Today, the microfinance industry
has become both more crowded and complex. The concept of microfinance no longer just covers microcredit
only, but also includes the possibilities of saving, insurance and money transfer. Although MFIs are
characterized as one type when it comes to financial services, there is a great variety of MFI’s in terms of legal
form, profit status, degree of sustainability and funding sources (Sima, 2013). The establishment of sustainable
MFI that reach a large number of rural and urban poor who are not served by the conventional financial
institutions, such as the commercial banks, has been a key component of the new development Strategy of
Ethiopia (Alemayehu, 2008).
Even though MFIs have shown a remarkable growth in outreach and performance in the last 20 years, they
are expected to expand significantly to meet the growing demand for loan, saving, insurance and money transfer
service. Among the several challenges faced by the MFIs in Ethiopia, lack of loan fund to lend to clients, limited
use of back-office and front-office technologies to improve the capacity of MFIs, limited capacity to attract
skilled staffs who effectively deliver quality financial services to clients and high staff turnover, limited financial
education to the public and limited capacity to mobilize savings are of great magnitude (Wolday, 2012). Thus,
the intention of this study was to examine the financial and operational performance challenges of microfinance
institutions in Bale zone.

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.9, No.9, 2018

General Objective
The general objective of this study is to examine the loan disbursement and collection of microfinance
institutions in Bale zone.` Specific objectives of the study are:
• To analyze the trend of loan disbursement and collection in the Microfinance Institutions (MFIs) in Bale
Zone.
• To examine the trend of loan collection in the Microfinance Institutions.
Research Design
This research was mainly designed to assess the loan disbursement and collections of the three MFIs found in
Bale Zone namely PEACE, OCSSCO Goba branch and OCSSCO Robe/Sinanna branch. These MFIs are
purposively selected due to their location of zonal offices & where major activities are held. Census was applied
for officials/employees currently working in the selected MFIs since they were manageable. To draw the
required sample size of clients/beneficiaries from the three MFIs 10,000 populations, stratified sampling
technique was employed. Thus, 384 officials/employees and beneficiaries or clients were selected as subject of
the study using Yamane’s (1973) sample size determination formula. Both primary and secondary data collection
sources were used. Using these two sources, the researcher applied different data collection methods such as
questionnaires, interviews, focused group discussions and observation. Moreover, in the data collection methods
of the unstructured questionnaire, close and open ended questions were included. Unstructured interviews were
also conducted and employed with the help enumerators. Moderators were also took their part in facilitating
focused group discussions of clients.
Descriptive and content analysis were used to analyze quantitative and qualitative data respectively. The
descriptive data analysis comprised of trend analysis of financial ratios from the financial statements, portfolio
and activity reports of the three selected MFIs. The study covered three consecutive fiscal periods, 2005E.C to
2007E.C. Finally, to keep the reliability and consistency of primary data collected, questionnaires and
interviews were translated into Afan Oromo and Amharic languages.
Sampling Design and Sample Size Determination
Sample design specifies sampling technique used to draw true representative sample from the study population.
Goba and Robe Woredas Microfinance Institutions (MFIs) were purposively selected due to the availability of
MF branch offices and where major financial activities were held in these two towns. On top of this, potential
beneficiaries such as TVET and university graduates who need more services from Microfinance Institutions in
addition to the Small Scale Microenterprises as well as many poor residents are found in these two Woreda
towns (zonal and woreda MFIs, 2015). Secondly, Oromia Credit and Savings Share Company (OCSSCO) and
Poverty Eradication and Community Empowerment (PEACE) were selected purposively because of their
dominance in credit and loan portfolio management along with their location of major zonal office.
Some scholars suggest application of the stratified sampling to determine representative sample size. Strata
are purposively formed and are usually based on past experience and personal judgment of the researcher kotari
(2004). According to, this proportional allocation, stratified sampling technique is considered most efficient and
an optimal design when the cost of selecting an item is equal for each stratum, there is no difference in within-
stratum variances, and the purpose of sampling happens to be to estimate the population value of some
characteristic. The researcher prefers to conduct equal sample selection from each stratum would be more
efficient even if the strata differ in sizes due to time and financial constraints. Thus, 338 total sample
size/respondents were selected, nearly 100 and above from each strata or each stratum proportionally and
intentionally.
Following their arguments, the researcher has adopted the under mentioned Taro Yamane’s (1973)
sampling formula was used at 95% confidence level.
n = __N____
1+N (e) 2
Where: n = sample size,
N = Population size = 10,000,
e = sampling error/level of precision = 5%
To illustrate how the predetermined sample size of the total population is calculated as follows:
a) Applying the above formula,
n = __10,000____
1+10,000 (0.05) 2
= __10,000____
26
= 384 sample respondents were considered

RESULTS AND DISCUSSION

This section of the data analysis and interpretation comprised of information gathered from documents and

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ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.9, No.9, 2018

records of financial statements, operational and portfolio reports. Furthermore, the whole data analysis and
interpretation was followed by convenient results and discussions in line with the research questions.
MFIs Loan Collection Years of Operation
Growth
PEACE/GOBA 2005 E.C 2006 E.C 2007 E.C Average
Rate 2006/7
Total loans
6,233,000 7,189,600 8,114,800 7,179,133 12.87%
disbursed
Loan collection 4,520,819 5,167,177 5,390,154 5,026,050 4.32%
Outstanding loan 1,712,181 2,022,423 2,724,646 2,153,083 34.72%
Growth
OCSSCO/GOBA 2005 E.C 2006 E.C 2007 E.C Average
Rate 2006/7
Total loans
NA NA 12,393,901 ---- ----
disbursed
Loan collection NA NA 7,893,439 ---- ----
Outstanding loan NA NA 4,500,462 ---- ----
OCSSCO Growth
2005 E.C 2006 E.C 2007 E.C Average
ROBE/SINANNA Rate 2006/7
Total loans
9,821,422 24,078,128 81,046,807 38,315,452 236.60%
disbursed
Loan collection 3,827,528 15,885,062 16,353,819 12,022,136 2.95%
Outstanding loan 5,993,894 8,193,066 64,692,988 26,293,316 689.61%
Sources: Bale zone and Woreda branch MFIs, 2016
i) Loan Disbursement
In year 2005 PEACE MF planned to disburse EB 6,200,500 for a total of 1500 clients with the assumption that
each will have an average loan of birr 4,134 as revealed in above table 4.1. However, the actual number of
clients who took loan within the budget year were only 1,493 while the total amount of loan disbursed was EB
7,189,600 leaving the average loan size to be birr 4,793.70, which was more than the plan. Hence, the target
achievement for the disbursement 116% that was a remarkable achievement more than the plan. The same was
true for PEACE MF in 2006 and 2007. For instance, it planned to disburse EB 7,500,350 for a total of 1809
clients with the assumption that each will have an average loan of birr 3968.43. Whereas the clients took loan
were 1,689 while the loan amount disbursed in 2007 was 8,114,800 the average loan size for clients 4,293.55
that were more than the plan. Thus, the target achievement for the disbursement 108% that was a remarkable
achievement more than the plan. Furthermore, there was good achievement and growth of total disbursement,
loan collection and outstanding loan in the MFIs selected. The data for OCSSCO Goba branch was not available.
Considering the OCSSCO Robe/Sinanna branch case, in 2006 it planned to disburse a total of EB 24,078,128 to
4,470 clients as indicated in table 4.1 above whereas the actual amount of loan disbursed was birr 15,885,062
which enabled the firm to achieve only 65.97% of its plan. The reason for the lower achievement of disbursed
loan seems that clients who were not active in terms of clearing their arrears or sum unpaid were terminated from
the program to the extent of using their savings to offset. The outstanding loans and this made the repeat loans
lower than what was expected. On the other hand, during 2007 OCSSCO Robe/Sinanna branch MFI planned to
disburse a total loan of birr 84,246,800 but actually disbursed birr 16,353,819, which enabled the firm to achieve
19.41% of its plan. It seems that the lower loan disbursement rate was due to the unfair and less achievement of
loan repayment and outreach program by the firm.
ii) Loan Collection
During 2005 to 2007 PEACE MF planned achievement in loan collection was a remarkable performance as the
operation report revealed as 99%, 98.9% and 98% respectively for the fiscal periods mentioned. With regard to
collection, OCSSCO Robe/Sinanna branch in 2005 to 2007 had also a remarkable trend, 100%, 99.80% and
90.90% respectively in the fiscal year. As it was explained earlier the data for OCSSCO Goba branch didn’t
available.

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Table 4.2. Gross Savings, Withdrawals and Net Savings

Years of operation
Growth
MFIs Branche Items
2005 E.C 2006 E.C 2007 E.C Average Rate
2006/7
Gross savings 574,301 604,300 535,458 571,353 11.39%
PEACE Goba
Withdrawals 330,050 406,700 416,213 384,321 2.34%
Net savings 244,251 197,600 119,245 187,032 39.65%
Gross savings 5,250,000 9,260,000 15,800,000 10,103,333.33 70.63%
OCSSCO Goba Withdrawals 1,200,000 5,320,000 V bbb hn 4,916,666.67 54.70%
Net savings 4,050,000 3,940,000 7,570,000 5,186,666.67 92.13%
Robe Gross savings 9,350,000 18,260,000 23,500,000 17,036,666.67 28.70%
OCSSCO /Sinann Withdrawals 4,335,000 10,310,000 13,100,000 9,248,333.33 27.06%
a/ Net savings 5,015,000 7,950,000 10,400,000 7,788,333.33 30.82%
Source: Bale zone and Woreda branch MFIs, 2016
From the above table 4.2, there was an indication of which MFI mobilized savings and retain more money
within the firm to get rid of financing problems for its operations. Hence, PEACE saved a gross amount of Br.
574,301and allowed withdrawal of 330,050, which showed a net savings of 244,251 in 2005, better performance
than the other years of time. There was greater mobilization in 2006, 604,300, at the same time the firm also
allowed withdrawal of 406,700 which resulted in the net savings of 197,600. It was similar for the year of
operation in 2007. The MF encountered a declining rate of net savings in the year 2005 to 2007.
On the other hand, there was a good increasing trend in terms of both gross saving and net savings for
OCSSCO Goba branch. For instance, in 2005 there was a gross savings of 5,250,000 of this amount only
1,200,000 was withdrawal. It had a net savings of 4,050,000 or 77.14% amount was not disbursed. Similarly,
almost half of the gross saving was net savings in the year 2006. The gross savings reached 15,800,000 and
withdrawal of 8,230,000 in 2007. Good achievement of net savings was also seen in OCSSCO Goba branch as
compared to other counter parts, that was 5,186,666.67 or 92.13% net savings growth rate.
Active Clients and Dropout
Figure 4.1. Number of Active Clients

Source: Bale zone and Woreda branch MFIs, 2016

In each of the sampled MFIs as shown on figure 4.1, to increase the number of clients and at the same time
to fill in the gap created by dropouts in fiscal years 2005 to 2007. Hence, a total of 351 new clients joined
PEACE MFI in 2007 after passing the evaluation criteria. This includes replacement for client dropouts 208
(11.10%) from the balance of active clients at the end of the previous year (2006).
Whereas in the case of OCSSCO Goba branch, in 2006 a total of 3,180 clients took the orientation program
and joined OCSSCO after completing the preliminary criteria which was encompassed 730 new clients as

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compared to 2005. In 2007 a total of 4,800 clients were registered in its branch was an increased by 1,620 new
clients compared to 2006 and took the orientation programs and joined OCSSCO/Goba MFI. This includes
replacement of client dropout 580 (12.08%) from the balance of active clients that was registered at the end of
the previous year, 2006. OCSSCO Robe/Sinanna MFI also made client mobilization activities in 2006. As a
result, a total of 3,980 clients had been registered and became client of the firm including existing and 1,180
newly enrolled. In 2007 a total of 5,300 clients were registered in the branch that showed increase of 1 320 new
clients compared to 2006 and took the orientation programs and joined OCSSCO Robe/Sinanna MFI. This
includes replacement of client drop out 720 (13.58%) in 2007 and from the balance of active clients at the end of
the previous year, 2006. The dropout rates as the data obtained from the MFIs selected at the end of 2007 E.C
were 10.63%, 12.08 and 13.58% for PEACE, OCSSCO Robe/Sinanna and OCSSCO/Goba branches respectively.

Conclusion
There was good achievement and growth of total disbursement, loan collection and outstanding loan in the MFIs
selected except the data for OCSSCO Goba branch that was not available. The planned achievement in loan
collection was a remarkable performance as the operation report revealed for PEACE and Robe/Sinanna
branches during the fiscal period 2005 to 2007.
The result showed that there was a drastic change on both gross and net savings in all selected sample MFIs,
especially in OCSSCO Goba and Robe/Sinanna branches in 2005 to 2007 fiscal periods. For PEACE MF, there
was greater mobilization in 2006, 604,300, at the same time the firm also allowed withdrawal of 406,700 which
resulted in the net savings of 197,600. It was similar for the year of operation in 2007. The MF encountered a
declining rate of net savings in the year 2005 to 2007. For OCSSCO Goba branch, there was an increase of both
gross savings and net savings that was 95.29% and 58.52% in the fiscal year 2005 to 2006. It was also similar for
the operation year 2007 for OCSSCO Robe/Sinanna branch.
Even though there was dropout and conversely institutions engaged every year in client mobilization
activities, there was an increase in overall number of clients and fewer drop out in all of the three MFIs in the
sample. It seems that the major causes for the higher savings-withdrawals and client dropouts are: (1) the small
loan size, (2) the short repayment period, and lack of generating good business idea on the side of clients.
As confirmed by the majority 181 (53.75%) and another 83 (24.65%) of the clients the loan size given to
the clients is "Average" and "Small", respectively. Also, regarding the loan repayment period, slightly more than
half 187 (55.53%) of the MFIs clients responded that the loan repayment period is quite "sufficient".
All the three MFIs included in the study undertake saving mobilization activities in years 2005 to 2007. In
all of the three sampled MFIs savings shows increasing pattern. Accordingly, the reports obtained from PEACE
MFI revealed that in 2006 savings (total) reached birr 1,886,900 from birr 899,900 in 2005, that is it is increased
by 109%. However, compared to the set target, it achieved only 46.70%% of the plan. In 2007 PEACE declined
in its gross savings plan though the achievement was 88.99% of the plan. During 2006 OCSSCO/ Goba planned
to achieve birr 11,500,000 in gross savings but actually achieved birr 9,260,000 (or 80.52%) of its target. There
was also remarkable savings plan growth of 47.44% from year 2005 to 2006. Similarly, the MFI planned a gross
savings of 18,000,000 and achieved only 15,800,000 or 87.77% and showed an increase percent of 56.52 in its
saving mobilization. From all the three MFIs gross savings 17,500,000 was the second great achievement for
OCSSCO Robe/Sinanna branch in the year 2006. Out of this plan, 18,260,000 or 104.34%, more than the target
was achieved. Furthermore, in the 2007 fiscal year OCSSCO Robe/Sinanna planned a gross savings of
21,500,000 and achieved 23,500,000 or 109.30% that was the first great performance from all of its counter parts
in the year 2007. Overall, the MFIs included in the study seem efficient in mobilizing savings.
Above all, mobilization of saving is one of the focus areas of MFIs for several reasons: (1) to help clients
accumulate own capital by way of saving, (2) the mobilized saving from clients is to be used to finance a good
part of the program at relatively lower price than borrowed fund. It is indicated in the study that in all of the
MFIs, client savings shows continuous increment over the three years period. Hence, this can be considered as
the strengths of the institutions.
On the other hand, it is fact that the only source of revenue for MFIs is the revenue from loans. For the
institutions to earn sufficient income, it has to disburse loans in sufficient amounts. However, as reports revealed
the MFIs included in the study seem efficient in meeting their target. For any MFIs in order to function smoothly,
it has to collect in sufficient amounts and on time the disbursed loan from the clients. Unless otherwise, MFIs
collect their claims with great care and follow-up, their operations will be dismantled. However, it is indicated in
the study that almost all of the MFIs in the sample achieved more or less nearer to their plan.

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