MBA 2021

1. ROLE OF MICRO AND SMALL BUSINESS ENTERPRISES ON
POVERTY REDUCTION IN THE CASE OF HARAR TOWN
MBA THESIS PROPOSAL
By:1)Iliyas Sufiyan Abdella
2) Abdukedir Ahmed Mume
3) Salim Ahmed Sali
4) Se’ada Abdulaziz Ali
5) Misra Mohammed Adem
RIFT VALLEY UNIVERSITY
HARAR CAMPUS
DEPARTMENT OF MBA
JANUARY 2022
HARAR, ETHIOPIA

2. ROLE OF MICRO AND SMALL BUSINESS ENTERPRISES ON
POVERTY REDUCTION IN THE CASE OF HARAR TOWN
MBA THESIS PROPOSAL
By: 1)Iliyas Sufiyan Abdella
2)Abdukedir Ahmed Mume
3)Salim Ahmed Sali
4)Se’ada Abdulaziz Ali
5) Misra Mohammed Adem
RIFT VALLEY UNIVERSITY
HARAR CAMPUS
DEPARTMENT OF MBA
MAJOR ADVISOR: DEBELE TEZERA (PhD)

3. ACRONOMY
MSE: Micro and Small Enterprises
MFI: Micro Finance Institution
CGAP: Consultative Group o Assist Poor
NGO: Non- Governmental Organization
SACCOS: Saving and Credit Cooperatives
ROSCAS: Rotating Saving and Credit Association
MOFED: Ministry Of Finance and Economic Development
CSA: Central Statistical Authority
HICE : Highly Interactive Computing in Education

4. Table of Contents
ABBREVIATIONS AND ACRONYMS...................................................................................Ι
LIST OF TABLES ...........................................................................................................Ι
1.INTRODUCTION...........................................................................................................1
1.1 Background of the Study...........................................................................................1
1.2 Statement of the Problem ..........................................................................................1
1.3 objectives of the study...............................................................................................2
1.3.1 General objective ...................................................................................................2
1.3.2 Specific objectives..................................................................................................2
1.3.3 Researcher question...............................................................................................3
1.4 Significance of the study ...........................................................................................3
1.5 Scope of the study ....................................................................................................3
1.6 Organization of the Proposal......................................................................................4
2.LITERATURE REVIEW....................................................................................................4
2.1 literature overview ....................................................................................................4
2.2 Poverty....................................................................................................................5
2.2.1 Concept and definition of poverty ............................................................................5
2.2.2 Poverty measurements ...........................................................................................6
2.2.2.1 Absolute poverty approach...................................................................................6
2.2.2.2 Relative poverty approach ....................................................................................7
2.2.3 Poverty in Ethiopia.................................................................................................7
2.3.1 The Concept of Microfinance ...................................................................................9
2.3.2 The Evolution of Microfinance ............................................................................... 10
3.3.3 Micro finance in Ethiopia...................................................................................... 11
2.3.4 The impact of microfinance on poverty reduction .................................................... 13
3.RESEARCH METHODLOGY........................................................................................... 15
3.1 Description of the Study Area .................................................................................. 15
3.1.1 Location.............................................................................................................. 15
3.1.2 Population .......................................................................................................... 16
3.1.3 Climate condition.................................................................................................16
3.2 The Data................................................................................................................ 17
3.2.1 Type and source of data........................................................................................ 17
3.2.2 Method of data collection...................................................................................... 17
3.2.2.1 Questionnaires .................................................................................................17
3.2.2.2 Interviews......................................................................................................... 18

5. 3.2.2.3 Document Analysis and literature study.............................................................. 18
3.2.3 Sampling techniques............................................................................................ 18
3.2.3.1 Sampling size ...................................................................................................19
3.2.3.2 Sampling method.............................................................................................. 19
3.3 Methods of Data Analysis ........................................................................................ 19
3.3.1 Descriptive method of analysis.............................................................................. 20
3.3.2 Econometrics methods of analysis......................................................................... 20
3.4 Variables Definitions and Hypothesis........................................................................ 21
3.4.1 Dependent variable .............................................................................................. 21
3.4.2 Independent variables .......................................................................................... 21
3.4.3 Hypothesis of the Study........................................................................................ 21
3.4.4 Time and budget plan .......................................................................................... 22
Reference .................................................................................................................... 23

7. 1
1. INTRODUCTION
1.1. Background of the Study
Microfinance has established itself as an integral part of financial sector policies of
emerging and developing countries during the past three decades. As a result, it is now
considered as one of the most promising tools in focusing on poverty in different
developing countries. The interest with micro financing derives from the fact that the
provision of financial services can contribute to poverty reduction, at the same time,
pass the sustainability.
The studies of different scholars showed that microfinance interventions have a vital
influence in reducing poverty, which consequently help to contribute to food security
and improve the social relations. It is also showed that it can help to lessen the
vulnerability to economic risk because it can help poor to diversify their sources of
income, build up physical, human as well as social asset, pertains on good money
management, reestablish the base of household in terms of income and assets,
particularly after economic shocks and smooth the consumption.
1.2. Statement of the Problem
According to “The Dictionary of Modern Economics” Poverty can be viewed as an
absolute or relative concept. The absolute poverty approach defines minimum level of
income required to sustain life. The relative poverty approach defines relative to the
appropriate poverty groups. Poverty is defined by several authors as it is the situation
of having not enough money to meet the basic needs of human beings (Hulme and
Paul, 1997) Poverty at its broadest level can be conceived as a state of deprivation
prohibitive of decent human life. This is caused by lack of resources and capabilities to
acquire basic human needs as seen in many, but often mutually reinforcing parameters
which include malnutrition, ignorance, prevalence of diseases, squalid surroundings,
high infant, child and maternal mortality, low life expectancy, low per capita income,
poor quality housing, inadequate clothing, low technological utilization, environmental
degradation, unemployment, rural-urban migration and poor communication.

8. 2
Across the world almost every country has to face the poverty. Poverty is the condition
in which low-income people cannot meet the basic needs of life. This situation leads to
many difficulties like decreased health facilities; high illiteracy rate, decreased quality
of life etc., and these difficulties motivate human beings to commit heinous crimes and
sometimes suicide. Poverty is caused by both internal and external factors. Whereas
the internal causes can be clustered into economic, environmental and social factors,
the external causes relate to international trade, the debt burden and the refugee
problem. Because of this reason countries make strategies that can minimize or totally
eradicate poverty from their nations, from this poverty elimination ways one of the most
known way is micro and small business enterprise ways. These micro and small
business enterprises were the main tools those help for eradicate poverty. Since the
poor didn’t mostly engaged on the activities of micro and small business enterprises
due to lack of awareness, the role micro and small business enterprises became the
major problem solvers. Poverty reduction efforts were involved in enabling the poor to
engage in activities that could lead them to a sustainable life. Given their flexibility,
location, low requirements of capital training and technology, micro and small business
enterprises were considered as a means of reducing poverty. This would lead to
increase in economic growth. This study therefore, would try to illustrate the roles of
MSEs which attempted to deal with poverty reduction capacity ofmicro and small
business enterprises and how these activities to reduce poverty in the Harar town.
1.3. Objectives of the Study
The main objectives of the study are to analyze and study the role of Micro and Small
Enterprises in poverty reduction in Harar town. In line with this, the following are the
general and specific objectives:
1.3.1 General Objective
The overall general objectives are to assess the role of micro and small enterprise in
poverty reduction among peoples of Harar town.
1.3.2 Specific Objectives
(1) To examine the current condition of poverty in Harar town.
(2) To analyze the current status of micro and small enterprise in Harar town
(3) To present the different roles and benefits that acquired from micro and small
enterprise

9. 3
(4) To evaluate the impact of micro and small business enterprise in the overall socio-
economic growth.
1.3.3 Researcher Question
(1) Are peoplesengagedon the activities of micro and small business enterprise?
(2) Is there any increase in income level, education and health facilities for family
members, after engaged in micro and small business enterprise?
(3) Are Micro and small business enterprises helping in generating new employment
opportunity?
1.4. Significance of the Study
The study has much significance that can be used for both ;the peoples engaged on the
activities of micro and small business enterprise and for the MSE’s.
From this many importance’s some of them are listed below:
(1) The study will contributes to the body of knowledge on deep understanding of the
contributions of (MSEs) in poverty reduction in Harar taking into consideration the
objectives for its establishment and the factor that the government has been emphasize
on it as one of the important weapon for poverty reduction and ultimately poverty
alleviation in the country.
(2) This study will intended to shed light on the relationship between microfinance
services and poverty reduction particularly with the focus on the lives of Harar
inhabitants, those who involved with the MSEs and those who don’t involve with the
MFIs at all. This will help them to come out with the more convincing conclusion and
then solution on the challenges facing the MSE’s.
(3) This proposal will offer empirical evidence on the contribution of microfinance
services on poverty reduction and ultimately poverty reduction in Harar.
(4) A study of this nature is equally very important because it is going to enlighten the
government and the public on the role of MSEs in the poverty reduction effort.
1.5. Scope of the Study
In an attempt to investigate the role of micro and small enterprises on poverty
reduction, the study focused on one of MSEs that located in Harar City as a case study.
As we know Harar is capital city of Harari regional state and Eastern Hararge zone. And
have more than 151,977 populations, from this population density it is important to

10. 4
manipulate the study. The proposal covered credit facilities provided by the MSEs and
clients perception on income improvement and/or reduced poverty levels.
1.6. Organization of the Proposal
This proposal will organize under three chapters. The first chapter is concerned with
the introductory part including background, problem statement, and objective of the
proposal, significance of the proposal, and scope of the proposal and organization of the
proposal. The second chapter deals with literature review which comprises the
conceptual framework of the proposal area. Finally chapter three emphases on the
methodology that will used for data gathering, analysis and hypothesis will use.
2. LITERATURE REVIEW
2.1. Literature Overview
The basic idea of microfinance is to provide credit to the poor people who otherwise
would not have access to credit services. Micro-finance program extend small loans to
very poor people for self-employment projects that generate income and allow them to
take care for themselves and their families. This program is working in many
developing countries. There is no dearth of literature related to microfinance. In order
to find the impact of microfinance program, impact assessment studies have been done
by many authors in different countries. The literature on microfinance offers a diversity
of findings relating to the type and level of impact of the program. There are various
studies which confirm that microfinance program has a significant positive impact in
increasing employment and reducing poverty. A number of studies show that the
participant households enjoy higher standard of living as compared to the non-
participants. The program reduces consumption as well as income vulnerability among
its beneficiaries. Some of the studies also confirm that the program is helpful in
attaining millennium development goals by reducing poverty, hunger, infectious
diseases and through women empowerment. There are a number of studies which
explain that participation in the program has led to greater levels of women
empowerment in terms of increase in knowledge, self-confidence, economic, social and
political awareness, mobility, development of organizational skills etc. However, some of
the studies show that the program is not reaching the bottom poor people and the

11. 5
group loans are utilized for non-income generating activities such as consumption and
other emergency needs. Thus the literature on microfinance provides mixed results
about the impact of microfinance program on the program participants.
This chapter reviews the basic concepts of poverty and microfinance and establishes
the analytical framework used in this research. The first part is related to concepts and
issues of poverty that constitutes an important element of this study. The second part
deals with the concept, evolution and approaches of microfinance. The third part deals
with empirical literature regarding the link between poverty and micro-finance from the
context of Ethiopia.
2.2. Poverty
2.2.1 Concept and Definition Of Poverty
Discussion about the contribution of microfinance institution in poverty reduction
should start with a brief discussion of poverty. According to the World Summit for
Social Development held in Copenhagen in 1995 explain poverty by showing indicators
of poverty such that “Poverty has various manifestations including lack of income and
productive resources sufficient to ensure sustainable livelihoods; hunger and
malnutrition; ill health; limited or lack of access to education and other basic services;
increased morbidity and mortality from illness; homelessness and inadequate housing;
unsafe environments; and social discrimination and exclusion. It is also characterized
by lack of participation in decision making and in civil, social and cultural life …” Also
poverty has been defined as a state of deprivation prohibitive of decent human life
(URT, 1999). Poverty is caused by both internal and external factors. Whereas the
internal causes can be clustered into economic, environmental and social factors, the
external causes relate to international trade, the debt burden and the refugee problem.
Poverty has a negative impact to the individuals and the economies of the countries
that undergo the situation and many efforts are been put forward by the government of
the countries under poverty to combat and mitigate such unfavorable situation, for
example in Ethiopia there have been several strategies to combat this unfavorable
situation such as Millennium development goal, running between 2000 – 2020 and
other strategies that are implemented by government and NGOs.
According to the World Bank report (2002), the dimension of poverty is classified as at
least in four dimensions. These are: lack of income, low level of achievement in

12. 6
education and health, vulnerability to risks and some sort of insecurity and
voiselessness. The broad and widely used definition of poverty is developed by the
World Bank, which incorporates the economic, social, political and environmental
situations of the people. The broader definition of poverty as the Multidimensional
phenomena leads to a clearer understanding of its causes and to formulate a more
comprehensive policy aimed at poverty reduction.
2.2.2 Poverty Measurements
The measurements of poverty (magnitude, prevalence, intensity, severity and
persistence) are the starting point for any logical step to intervention for purpose of
eradication. This starts off with defining a poverty line, which divides the poor, and
non- poor. The concept ‘poverty line’ is elusive and there still exists a significant debate
on what this measure should be ‘stating’ for operational and policy purpose. However,
in spite of the rich literature on poverty indices, empirical work has generally used
indices, which at most give the aggregate indices and aggregate intensity of poverty
(David, 1994; Kingdom and Mwisomba,1995).
Poverty can be commonly measured by constructing a line called poverty line. Poverty
line is also defined as a level of per capita income or consumption level below which an
individual is labeled to be poor (WB, 1991). The poverty line represents a minimum
level of economic participation in a given society at a given point in time. People below
this threshold is said to be poor. Poverty line can be estimated in two different
approaches. These approaches are absolute poverty and relative poverty.
2.2.2.1 Absolute Poverty Approach
Absolute poverty refers to a condition in which people barely exist. In such situation,
the availability of the next meal will be a matter of life or death. It is a critical condition
in which people live on aid, food relief or their own meager returns from squatter
farming, prostitution, scavenging on refuse tips and so on (Todaro, 1997). It tends to
identify those who are starving without any comparison made with others.
To allow for international comparison the world Bank has established an international
poverty line of 1US dollar a day per person in 1985 purchasing power parity (PPP)
prices which is equivalent to 1.08 dollar a day per person in 1993 PPP prices. According
to this measure the portion of extremely poor people in the world’s population (people

13. 7
living on less than 1 dollar a day) fell between 1990 and 1999 from 29 percent to 23
percent respectively. Developing countries have the highest percentages of population
living below the poverty line. The highest incidence of poverty is observed in sub-
Saharan Africa, with almost half of its population living below the poverty line (1
dollar).
2.2.2.2 Relative Poverty Approach
The relative poverty implies that one has less than what others have. It tends to identify
with comparison made with others. It tends to identify with comparison of the
circumstances one group of people or an entire economy with another one. It refers to a
relative income differential of distribution. It may not be a situation of an entanglement
in between life and death as of the case in absolute poverty. It exists when the subjects
under consideration are “poor” in relation to others (Todaro, 1997).
2.2.3 Poverty in Ethiopia
Poverty is characterized by inadequacy or lack of productive means to fulfill basic needs
such as food, water, shelter, education, health and nutrition. The multi-dimensional
character of poverty in Ethiopia is reflected in many respects, such as destitution of
assets, vulnerability and human development. The World Banks definition of poverty
indicates that poverty is “...a pronounced deprivation of well-being related to lack of
material income or consumption, low levels of education and health, vulnerability and
exposure to risk and noiselessness and powerlessness (World Bank 2001a, as quoted
by Pradham et al., 2002). This definition fairly describes the nature of poverty in the
Ethiopian context. As the concept of poverty reflects “socially perceived deprivation” of
basic human needs, its understanding also considers the minimum living standards of
the people. Poverty alleviation and reduction of economic inequality is the major socio-
economic and political issue in the country. As experience has shown, the existence of
large number of poor people and the prevalence of economic inequality may bring about
social tensions which would induce various criminal acts if situations go beyond the
limits of social tolerance. Poverty alleviation would, therefore, enhance economic
development and result in improved incomes and better well-being of the people which
is a pre-requisite for peace and further development. However, attempts to eradicate

14. 8
poverty would require strong commitment on the part of concerned authorities in favor
of economic development to induce the sustainable livelihood of millions in urban and
rural areas of Ethiopia. Understanding poverty in the Ethiopian context also needs to
consider its multidimensional characteristics which go beyond mere income and food
provision. Such characteristics include aspects of human capabilities, assets and
activities necessary for sustainable livelihoods. A sustainable livelihood is one that can
“cope with and recover from stresses and shocks and maintain or enhance its
capabilities and assets both now and in the future, without undermining the natural
resource base” (Carney 1998). The fundamental bases of livelihood comprise natural
(land, forests, water, pastures, and wild life), physical (farm animals, tools/machinery,
economic and social infrastructure), financial capital (income and savings), social
relations and human capital (health, education etc.). The Ethiopian situation clearly
reflects the degree to which the bases for sustainable livelihood are adversely affected
by natural and man-made calamities. The underprivileged poor have limited access to
most of the livelihood capital assets which has widened income disparity and
undermined their bargaining power to establish sustainable livelihoods. This socio-
economic condition emphasizes the need for “political capital” as a means of ensuring
better participation in deciding on matters that affect the well-being of the poor and
enhance improved security of subsistence needs (Dubois 2002). Thus, the issue of
governance in addressing poverty in Ethiopia is considered a vital element in the
poverty alleviation process. Good governance can facilitate participatory approaches to
poverty issues, ensuring power sharing and empowerment of the poor. In addition,
understanding the role of formal and informal processes and structures is realized to
be an important aspect of the coping strategies of the poor, particularly with respect to
employment generation (Edmunds and Wallenberg, 2002, et al, as quoted by Dubois).
Recent statistical data on poverty and other indicators of welfare are available from the
Welfare Monitoring System, which has been managed by the (MOFED). Data on income
poverty are available from two national (HICE) surveys carried out by the Central
Statistical Authority (CSA) in 1995/96 and again in 1999/2000. Other data are also
available from a series of surveys (WM) conducted annually (save one year) since
1995/96. Further details are published in the Poverty Profile of Ethiopia (MOFED,
2002).

15. 9
2.3.1 The Concept of Microfinance
According to Patrick Meagher, microfinance is described as ‘lending small quantities of
cash for short periods with frequent repayments’ (Meagher 2002:7). However, this
definition equates the concept with micro-credit, which is rather a part of microfinance
service. For Van Maanen, ‘microfinance is banking the unbankables, bringing credit,
savings and other essential financial services within the reach of millions of people who
are too poor to be served by regular banks, in most cases because they are unable to
offer sufficient collateral’ (Maanen 2004:17). In broader understanding, ledger wood
conceived that financial services generally include savings and credit; however, some
MFIs also provide credit cards, payment services, money transfers, and insurance
services. Besides, many MFIs undertake social intermediation services such as group
formation, development of self-confidence, and training in financial literacy and
management capabilities among members of a group. Thus, the concept of
microfinance often includes both financial and social intermediations (Ledger wood
1999: 1).
The definition of a microfinance institution (MFI) is wide, Consultative Group to Assist
the Poor (CGAP) defines it as “an organization that provides financial services to the
poor” (CGAP 2012) in which these financial services are of a broad range such as
deposits, loans, payment services, money transfer, and insurance (Filipinas, 2002) but
furthermore it is also common that MFIs provide non-financial services like social
intermediation, for example training and education about finance, cooperatives and
group formation (Ledger wood, 1999). Within this wide definition of MFIs a variety of
several suppliers are involved, which are organized and operate in different ways, for
example banks, NGOs, community-based institutions like self-help groups,
cooperatives and insurance companies (CGAP, 2018). These various suppliers also
differ in legal structure and can be divided into three groups, formal, semiformal and
informal. Both formal and semi-formal institutions are registered and subject to laws
but the difference are that semi-formal institutions are usually not subject to banking
regulation and supervision, while the informal institutions are not under any law at all
and not registered. Formal MFIs are for example private and public banks, finance
companies and insurance firms. Among semi-formal MFIs are credit unions and

16. 10
cooperative banks, savings and credit cooperatives, i.e. SACCOS, and sometimes NGOs
while self-help groups, local money lenders, NGOs and rotating savings and credit
associations (ROSCAS) are informal MFIs (Ledger wood, 2019; CGAP, 2021). The main
features of a microfinance institution which differentiate it from other commercial
institutions, are such that, it is a substitute for formal credit; generally requires no
collateral; have simple procedures and less documentation; easy and flexible repayment
schemes; financial assistance of members of group in case of emergency; most deprived
segments of population are efficiently targeted; and, last but not least, is groups
interaction.
2.3.2 The Evolution of Microfinance
Microcredit and microfinance are relatively new terms in the field of development, first
coming to prominence in the 1970s, according to Robinson (2001) and Otero (1999).
Prior to then, from the 1950s through to the 1970s, the provision of financial services
by donors or governments was mainly in the form of subsidized rural credit programs.
These often resulted in high loan defaults, highloses and an inability to reach poor
rural households (Robinson, 2001). Robinson states that the 1980s represented a
turning point in the history of microfinance in that MFIs such as Grameen Bank and
BRI began to show that they could provide small loans and savings services profitably
on a large scale. They received no continuing subsidies, were commercially funded and
fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was
also at this time that the term “microcredit” came to prominence in development (MIX,
2005). The difference between microcredit and the subsidized rural credit programs of
the 1950s and 1960s was that microcredit insisted on repayment, on charging interest
rates that covered the cost of credit delivery and by focusing on clients who were
dependent on the informal sector for credit (ibid.). It was now clear for the first time
that microcredit could provide large-scale outreach profitably. The 1990s “saw
accelerated growth in the number of microfinance institutions created and an increased
emphasis on reaching scale” (Robinson, 2001, p.54). Dichter (1999, p.12) refers to the
1990s as “the microfinance decade”. Microfinance had now turned into an industry
according to Robinson (2001). Along with the growth in microcredit institutions,
attention changed from just the provision of credit to the poor (microcredit), to the

17. 11
provision of other financial services such as savings and pensions (microfinance) when
it became clear that the poor had a demand for these other services (MIX, 2005).
The importance of microfinance in the field of development was reinforced with the
launch of the Microcredit Summit in 1997. The Summit aims to reach 175 million of
the world’s poorest families, especially the women of those families, with credit for the
self-employed and other financial and business services, by the end of 2015
(Microcredit Summit, 2005). More recently, the UN, as previously stated, declared 2005
as the International Year of Microcredit.
3.3.3 Micro Finance in Ethiopia
In Ethiopia, though savings and credit programs were operated for a number of years
by NGOs, microfinance operation in a regulated form is a relatively new phenomenon.
The operation was for the first time undertaken by the market Town Program of the
World Bank. This program was implemented jointly with the Development Bank of
Ethiopia and the Bureaus of Trade and Industry in what was then called: Market
Towns in phase one and then spread to all the major towns of the country. Most of the
borrowers were women, (Tsehay and Mengistu, 2002).Microfinance services were
introduced after the demise of the Derg regime following the policy of economic
liberalization. Microfinance is taken as a shift from government and NGOs subsidized
credit programs to financial services run by specialized financial institutions. With this
shift some NGOs and government microcredit programs were transformed to micro
finance institutions (Degefe, 2009). Microfinance institutions started proliferating
following the issuance of proclamation No 40/1996 which regulated the business of
microfinance in the country.
The National Bank of Ethiopia, that is the licensing authority, has since been issuing a
number of guidelines that underpin the operation of microfinance in the country
(Teshay and Mengistu, 2002). The regulatory framework was put in place as part of
government’s effort to liberalize the financial sector and lay down an alternative
institutional frame work to provide financial services mainly to the rural poor to boost
agricultural production enable food self-sufficiency and reduce poverty. Most
importantly experts observing the unsound financial practices of NGOs, and
government agencies recommended the regulatory framework to promote more

18. 12
systematic financial service provision and bring microfinance in the country within the
existing financial system (Degefe, 2009). Currently, there are 29 MFIs in the country, of
which 12 are licensed to operate in regional states and the rest are licensed to operate
nationwide (Haftu,et, al. 2009). They provide financial service, mainly credit and saving
and, in some cases, loan insurance. Almost all microfinance institutions in the country
have poverty alleviation as an objective. They are thus meant to address the lower
strata of micro-entrepreneurs including those engaged in activities that are started and
operated just for survival. However, most of the microfinance institutions in the country
are relatively young. They seem to replicate each other instead of innovating their own
approach. Their financial products are almost the same with the exception of a few
microfinance institutions that have recently started adding some new products. The
loan sizes of most of the microfinance institutions are too small that some of their
clients outgrow it very quickly. Some of the causes for high client drop out in both rural
and urban areas seem to be small loan size, lack of product diversification on the part
of the MFIs, lack of flexibility in approach among others (Haftu,et al. 2009). The Nation
Bank of Ethiopia directive issued in 2006(MFI/18/2006) allows MFIs to provide larger
loans to individuals using appropriate collateral, subject to single borrower limit of 1%
of their capital. On the bases of this framework, some MFIs started extending relatively
larger loans for working capital and for investment in cases where government agencies
like Micro and Small enterprise development agency are involved in the recovery of
loans through different linkage mechanisms. Relatively bigger amounts of working
capital loans are extended to those who have established businesses or can offer
collateral in fixed asset form (Haftu, et al. 2009). The potential demand for microcredit
in Ethiopia is enormous. However, there is very limited supply of financial services to
the poor household (Wolday, 2002). The major sources of loan or financial service in
Ethiopia are; formal banks, Microfinance Institutions, Cooperatives, NGOs which are
involved in the delivery of financial services, government projects and programs
involved in providing loans, semi-formal finance( Iqub, Iddir, Mahiber) and, informal
finance( private money lender, traders supplier credits, friends, and relatives) The
conventional banking sector in Ethiopia has been too weak to serve the needs of poor
people due to limited branch and high collateral requirements. Moreover, the formal
bank sector considers the poor as credit risks (Haftu, et al. 2009).Access to institutional

19. 13
credit that contributes to an increase in investment is very limited. The majority of the
poor get access to financial services through the informal and semi-formal channels
such as private money lenders, Iqub, Iddir, friends, relatives, traders, among other
(Wolday and GbereHiewot, 2006). The informal lenders such as the money lenders,
traders, friends and relatives enforce loan contracts and their loan recovery rate high
and the loan terms are flexible. However, the interest rates are very high. The semi-
formal lending institutions such as Iqub and Iddir are the dominant and sustainable
traditional institutions which meet the financial and social needs of the poor. Iqub is
the dominant form of saving and credit cooperatives in Ethiopia which is popular in
both urban and rural areas, Iqub is not a permanent club; it could be continued or
dissolved after its members have a turn (Wolday, 2002). The conventional banking
sector in Ethiopia has been too weak to serve the needs of poor people due to limited
branch and high collateral requirements. Moreover, the formal bank sector considers
the poor as credit risks. As a result, The Formal Bank of Ethiopia do not have mission
of financing the poor in micro and small Enterprise sector (Wolday, 2002). Thus, MFIs
and savings and credit cooperatives should be designed to respond to the failure of the
conventional banks to serve the financial needs of small farms and micro and small
enterprise operators in urban areas. Thus, delivering financial services to the poor
requires financial systems that reach the poor and an innovative targeting methodology
and credit delivery mechanisms that helps identify and attract only the poor who can
initiate and sustain productive use of loans.
2.3.4 The Impact of Microfinance On Poverty Reduction
There is a certain amount of debate about whether impact assessment of microfinance
projects is necessary or not according to Simanowitz (2001b). The argument is that if
the market can provide adequate proxies10 for impact, showing that clients are happy
to pay for a service, assessments are a waste of resources (ibid.). However, this is too
simplistic a rationale as market proxies mask the range of client responses and benefits
to the MFI (ibid.) Therefore, impact assessment of microfinance interventions is
necessary, not just to demonstrate to donors that their interventions are having a
positive impact, but to allow for learning within MFIs so that they can improve their
services and the impact of their projects (Simanowitz, 2001b, p.11).

20. 14
Poverty is more than just a lack of income. Wright (1999) highlights the shortcomings
of focusing solely on increased income as a measure of the impact of microfinance on
poverty. He states that there is a HIV/AIDS, malaria and other diseases; (vii) ensure
environmental sustainability; and (viii) develop a global partnership for development
(Littlefield, Murdoch and Hashemi, 2003). Such as good client retention and repayment
rates.Significant difference between increasing income and reducing poverty (1999). He
argues that by increasing the income of the poor, MFIs are not necessarily reducing
poverty. It depends what the poor do with this money, oftentimes it is gambled away or
spent on alcohol (1999), so focusing solely on increasing incomes is not enough. The
focus needs to be on helping the poor to “sustain a specified level of well-being” (Wright,
1999, p.40) by offering them a variety of financial services tailored to their needs so
that their net wealth and income security can be improved. It is commonly asserted
that MFIs are not reaching the poorest in society. However, despite some
commentators’ scepticism of the impact of microfinance on poverty, studies have shown
that microfinance has been successful in many situations. According to Littlefield,
Murduch and Hashemi(2003, p.2) “Various studies…document increases in income
and assets, and decreases in vulnerability of microfinance clients”. They refer to
projects in India, Indonesia, Zimbabwe, Bangladesh and Uganda which all shows very
positive impacts of microfinance in reducing poverty. For instance, a report on a share
project in India showed that three-quarters of clients saw “significant improvements in
their economic well-being and that half of the clients graduated out of poverty” (2003,
p.2). Ditcher (1999, p.26) states that microfinance is a tool for poverty reduction and
while arguing that the record of MFIs in microfinance is “generally well below
expectation” he does concede that some positive impacts do take place. From a study of
a number of MFIs he states that findings show that consumption smoothing effects,
signs of redistribution of wealth and influence within the household are the most
common impact of MFI programs (ibid.). Hulme and Mosley (1996, p.109) in a
comprehensive study on the use of microfinance to combat poverty, argue that well-
designed programs can improve the incomes of the poor and can move them out of
poverty. They state that “there is clear evidence that the impact of a loan on a
borrower’s income is related to the level of income” as those with higher incomes have a
greater range of investment opportunities and so credit schemes are more likely to

21. 15
benefit the “middle and upper poor” (1996, pp109-112). However, they also show that
when MFIs such as the Grameen Bank and BRAC provided credit to very poor
households, those households were able to raise their incomes and their assets (1996,
p.118). Mayoux (2001, p.52) states that while microfinance has much potentialthe
main effects on poverty have been: Credit making a significant contribution to
increasing incomes of the better-off poor, including women, Microfinance services
contributing to the smoothing out of peaks and troughs in income and expenditure
thereby enabling the poor to cope with unpredictable shocks and emergencies.
Hulme and Mosley (1996) show that when loans are associated with an increase in
assets, when borrowers are encouraged to invest in low-risk income generating
activities and when the very poor are encouraged to save; the vulnerability of the very
poor is reduced and their poverty situation improves. Johnson and Rogaly (1997, p.12)
also refer to examples whereby savings and credit schemes were able to meet the needs
of the very poor. They state that microfinance specialists are beginning to view
improvements in economic security, rather than income promotion, as the first step in
poverty reduction (ibid.) as this reduces beneficiaries’ overall vulnerability.
Therefore, while much debate remains about the impact of microfinance projects on
poverty, we have seen that when MFIs understand the needs of the poor and try to
meet these needs, projects can have a positive impact on reducing the vulnerability, not
just of the poor, but also of the poorest in society.
3. RESEARCH METHODLOGY
3.1 Description of the Study Area
3.1.1 Location
The proposal will conduct in Harar town, from this many reasons the first reason that
can be illustrated at the top is there is a lot of small business entrepreneur’s, and the
other thing this area specially known by industrialization. Small business owners and
other business firms engaged on different business like preparing raw material for the
factories and many other job opportunities.

22. 16
3.1.2. Population
According to the different data showing us, the 2019 population and the housing
census, Harar city has a population of 151,799.
3.1.3 Climate condition
The climate of Harar is classified as subtropical highland climate (Cwb) in Köppen-
Geiger climate classification system. Throughout the year, afternoon temperatures are
warm to very warm, whilst mornings are cool to mild. Average monthly temperatures
and weather, sunny and cloudy days. Annual rainfall and snowfall in Harar 2015 –
2022.Average monthly temperatures (day and night) in Harar. Average yearly
precipitation (rain and snow) and days of wet weather per month in Harar. Warm,
sunny months for a trip to Harar.
Topography For the purposes of this report, the geographical coordinates of Harar are
9.314 deg latitude, 42.118 deg longitude, and 6,289 ft elevation. The topography within
2 miles of Harar contains very significant variations in elevation, with a maximum
elevation change of 1,332 feet and an average elevation above sea level of 6,391 feet.
Within 10 miles contains very significant variations in elevation (3,655 feet). Within 50
miles also contains extreme variations in elevation (8,681 feet). The area within 2 miles
of Harar is covered by cropland (99%), within 10 miles by cropland (85%) and shrubs
(15%), and within 50 miles by cropland (41%) and shrubs (29%).
Humidity We base the humidity comfort level on the dew point, as it determines
whether perspiration will evaporate from the skin, thereby cooling the body. Lower dew
points feel drier and higher dew points feel more humid. Unlike temperature, which
typically varies significantly between night and day, dew point tends to change more
slowly, so while the temperature may drop at night, a muggy day is typically followed by
a muggy night. The perceived humidity level in Harar, as measured by the percentage
of time in which the humidity comfort level is muggy, oppressive, or miserable, does not
vary significantly over the course of the year, remaining a virtually constant 0%
throughout.

23. 17
3.2. The Data
3.2.1 Type and Source of Data
Data will be classified as primary data and secondary data; in this proposal, the
proposal doer will collect and use both primary and secondary data. Primary data will be
the data which the investigator will prepare for a specific analysis i.e. data collected for
the first time. These data will be needed because they generate new and original
information. The investigator will collect these data through interviews.
In this investigation, the investigator will also collect and use secondary data.
Secondary data will be collected through analysis of the MFI’s documents such as
Annual financial reports, various investment policies, number of members etc. The
secondary data will so important to be used in this investigation since it useful to
answer the questions of the investigator. Secondary data does not also exhaust people’s
good will by re-collecting readily available data and allow for large scale studies on a
small budget. These data will also having some disadvantages because they will not
make for the proposal development, but for other uses therefore, the proposal will not
take them directly instead modified them to be more useful for the investigation.
3.2.2 Method of data collection
In this, the investigator will use various data collection methods depending on the type
of information required, who are having that information, how complex are those
information, and also how confidential are those information. The investigator will use
questionnaires, interviews and document analysis as methods of data collection. The
reasons for employing these three methods of data collection will due to the nature of
the proposal and also to enhance the validity and reliability of data will collected and
used for the purpose of achieving the study’s objectives and answering the questions.
The proposal will develop the main tools which will use in proposal, first in Amharic
and then translated into English to enhance a clear understanding of the information
investigator will need from the respondents.
3.2.2.1 Questionnaires
The investigator will use both structured and unstructured questionnaires. The questionnaire
will be designed, pre-tested and administered to targeted group for data collection. The
questionnaire will designed in order to obtain both qualitative and quantitative information

24. 18
from MFIs borrowers and non-borrowers. It contained questions on household general
characteristics, ownership of assets, expenditure on basic needs and housing quality.
Moreover, borrowers’ questionnaire included the questions indicating amount of credit
disbursed, savings and its use. Furthermore a checklist will use to collect data from MFIs
officials.the checklist for officials aimed at gathering information about bank operations, types
of service offered, number of borrowers, source of capital and saving and credit statistics.
3.2.2.2 Interviews
The interview method of collecting data will involve presentation of oral-verbal stimuli
and reply in terms of oral-verbal responses. The proposal doer will use face to face
individual interviews in collecting secondary data. The discussions will semi structured
and will conduct with the aid of a list of questions that investigator will provide some
directions and control. The discussions will recorded and noted to make the facilitator
(investigator) able to capture all the relevant matters. The reasons of choosing the use
of interviews are to ensure that the investigator uncovers perceptions at a senior level
and to get more clarification of some issues pertaining to the MFIs management,
membership and their benefits, and contribution toward poverty reduction.
3.2.2.3 Document Analysis and literature study
Secondary data will be collected by other sociologist, government departments, official
bodies, or individuals and then re-used. Document analysis as one of the way of
collecting secondary data will involve gaining of data through a range of documents and
making formal evaluation of the documents that will be for the contents analysis. In
this proposal the analysis will be done by the proposal doer on the different documents
including MFIs Annual financial reports, various investment policies, and number of
members etc.
3.2.3 Sampling techniques
Both probability and non-probability sampling techniques will be used to collect data at
different stages. First purposive sampling will be used to select the region due to a
region accessible to the proposal doer. With regard to the sample size, proposal will
apply a simplified formula provide to determine the minimum required sample size at
95% confidence level, degree of variability= 0.5 and level of precision (e) = 9%.
n = N__
1+N (e) 2

25. 19
Where n is sample size, N is the total number of study population,
Where e is the level of precision
3.2.3.1 Sampling size
The sample size will draw from users who will be members and non-members in the
MFIs within the selected kebele will visited for data collection. The sample size collected
per each kebele according to the number of the user’s respondents for the proposal.
3.2.3.2 Sampling method
Two categories of households MFIs borrowers (beneficiaries) and non-borrowers (non-
beneficiaries) will select for the proposal. The simple randomly sampling method will
use to select members and non-members. More specifically, borrowers will draw from
different MFIs. Similarly, simple random sampling technique will employee to select the
control group i.e. borrowers from selected kebele and served by the MFIs.
3.3. Methods of Data Analysis
Data obtained from the field will in raw form and will be difficult to interpret. Such data
will be summarized, organized, and checked to ensure the completeness, accuracy,
clarity, and consistence. Marshall and Rossman (1995:111) indicates that, data
analysis brings order, structure, and meaning to the mass of data and it is a time
consuming, creative, and fascinating process. The process facilitated proper recording
and enable the investigator to discover the relevance of each data collected consistence
with the investigation objectives. Due to the nature of this investigation, both
qualitative and quantitative data analysis techniques will be used. The data will
analyzed on item by item basis putting into consideration the importance of each item
under the investigation. After collecting the data, both descriptive statistics and
econometric tools will be employed so as to investigate the impact of MFIs on improving
the life of the clients. From the statistical tools, Chi Square analysis will be used to
investigate the difference in welfare between the borrowers and non-borrowers. A
summary of statistics and tabulation of field data will use to examine the impact of
MFIs intervention towards poverty reduction. The cross tabulations will highlight
differences in the mean values of the hypothesized impact variables between borrowers
and their counter parts.

26. 20
3.3.1 Descriptive method of analysis
Descriptive statistics will be used to describe the basic features of the data in
investigation. They will prove simple summaries about the sample and the measures.
Together with simple graphics analysis; they will form the basis of virtually every
quantitative analysis data. Descriptive statistics will be used to present quantitative
descriptions in a manageable form. In the proposal it will have lots of measures. Or It
will measure a large number of people on any measure. Descriptive statistics will help
us to simply large amounts of data in a sensible way.
3.3.2 Econometrics methods of analysis
Econometrics may use standard statistical models to study economic questions, but
most often they are with observational data, rather than in experiments. In this
proposal, the design of observational proposal in econometrics will be similar to the
design of studies in other observational disciplines, such as astronomy, epidemiology,
sociology and political science. Analysis of data from an observational proposal will be
guided by the prposal protocol, although exploratory data analysis may by useful for
generating new hypotheses. Economics often analyzes systems of equations and
inequalities, such as supply and demand hypothesized to be in equilibrium.
Consequently, the field of econometrics will develop methods
for identification and estimation of simultaneous. These methods are analogous to
methods used in other areas of science, such as the field of system in systems
analysis and control theory. Such methods may allow researchers to estimate models
and investigate their empirical consequences, without directly manipulating the
system.
One of the fundamental statistical methods that will be used by econometricians
is regression analysis. Regression methods are important in econometrics because
economists typically cannot use controlled experiments. Econometricians often seek
illuminating natural experiments in the absence of evidence from controlled
experiments. Observational data will be subject to omit and a list of other problems
that must be addressed using causal analysis of simultaneous-equation models.

27. 21
3.4. Variables Definitions and Hypothesis
3.4.1 Dependent variable
 Fulfilment of Basic Needs (BN).
 Living Standard (LS).
 Self-employment (SE).
 Microfinance (MF)
3.4.2 Independent variables
3.4.3 Hypothesis of the Study
After reviewing the literature on impact of microfinance on poverty reduction in chapter
two, followings hypothesis will be developed to check the impact of microfinance on
poverty reduction.
HYPOTHESIS: 1
H0:There is no relationship between Microfinance (MF) & Fulfillment of Basic Needs
(BN).
H1:There is a relationship between Microfinance (MF) & Fulfillment of Basic Needs
(BN).
HYPOTHESIS: II
H0: There is no relationship between Microfinance (MF) & Living Standard (LS).
H1: There is a relationship between Microfinance (MF) & Living Standard (LS).
HYPOTHESIS: III H0: There is no relationship between microfinance (MF) & Self
Employment (SE).
H1: There is a relationship between Microfinance (MF) & Self Employment (SE).

28. 22
3.4.4 Time and budget plan
Table 3.1 budget plan
No List of item Persons Day Cost/unit Total
1 Expense for printing and
photocopying related document that
will be obtained from libraries,
internet and other sources
1 30 500 3000
2 Internet use and paper cost 1 - 0.20 300
3 Transport cost 1 - 20 1000
4 Refreshments payment for interview - - - -
Total 4300
Table 3.2 time plan
Work Plan Period Description of proposal
Activity
Person Responsibility
May 15-June 25 Final Draft Proposal
preparation
The proposer
May 25-May 26 Final Draft Proposal
Submission by Hard
Copy
The proposer
May 27- June 5 Wait for if any comments
raise from advisor paper
submission with hard
copy
The proposer

29. 23
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