Assessment of the potential and challenges of microfinance institutions (1)

Assessment of the Potential and Challenges of
Microfinance Institutions to enable the uptake of
household biogas in the National Biogas Program
(NBP) of Ethiopia
Biruk Tadesse Woldearegay
Supervisors
Dr. Joy Clancy
Dr. A.L. Kooijman van Dijk
Thesis submitted for the fulfilment of Masters of Science degree in Environmental and Energy
Management, University of Twente, the Netherlands
December 2010

Biruk Tadesse Woldearegay, 2010 University of Twente, the Netherlands
i
Abstract
The earliest biogas digesters in Ethiopia were installed in the 1970s and since then a number of
attempts has been made to introduce biogas technology but the wider dissemination has been limited
due to different reasons among which lack of financial capacity by rural households takes the upper
hand.
This dissertation focuses on the assessment of potential and challenges of Ethiopian Microfinance
Institutes (MFIs) to enable the uptake of household biogas in the National Biogas Program (NBP) of
Ethiopia. This dissertation met these twin research objectives through an extensive study of relevant
literature and the implementation of practical research. The empirical research was carried out through
a survey research strategy using semi-structured questionnaire distributed to seven participating MFIs
from all the four regional stated of the country where the NBP is being implemented.
This research produced a number of key findings: the survey confirmed that Ethiopian MFIs are
highly dependent on fund from external sources and they will find it difficult to extend loan for biogas
user while satisfying the current financial need of their clientele; they also lack human resource
capacity to participate in the NBP; they exhibited low level application of modern technologies such as
MIS as a result of their limited financial capacity; majority of the surveyed MFIs are not aware of
biogas technology and its benefit to the society, the environment and the business opportunity for their
own organisation provided through new loan product; even if there is lack of proper infrastructure
which could result in higher interest rate for rural households to compensate the resulting higher
transaction cost, Ethiopia MFIs are not charging rural clients higher interest rate, they rather vary the
interest rate based on the lending methodology, the type of loan products and the repayment period
which is the same for all rural, semi-urban and urban clients.
The main conclusions drawn from this research are that without building their financial, human
resource and institutional capacity, with their current limited capacity Ethiopia MFIs will find it
difficult to participate in the NBP; lack of awareness about biogas technology lead MFIs to think that
providing loan for biogas user is a risky business and they put forward a number of pre-requisites and
additional guarantee requirement for biogas digesters for the sake of their own security; their lack of
awareness found out to be a low level problem that could be addressed by continuous training and
awareness raising campaigns.
Based on the experience of India, Nepal, China and Bangladesh government role in the early stage
of their domestic biogas program, this research has recommended to avail gradually withdrawable fund
in a declining basis for the MFIs in order to help them engage in the NBP and build their capacity;
another source of fund could be to tap in to the potential of funds from an international NGO; the
requirement of an intermediate NGO to address the knowledge gap and facilitate the communication
between MFIs and Energy companies is also emphasised.

ii
Acknowledgements
I would like to take the opportunity to extend my heart-felt gratitude towards all my professors from
University of Twente who generously helped me colour the mosaic of this project with the tiles of their
knowledge, expertise and experience. I am greatly indebted to my supervisors Dr. Joy Clancy and Dr.
A.L. Kooijman-van Dijk. Especially, I would like to thank Dr. Joy Clancy who through her intellect
helped me in successfully completing this project. She provides me with valuable insight into the topic
since the inception of the thesis idea, she provided me with priceless feedback throughout the whole
thesis period and she has been a constant source of inspiration for me!
My thanks also goes to all the program managers and coordinators of the MEEM program for their kind
cooperation and assistance which otherwise makes my stay in the Netherlands too difficult. It has been a
fascinating time to be part of this international group, I have learnt a lot from your diverse experience
and my thanks goes to all the MEEM 11 groups, specially my roommates.
I am thankful to Mr. Misganw Asnakew, from EAEDPC, Manger of National Biogas Program for giving
me his full cooperation and providing me with valuable information required for this project work. I also
would like to thank Mr. Willem Boers from SNV Ethiopia for being so kind to respond to my stream of
e-mails while looking for background information regarding the NBP in the very beginning which
helped me to shape my topic. My thanks also goes to Mr. Melis, Dr Getachew and W/ro Worknesh from
SNV Ethiopia for their kind support. I would also like to thank all those from the participating MFIs
who cooperated me by providing data and filling the questionnaire, thank you all! without your
cooperation this research would have not come to end.
My special gratitude also goes to my lovely wife for her patience, support and encouragement during the
course of my study; I would also never forget the support of our families during the hardest time of our
relationship when we were physically apart.
I preserved my special thanks towards the end, and it goes to my full scholarship provider - Netherland
Fellowship Program (NFP) without which it was impossible even to think of a participation in this
program. The only thing I can say is let God Bless Holland.

iii
Contents
Abstract........................................................................................................................................................ i
Acknowledgements..................................................................................................................................... ii
List of Acronyms ....................................................................................................................................... vi
List of Figures..........................................................................................................................................viii
List of Tables ...........................................................................................................................................viii
Chapter 1-Introduction................................................................................................................................ 1
1.1 Background and Rationale........................................................................................................ 1
1.2. Research Problem..................................................................................................................... 6
1.3. Research Focus and Limitations............................................................................................... 8
1.4. Research Objectives and Questions........................................................................................ 10
1.4.1. General Objective................................................................................................................... 10
1.4.2. Specific Objectives and Questions ......................................................................................... 10
1.5. Conceptual Framework........................................................................................................... 11
1.6. Value of the research .............................................................................................................. 13
1.7. Outline of the thesis................................................................................................................ 13
1.8. Summary................................................................................................................................. 14
Chapter 2-Literature Review..................................................................................................................... 15
2.1. Introduction ............................................................................................................................ 15
2.1.1. What is Microfinance?............................................................................................................ 16
2.1.2. Microfinance in Ethiopia........................................................................................................ 17
2.1.2.1. The Growth of Microfinance Business in Ethiopia since 1996 ...................................... 20
2.1.2.2. Sources of Funds for Ethiopia MFIs ............................................................................... 22
2.1.2.3. Performance of Ethiopia’s MFIs..................................................................................... 23
2.2. Biogas in Ethiopia .................................................................................................................. 29
2.2.1. Overview of the National Biogas Program (NBP) of Ethiopia .............................................. 31
2.3. A Look at the Experience of Other Countries in Financing Domestic Biogas....................... 35
2.3.1. China....................................................................................................................................... 35
2.3.1.1. Background ..................................................................................................................... 35

iv
2.3.2. Nepal....................................................................................................................................... 37
2.3.2.1. Background ..................................................................................................................... 37
2.3.2.2. Government strategies for promoting investment in biogas sector................................. 40
2.3.3. India........................................................................................................................................ 43
2.3.3.1. Background ..................................................................................................................... 43
2.3.3.2. Financial instruments applied in India ............................................................................ 45
2.3.4. Bangladesh.............................................................................................................................. 47
2.3.4.1. Background ..................................................................................................................... 47
2.3.4.2. Financing Instruments Used to Finance Biogas Plants................................................... 49
2.3.4.3. The New Financing Structure for Biogas........................................................................ 49
2.4. Challenges of MFIs to provide loans to RETs (Biogas)......................................................... 52
2.5. Summary and Emerging Issues .............................................................................................. 59
Chapter 3-Research Methodology ............................................................................................................ 60
3.1. Introduction ............................................................................................................................ 60
3.2. Research Strategy ................................................................................................................... 61
3.2.1. Site and Sample Selection ...................................................................................................... 64
3.3. Data Collection....................................................................................................................... 66
3.4. Framework for Analysis ......................................................................................................... 67
3.5. Data Reliability and Validity.................................................................................................. 69
3.6. Limitations and Potential Problems........................................................................................ 69
Chapter 4-Survey Findings: Description, Analysis and Synthesis ........................................................... 71
4.1. Introduction ............................................................................................................................ 71
4.2. Background Information of Participating MFIs ..................................................................... 71
4.3. Awareness of Ethiopia MFIs about the NBP.......................................................................... 72
4.4. Potentials of Ethiopia MFIs.................................................................................................... 74
4.4.1. Financial Capacity.................................................................................................................. 74
4.4.2. Institutional Capacity.............................................................................................................. 76
4.4.3. Human Resource Capacity ..................................................................................................... 77
4.5. Challenges to Ethiopia MFIs .................................................................................................. 80

v
4.5.1. Lack of awareness and knowledge of MFIs about biogas technology................................... 80
4.5.2. Lack of Confidence by MFIs about biogas ............................................................................ 82
4.5.3. Availability of Infrastructures ................................................................................................ 84
4.5.4. Transaction cost...................................................................................................................... 85
4.5.5. The Regulatory Framework of Ethiopia’s MFIs .................................................................... 86
Chapter 5-Conclusions and Recommendations ........................................................................................ 89
5.1. Introduction ............................................................................................................................ 89
5.2. Research Objectives: Summary of Findings and Conclusion ................................................ 90
Research Objective 1: Potential or Capacity of Ethiopia’s MFIs......................................................... 90
Summary of Findings........................................................................................................................ 90
Conclusion ........................................................................................................................................ 91
Research Objective 2: Challenges of Ethiopian MFIs.......................................................................... 91
Conclusion ........................................................................................................................................ 92
Research Objective 3: Experience of other countries in financing domestic biogas program ............. 93
Conclusion ........................................................................................................................................ 94
5.3. Recommendations .................................................................................................................. 95
5.4. Reflection and Future Research Areas ................................................................................... 98
References............................................................................................................................................... 100
Appendix A: Administrative Regions of Ethiopia.................................................................................. 109
Appendix B: Peer Group Classification of Ethiopia MFIs ..................................................................... 110
Appendix C: The Role of AEMFI .......................................................................................................... 111
Appendix D: Final Questionnaire........................................................................................................... 113
Appendix E: Sample Filled Questionnaire ............................................................................................. 121
Appendix F: Funding Sources, Products & Services and Investment Requirement of Ethiopia MFIs.. 129

vi
List of Acronyms
AD : Anaerobic Digestion
ADBN : Agricultural Development Bank of Nepal
ADCSI : Addis Credit and Saving Institute
AEMFI : Association of Ethiopian Microfinance Institutes
BCSIR : Bangladesh Council of Scientific and Industrial Research
BSP : Biogas Support Program (Nepal)
CGAP : Consultative Group to Assist the Poor
CRS : Catholic Relief Service
DANIDA : Danish International Development Agency
DECSI : Dedebit Credit and Saving Institute
EAEDPC : Ethiopia Alternative Energy Development and Promotion Centre
EEA : Ethiopia Energy Authority
EREDPC : Ethiopian Rural Energy Development and Promotion Centre
ETB : Ethiopian Birr
FSS : Financial Self Sustainability
GHG : Green House Gas
GLP : Gross Loan Portfolio
GNI : Gross National Income
IDCOL : Infrastructure Development Company Limited-Bangladesh
KVIC : Khadi and Village Industries Commission-India
LGED : Local Government Engineering Department-Bangladesh
MBB : Micro Banking Bulletin
MFI : Micro Finance Institute
MIX : Microfinance Information Exchange
NABARAD : National Bank for Agriculture and Rural Development-India
NBE : National Bank of Ethiopia
NBP : National Biogas Program
OCSSCO : Oromia Credit and Saving Share Company

vii
OSS : Operational Self Sustainability
PEACE : Poverty Eradication and Community Empowerment
RETs : Renewable Energy Technologies
RFI : Rural Financial Institutions
RSRF : Rural Self-Reliance Fund-Nepal
SEEP : Small Enterprise Education and Promotion
SFPI : Specialized Financial and Promotion Centre
SME : Small and Medium Scale Enterprises
SNNPRS : Southern Nations, Nationalities and Peoples Regional State
SNV : Netherlands Development Organization
SSRE : Small Scale Renewable Energy
SWOT : Strength Weakness Opportunity and Threat
TJ : Tera Joule
UNEP : United Nation Environmental Program
UNESCAP : United Nation Economic and Social Commission for Asia and the Pacific

viii
List of Figures
Figure 1: Conceptual Framework of the Study........................................................................................ 12
Figure 2: Critical Microfinance Triangle ................................................................................................ 24
Figure 3: Outreach of Ethiopia’s MFIs by Number of active borrowers ................................................. 25
Figure 4: Financial performance of Ethiopia MFIs (end of 2008) ........................................................... 27
Figure 5: Biogas Plant Investment Comparison....................................................................................... 32
Figure 6: Intervention Model by sector facilitators for Nepal Biogas Program ...................................... 39
Figure 7: Analytical Framework of the Study ......................................................................................... 68
Figure 8: Borrowers to Staff Members ratio for Ethiopia MFIs .............................................................. 78
Figure 9: Guarantee Requirement of Ethiopian MFIs for biogas digesters............................................. 83
Figure 10: Availability of infrastructure in the operating Woredas (districts) of MFIs......................... 84
List of Tables
Table 1: Source of Funds of MFIs in Ethiopia, September 31, 2006........................................................ 22
Table 2: Regions and Woredas selected for the first phase of the NBP of Ethiopia.................................. 34
Table 3: China’s development status of rural household-scale biogas digesters from 1991-2005............ 36
Table 4: Biogas Plants Installed in Nepal as of end of December 2009................................................... 40
Table 5: Subsidy Amounts (NRs) on Biogas (Nepal).............................................................................. 41
Table 6: Biogas Plant Construction Target for Bangladesh .................................................................... 48
Table 7: Risks anticipated by Ethiopian MFIs to provide loan for biogas users...................................... 81
Table 8: Pre-Conditions set by Ethiopian MFIs to extend loan for biogas users..................................... 82

Chapter I: Introduction 1
Chapter 1-Introduction
1.1 Background and Rationale
In developing countries, over 500 million households still use traditional biomass for cooking and
heating (UNEP, 2009). In Ethiopia, presently 95 percent of national energy consumption is derived
from fuel wood, dung, crop residues, and human and animal power. The remaining 5 percent is from
electricity, 90 percent of which is generated by hydropower (World Bank 2006). Since small percentage
of the population has access to electricity, there is great reliance on biomass and fuel wood. This
reliance intensify deforestation and soil degradation, and increase the burden on women and children
who traditionally gather and transport fuel wood and other organic fuels and also suffer from indoor air
pollution.
The use of bio-mass spurs deforestation and soil erosion and contributes to a significant environmental
health problem: exposure to smoke and indoor air pollution, which causes elevated under age five
mortality and a high incidence of respiratory diseases, mainly in women and children (World Bank,
2006). To put things in perspective, the provision of air that is safe to breathe is just as important as safe
water or food. Yet many millions of people, predominantly women and children in the poorest
developing countries, are obliged to breathe air that is heavily polluted with biomass emission products
(WHO, 2002). According to WHO, (2002) people who are using dung and crop residues for cooking
purpose are exposed to indoor air pollution that exceeds the level recommended by WHO by a factor of
10, 20 or more. In the majority of rural and urban areas of Ethiopia, solid biomass is being vastly used
for cooking and heating purpose leaving millions of people exposed to different kinds of diseases caused
by their exposure to indoor air pollution. WHO reasonably argued that exposure to biomass smoke is a
significant cause of health problems such as acute respiratory infections (ARI) in children, chronic
obstructive lung diseases (such as chronic bronchitis and asthma), lung cancer and pregnancy-related
outcomes. Global estimates show that about 2.5 million deaths each year result from indoor exposures to
particulate matter in rural and urban areas in developing countries, representing 4-5% of the 50-60
million global deaths that occur annually (WHO, 2002).

Biogas, a methane rich gas (heat content of 18.6 - 26.04 MJ m-3
) produced by anaerobic fermentation of
organic material, is distinct from other renewable energy sources such as solar, wind, thermal and hydro
because of its importance in controlling and collecting organic waste materials that, if untreated, could
cause severe public health and environmental pollution problems (Amigun and von Blottnitz, 2007)
Production of biogas through anaerobic digestion (AD) is a relatively simple carbon reducing
technology that can be implemented at commercial, village and household scales. It allows for the
controlled management of large amounts of animal dung and the safe production of gas for cooking,
lighting or power generation (van Ness, 2006)
Ethiopia has one of the lowest rates of fertilizer use, and households use a significant quantity of dung as
an important source of domestic fuel instead of manure, particularly in the northern half of the country’s
highlands (Mekonnen & Kohlin, 2008). The burning of dung and crop residue is a considerable loss of
plants nutrient. Using crop residues and dung as fuel, rather than returning this organic matter to the
soil, causes a decline in soil fertility and deterioration in soil structure (World Bank, 2006). Use of
agricultural residues and cow dung in large proportions for domestic energy purposes also creates
negative effects on agricultural productivity because, these natural fertilizers and soil conditioners are
carried away from the farms permanently and are never replaced or returned to the farm soil (Mekonnen
& Kohlin, 2008; UNDP, 2009).
For maintaining crop productivity, fertilizers play an important role and farmers in developing countries
like Ethiopia are in dire need of fertilizers. Nonetheless, many small farmers continue to burn potentially
valuable natural fertilisers, despite being unable to afford chemical fertilisers (UNESCAP, 2007).
Despite the high cost of chemical fertilizers, the amount of soil conditioning elements in a natural
organic fertilizer is far better than chemical fertilizers. UNESCAP (2007) argued that the amount of
technically available Nitrogen, Potassium and Phosphorous in the form of organic materials is around
eight times as high as the quantity of chemical fertilisers actually consumed in developing countries.
According to UNDP (2009), as early as 1984, the World Bank warned that, in Ethiopia, the cost of total
decrease in agricultural productivity due to using agricultural residues for energy purposes was
equivalent to nearly 6 percent of GDP which is a huge loss to a country where agriculture is the primary
source of the total GDP. In addition to the unaffordable cost of chemical fertilizers by developing

country farmers, repeated use of chemical fertilizer has also its own side effect on the environment and
contributes to the increase in global Green House Gas (GHG) emission.
One of the main advantages of biogas production is the ability to transform waste material into a
valuable resource, by using it as substrate for AD (Al Seadi et. al, 2008). Improperly handled cow dung
can be a source of uncontrolled methane emission to the atmosphere, which is a much more potent GHG
than CO2. In addition to being a clean source of energy for households, biogas production can also
benefit the environment by reducing the amount of GHG released if cow dung or other organic wastes
are left unattended. A recent study conducted by UNEP based on experimental plants reveals that the
Life-Cycle-Assessment (LCA) of biofuels showed a wide range of net GHG savings compared to fossil
fuels. High GHG savings are recorded from biogas derived from manure and ethanol derived from
agricultural and forest residues, as well as for biodiesel from wood.
A Well-functioning biogas system can yield a range of benefits for the users in particular and the society
and the environment in general. A study commissioned by the United Nations Asian and Pacific Centre
for Agricultural Engineering and Machinery (APCAEM) summarizes the multi faceted benefits of
biogas technology as follows.
• Production of energy (heat, light, electricity);
• Transformation of organic wastes into high-quality fertiliser- i.e. the waste is reduced to slurry that
has a high nutrient content, making an ideal fertiliser;
• Improvement of hygienic conditions through reduction of pathogens, worm eggs and flies- i.e.
during the digestion process, dangerous bacteria in the dung and other organic matter are killed,
which reduces the pathogens dangerous to human health. Sasse (1988) found out typhoid,
paratyphoid, cholera and dysentery bacteria (in one or two weeks), hookworm and bilharzias (in
three weeks) as the principal organisms to be killed in biogas plants. He also indicated that
tapeworm and roundworm die completely only when the fermented slurry is dried in the sun;
• Reduction of workload, mainly for women, in firewood collection and cooking; this benefit actually
is conditional, i.e., provided that the cattle are not wandering here and there which makes the dung
collection difficult and there is enough supply of water nearby, in the absence of easy access to feed

stock, it is difficult to judge a biogas digester as reducing workload for women and children who are
the main actors in the collection process of many traditional fuels;
• Positive environmental externalities through protection of soil, water, air and woody vegetation;
• Economic benefits through energy and fertiliser substitution, additional income sources and
increasing yields of animal husbandry and agriculture;
• Other economic and eco-benefit through decentralized energy generation, import substitution and
environmental protection.
In Ethiopia, despite the high potential for biogas technology and the fact that biogas technology offers a
multitude of advantages to rural households the society and the environment, the wider dissemination of
the technology is limited until the National Biogas Program (NBP) is launched in 2008. In their studies,
as a possible solution to the problem of limited use of dung as manure, Mekonnen & Kohlin, (2008)
suggested encouraging households to substitute other fuels and use more efficient cooking stoves, so
that dung can be used for manure. However, encouraging households could never be viewed as a
solution without providing the lacking technical and financial support to rural households who are more
or less unaware about the technology. To consider biogas technology as an alternative fuel to the well-
known traditional fuels; rural household might have different challenges among which financial
limitation takes the upper hand. According to UNESCAP 2007,
An obvious obstacle to the large-scale introduction of biogas technology is the fact that the
poorer strata of rural populations often cannot afford the initial investment cost for a biogas
plant. This barrier remains despite the fact that biogas systems have proven to be
economically sound investments in many cases.
While biogas technology appears to be competitive in economic terms, it is not generally financially
viable to rural households who have limited capacity to be able to pay the high upfront cost of the biogas
digester. For a wider dissemination of this technology in rural areas, efforts must be made not only to
reduce construction costs, but also to develop credit and other financing mechanisms for biogas
technology (UNESCAP, 2007).
The lack of access to credit for the poor is attributable to practical difficulties arising from the
discrepancy between the mode of operation followed by financial institutions and the economic

characteristics and financing needs of low-income households (Vetrivel & Kumarmangalam, 2010). For
example, commercial banks or lending institutions require that borrowers should have stable source of
income out of which the principal and interest can be paid back. Unfortunately, regardless of its size, the
income of many self-employed households is not stable which keep poor household out of the service
domain of commercial banks and lending institutions. In order to minimize administration cost,
commercial lenders prefer to deal with large loans in small numbers which is not the way to address the
financial need of the poor who can be reached through small loans in large numbers; the collateral
requirement of commercial banks also exclude low income households who don’t have a clear title to
their property. One of the biggest problems of Ethiopia’s financial system is the collateral law which
doesn’t allow using land as collateral; this is a tough challenge for rural households, the majority of
whom owned a land could use it as collateral to access financial services.
Many institutions/individuals have examined the importance of energy-poverty linkage but few have
observed the role of finance (especially microfinance) in improving energy access (Rao et. al, 2009).
Especially, UNEP, (2007) argued that MFIs have developed tremendous capacities and networks to
deliver small scale and microfinance and these can potentially be tapped to deliver Small Scale
Renewable Energy (SSRE) systems. In the face of this, it should be noted that, since no MFIs in
Ethiopia has a system in the ground to provide loan for energy services, most MFIs may struggle to
integrate loans for energy service in their loan product. This can be attributable to the fact that, due to
lack of prior information and awareness about biogas technology, MFIs may be resistant to extend loan
for biogas users. Another reason could be, for biogas users MFIs may be required to adopt a collateral
system other than group collateral, which may not suit the majority of MFIs who prefers group
collateral. Financial, institutional and human resource capacity could also pose a possible problem for
MFIs.
Apart from the effort by Ethiopian Alternative Energy Development and Promotion Centre (EAEDPC)
and Netherland Development Organisation (SNV) to attract MFIs to take part in the NBP, currently in
Ethiopia no MFIs is formally engaged in providing loans to any kind of energy services. To the
knowledge of the researcher, there is also no study conducted in the assessment of potential and
challenges of Ethiopia’s MFIs with regard to their participation in providing loan to energy services. It is

at the backdrop of this phenomenon that the current study is commissioned in an attempt to examine the
potential of Ethiopia’s MFIs to enable the uptake of household biogas and the challenges faced by them,
which will limit their participation in providing loans to household for financing biogas technology.
1.2. Research Problem
Despite its essentiality in sustaining people’s livelihood, modern energy is one of the scarce
commodities to rural households. There is a definite difference in fuel type based on household income.
Low-income households use biomass. The fuel quality is low, burning with levels of smoke and
particles that are recognized as having negative effects on health (Clancy, 2002.) The low-level income
of rural households coupled with other different factors has deprived rural households from enjoying the
service of modern energy that does not cause indoor air pollution. Rural households use biomass as a
main source of energy for cooking as well as lighting, the burden of biomass collection largely rests on
the shoulder of women and the time spent for biomass collection could be shifted for other livelihood
activities if rural households can have access to cleaner energy sources like biogas. According to Clancy
(2002), poor households rely most on biomass and tend to spend more time searching than the
households in higher income groups. Wealthier households will also purchase other higher quality fuels
that will be used for a greater variety of end-users than in poor households.
The chance to have access to modern energy of rural households can be greatly enhanced by building
financial capacity of poor households through different mechanisms or providing them with financial
support in terms of credit with affordable interest rate and with reasonable loan maturity period. Due to
the high requirement of collateral that is beyond the capacity of rural households and the loan policies of
Ethiopian banks, rural households cannot directly go to bank to secure loan for financing their energy
expense. Micro Finance Institutions (MFIs) can play the linking role between banks and the rural
households and provide loan to help households cover the high upfront cost of biogas digesters and
associated appliances.

Currently, Ethiopia’s MFIs1
are participating in agricultural and other development activities providing
credit services to finance agricultural input, establishment of small businesses and consumption for over
2 million people. However, their participation in providing credit for Renewable Energy Technologies
(RETs) projects is nonexistent. The feasibility study of the National Biogas Program (NBP) of Ethiopia
revealed that the visited regional credit organizations (Oromia Amhara, Tigray and Southern Nations,
Nationalities and People’s Regional State (SNNPRS) ) acted “carefully positive” on the prospect of
extending biogas loans. As biogas is relatively unknown, and does not provide direct income (rather
savings that are not always easily monetized) they indicated they may want some sort of an additional
guarantee. According to Morris et al. (2007),
If appropriately designed, loans offered by MFIs can provide clients with access to high
quality modern energy services by closely matching loan payments to existing energy
expenditures or income flows. Such loans can offset the high upfront cost associated with
cleaner, more efficient technologies, such as biogas, micro hydropower, wind, solar or
liquefied petroleum gas (LPG)
Ethiopia Rural Energy Development and Promotion Centre (EREDPC)2
has launched the NBP with the
objective of constructing 14,000 biogas plants between 2008 and 2012 in selected Woredas3
of four
regions of the country, namely Oromia, Amhara, Tigray and SNNPRS regions. From the experience of
other countries that are at an advanced stage in the introduction and dissemination of biogas technology,
it has been observed that, it will be difficult to achieve the objective of the NBP without the active
participation of MFIs in providing loans to rural households. In the face of this, to invite MFIs to
participate in the NBP they need to be more aware about the technology so as to enable them clear their
doubt on the technology and prepare their way of tackling the pre-conceived risks associated with
providing loan for biogas users.
It is of paramount importance to assess their potential in terms of finance, human resource, and
institutional capacity. The challenges of MFIs also needs to be identified so as to serve as an input to
1 Micro Finance Institutes (MFIs) are credit and saving institutions regulated by the National Bank of Ethiopia (NBE)
which provide loan to urban, peri-urban and rural households and other small and micro enterprises.
2 This name has recently been changed to Ethiopia Alternative Energy Development and Promotion Centre - EAEDPC
3 Woreda is an administrative division of Ethiopia managed by a local government and is equivalent to a district. Woredas
are composed of a number of Kebele, or neighbourhood associations, which are the smallest unit of local government in
Ethiopia. Woredas are typically collected together into zones, which form a regional administration called “Kilil”

any governmental and/or non-governmental organizations that may take part in assisting MFIs to cope
up with their challenges and pave the way for their participation. Therefore, this study will attempt to
assess the potential of and challenges to Ethiopia’s MFIs in order to indicate the mechanism by which
their potential could be enhanced and the way to tackle their challenges. The study also will try to look
at the experience of other countries that have successfully implemented domestic biogas program with
the integration of financial service from MFIs so as to find out which of their experience could be
adopted to the NBP of Ethiopia.
1.3. Research Focus and Limitations
It is believed that the wider dissemination of biogas technology in the rural areas have a multitude of
advantage to rural households and to the local and global environment. Access to energy for low-income
people means choices about what to do at night, improved health and safety, and the ability to direct
scarce funds to more productive uses (Aron et al. 2009). Considering the low-level income of rural
households, the majority of their income is spent on inefficient fuel for lighting and heating. From this, it
is clear that the major beneficiaries of biogas technology are rural household women and children up on
whose shoulder the collection of traditional biomass fuels is rest. They are also the victim from indoor
air pollution caused by the use of inefficient fuels and not well-ventilated kitchen.
According to Qurashi & Hussain, (2005) the technology is especially attractive, because it combines
cleanliness with the conversion of the animal-dung into good quality, clean fertilizer. It also provides the
possibility of stopping the environmental damage, resulting from deforestation caused by indiscriminate
lopping of trees and burning of wood as fuel for cooking and heating. However, providing all these
benefits to developing countries like Ethiopia, the wider dissemination of the technology is limited.
Qurashi & Hussain (2005) have identified two difficulties in popularizing biogas technology; these are
(i) the capital outlay, and (ii) the messy nature of the inputs. The later one can be handled easily with
simple technology and awareness on how to feed the system but what needs more attention is the former
one, which is the capital outlay. The high upfront investment cost is a barrier for rural households to
adapt the technology and make use of it.

The focus of this research is to investigate the financial, human resource and institutional
potentials/capacity of Ethiopia’s MFIs in order to have the understanding of to what extent are MFIs
capable of providing loan for biogas users. Thoroughly exploring their challenges that might have
restricted their participation in the NBP is also another area addressed by this study. The study also
looked at the experience of other countries like China, India, Nepal and Bangladesh in linking
Microfinance service for energy (biogas) lending so as to find out if there is anything that can be adapted
in the NBP of Ethiopia.
In order to review the experience of other Asian countries (China, India, Nepal and Bangladesh) the
researcher had to solely depend on internet sources, some of the information from the internet are not
fully accessible and it is difficult to generalize that a thorough investigation has been made on the recent
financial mechanisms that are currently being applied by these countries.
In addition to this, the researcher would like to acknowledge the limitation of this research in extracting
an in depth information from MFIs because of the fact that MFIs (especially the largest that are
supposed to be the potential source of loan for biogas users) are located in regions and it was difficult to
personally appear in their presence and interact with key informants, instead of sending the
questionnaire, the researcher believed that personally distributing the questionnaire could help to held
informal discussion with concerned individuals; apart from the regional MFIs, the researcher distributed
the questionnaire personally to those MFIs that are based in the capital city, Addis Ababa and it has been
found out that it was possible to extract useful data by holding informal discussion with key informants
so it could have been possible to extract a lot of useful information from the regional MFIs if not for the
time limitation of the study.

1.4. Research Objectives and Questions
1.4.1.General Objective
The overall objective of this study is to make recommendations by evaluating the potential (that enable)
and challenges (that limit) of Ethiopia MFIs and drawing from the experience of other countries in
financing domestic biogas program.
1.4.2.Specific Objectives and Questions
To assess whether Ethiopia’s MFIs have the required potential/capacity to provide loan for
biogas users
Question 1: To what extent do Ethiopia’s MFIs have the financial, human resource and
institutional capacity that will enable them to provide loan for biogas users?
To assess the challenges of Ethiopia’s MFIs that will limit their participation in the NBP of
Ethiopia
Question 2: What are the challenges of Ethiopia’s MFIs that have limited their
participation in the NBP of Ethiopia?
To look at the experience of other countries in financing domestic biogas programs
Question 3: Which of the experiences of other countries (China, India, Nepal and
Bangladesh) that have successfully implemented domestic biogas program could be taken
on board for the NBP of Ethiopia?
To formulate recommendations on the mechanism by which the potential and challenges of MFIs
could be addressed
Question 4: What could be recommended for the successful integration of MFIs in the
NBP?

1.5. Conceptual Framework
A conceptual framework is a formulation of a tentative theory of what the researcher thinks is going on
and why (Miles & Huberman, 1994). The main concepts spinning in this empirical study are potential
and challenges; the potential of MFIs is looked only from the perspective of the financial, human
resource and institutional capacity; it is believed that if MFI don’t have the required financial, human
resource and institutional capacity that will enable them to design an energy loan product and extend
loan for biogas users, it will be a challenge for them, in addition to this, lack of infrastructure, lack of
proper knowledge about biogas from both the MFIs and the household part is a possible challenge,
application of technology like MIS, the MFIs regulatory framework and transaction costs are also
addressed under challenges.
According to Miles & Huberman, (1994) Conceptual frameworks are simply the current version of the
researcher’s map of the territory being investigated; accordingly, a conceptual map of the study
indicating the main concepts and their assumed association is developed and presented in Fig. 1 so as to
guide the empirical study. The two main concepts are not mutually exclusive but rather they are
interdependent. If the MFIs have the financial, institutional and human resource capacity that will enable
them to provide loan for biogas users, this means that they don’t necessarily face challenges in these
areas; in addition this can show that the MFIs have the potential to make use of information technology
like computerized Management Information System (MIS) because its application requires human
resource, financial and institutional capacity. The MFI regulatory framework and availability of
infrastructures like road, electricity, telephone and water are challenges posed by the external
environment and has nothing to do with the capacity of the MFIs but the absence of enabling
environment and infrastructure will negatively affect the MFIs activities and limit their success.
The potentials and challenges of MFIs will affect the wider dissemination of biogas digesters carried out
by the NBP; therefore, their potential and challenge will be assessed and the recommendation will be
formulated for the NBP as well as for MFIs.

Figure 1: Conceptual Framework of the Study
Potential/Capacity
• Financial
• Human Resource
• Institutional
Challenges
• Infrastructure
• Awareness
• Regulatory Framework
RecommendationsMFIs NBP
Experience of other
countries in
financing domestic
biogas program

1.6. Value of the research
The motivating philosophy of this research is that unless MFIs participate in the NBP of Ethiopia, it is
difficult to realize the objectives of the program and to bring the intended effect; for MFIs, to participate
in the NBP and provide loans for biogas users, their potential/capacity need to be assessed to find out in
what aspects they need a support; in addition to this there is also a need to assess their challenges that
may restrict MFIs from taking part in energy lending so as to propose ways on how their challenge could
be tackled.
Regarding the service of Microfinance, though most scholars agree in its difficulty to measure, every
attention is on the impact of the service of Microfinance on poverty reduction and most researches are
carried out in relation to the impact of Microfinance service in poverty reduction. However, the
researcher believes that in Ethiopia’s context the link between the provision of energy service and
poverty reduction is overlooked, this can be observed by the fact that a little has been researched in this
regard. To facilitate energy services to the rural poor, the role of MFIs can never be underestimated.
This research will assess the potential and challenges of Ethiopia’s MFIs in order to recommend the
mechanism by which their challenge could be addressed and their potential could be enhanced, it also
look in to the experience of other countries that are benefited from the link between MFIs and their
domestic biogas program so as to share from their experience in Ethiopia’s context; by doing this the
study will bridge the gap between the NBP and the service of MFIs. The fact that no MFIs in Ethiopia is
currently providing loan for financing energy services makes this study a worthy undertaking and
original contribution to the discipline.
1.7. Outline of the thesis
This thesis contains a total of five chapters. Within sub topics background and rationale; research
problem; research focus and limitations; research objectives; conceptual framework and the value of the
research, Chapter 1 illustrates the basic rationale behind the importance of an empirical research to
establish a link between Microfinance and the NBP of Ethiopia. Chapter 2 present the literature review;
the main issues covered in this section are an in depth background information about Microfinance and

biogas in Ethiopia, the challenges faced by MFIs to consider energy lending for rural households and
experience of other countries like China, India, Nepal and Bangladesh who have a good track record in
integrating Microfinance with their domestic biogas program.
Chapter 3 outlines the methodology followed in the course of the study. Research strategy, data
collection, analytical framework and limitation and potential problems faced during the study are the
topics covered in this chapter. Chapter 4 reveals the findings of the survey. This chapter discusses the
main findings, analyze the data collected from primary and secondary sources and synthesize the
empirical findings with the literature review. Chapter 5 will draw conclusion from the result of Chapter
four and will present the stemming recommendation from the conclusion.
1.8. Summary
This chapter introduced the research topic, and the research objectives and research focus. The research
focuses on the assessment of potential and challenges of Ethiopian MFIs to enable the uptake of
household biogas in the NBP of Ethiopia.
In order to put the study in perspective, section 1.1 outlined the background information and rationale of
the study, the research problem is described in section 1.2, section 1.3 depicted the research focus and
limitations, the conceptual framework of the study is presented in section 1.5, the value of the research is
explained under section 1.6 and the outline of the study is presented in section 1.7.

Chapter II: Literature Review 15
Chapter 2-Literature Review
2.1. Introduction
This literature review will examine the main issues surrounding the potential and challenges of MFIs to
participate in the NBP of Ethiopia. Impediments to the successful linkage of biogas technology and
provision of finance for the purpose of financing biogas technology in rural areas, and experience of
other countries that successfully implement household biogas program with the participation of MFIs
will be reviewed. The study with in this review of literature focuses on objective one, two and three that
are set out in sub section 1.4 of the introductory chapter and will help to supplement the empirical data
collected from participating MFIs. Both objectives one and two will be met with the vehicle of empirical
data collection and literature review, objective three will be met entirely through literature review, while
the final objective - objective four is derived as a result of the findings from objectives one, two and
three. Specifically, with the context of the potential and challenges of MFIs, the objectives of this
research are to:
Assess whether Ethiopia’s MFIs have the required potential/capacity to provide loan for biogas
users
Assess the challenges of Ethiopia’s MFIs that will limit their participation in the NBP of
Ethiopia
Look at the experience of other countries in financing domestic biogas programs
Formulate recommendations on the mechanism by which the potential and challenges of MFIs
could be addressed
By exploring the above areas of literatures, a significant contribution will be made to this research. The
challenges or barriers to MFIs in terms of their financial, institutional and human resource capacity;
awareness about biogas technology; lack of confidence by MFIs that they will not be able to recover
their money due to different problems pertaining to the technology users and other related issues will be
examined. Importantly, the experience of other countries like China, India, Nepal, and Bangladesh that
are in a more advanced stage of financing RETs especially biogas technology will be reviewed to see if
their experience can be adapted to the NBP of Ethiopia as a guideline. Because, according to REN21
(2008), about 25 million households worldwide receive energy for lighting and cooking from biogas

produced in household-scale plants (called anaerobic digesters). That includes 20million households in
China, 3.9 million households in India, and 150,000 households in Nepal. In effect, the value of
studying the aforementioned literature areas will be to provide a meaningful discussion and analysis of
financing biogas technology, in a structured way.
At the end of this major section, it is hoped that a critical understanding of key issues is exhibited, that
the reader will be better informed in the areas and that there will emerge a clear focus, and justification
for empirical research in the field of financing biogas technology.
2.1.1.What is Microfinance?
The roots of Microfinance can be found in many places, but the best known story is that of Muhammad
Yunus, the founder of Bangladesh’s Grameen Bank (de Aghion & Morduch, 2005). Pioneered by
Mohammad Yunus in the 1970s, MFIs today are spread all over the world (including in developed
countries such as the United States) and count over 100 million of the world’s poor among their clients
(Agrawala & Carraro, 2010). The success of the Bangladesh’s Grameen Bank is widely acknowledged
and is being replicated as a model in many developing countries.
The definitions of Microfinance proposed by different scholars and organizations is more or less the
same except some variations; most of them share the same view in that the service targets poor people
who can’t access formal banking services, the slight variation in the definition might arise from the
specific objective of the organizations or the purpose that scholars are writing the paper for; some of the
definitions pertaining to Microfinance are highlighted below.
Wilson (2003): “Microfinance is the provision of banking services such as savings, credits and money
transfer to poorer people who cannot access ordinary mainstream banking services.”
UN: “Microfinance can be broadly defined as the provision of small scale financial services such as
savings, credits and other basic financial services to poor and low-income people.”

CGAP4
: “Microfinance offers poor people access to basic financial services such as loans, savings,
money transfer services and micro insurance.”
Micro Energy Credits5
: “Microfinance is an innovative banking system that provides small loan to
poor people (often women) to help them start their own businesses and gradually work their way out of
poverty”
The definition provided by Wilson (2003) doesn’t explicitly indicate that the service is a small scale
service and ignores the term “micro” which actually differentiate the service from normal banking
service provided by commercial banks; the content of the definition by UN, CGAP and Micro Energy
Credits is synonymous but an all rounded definition of Microfinance is provided by the Microfinance
Information Exchange (MIX) below.
MIX6
: MIX recognises many general definitions of microfinance, but for analysis purposes, employ a
functional definition: “Microfinance services-as opposed to financial services in general-are retail
financial services that are relatively small in relation to the income of a typical individual. Specifically,
the average outstanding balance of microfinance products is no greater than 25% of the average income
per person (GNI per capita).” Therefore the term MFIs refers to a wide range of organizations
dedicated to providing these services and includes NGOs, credit and saving unions, cooperatives, private
commercial banks, non-bank financial institutions and parts of state owned banks7
.
2.1.2.Microfinance in Ethiopia
Rural communities in Ethiopia face significant challenges related to energy, food security and economic
stability. Today, as many as 40% of all rural Ethiopian households fail to produce enough food or
generate sufficient income to meet their basic nutritional needs (the 2200 calories, recommended by
WHO) (Gobezie, 2008; Lennon & Kebede, 2008). Poverty in Ethiopia is more persistent in the rural
areas and especially amongst the agriculture households (Pitamber, 2003). Most rural households
depend on agriculture as their primary source of income but lack essential social infrastructure, such as
4 http://www.cgap.org/p/site/c/template.rc/1.26.1302/
5 http://microenergycredits.com/microfinance/what-is-microfinance/
6 http://www.themix.org/about/microfinance
7 http://www.microfinance.ca/index.php?title=Welcome

roads, education and primary health care facilities, safe drinking water supplies and fuel (Pitamber,
2003). Access to finance by majority of poor households in Ethiopia is primarily through informal
systems including money lenders, traders, friends, relatives, idirs8
and ikubs9
(Sebstad, 2003)
Microfinance is said to serve as a gate way to financial service for rural people that are deemed too poor,
too risky and too costly to be served by commercial banks. Ethiopia’s public and private banking system
is not designed to address the specific savings and credit needs of the food-insecure rural households.
Even in urban areas, where more financial services exist, rigid banking criteria effectively place these
services out of the reach of poor households. A study by Lennon & Kebede, (2008) reveals that rural
households have even less access to banks and correspondingly fewer options, which leaves them
vulnerable to traditional moneylenders who charge interest rates as high as 100% on a two-to-three
month loan. Financial access by rural households definitely plays an important role to rural development
which in turn contributes to an overall economic growth of poor countries like Ethiopia.
Before the emergence of MFIs in Ethiopia, financial service has been delivered for several years by
projects designed by government ministries, departments and non-governmental organizations. For rural
areas, the credit scheme was designed and operated by the ministry of agriculture while the ministry of
trade and industry was responsible for urban areas. As a component of their integrated program, several
international and indigenous non-governmental organizations also used to operate micro credit schemes.
In addition to benefiting their immediate beneficiaries, these programs had introduced the very concept
of micro credit, micro finance and market led approach to offering financial service to the poor.
However, this unstructured and unprofessional intervention by governmental and non-governmental
organizations has its own limitation. In this regard AEMFI (2003) has highlighted key limitations of
such interventions, some of which are
8 Iddir is an informal association whereby savings are made primarily for the purpose of covering the cost of funerals or
weddings.
9 Iqqub is an informal, ad-hoc association organized by members for the purpose of pooling their savings in accordance
with rules established by the group. Members agree to deposit monthly or weekly contributions of a fixed sum with an
elected treasurer or, where accessible, in a bank. Lots are drawn weekly or monthly by turns and members in need can
purchase the winner’s lot by paying a premium (Pitamber, 2003).

• The orientation of the micro credit scheme was geared towards a project concept. NGOs and
government project involved in micro programs were not interested in establishing sustainable
institutions that deliver diversified financial service to the poor.
• Unsustainable micro credit with low lending rate created a problem in building sustainable
institutions.
• There was a very high default of the input loans of the Development Bank of Ethiopia (DBE).
This was mainly the result of borrower’s perception of the lending organizations as donor
funded or government funded established financial service for humanitarian reasons.
• The employees of the lending NGO and project were not seriously committed to loan recovery,
rather they focus on keeping funds flowing
• The micro credit program on NGOs and government projects concentrated entirely on provision
of credit. Saving was forgotten in the delivery of financial services to the poor.
• Donors were considered as the only source of loan funds, which unfortunately encourages
dependency.
According to Berihun (2005), the careful observation of the limitations of the above intervention, which
actually reflect the fact in the ground, coupled with the government’s Agricultural Development Led
Industrialization (ADLI) policy, the Government of Ethiopia was forced to re-consider the operational
modality of Microfinance to facilitate a very significant improvement in service delivery and outreach.
Consequently, in June 1996 the government came up with proclamation No. 40/199610
and the National
Bank of Ethiopia (NBE) was entrusted with licensing and supervision of MFIs in the country.
Under this proclamation, Micro financing business is defined as “an activity of extending credit, in cash
or in kind, to peasant farmers or urban small entrepreneurs, the loan size of which shall be fixed by the
bank11” and Micro Financing Institutions means “a company licensed under this proclamation to
engage in Micro financing business in urban and rural areas.”
10 Proclamation No. 40/1996 is a proclamation for the licensing and supervision MFIs in Ethiopia
11 Here, the bank refers the National Bank of Ethiopia, which is mandated to license and supervise MFIs in Ethiopia

The enactment of the Microfinance legislation has led to the transformation of traditional NGO
microcredit program into full fledged MFIs including SFPI, Bussa Gonofa, PEACE, ESHET, Wasasa
etc. In addition, most regional governments stimulated the establishment of new MFIs or co-invested in
existing ones that were previously aligned to NGO like ACSI, DECSI, OMO and OCCSCO (MicroNed,
2008). According to the above proclamation, MFIs should provide credit through group based lending
methodology, MFIs are allowed to mobilize saving but, in terms of loan size, they are restricted to a
maximum of 5,000 Ethiopian Birr (ETB) and the repayment period should be no more than one year.
With a view to further stimulate economic activities and provide opportunities for majority of the poor
to escape poverty through the provision of more and appropriate financial services, besides introducing a
legal framework for the establishment and supervision of MFIs in Ethiopia, the Government of Ethiopia
has been refining the regulatory framework for the Microfinance operations. The commitment of the
government has been demonstrated when the former proclamation 40/1996 was reviewed and replaced
by proclamation No. 626/2009 so as to make it flexible and help MFIs to extend their service to rural
households. Furthermore, the National Bank of Ethiopia issued a new directive on May 2002 to improve
the regulation limits on loan size (Br. 5000), repayment period (one year), and lending methodology
(social collateral) (Alemu, 2006) inter alia.
2.1.2.1. The Growth of Microfinance Business in Ethiopia since 1996
Since the government instituted a legal and policy framework for MFIs in 1996 through proclamation
40/1996, by the time this study is conducted, 32 MFIs have been registered by the NBE and are
operating under the auspices of this proclamation. Ethiopia’s Microfinance industry has shown steady
growth trends over the last several years that are marked by an industrial asset holding of 5.9 billion
ETB as of fiscal year ending 2008 (AEMFI, 2010). Gobezie (2009) claims the current number of MFIs
can be considered as significant growth by any standard; nonetheless, when we look at the number of
MFIs, since the enactment of the Microfinance proclamation, number wise, no one will deny that the
number of MFIs is increasing, yet considering the potential demand particularly in rural areas, the
available MFIs can only satisfy an insignificant proportion of people who are in dire need of financial
services. MicroNed, (2008) highlights that the last decade has seen the Ethiopian Microfinance industry
grows rapidly towards maturity but, despite all this significant gains, the general outreach is still very

low estimated at 20-25% of the demand with most of the underserved areas being felt in the rural areas.
Pitamber (2003) also concluded that although, the performance of the Microfinance sector in Ethiopia
can be considered to be quite impressive, their current outreach is comparatively small compared to the
number of poor rural households living below the national poverty line.
Even if large MFIs in Ethiopia are reaching a significant number of people, their service is more or less
limited to their respective regions. According to Wiedmaier-Pfister et al. (2008), MFIs are concentrated
in the three regions of Addis Ababa, Oromia and SNNPRS. In Amhara and Tigray regions, the majority
of clientele are being served by two of the largest MFIs in the country, namely ACSI and DESI
respectively. Besides the general disparity between the rural and urban areas, there are no formal
Microfinance services in three administrative regions i.e. Afar, Somali and Gambella regional states,
which are characterised by pastoralist engagements (MicroNed, 2008) and in other regions MFIs are in
their infant stage where they have limited capacity to satisfy their customer’s demand in terms of their
loan product and outreach. The Association of Ethiopian Microfinance Institution (AEMFI) once
estimated that in order to satisfy the microfinance demand in Ethiopia, we need about 300 MFIs.
AEMFI (2007), emphasize this by example:
If we assume that there are fifteen million households in Ethiopia, targeting one person per
household who requires micro-credit and also assuming half of the households are able poor
then, over 7.5 million active clients will require micro-credit.
Even if Ethiopia is said to have the second largest microfinance users in sub-Saharan Africa, there is still
a lot to be done to increase the service of Microfinance and improving the quality of service and
outreach of microfinance institutions. In the previous paragraph it has been stated that the geographical
distribution of MFIs is not well spread in all regional states, besides that, most of the MFIs are
concentrated in the capital city and other major regional cities which leaves many poor people in
demand of small scale financial services; however this situation should not be considered as the mere
weakness of the MFIs, it has to do with the role of the government and other concerned organizations to
improve infrastructure status of remote areas which definitely restricts MFIs from opening branches in
these regions.

2.1.2.2. Sources of Funds for Ethiopia MFIs
A feature of all Ethiopian MFIs is that they are actively involved in savings mobilization, which is
explicitly sanctioned by the Microfinance law (Sebstad, 2003). Savings are central to Ethiopia MFIs and
provide an important source of funds for lending. The two types of individual savings include
compulsory savings which stay with the MFIs until the client leaves the program and voluntary savings
which the client can withdraw any time.
Table 1: Source of Funds of MFIs in Ethiopia, September 31, 2006
Source: AEMFI 2007
MFI Saving Paid-up
equity
Loan from
Banks
Loan from
RUFIP
Grant/Donation
equity
Net Income
from
lending
Total
ACSI 335,168,000 46,734,000 8,570,700 85,253,898 71,629,000 133,625,000 680,980,598
ADCSI 41,341,000 120,942,000 20,000,000 8,703,000 4,526,000 11,688,000 207,200,000
Aggar 1,868,005 4,247,601 - - - - 6,115,605
Asser 257,467 1,817,000 - - - - 2,074,467
AVFS 2,161,556 204,000 2,180,507 - 4,799,097 188,638 9,533,797
Benishangul 5,721,410 300,000 - 1,530,959 - 994,749 8,547,118
Bussa
Gonofa
1,932,501 899,708 - 2,175,030 7,805,671 233,194 13,046,104
DECSI 198,115,406 4,775,001 307,000,000 46,000,000 53,074,506 28,191,787 637,156,700
Dire 1,204,688 6,001,000 - - 3,250,000 - 10,455,688
Digaf 637,610 215,000 - - 30,000 - 612,610
Eshet 2,644,101 225,000 - 6,043,453 6,279,041 3,546,986 18,738,581
Gasha 5,240,486 203,700 - 3,600,000 6,143,516 435,143 15,622,845
Ghion 305,294 353,100 - - - - 658,394
Harbu 1,055,245 200,000 - 759,997 645,633 - 2,660,875
Letta N/A N/A - - - - -
Meket 253,438 1,300,000 - 344,700 1,587,205 13,108 3,498,451
Meklit 2,585,990 200,000 - 2,805,990 1,750,446 1,352,494 8,694,920
Metemamen 60,900 200,000 - - 6,436,000 - 6,696,900
OCCSCO 76,515,595 96,600,000 8,570,700 40,890,643 24,784,453 25,385,761 245,747,151
OMO 46,645,394 14,211,036 - 11,500,000 14,319,603 2,162,990 85,839,022
PEACE 5,350,286 200,000 6,503,535 6,843,598 2,403,715 563,949 21,865,082
SFPI 7,204,695 406,000 - 4,000,000 12,428,495 103,149 24,142,339
Shashemene 520,839 2,649,760 - - 348,506 26,100 3,545,204
Sidama 4,542,429 13,087,305 6,581,000 - 17,663,307 - 41,812,225
Wasasa 4,573,967 201,000 2,366,000 4,342,589 6,253,326 910,137 18,647,019
WISDOM 12,009,745 22,240,525 - 7,483,200 - 86,589 41,820,059
Total 754,646,045 311,412,736 361,772,442 232,277,057 246,157,518 209,507,774 2,115,649,940
Percentage 36 15 17 11 12 10

For government supported MFIs, besides savings, donated equity finance from regional government
have been a crucial source of capital. Other sources of donated equity finance for MFIs includes donor
organizations, foreign NGOs, churches and other associations. According to Sebstad, (2003), SIDA is
one of the few bilateral (or multilateral) donors to provide large amounts of capital funding through its
support for ACSI. Generally, although the resources are not enough to meet the huge demand for loans,
Ethiopian MFIs have been obtaining their loanable funds from various sources such as saving mobilised
by MFIs, grants from donors, securitisation, selling bonds, equity from various sources and loans
(AEMFI, 2007). Table 1 summarises the main funding sources of MFIs as of September 31, 2006 which
includes saving mobilisation, paid up equity, loan from banks, loan from Rural Financial Intermediation
Program (RUFIP), grant/donations, and net income from lending.
2.1.2.3. Performance of Ethiopia’s MFIs
Different segments of the microfinance industry propose different criteria to evaluate performance but a
consensus is emerging among analysts to evaluate the industry in terms of a critical triangle (Meyer,
2002a). A critical triangle is a conceptual framework for thinking about three overarching policy
objectives: outreach to the poor, financial sustainability and welfare impact.
The critical triangle developed by Zeller & Meyer (2002) is presented in Figure 1. The inner circle in the
figure represents MFI innovations in technology, policies, organization, and management that affect how
well each objective is met. The outer circle represents the environment within which microfinance
operates that also affects the MFI’s performance. According to Meyer, (2002a), this environment
broadly includes the human and social capital possessed by the poor, the economic policies of the
country, and the quality of the financial infrastructure that supports financial transactions. As per this
framework, the success of MFIs in meeting the objective of outreach, financial sustainability and
welfare impact will depend on the internal environment (created by individual MFIs) of MFIs and the
external environment (provided by the government and society). Performance criteria are required for
each objective and all three must be measured to thoroughly evaluate Microfinance performance
(Meyer, 2002a)

I. Outreach
Outreach, at a glance can be defined as the number of people served by MFIs, but according to Navajas
et al, (2000) outreach is a multidimensional concept which can be defines as: ‘Outreach is the social
value of the output of a microfinance organization in terms of depth, worth to users, cost to users,
breadth, length, and scope’. According to Navajas et al, (2000), depth of outreach is regarded as the
value that society attaches to the net gain from the use of microcredit by a given borrower. Worth of
outreach is ‘how much a borrower is willing to pay for a loan’ this depends on the motivation of the
borrower to repay his/her loan which can be attributable to the satisfaction derived from the activities
where the loan is used for.
Figure 2: Critical Microfinance Triangle
Source: Zeller and Meyer (2002)

Cost of outreach to user is ‘the cost of a loan to a borrower’. Navajas et al., (2002) further explained that
cost to user includes both price to user and transaction cost where price includes interest and fees but
transaction costs are non price costs. In this case, transaction costs for users are both non-cash
opportunity costs such as the value of the time to get and to repay a loan and loan-related cash expenses
such as transport, documents, food, and taxes. Breadth of outreach is ‘the number of users’ while length
of outreach is ‘the time frame in which a microfinance organization produces loans’. Finally, Scope of
outreach is ‘the number of types of financial contracts offered by a microfinance organization.’
Source: Author’s Compilation from AEMFI 2010
Figure 3: Outreach of Ethiopia’s MFIs by Number of active borrowers
MIX (2005), classified outreach as: ‘efforts to extend Microfinance services to the people who are
underserved by financial institutions.’ MIX (2005) also proposes outreach to be measured in terms of
breadth - number of clients served and volume of services (i.e., total savings on deposit and total
outstanding portfolio) - or depth - the socio-economic level of clients that MFIs reach. In terms of their
number of borrowers, ACSI and DECSI are the two largest MFIs among the twelve Africa’s MFIs

ranked by the MIX (2005). Ethiopian MFIs performance analysis report (2010) published by AEMFI
showed that the 23 reviewed MFIs provided financial intermediation to over 2.2 million clients in the
fiscal year ending 2008. The graph in figure 3 shows the breadth of MFIs in terms of the total number of
clients served as of end of 2008.
II. Financial Sustainability
Meyer (2002a) discovered that the financial sustainability of MFIs is important as the poor benefit most
if they have access to financial services over time rather than receive, for example, just one loan but
denied future loans because the MFI has disappeared, or is illiquid because repayment rates are low, or
funds promised by donors or governments have not materialized. Basing on the fact that most of
Ethiopian MFIs are dependent on funds from donors and other financial sources, the majority of
Ethiopian MFIs clientele could suffer from either insufficient or discontinuous amount of loans from
MFIs. According to Meyer (2002a), there are two levels by which financial sustainability can be
measured. The first is lower level of achievement in which the MFI reaches Operational Self
Sustainability (OSS). This means that operating income is sufficient to cover operating expenses like
salaries and wages, supplies, loan loss and other administrative costs. The second one is Financial Self
Sustainability (FSS) which is a higher standard; because it means that the MFI can also cover the costs
of funds and other forms of subsidies received when they are valued at market rates.
The difference between FSS and OSS is that financial self-sustainability measures not only an
institution’s ability to cover its operating costs but also its ability to maintain the value of its equity
relative to inflation, and to operate and expand without subsidies (Barres et al., 2005). According to
Barres et al. (2005), broadly speaking, OSS measures ability to survive, while FSS is a better indicator
of ability to grow. Therefore, achieving FSS is crucial for MFIs; it is an indication that the MFI would
still breakeven if all the subsidies would be removed. AEMFI’s report showed that Ethiopia’s MFIs
were unable to attain FSS in 2008 a reversal of the prior year achievements in which 30% of the
analyzed MFIs were FSS. One plausible explanation for this could be the high inflation in that year
which stands at an annual average of 44% (versus an annual average of 17.2 in December 2007). The
financial performance of Ethiopian MFIs in terms of FSS and OSS is presented in Figure 4.

A study by Ejigu (2009) regarding the performance analysis of sample microfinance institutions in
Ethiopia revealed that Ethiopia’s Microfinance industry faced with two pronged challenges. The first is
the need to reach the poorest customers and the second one is being financially self sufficient. Although
the industry is growing, these two critical questions of reaching the poorest of the poor and building a
financially sustainable industry needs to be addressed. The study participated 16 MFIs and makes use of
data collected from the MIX website and using one sample t test, one way Analysis of Variance
(ANOVA) with Scheffe Post Hoc Comparison test, Kruskall-Wallis test and Pearson correlation
coefficient for data analysis concluded that in terms of the depth of outreach (which is measured by
average loan size, average loan size per Gross National Income (GNI) per capita and the percentage of
women borrowers) the poorest of the poor are not reached and in this regard Ethiopian MFIs are
generally poor; this can be evidenced by the fact that as of January 2009, the 27 MFIs in the country
meet only less than 20% of the demand for financial service of the active poor (AEMFI, 2009).
Source: Author’s Compilation from AEMFI 2010
Figure 4: Financial performance of Ethiopia MFIs (end of 2008)

Ejigu (2009) also argued that their performance in terms of the ratio of GLP to asset is also poor; they
also allocate a lower proportion of their total asset in to loans. They are not also using their debt capacity
properly. The large and smaller MFIs are allocating more Loan Loss Provision (LLP) expense than the
industry average and the related Portfolio at Risk (PAR) is high for these MFIs. All the MFIs are good at
breadth of outreach (which is measured by number of borrowers and GLP), cost management, efficiency
and productivity. They also charge low interest rates. The profitability and sustainability of the MFI
depend on their size. From a simple correlation analysis, Ejigu (2009) found that there is a trade-off
between serving the poor and being operationally self-sufficient. MFIs age correlates positively with
efficiency, productivity, the use of debt financing (commercialization) and OSS. It is also found that the
use of debt financing makes firms more efficient and productive.
III. Impact
Measuring the impact of a MFIs program on their clients is the most debated and controversial issue in
the Microfinance industry. The service of MFIs is most of the time associated with poverty reduction,
according to Meyer (2002a) reducing poverty is an explicit or implicit benefit of most microfinance
programs. Meyer, (2002a) argued that the conceptualization of poverty is changed over the past two
decades and he referred to the recent expanded view of poverty which is found in the world
development report 2000/200112
, in comparison with the historical definition of poverty, Meyer, (2002a)
concluded that determining if microfinance actually helps lift people out of poverty requires selecting
which definition of poverty to use, then measuring if they become less poor by receiving financial
services in which case the result of impact assessment should be treated with great caution.
12 The report noted that not only do the poor lack income; they lack adequate food, shelter, education and health. They are
vulnerable to ill health, economic dislocation, and natural disasters. They are often exposed to ill treatment by the state and
are powerless to influence decisions that affect their lives.

2.2. Biogas in Ethiopia
Ethiopia has the largest livestock population in Africa. A survey in 2003 counted 35 million cattle, 25
million sheep, and 18 million goats. Livestock is an integral part of nearly all the mixed type highland
farming systems and the principal store of farmers’ wealth. Agriculture employs 80 percent of the
population and accounts for almost 50 percent of the gross domestic product (GDP). Smallholder
farmers, generally with less than 1hectare of land account for about 95 percent of the agricultural output.
In times of good weather, roughly 75-80 percent of the annual output is consumed at the household level
(World Bank, 2006). Despite being blessed with livestock, for many years Ethiopia couldn’t enjoy the
social, economic and environmental benefit through the use of cow dung as a source of energy (biogas);
rather, the dung in the form of dung cake is burned directly which otherwise could have been used as a
feed stock for biogas generation where the sludge can be used as an organic fertilizer.
Burning dung cake as a source of energy for households can cause indoor air pollution which will result
in different health problems. In Ethiopia majority of the rural households use dung cake for cooking
purpose of the major staple food “Enjera13
”. This activity takes place either in the main living room or in
a separate kitchen (which is rare in rural areas) that is not well ventilated. According to Clancy, (2002),
cooking can be inside or outside the building; for example, fuel efficiency is influenced by wind and
draught and health is affected by poor ventilation creating inefficient smokes and particulate dispersal.
This is an indication that the use of inefficient and unclean source of energy in a kitchen which is not
well ventilated can be the source of different diseases. A Staggering 1.6million people die every year
due to the toxic effect of indoor air pollution from cooking fires (Aron et al. 2009)
As has been said earlier, Ethiopia is a country largely dependent on agriculture and almost all the
agricultural activities are carried out by the rural people in a traditional manner; holding the key to the
economic backbone of the country, relatively small attention is given to rural development in Ethiopia.
One of the key elements to rural development is access to modern energy. However, despite all the
attention given to energy issues in Ethiopia, in the past rural communities continue to be deprived of
basic energy services. Modern forms of energy are simply not available in rural areas while traditional
sources are rapidly being depleted, thereby deepening the rural energy crisis (EREDPC 2007).
13 Enjera is a large approximately 60cm diameter spongy pan cake made of fermented “teff” dough.

If we look back to the history of biogas in Ethiopia, the earliest biogas digesters in Ethiopia were
installed in the early 1970s but soon fell into disuse (World Bank, 1996); in 1977, Tarrant undertook a
comprehensive evaluation of the use of a community plant for the generation of electricity in Debark14
,
Ethiopia. He concluded, using three different measures of social worth, that the project was viable at
current oil prices (the fuel used to value biogas), but that the project was not financially viable.
However, the detailed figure provided on financial and social cost and benefit suggest that a subsidy to
cover the financial deficit would still leave the project socially viable. He concluded that more detailed
field evidence was required on three critical parameters: electricity demand projection, slurry transport
costs and the value of dung to firm up the estimates presented (World Bank, 1986).
Beginning in 1979, a series of digesters were installed for research and demonstration purposes
by the Ethiopian Energy Authority (EEA) (World Bank, 1996). Following this, a number of other
government and private organisations have installed digesters since that time. According to the report of
joint UNDP/World Bank Energy Sector Management Assistance Program (ESMAP), it is estimated that
the total number installed was about 200. Among these digesters, 80% were the Indian floating steel
dome design (which the dome was liable to rust), 15% the Chinese fixed dome design (susceptible to
cracking and leak) and the remainder 5% are of different designs. A survey carried out by EEA revealed
that 55% of the digesters were out of action and the reasons were technical problems, lack of proper
management, unavailability of dung and lack of interest among users inter alia (World Bank, 1996).
As compared to that of household digesters, the performance of community digester as well as schools
and such institutions was particularly bad. Problems particular to institutional and community biogas
digesters were lack of feedstock supply, general operation and maintenance, and equitable sharing of
benefits; these problems appeared to be virtually insolvable and ended in the failure of almost all of the
digesters. Finally, it is generally agreed that any near-term biogas deployment will have to be based on
family digesters providing fuel for cooking and lighting, with sludge being used as fertiliser. Based on
this conclusion, within that year (1979) effort has been made to introduce biogas technology at
household level but the wider dissemination has been limited owing to different reasons. In the last two
and a half decades, around 1000 biogas plants were constructed in various parts of the country. By the
14 Debark is a town in Amhara region located in the Northern part of Ethiopia

time the feasibility study for the NBP is conducted, approximately 40% of the plants were not
operational due to lack of effective management and follow-up, technical problems, loss of interest,
reduced animal holdings, and evacuation of ownership and lack of water.
2.2.1.Overview of the National Biogas Program (NBP) of Ethiopia
Due to the renewed interest in biogas and in order to unleash the potential for this bio-fuel in Ethiopia, in
2006, a feasibility study has been commissioned to assess the prospects for domestic biogas in the
country. According to EREDPC (2006), the main findings of the feasibility study with regard to
functionality and economics are explained below
Functionality
60% of the visited installations were not functioning, i.e. among the total installation fixed dome
digesters (68% functioning) scored significantly better than the floating drum digesters (16%
functioning) the reasons for the malfunction of the digesters are:
Technical problems: Mainly smaller issues, like water trapped in the piping, unprotected piping
damaged by cattle, broken stoves and biogas lamps, leaking gas-hoses; occasionally major technical
issues like broken digesters and inlet pipes were observed the other problem is the nearly-total
absence of technical back-up services clearly aggravates the impact of smaller technical problems.
Water Shortage - Particularly around Dessie in Amhara region, a remarkably high share of older
floating drum plants were not in operation. In other places too, the large distance to the water source
was reported to be the reason to stop operating the plant, often in relation with children leaving the
house (thus reducing the energy requirement of the household as well as the “free” labour of the
children for fetching water)
Dung Shortage - Sometimes induced by droughts, and sometimes a result of changing cattle holding
style.
Abandoned - Few plants were abandoned; families move, and a biogas plant cannot be moved along
(although one household did take the steel drum of the floating drum plant).
Loss of interest - In a few cases, break downs were claimed that did not add up with the
observations, very simple repairs would be carried out for years, etc. Obviously, owners lost interest
in operating the plant, but the underlying cause was not always clear.

Economics
• Investment cost: The reported investment costs for domestic biogas plants range from some ETB
6,000 to 12,000 for fixed dome installations (8m3
to 20m3
). Floating drum plants are more
expensive, and would typically start at ETB 8,000 for the smallest size of 8 m3
digester volume. A
detailed Bill of Quantities from 1995 informs on the costs of an 8 m3
floating drum installation. In
this Bill of Quantities the total costs amounted to ETB 8,451 (materials ETB 7,268 + labour ETB
1,183). Although the reported investment costs should be taken with care, the conclusion that biogas
plants in Ethiopia are high, both in absolute as well as relative terms, seems valid. The comparison
of digester costs with other countries like Nepal and Vietnam showed that in Ethiopia, biogas
digester is costlier than these countries. The graph in Figure 5 describes this comparison.
Source: EREDPC 2006
Figure 5: Biogas Plant Investment Comparison
The huge difference in the cost of digesters could be the result of different factors; however, the
earlier adaptation of the technology in Nepal and Vietnam could have contributed to the reduced cost
of digesters through research and development, the availability of biogas companies could also
reduce the cost of digesters due to competition between companies. It should also be noted cost of
different construction material and labour cost could vary seemingly among these countries which is
one of the driving force in the dissemination effort of biogas digesters.
• Plant Size: In relation to the amount of available dung, the size most of the plant constructed in the
surveyed areas range from 12m3
- 20m3
whereas the amount of available dung could in many case be

as low as 5 or 6 kg per day per head. Taking in to account different factors it is concluded that a 4m3
digester installation would rather suffice.
• Used Materials: The use of non-local materials increases the investment costs. Clay bricks can easily
double in price if transported over larger distances; moreover, non-local products, particularly
appliances, valves and taps, aggravate the maintenance problem as replacements, spare parts and
repair knowledge are rarely locally available. The high investment costs of the observed plants and
the high incidence of minor technical problems leading to dysfunctional installations can both to
some extent be attributed to the use of non-local materials for plant construction and appliances.
• Investment Subsidy: Most of the visited installations were fully subsidized. The popular view would
hold that full subsidies undermine the ownership of the installation, resulting in the biogas plant not
receiving the desired “tender love and care”.
• Investment Credit: None of the installations was financed with credit. Although all regions currently
appear to have a fair micro credit network, only recently the MFIs adjusted their loan conditions in
such a way that investments of a biogas installation could be accommodated.
Based on the study, a formal partnership between Ethiopia Rural Energy Development and Promotion
Centre (EREDPC) and Netherland Development Organization (SNV) has been formed and in 2007 a
joint EREDPC/SNV team was established to develop a Program Implementation Document. An
extensive stake holder consultation both at regional and national level resulted in awareness rising about
the NBP. In the first pilot phase, the program envisages constructing 14,000 biogas plants in different
Woredas of selected regions of the country (Oromia, Amhara, Tigray and SNNPRS) and later on
looking at the result of the pilot phase; the program will upscale and construct many other biogas plants
covering more areas of the country. The regions and Woredas targeted by the NBP in the first phase are
presented in Table: 2

Table 2: Regions and Woredas selected for the first phase of the NBP of Ethiopia
Regions Oromia Amhara SNNPRS Tigray
Woredas Ada’a Bahir Dar Zuria Dale Hintalo Wajirat
Dugda Bora Dembi Mareko Raya Azebo
Hetosa Gonder Zuria Meskan Western Tigray
Ambo Fogera Aarba Minch Zuria
Kuyu Dangila Derashe Special
Source: EREDPC 2007
The overall goal of the NBP is to improve the livelihood and quality of life of rural households in
Ethiopia through the exploitation of market and non-market benefits of domestic biogas such as
replacement of unsustainable utilization of wood and charcoal for cooking and lighting; use of the high
value organic fertilizer from the bio-slurry; and improvement of health and development conditions for
rural households (EREDPC, 2007).

2.3. A Look at the Experience of Other Countries in Financing Domestic
Biogas
As compared to other countries which have started domestic biogas program well ahead of Ethiopia, the
National Biogas Program of Ethiopia could have a lot to learn from their experience. It should be well
noted that the difference in technological level, the financial system, geographical and weather
conditions and the availability of feed stocks of those countries could be quite different from that of
Ethiopia and it may not be possible to directly adapt the experience of those countries to Ethiopia
without some modifications and adjustments. The following section will briefly look at the experiences
of countries like China, Nepal, India, and Bangladesh in integrating Microfinance to their domestic
biogas program.
2.3.1.China
2.3.1.1. Background
The history of biogas utilization in China dates back to the 1920s when Luo Guorui constructed
his earliest digesters in eastern Guangdong province. In the following decade he commercialized his
patent by setting up the China Guorui General Firm of Gas in Shanghai. In 1936, Professor Zhou
Peiyuan, the then chairman of State Science and Technology Association, built power-generating biogas
facilities in Zhejiang province (Nianguo 1984). According to Nianguo (1984) wars retarded the
development of biogas plants so that the first large scale construction of biogas digesters only took
place in late 1950s when millions were built. However, not all the digesters built were successful
due to problems in supplying the technology to too vast an area of the country. The real breakthrough
came in the mid-1970s during which time it is reported that some seven million biogas digesters were
built, mostly digesters serving the needs of single families in rural areas. Even allowing for a certain
percentage of failures this was a tremendous achievement since the figure out-numbers the rest of the
world’s total at that time, and the facilities provide much needed energy to farmers in a developing
countries.
The dissemination of domestic biogas digesters in China has taken several stages since the 1970’s. Many
factors are involved in affecting the dissemination work. Besides science and technology, government

Assessment of the potential and challenges of microfinance institutions (1)

Assessment of the potential and challenges of microfinance institutions (1)

Recommended

Recommended

More Related Content

Similar to Assessment of the potential and challenges of microfinance institutions (1)

Similar to Assessment of the potential and challenges of microfinance institutions (1) (20)

More from Habtamu Tezera

More from Habtamu Tezera (7)

Recently uploaded

Recently uploaded (20)

Assessment of the potential and challenges of microfinance institutions (1)