MFI characteristics and loan preferences of farmers: Household-level evidence from rural Ethiopia

One of the debates around sustainability and the scaling up of micro-financial services is the commercialisation of micro-finance institutions (MFIs). This paper examines the contribution of the commercialisation of MFIs to ensuring the sustainability of MFIs and in scaling up their commitment to serve their primary target groups: poor and marginalised people. By using household-level data from rural Ethiopia and secondary data from selected MFIs, the study systematically examines the characteristic of MFIs and the factors determining the choice of farmers for MFIs vis-à-vis informal institutions. However, MFIs have achieved rapid growth in the number of beneficiaries, and have also gradually shifted away from their traditional primary targets (poor households) toward not-so-poor households and even large-scale investors: a drift in mission. The paper argues that, unless regulated, this commercialisation incentivises MFIs to transform themselves into conventional banks. The primary aim of the MFI project was to create vibrant financial institutions that are committed to serving poor and marginalised people. The research also identifies factors related to loan terms and household characteristics that strongly determine the choice of farmers for MFI loans.