Until 1996, the provision of microfinance services in Ethiopia has been carried out mostly by donor funded programs through NGOs and government institutions. Most of the time a poverty lending approach was followed with subsidized interest rates. This practice has undermined loan collection performance leading to huge default and hence weakened the development of self-sustaining MFIs. After 1996, however, a regulatory framework for Licensing and Supervision of MFIs was introduced, and as a result, most of the donor funded micro credit programs that were carried out by NGOs were transformed to be regulated institutions. The proclamation 40/1996 was issued in 1996 based on the limited microfinance experience which was prevailing at the time. In order to address various problems related with regulation and go with the development of the sector, the Government and National Bank of Ethiopia have been making effort to gradually improve the regulatory framework. The findings of this research paper suggest that the regulation and supervision of MFIs in Ethiopia brought many benefits. These are the following: The regulatory framework in Ethiopia has created an enabling environment for establishment of specialized formal financial institutions that provide financial service to those who were considered as unbankable, enabled MFIs to offer a wide range of products (for example credit, savings and money transfer etc.) and promoted standardization and transparency in the sector. In general, the regulatory and supervisory framework, in addition to other factors, has benefited the microfinance institutions in Ethiopia to show impressive performance in terms providing wide range of finical services including: extending credit, saving mobilization, money transfer and providing other related services to lower income section of the population. The regulatory and supervisory framework has also its own constraints and challenges which are discussed in detail in this paper by highlighting appropriate recommendation to tackle them.
National Bank of Ethiopia