The Role of Microfinance Institution for Poverty Reduction in Ethiopia

Micro finance institutions are basically set up with the goal of poverty alleviation. These institutions have a very important and effective role in both developed and in developing countries because it is considered the backbone of their economies. This indicates that without the establishment of micro finance institutions, no developing nation can achieve a viable economic growth/development or the reduction of poverty since they lack enough amount of money. Micro finance institutions can play a role in reduction of poverty and improving the socio-economic condition of the poor since there is a positive contribution of micro finance institution and social development, in which there is better access to health, education and basic services and greater social respect. The contribution of education level and entrepreneurial skills has positive impact to poverty reduction in which there is increase in income, better living conditions and better access to basic needs. This review examines on the role of micro finance institutions for poverty reduction and the challenges on the performance of operating micro finance institution. The review result suggest that major problems that faces the micro finance institution in order to take and operate their business are absence of training for borrowers, weak monitoring and support system, high interest rate, uncomfortable loan repayment schedule, loan size, loan capital shortage, lack of use of technology and cost effective methods, human resource problem, lack of access to credit, insufficient support from government, limited management capacity of microfinance institutions, less attraction on financial sustainability, improper regulations, and limited management capacity of micro finance institutions. Keywords: MFIs, poverty, role of MFIs, problems on performance, poverty reduction DOI: 10.7176/JESD/10-5-04 Publication date:March 31st 201