Regulation & Supervision of Microfinance Business in Ethiopia: Achievements, Challenges & Prospects

This paper highlights benefits of MFI regulation and supervision in Ethiopia.

Ethiopia introduced a regulatory framework for MFI licensing and supervision in 1996. Since then, the government and National Bank of Ethiopia (NBE) have made efforts to gradually improve the regulatory framework. Regulation and supervision have helped to create an enabling environment for establishment of specialized formal financial institutions that provide financial services to the poor. They have also encouraged MFIs to offer a wide range of products, and promoted standardization and transparency in the sector.

The paper makes recommendations to tackle problems that still persist in the regulatory and supervisory framework for Ethiopian MFIs. They include:

• Designing a clear tier regulatory framework for graduating MFIs;
• Linking capital adequacy requirements to MFI’s total capital and core capital;
• Increasing initial minimum capital requirement for establishing MFIs;
• Encouraging MFIs to search for potential investors, especially among international MFIs, agencies, and NGOs;
• Designing a clear regulatory framework for banks to be involved in microfinance;
• Strengthening MIS and MFI internal controls;
• Building up NBE capacity and strengthening staff skills.