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Draft Assessment Report on Strategic Financing Framework and Innovative Financing Mechanisms in the Water Sector in Ethiopia

Target and Solution Groups (TSG)

10/18/2011

A Case Study in Rural Water Supply Sanitation and a brief assessment other subsectors

Prepared By:-Teklehaimanot Molla

Strategic Financing Framework and Innovative Financing Mechanisms in the Water Sector in Ethiopia

A Case Study in Rural Water Supply Sanitation and Other

Table of ContentsACRONYMS..........................................................................................................................................3

Back ground................................................................................................................................................4

Executive Summary.....................................................................................................................................5

Notes on Financing Mechanisms and Measures..........................................................................................0

PART 1. COUNTRY WATER SECTOR ASSESSMENT:........................................................................3

1.1. Financing needs of the water sector in Ethiopia..............................................................................3

1.2. The 3Ts: current financing policy, sector revenues and mechanisms in country.............................5

1.3. Commercial Sources of Finance Used In the Water Sector in Ethiopia.........................................11

1.4. Financial innovations:........................................................................................................................13

PART 2. Analysis of Innovative Financing Mechanisms in the Water Sector (15-24 pages)....................17

I. Introduction.......................................................................................................................................17

II. A Similar Case Study on Rural Financing.........................................................................................18

III. Financing Mechanisms..................................................................................................................18

A. Community Development Fund (CDF).............................................................................................18

B. Micro finance institutions..................................................................................................................22

C. Loan from Local Commercial Development Banks.......................................................................25

D. Introduction to Other Regional Financers and Donors.......................................................................27

PART 3 Respective Duties of Implementation Agencies, With Regards To Water Fund Transfer...........28

I. At Federal Level,...............................................................................................................................28

II. At Regional Level..........................................................................................................................29

III. At Woreda Level...........................................................................................................................29

CONCLUSION.........................................................................................................................................30

MAJOR FUND FLOW OF PROJECTS IN ETHIOPIA...........................................................................31

Annex1. FGE FM Administrative Structures.........................................................................................31

Annex2. Channel I.................................................................................................................................32

Annex 3. Channel Ia..............................................................................................................................33

Annex 4. Channel Ib..............................................................................................................................34

Annex 5. Channel III.............................................................................................................................35

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Annex 6 Similar Case Study on Rural Financing.....................................................................................37

Annex 7 Community Development Fund (CDF).......................................................................................39

Annex 8 Micro finance institutions...........................................................................................................44

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ACRONYMS

AFDB African Development FundBoE Bureau of EducationBOFED Bureau of Finance and Economic DevelopmentBoH Bureau of HealthBWR Bureau of Water ResourcesCDM Community Development FundCMP Community Managed ProjectMoE Ministry of EducationMoFED: Ministry of Finance and Economic DevelopmentMoH: Ministry of HealthMoU: Memorandum of UnderstandingMWR: Ministry of Water ResourcesNWCO National WaSH Coordination OfficePMU Project Management UnitRWSSP Rural Water Supply anSanitation ProjectWASH: Water Supply and Hygiene EducationWoFED Woreda of Finance and Economic DevelopmentWASH Water Sanitation and Hygin Programme

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Back ground

The 6th World Water Forum will build on four preparatory processes: Thematic, Political, Regional and Grassroots and Citizen’s. AMCOW was selected as Regional Coordinator to drive the preparatory process in Africa. The Regional process aims at (a) mobilizing and engaging stakeholders throughout different regions of the world to catalyze action at regional and local level, and to contribute to the 6th World Water Forum and its outcomes; (b) articulating targets and interests that are relevant to particular regions; and (c) seeking commitments to follow-through and implement specific actions after the 6th World Water Forum.

AfDB, AfWA, AfUR, ANEW and WDA formed a Target and Solution Groups (TSG) for the Regional Target 5, “Develop and implement innovative financial mechanisms including taxes, tariffs, and transfers to meet the MDGs financial requirements by 2015 in all counties ” which was identified in the AMCOW 1st Multi Stakeholder Forum for Africa’s Preparatory Process for the 6th World Water Forum. TSGs are tasked to prepare detailed target action plan, identifying and reporting on solutions contributing to reach the given target and gather commitments for the implementation of these solutions.

The main objective of the assignment is to collect financially successful existing and innovative cases from Ethiopian water sub-sector which could contribute to development of a model framework for national water sector financing mechanisms, including use of the 3Ts (Tariffs, Taxes, and Transfers). The model framework is expected to be one which African counties could follow and build on to develop their own water sector financial mechanism to meet the MDGS financial requirements by 2015.

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Executive Summary

Introduction

The overall goal of Water Resources Policy of the Government of Ethiopia is to enhance and promote all national efforts towards the efficient, equitable and optimum utilization of the available Water Resources of Ethiopia for significant socioeconomic development on sustainable basis.

The government of Ethiopia established and promote the use of "Water Fund" for financing water projects. The Fund ensures that national commitments are in place for financing of water projects that involve "consumptive use" of water, ensure the proper utilisation of funds and other resources obtained from different external and internal sources.

Water resources are treated as a unitary resource requiring coherent planning for its effective use and management in order to reflect its economic value. In addition to the public sector main involvement privatisation of utility services and increased user involvement is promoted

While addressing the financing needs of other subsectors of the water sector this case study mainly focuses on Rural Supply Water and Sanitation projects

I. Water Sector Financing

As per the national plan, the estimated cost of water sector ranges from USD 5 to 12 billion for the years 2011 to 2015. The water sector includes water resources management, irrigation, water supply and sanitation. The sector share 6 % of the national budget, in average. Due to lack of information the water financing in the off-government budget, the private sector and self-supplies in the communities are not incorporated in the above data

USD(000,000)' 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Total (2010-2015)

Total National Expenditure 4,196 5,415 6,243 7,658 9,497 11,832 44,841Water 249 347 336 476 699 1,019 3,126

6% 6% 5% 6% 7% 9% 7%Source: -MoFED Growth and Transformation Plan

The government plan to reduce cost of the sector by decentralizing the planning than the former centralizing planning and by a continuous study of measures that will result in, economy, efficiency and effectiveness processes as well as by increasing participation of the private sector. The government expects that the participation of the private sector would result in better flow of funds to the sector. In addition this would satisfy one of the main objectives of privatization in

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Ethiopia, to get the government relieved from Ordinary concerns and to concentrate on more strategic issues.

Fund flow from the private sector is the key determinate of the Water Sector Planning next to taxes and tariff, national priorities, share of the other sector of the economy, regional requirements, growth levels, availability and transfer of funds from government, donors, International Banks

As under developed economy the rural communities at large and the urban poor are not able to cover recurring cost water supply not to mention the cost of investment.

Transfer of funds to the user is done through various channels. Most of the programmes use one of the three types of channels, which base the government administrative structure and banks.

Water Tariff is done by segmentation and price differentials. However, the segmentation is not to the adequate level and need a systematic analysis based on representative factors

Our assessment revealed that the sources of finance in the water sector are numerous depending on category of projects, which are mainly, water supply and sanitation, irrigation, hydropower, transport, industrial use and environment protection.

Conditional on the public and private interest the following are the key players in financing the water sector in particular: -

FinancingWater

Resource Management

Water Supply

and Sanitatio

n

Irrigation

Hydropower

Investment of the Government of EthiopiaLoan and grant from AfDB

Loan and grant from World BankFund flow Global Donor institutionsLoan from Local BanksLocal and international Investors in involved in agro industry, bottling, hydropower, subsectors sectorsJoint venture with foreign investorsLoan and transfer from microfinance institutionsContribution from regions and Community Development Funds

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Interestingly, a good financing lesson was created by the government in raising funds for Renaissance Hydroelectric Dam. A considerable amount was collected through

Public unconditional contribution Sell of five year local bonds, payable in local and foreign currency Created bank finance incentives for the purchase of bonds Promise/agreement of local banks co- finance the dam (promises are binding in Ethiopian Law) In kind promises including skills. Minimizing costs by utilizing local engineering companies

II. Selected Financing Mechanism

It is to be noted that in rural dominated Ethiopia the source of water is mainly outside the financing world as it is sourced from natural environment assisted by human labour, at current pace we have a long way to go to manage the resource effectively and competently

In fact, the water sector financing is very low compared to the countries natural untapped potential and the existing demand. At present most of the money is to route to basic water supply and sanitation or hygiene programmes. Despite the existence abundant rivers, ground water and rain fall, uses for irrigation agro-industry, energy and for demands of other sector of the economy is at infancy level.

As this case study mainly focuses on Rural Supply Water and Sanitation projects the selection criteria pay attention on the financing water supply need of the rural Ethiopia while due focus the needs of other subsectors of the water sector not being overlooked. The selected mechanisms are

1. Community contribution and The Community Development Fund

The Community Development Fund approach is a pioneered and developed in Amhara and Benishangul-Gumuz Regions

As the Woredas are the lower Ethiopian government administrative body, at grass root level communities are organized in associations called Kebele administrations. A Woreda have several kebeles, which are independent of government administration.This is already considered as accepted channel by the four ministries; Water, Health, Education MoFED, with the following key features

Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the physical construction of water schemes are transferred directly to the community by way of a micro credit institution. This would reduce the delay and risk experienced through banking transfers. .

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Community Financial Management: The communities, through water and sanitation committees (WASHCO), are responsible for the full development process through planning, financial management, implementation and maintenance. The unique feature in CDF community management is that the WASHCO manages not only community-generated funds but the government subsidy provided for capital expenditures. As learning curve improves, this will lead to increased use of funds, increasing community contributions for capital costs and cost effectiveness.

Procurement: A further aspect of community management is that the WASHCO is directly responsible for procuring the goods and services required for water scheme construction and installation.

2. Loan and transfer from Micro Finance Institutions

This provides the best mechanism to rural Ethiopia, due to the following, among others: - the Microfinance credit and saving institutions, are available in every woreda and remote

places next to community Development Funds, which operate at grass root community level They actively control the borrower or user of funds, due to their proximity, They require no collateral, but personal guarantees if large Nowadays their lending level is growing The public increasingly trusted their operation as their performance is visible and poor friendly The interest rate is relatively high compared to commercial banks Expanding at an increasing rate both in size of assets and office locations

The micro finance institutions have proved that they are fit for the purpose and have practiced it in several instances, including the water sector.they are already financing businesses related to the irrigation and water supply and sanitation sub sectors

3. Loan and transfers from Commercial Banks

The commercial banks served as a government and donors water sector fund transfers channel, for many years and are still indispensible financing mechanisms in regions where microfinances do not perform well.

There are fifteen banks in Ethiopia, including three government owned Commercial Bank of Ethiopia, which is the largest Bank, with 423 branches, followed by other two government run banks, Development Bank of Ethiopia and Construction and Business Bank

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After the deregulation of banking service, the private sector is growing faster and innovatively opening branches with new facilities. However, due to the decision of the government, only Commercial Bank of Ethiopia is used for the transfers of government involved projects.

4. Fund flow from Development Partners (DPs) and International and Local Non-Governmental Organizations (NGOs)

This category of donors combines nonrefundable assistance and grants to the sectors. The funds would flow directly to urban and rural projects through various means

These players have expertise that enables them to effectively implement water programs. Moreover, they bring additional and alternative experience to the projects and can contribute substantially to lessons learned and the achievement of best practices.

5. Water work Constructions by Public Regional Financers and Associations

There are unique players in funding the water and other sectors of economy with a recorded performance. This include

a. Regional Endowment fundsb. Regional Development Associations

These bodies are region specific and are very strong in Tigray and Amhara. Their strength includes but not limited to

By way of promoters , the agencies convince and managed to collect regular and special massive public free contributions

Conduct enormous public infrastructural development works, including hundreds of moderate rural dams, boreholes, water ponds, irrigation facilities and distant water supply service

Innovatively invest in lucrative and strategic developmental businesses (recently a public tender was made for Iron development

They are proved to mobilize public work resulting in recovering, lost forests, wildlife and related natural resources including streams, springs, medicinal and holy water and rivers also extending their seasonal flows.

Conclusion and Recommendation

The funding challenge is enormous for all water-related sectors: Water resources, management, Irrigation & drainage, Water and the environment, Water supply & sanitation, Hydropower

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Even though past funding was not to the adequate level still the financing of the international community is crucial until a with growth in the economy together with the development of the private sector address the demand

As the existing investment is very low, compared to the potential, in the near future conditions, though improved, the goals of the water sector may not be easily addressed by local tapped resources, without external financing and mobilizing the public and private efforts through infrastructural development which are proven way boosting the aggregate demands

Existing resources need to be used more effectively for y capacity building improving efficiency. The private sectors especially, the microfinances, do show their ability to reach the rural community, reducing the exaggerated lead time of commercial bank money transfers, to a great extent, as their proximity to the user community is fair .

Appreciating the achievements and efficiencies, funding agencies are expected to work on leveraging local private capital while the government facilitates what is expected in the arrangements, towards the attainment of its strategic plan. The private sector can participate for performance based fee; in the administration and extension of lines, fee collections, profitable identification and market segmentation study, with due interest and swiftness than the government bureaucratic structure.

It is not possible to observe the cumulative performance of the financing, as at present consolidation of works performed by all stake holders is not to the adequate level. In order to recognize the status of the water sector for present and future plan performance control and decision making, due regard should be paid as soon as possible.

Recommendation

Developments across the water financing spectrum : - Focus on improving performance of the water sector, also because it is key to attract new

resources from the 3Ts – users are more willing to pay when there is transparency and fairness in water service provision, the ministry of finance allocates resources according to past performance.

Reduce the risk of ODA crowding out repayable finance Ensure that low capacity to the use the available funds does not become a bottleneck Consider the impact of developments outside the sector on the sector’s financial

sustainability – such as improvements in tax collection by towns, new roads that reduce the cost of building and servicing water infrastructure in rural areas, or development of local financial markets.

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Notes on Financing Mechanisms and Measures

NO Financing mechanisms and Measures Features1. Subsidy by the government The aim is to reduce the population who have no

access to clean water Rural areas Low income groups Food and water insecured areas Drought and disaster prevention

2. Community partial contribution for full Organization and management costs and 10 to 20% capital costs

Contribution through Community development fund for the works of self-water supply

Public in kind contribution and public works with very low cost such as; Productive safety net programme (PSNP) water catchment projects

The beneficiaries are the community themselves. It is a way towards full cost recovery”

3. Microfinance, credit and saving associations revolving funds loan to community, individuals, groups for construction of self-water supply and fur water utilities of rural businesses

These also grant loans to communities for communities to enable them pay their part of contribution for RWSSP and WASH

The inistitutes are also being used as a transfer media to rural areas where banks do not have access

The fund transfer will be speed up. The degree of usage of funds and follow up of implementation would be to adequate level due to proximityInstead of the woreda which have no direct relation to community, the microfinances can communicate easily to communities committees, who are project holders

4. Loan donation and Aid Until full cost recovery is sustained international loan, Aid flows to the water sector should continue to increase and to align with country-owned strategies;

They should be used strategically to complement and reinforce .

5. Tariff by Segmentations of user Flat rate social tariff Low band then progressive user charges Business use tariffs

Tariffs are set in rural areas with the aim of recovering operation and maintenance costs; while, in urban areas, aim at total cost recovery through time (which covers operation & maintenance costs, depreciation and debit servicing).

In the urban areas, after the lower band, tariff rates are implemented on progressive basis, that are tied to consumption levels.

6. Funds raised through Business plan focusing a right mix of the taxes, tariffs and transfers – the “3T” This applies to five Towns, including Addis

Ababa, for full cost recovery program and six sub towns.

These are the ultimate financial sources of investment for the water sector:

It underlines the importance of strategic financial planning to find the right mix of the 3Ts for achieving water and sanitation targets,



and for leveraging other sources of finance. while ensuring affordability tariffs play in

achieving sustainable cost recovery.

7. Woredas allowed for (lower level of government structure) to use their tax collection and subsidized the gap by regions.

Encourage Woredas to increase revenue from taxes through innovation which in turn encourages taxable private sectors development

8. Saving and reduction of costs through BPR, supply chain management and decentralization of planning

The measure is to result to a focused operations and mangement, continuous improvement in reduction of non-value adding activities, wastes, increased efficiency and effectiveness thus reduction of costs

9. Charges for sanitation services: by the City and NGOs capital costs of constructing a common toilet

septic tank facilities are shared between condominium owners

operation and maintenance cost recovered Periodically

fixed and mobile toilets user charges a monthly fixed fee is collected from residents

for clearing their garbage

There are indicators that the sanitation charges are profitable over and above cost recovery, observing an on and off private sector involvement. The business man do not leave the business by their own reason, but they complain that the kebele communities are interested on the income.

10. Infrastructural aggregate demand boosting measures, such as road construction and communication media, enabling development and then water cost recovery

Surprisingly the measures found to be creating towns and cause the farmers product prices to increase, to a great extent, supporting the farmers’ affording capacity..

11. Local Equity and venture capital and Local bank loans

These source of finance are were private sector water bottling and the beverage sector

12. Fund flow from NGOs Civil works and water supply and sanitation services. As they have high level of expertise this group also contribute a knowledge Sharing scheme

The water resource management sources of finance is similar to the above.

A. Irrigation

No Financing mechanisms and Measures13. Government financing State owned irrigation projects for agricultural

businesses and resettlement areas. Capacity building and Promotion of agricultural

growth programs and funds, through Minstry of Agriculture and rural Development

As part of Boosting aggregate demandResettlement of pastoralists by way of irrigated agriculture

14. Local bank loans Private and governmental irrigation projects15. Loan from Global Finance and government

equityLarge farms and the sugar industries

16. Loan and transfer from Microfinance institutions

Small private (individual and community) irrigations

17. Foreign government banks finances Specially to sugar funds18. Sugar Funds Used for expansions and new industry

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A centralized Money reserved from the operating results of government owned sugar factories

development

19. Venture and Owners capital Private sector projects

B. Hydropower

No Financing mechanisms and Measures Project types20. Investment from Government and Electric

Corporation SourcesAll form of hydropower development

21. Loan from Local banks All form of hydropower development22. loan from Global banks Grand renaissance dam23. Bonds in local and foreign currency Grand renaissance dam24. Publicly mobilized free contribution Grand renaissance dam

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PART 1. COUNTRY WATER SECTOR ASSESSMENT:

WATER SECTOR FINANCING IN ETHIOPIA

1.1. Financing needs of the water sector in Ethiopia

The government of Ethiopia established and promote the use of "Water Fund" for financing water projects. The Fund ensure that national commitments are in place for financing of water projects that involve "consumptive use" of water Ensure the proper utilisation of funds and other resources obtained from different external and internal sources.

Water resources are treated as a unitary resource requiring coherent planning for its effective use and management in order to reflect its economic value. In addition to the public sector main involvement privatisation of utility services and increased user involvement is promoted

1.1.1. Water sector goals

According to the Federal Democratic Republic water sector strategy (2001) the overall goal of the Water Resources Strategy is to enhance and promote all national efforts towards the efficient, equitable and optimum utilisation of the available water resources of Ethiopia for significant socio-economic development on a sustainable basis. Towards this aim, the following strategic directions will be adapted with respect to main elements of the strategy.

The major objective of the clean water and sanitation policy is also contributing towards the alleviation of poverty by facilitating favorable conditions whereby the general public gets access to reliable and sustainable clean water and sanitation services.

With a view to alleviating this pressing problem the world community has set a Millennium Development Goal to reduce by half the number of people, who do not have access to potable water as well as basic health and sanitation services, by 2015.

1.1.2. Estimates of the cost of achieving those goals

The following show share of the water sector from the total expenditure budget of Ethiopia: -

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USD(000,000)' 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Total (2010-2015)

Total National Expenditure 4,196 5,415 6,243 7,658 9,497 11,832 44,841Water 249 347 336 476 699 1,019 3,126

6% 6% 5% 6% 7% 9% 7%Source: -MoFED Growth and Transformation Plan

The water budget above includes the total of capital and recurring expenditures.Due to lack of information the water financing in the off-government budget, the private sector and self-supplies in the communities are not incorporated in the above data.

1.1.3. Efforts to reduce the cost of achieving those goals

The following actions are thought to result in efficiency, among other things : - Decentralizing the planning than the former centralizing planning. The decentralization

do result allocation of more applicable budget The supply chain management, which now under study, would play an important role in

ensuring the sustainability of the plan The on-going urban water supply services and financial capacity building process would

help institutions to be self-reliant The fast growth of roads and other development infrastructure would make easily

accessible the construction sites of the water projects; Planned increasing involvement of the private sector

1.1.4. Experiences with strategic financial planning in the water sector

Long term financing plan and Budget has been practiced for more than 40 years in Ethiopia. Currently all the sector ministries and regional states are required to prepare and deliver their plans to Ministry of Finance and Economic Development for central planning and approval. If it is applicable the plan is done in consultaions of other major financers As noted above the country prepared five years Growth and Transformation Plan

1.1.5. Country-specific factors influencing the financing needs and the emergence of strategic financial plans

The budget for water is proclaimed under the name of Ministry of Water Resources.

Budget is a two way process in Ethiopia: -

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Upstream process from woreda to MOFED and A Down Stream process from MoFED to Woredas.

This would enable participation of the lower group of which factors are very much different while the government centrally focus on priorities and even rationing of available financial resources: -

The region sectoral Bureaus and the Bureau of Finance and Economic Development (BOFED) will allocate the available resources to the woredas and towns. The Woreda Water Offices will submit its plan and resources to the Woreda Plan and Economic Office, and finally to the Woreda Council. Woredas will clearly allocate their yearly and multi-annual resource budgets within their WaSH plan. The resources come from the Federal Government, donors, regional and community contribution

MoFED review and allocate the countries resources on priority basis and several parameter, based on the country’s strategic priority and in line with sector policy and past performance. In the allocation procedures, MOFED will consider share of the other sector of the economy regional requirements, availability and transfer of funds from government, donors, International Banks,

1.2. The 3Ts: current financing policy, sector revenues and mechanisms in country

1.2.1. Current water financing policy Acoording to the official Ethiopian Water Resources Management Policy the following Policy is set on drinking water supply Promote self-financing of programmes and projects at the local level. Provide subsidies to communities who can not afford to pay for basic services on capital

costs only; based on established criteria and phase out subsidy gradually. The criteria include living standards both in urban and rural, the growth of townsm the purpose of the consumption(special charge for business), level of consumption(charges will be made on progressive basis)

Enhance self-financed and total cost recovery programmes in urban water supplies. Ensure that all water supply undertakings will adequately address costs associated with

operation and maintenance and be based on "cost-recovery" principles. Ensure transparency and fairness in the management of water supply services so as to

enhance readiness to pay and participation by the users and communities in the financial management of systems.

Ensure responsibility and financial accountability in the management of water supply services

Promote the participation of local banks, other investors as well as popular and traditional self-help social associations (the associaions ranges from small entities in specific

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communities to regional associations, Idirs, rural credit services …etc) in the development of water supply through appropriate incentive mechanisms; such as arrangement crudities, assisting in civil works, and provision of materials.

Irrigation financing policy Establish norms and procedures for financial sustainability and viability of irrigated

schemes. This include procedures for use of water, preparation of business plan for recovery and followup,

Promote credit facilities and bank loans for the development of irrigation schemes. This is done through arrengements with government commercial banks

Develop the appropriate cost recovery systems and mechanisms for all irrigation schemes. User charges, organization and management costs, maintenance costs and long term recovery of investment costs are among the recovery systems.

1.2.2. Tariffs and other user contributions– financial resources generated and instruments used

Water Pricing policy

Ensure that management of water resources shall be always addressed in conjunction with basic social equity norms.

Ensure that the price for water should be neither too high (and discourage water use) nor too low (and encourage abuses and over use of water).

Promote that tariff setting shall be site specific, depending on the particulars of the project, location, the users, the cost and other characteristics of the schemes. The respective water offices set the tariffs. There are tarrif setting guidance according to specific towns and woredas

Ensure that the basic human needs of water for disadvantaged rural communities who cannot afford to pay for development of water systems, shall be borne by the government, as appropriate, and in so far as the communities are able and willing to cover the operation and maintenance costs on their own.

Ensure that pricing for urban water supplies shall aim at full cost recovery and develop cross-subsidization strategies and promote credit services. Towns are required to prepare business plan for cross subsidization. They set price differential according to level of usage and and purpose. The difference would be recovered from taxes according to business plan

As willingness to pay by users of water systems is a powerful impetus for financial sustainability of water resources systems, willingness to pay shall be promoted by, interalia stating the main objectives, instituting fairness in water systems, promoting transparency and communications.

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For urban water, the tariff in Addis Ababa for example has the following segments

a. Public Fountain{ - lower rateb. Progressive rate Domestic Customers monthly charges vary in progressive rate based on

consumption in m3. The bands arei. 0 to 7 m3(per household? What is the size of the average household in Ethiopia?)

ii. 07 to 20 m3iii. above 20 m3

c. Non domestic customers

Government and community Contribution to ADB Rural Water Supply and Sanitation Programme which is similar to the Water Sanitation Hygiene Programme (WASH), an: -

community contributions (10% in labour and/or materials, and sometimes cash Significant cash contribution by the community of about 5% of the capital cost of the facilities in cash and/or in-kind labor.

Within a region, selection criteria for the Participating Woredas shall include, inter-alia, the water supply coverage, proximity, geographic balance, population, prioritization of water supply in the Woredas planning process, and level of commitment as reflected in the collection of the communities’ contribution to the financing of the schemes, and the proposals for O&M cost recovery for the schemes through user charges. It is reported that the selection procedures are working well and are in progress

Regional Administrations will cover the Government’s contributions for the activities to be carried out in their respective regions while the Federal Government will fund the federal tier activities. Communities in the region depending to their condition contribute 10 to 20% capital costs while fully cover the organisation and management costs

In case of WASH, in all modalities subsidies are dependent upon up-front community contributions in cash, labour, and/or in-kind contribution of no less than 15% of the estimated capital cost of the project. Exception to this may be made in the case of projects supported through the Productive Safety Net Program. In Community Managed Project , Woreda has the authority to decide up-front cash contribution amount (usually from 1,000-3,000 Birr/project) to ensure full priority and ownership from the community.

1.2.3. Taxes – financial resources generated and instruments used

Tax and Tariff for water are made area specific and depend on regions and level of growth of town. Regional towns share experience of the city of Addis Ababa. The City administration release the following information to the public

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Aiming at ensuring complete coverage in water supply for the city of Addis Ababa, from the current 73pc coverage authorities’ claim there is, councilors of the Addis Ababa City Administration have approved 1.4 billion Br to the sector last week, an amount claiming from the city’s 11.8 billion Br budget for the 2011/12 fiscal year

“It is the first time that the city administration allocates such an amount in order to improve water supply,” Haile told Fortune

The city administration plans to cover part of its expenditures from tax

collections; 5.5 billion Br, 7.7pc more than last year, is expected from businesses

in the city as profit tax, while 6.2 billion Br is expected in non-taxable incomes.

The latter has seen an increase of 56.5pc from the last fiscal year, and is expected

to come from municipality services and loans.

The city council has approved the plan to collect from taxes on the assumption

that the tax collection will improve as the city’s revenues collection department

has merged with the Federal Revenues and Customs Authority (ERCA) six

months ago. ERCA hopes to collect close to 90 billion Br in the coming budget

year from direct and indirect taxes sources.

The federal government established a water fund for management of the financing of water works. The Fund requires towns to prepare business plan in order to enable them cover costs, including water, from various source of funds.

All towns and rural areas, which cannot cover cost of water and investment through tax and tariffs, are subsidized

1.2.4. Transfers – financial resources generated and instruments used

Funds flow in to the projects all sectors, including water, and within the projects to the various project institutions which will handle project funds, are presented in the table below. The channels were working for over ten years.

Fund flow Mechanism

Description Of The Fund Flow

Channel Ia Development partner funds will be deposited in to a single pooled foreign - currency “designated Account” and then transferred to pooled Birr

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account to be held by MoFED. MoFED will track the allocation among the various partners (Multi donors) using appropriate ledger accounts. From the pooled local currency account, MoFED will transfer funds to the separate local currency accounts to be opened by regional BOFED. Each Woreda and other implementing entities will open separate local currency accounts in which to receive funds from their respective regions.

Channel Ib Each development partner funds will be deposited into a speparte foreign - currency “designated Account” and then transferred to pooled Birr account to be held by MoFED. MoFED will track the allocation among the various partners (Multi donors) using appropriate ledger accounts. From the pooled local currency account, MoFED will transfer funds to the separate local currency accounts to be opened by regional BOFED. Each Woreda and other implementing entities will open separate local currency accounts in which to receive funds from their respective regions.

Channel II Development partner funds will be deposited in to a single pooled foreign - currency “designated Account” and then transferred to pooled Birr account to be held by Sectoral Minstry. The Ministry will track the allocation among the various partners (Multi donors) using appropriate ledger accounts. From the pooled local currency account, the Minstry will transfer funds to the separate local currency accounts to be opened by the regional Bureaus. Each Woreda and other implementing entities will open separate local currency accounts in which to receive funds from their respective regions.

Channel III Donors/financers make the fund flow directly to Implementing agencies

Note that channel I and II financial management is pooled at Woreda level, where WOFED Manages the accounting system for the sectoral projects operating in a specific woreda

Instead, at present, the government and World Bank agreed to channel Water fund transfers to Community Development Fund through microfinance institutions than Woreda Finance and Development Office, depending circumstance. This is found to remove delays in transfer and timely use of funds with more proximity of the user. Full discussion is given at CDF section of this report

The chart in the next page shows the available funding Routs: -

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Note See annexes for individual channel flow

Country-specific factors affecting the mix of the 3Ts

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All of the revenue mechanisms

Aloccations to water depends not only on requirement but also on other external factors. In addition to taxes and tariffs and transfers, National Priorities, share of the other sector of the economy regional requirements, growth levels, availability and transfer of funds from government, donors, International Banks, the private sector, extent of community contribution in kind are key determinates of the Water Sector financing.

As under developed economy the rural communities at large and the urban poor are not able to cover recurring cost water supply not to mention the cost of investment.

1.3. Commercial Sources of Finance Used In the Water Sector in Ethiopia

1.3.1. Loans

1.3.1.1 Commercial bank loans

After the deregulation of banking service the following commercial banks are being established in the private sector, which are growing faster and innovatively opening branches with new facilities

At present there are fifteen banks in Ethiopia, including three governments owned. The government runs Commercial Bank of Ethiopia, which is the largest Bank, Development Bank of Ethiopia and Construction and Business Bank

Water bottling and beverage industries share increasing proportion from towns water supply

1.3.1.2. IFI loans: with sovereign guarantees, direct lending to sub-sovereigns

As an example huge dams and hydroelectric plants were financed by the following, in addition to the Ethiopian government and EEPCo: - World Bank, Chinese, Italy and EIB, Italy, Exim Bank of China, FairFund, Chinese

1.3.1.2. Microcredit loans

The following microfinance funds are practiced in Ethiopia

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http://en.wikipedia.org/wiki/European_Investment_Bank



a) Microfinance and Credit Saving Institutions There are twenty two microfinance institutions in Ethiopia. The institutions provide loans to private self water supply, construction of wells and irrigations

b) Community Development Fund and Community Managed Programmec) Regional Development Associations: - Founded on publicly raised funds (public fee

contributions), these are relatively huge funds, involved with various infrastructure development activities, including water works, education and health.

d) Managed funds and Farmers Credite) Equb (traditional regulated regular periodic group saving and repayable by lottery

turn by turn each member the sum of the specific week, month and monthly contribution in a) and

f) Edir (Traditional Associated Community Self governance . g) Endowment Funds for rehabilitationh) Revolving Funds

1.3.2. Bonds

The Ethiopian government vow to fully finance a new grand hydroelectric project on the Nile River, which cost 80 billion birr (around 4. 8 billion US dollars at the current exchange rates). The grand project has an estimated capacity of producing 5,250 megawatts of electricity when completed in 2017. It is being constructed 20 to 40 kilometers at the east of Sudanese border.

While much of the funds comes from the government the following funding are being used

a. Public mobilization

National Council for the Dam is established and events are to being held to enable other members of the society and the Ethiopian Diaspora contribute their share in the support.

Accordingly the public servants, private and from students and public institutions continue to support in cash and promise

public mobilization coordination councils for the dam is extended up to districts and localities to enable saving bond purchases from credit and savings institutions, in the areas where there are no banks.

b. Local bonds• A five year bond, with 5% interest, is being purchased by local investors

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• Public servants and the private sector workers for the support they have made for the dam earlier by donating their salary, the donation was changed to saving bond purchase to ensure sustainable development.

c. Bonds to Diasporas and Foreigners

With a minimum USD 500, a Corporate Bond named EEPCO Millennium is issued by Ethiopian Electric Power Corporation( EEPCO), by the Agent: Commercial Bank of Ethiopia (CBE). The currencies applied are USD, Pound Sterling, Euro and other convertible currencies

The bond is guaranteed by the Government and is to mature in 5, 7 and 10 years with at interest rates of 4%, 4.5 % and 5% respectively.

Additional Benefit: • The bond can be used as a collateral for loans in local currency.• Income Tax: Interest income earned from the bond is free from any income tax.To this date 7.8 Billion Birr was issued for the Dam

1.3.3. Equity (from local or international capital markets)

Capital markets are not practiced in Ethiopia. However any foreign investor can make its accessible capital market source among other financing. Full information is not available in this regard

Large companies which are listed in capital markets of different countries were working in joint venture or entering in to Ethiopian market by establishing companies envolving including water bottling, agricultural farms which use huge borhole in dry land and irrigation from large river and lakes, not to mention other industries.

Local venture capital institutions are at an emerging stage and is involved in many including agriculture water bottling, real-estate, beverages etc. these include access capital, Habsha

1.4. Financial innovations: (Blending grants, guarantees and insurance products, grouped financing vehicles, credit ratings, project preparation facilities)

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Co-financing of loan specially by the three government banks are being provided for huge commercial projects

With regards to water, energy and irrigation, recently, both government and private commercial, construction and development banks held meetings and reach agreement to finance the country’s huge Dam. The exact arrangement of the financing is not yet publicized.

Guarantees and insurance bonds are long being practiced for both international and local contracts., including water consulting and construction works This applies for governmental and private sectors.

Credit rating of customers is solely practiced for internal use of individual banks and there are no standardized acceptable common sue of ratings. It is repeatedly noted that rated and favored customers by one bank has been found corrupted by regulatory bodies. However, banks consider strength and good history of the borrower as one of their evaluation. Moreover, government enterprises are considered as low risk borrowers. Depending on the sectors, there are also facilities which are supported by government incentives. For many years farm based and exports have good access to bank grants. There are several government business enterprises which finance their irrigation from commercial banks. The hydropowers are also some of the examples.

Options for Private Sector Participation o Management contracts through concessions to full-fledged privatisation of

energy, water and sanitation utilities and state-owned public transport companies (Tele and others).

Consultant outsourcing Other public sector projects Afforestation and Reforestation and other environmental measures resulted in new

water sources, recovery of lost stream and other natural resources which cannot be easily determined in monetary terms

It is to be noted that despite several privatization and deregulation of government business enterprises, still the government play a good proportions in huge utilities; water, electricity (Dams and hydro plants), telecommunication and sugar (which encompasses all the water subsector in addition to cane farming and factory), cement, airlines, towns-public transport, metal industries, construction, River valleys agriculture, real-estate etc.

1.4.1. Country-specific factors limiting the flows of repayable finance for the water sector

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The government policy incorporates clause to Promote credit services, by the government, for water resources development undertakings

Except for water supply and sanitation subsector, there is a reasonable bank and other types of finances. Other sub sectors especially , dam, ponds and irrigation for farms, hydro electric dams, non-domestic users (business which water as utilities), beverage industries including water bottling have good bank and credit financing.

Like any country water in Ethiopia is considered as free goods until the current introduction of water bottling companies, which created a supply push huge demand, which attract the commercial banks to provide repayable loans including for export businesses

Among factors limiting the flows of repayable finance for the water sector

Existence of large population which cannot afford to cover cost of water and facilities The National Bank of Ethiopia, the regulatory body highly focused and allocate to

external funding and appears that less practical attention is provided on innovative financing mechanism

The attractive water sector policies regarding enhancing self-financing schemes, in water supply, irrigation, hydropower and many other, and associated credit facilities and loans, is not well communicated to the private sector. Details to be implemented are not readyand explained to the public

private sector has little interest on water business as the opportunity cost is high compared to the general market.

The historical poor performance indicators/deficit is discouraging in the absence of a proper due diligence, aiming at operation quality improvement, cost saving measures and cash flow improvement. A proper due diligence should be prepared summarizing key issues to perform financial evaluation on segment basis.

Infrastructure investments tend to be capital intensive and lumpy, and have long gestation and even longer payback periods (in this regard the private sector can participate in the incremental cost management, including working capital mangement and extension of supply lines)

These private sector risks are many and varied: among the risks a&b below are more important to Ethiopia

a. demand for the services provided may turn out to be lower than expected; b. tariffs may be too low and not permitted to adjust to reflect costs; c. the condition of infrastructure may turn out to be worse, d. Delays of construction longer, and costs higher than anticipated. e. Other risks include the

i. financial risk of currency devaluation,

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ii. legal risks in dispute resolution, and iii. the political risk of asset appropriation.

As a result of one or more of these risks, the private contractor may be unable to recover costs and earn a reasonable profit. Indeed, how these risks are quantified and mitigated turns out to be the key to private sector participation in infrastructure projects. The principle is that whoever controls a particular risk best should assume it and be compensated for it.

Expansion and increasing needs of urban water supply and sanitation, and the inability of the public sector to mobilize the needed resources ( this is a capacity issue not only mobilizing but also use of funds). Poor level of use of funds were observed not only in the water sector but also in others

Low infrastructure and remoteness the rural Ethiopia to do holistic finance The limitation of the financial sector. The private sector financial institutions are at

emerging stage and mostly town based Except a rare arrangement, Donors money are limited to be transferred only through

the government owned Commercial Bank of Ethiopia Capacity issues: - human resource, financial resource

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PART 2. Analysis of Innovative Financing Mechanisms in the Water Sector (15-24 pages)

I. Introduction

As an emerging market economy, traditionally the governments have been the primary source of financial resources for investments in the water and energy sectors. The service was provided by state enterprises, usually at a subsidized price and the state contributed and/or mobilized the financial resources for investment in maintenance and supply expansion.

A second reason why state control and public provision was thought to be the appropriate model was the public good feature of clean water and sanitation in terms of public health, as well as the environmental externalities of energy and water resource development and use.

The experience of public provision and financing has been disappointing in terms of quality of service, coverage and costs. Furthermore, the traditional sources of financing dried up as public utilities piled up larger and larger deficits due to poor cost recovery, governments faced increasingly tight fiscal constraints and official development assistance (ODA) failed to keep up with expanding needs.

As government and regional state have many things to do, with priority, the allocation of shared resources physical and financial resources, as well as operation and management is of very much vulnerable for risk of not meeting plans.

A growing financing gap and the build-up of unmet demands for improved quality of service and expanded coverage forced governments and public utilities to seek private capital both at home and abroad, through both debt and equity participation by the private sector.

At the same time, technological progress and institutional innovations made possible a wide spectrum of private sector participation, ranging from management contracts through concessions to full-fledged privatisation of energy, water and sanitation utilities and state-owned public transport companies.

As noted in the previous section the source of finance vary and include the following

i. World bank African Development Bank and related Donors Managed Fundsii. Community Development Fund

iii. Micro finance institutioniv. Loan from Local Commercial Development Banksv. International Financial Institution and Foreign governments Loans

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vi. Insurance Sureties and Investmentsvii. Donors Fund

viii. Equity (from local or international capital markets)

II. A Similar Case Study on Rural Financing

In year 2007 the World Banks sponsored assessment of the systems utilized for transferring Productive Safety Net Programme (PSNP) cash resources within the Ethiopian banking system1. The PSNP is working with communities in food insecured areas, by way of public work, including water development. The payment include payroll for public work and direct payments for disables. The following were the findings of the assessment, among other: -

The result of the study indicates that compared to the commercial banks, the microfinance institutions are competent for rural fund transfers, lending to private and community self water supply

III. Financing Mechanisms

A. Community Development Fund (CDF)

As the Woredas are the lower Ethiopian government administrative body, at grass root level communities are organized in associations called Kebele administrations. A Woreda have several kebeles, which are independent of government administration.

The Community Development Fund approach is a pioneered and developed in Amhara and Benishangul-Gumuz Regions.

A.1. Financing mechanism

The following is extract from The WaSH Implementation Framework, a document which is signed by four ministries of the Ethiopian government; the Ministry of Water and Energy, Ministry of Health, Ministry of Education and the Ministry of Finance and Economic Development and by observers: - the Development Assistant Group’s (DAG) Water Technical Working Group and For the Civil Society Organization (CSOs) of the WaSH Sector

1 The assesment was conducted by the writer of this report

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The World Bank mainstreamed the CDF Approach into the National Water Sanitation and Hygiene (WaSH) Program (WaSH Growth & Transformation Plan/Universal Access Plan (GTP/UAP)) for its wider application.

The WASH objective is interestingly exactly similar to the Rural Water Supply and Sanitation fund of the African Development Fund (AfDB).

A.2. Key characteristics/Features of the CDF Approach

Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the physical construction of water schemes are transferred directly to the community by way of a micro credit institution. This would reduce the delay and risk experienced through banking transfers. .

Community Financial Management: The communities, through water and sanitation committees (WASHCO), are responsible for the full development process through planning, financial management, implementation and maintenance. The unique feature in CDF community management is that the WASHCO manages not only community-generated funds but the government subsidy provided for capital expenditures. As learning curve improves, this will lead to increased use of funds, increasing community contributions for capital costs and cost effectiveness.


A.3. Background and Rationale for Mainstreaming

Steps in Mainstreaming

Integration: In this National WaSH Implementation Framework the principles and basic procedures of the CDF approach are built into the WaSH program as part of the Community Managed Project (CMP) funding mechanism.

It is presented as alternative funding mechanism to the existing Woreda Grant which is hereby known as the Woreda Managed Project (WMP) funding mechanism which includes regional and national managed projects on behalf of Woredas or towns.

The preconditions, however, are considerable and include:

that the region and the woreda have negotiated fund transfer arrangements with an established financial intermediary at both levels

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that the region and the woreda have put in place the necessary capacity building and technical assistance provisions to equip and backstop WASHCOs and to train and support woreda and finance institution personnel for the special requirements of CMP

that hydro-geological conditions permit low cost technologies

that there is reasonable expectation that a sustainable supply chain for local procurement can be developed

that there are a sufficient number of communities in the region/woreda selecting CMP to make it a viable option

that the applicant communities are sufficiently cohesive to undertake community project management and later to sustain management of operations and maintenance

that the cost and complexities of the preferred or required technologies and the project size fit within the parameters of the CMP

A.5 Impacts of adoptionAt Amara and Benshagul regions it is found to be a user friendly approaches with the above positive attributes.

A.5.1 Financial flows generated

As noted above the CDF approach managed to generate the interests of the World Bank and managed funds of the NGOs and civil society groups. For many years, In the Amara region, CDF and the Credit and Saving Association were working together, to satisfactory level. the adoption will materially impact the works of the microfinance institution and the rural Ethiopia, positively.

A.5.2. Other impacts

The approach will creates confidences of other funding agencies to water and other sector. The proximity of this institutions to the users will reduce the time gap between decision making and implementation, absolutely impacting resource efficiency

A.5 Conclusions: pros, cons and replicability

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The advantage and the disadvantages of the financing mechanisms are sufficiently detailed above. The exceptional importance of the CDF is its user friendly approach and proximity to the project, with fast delivery

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B. Micro finance institutions

There are twenty two Microfinance and credit andsaving institutions in Ethiopia. Compared to other credit service providers, these are uniquely granting microcredits to Rural Ethiopia, in addition to their presence in the town

B.1 The financing mechanism

Proclamation No. 40/1996, titled “A proclamation to provide for the licensing and supervision of the business of microfinance institution”, and the directives issued by the National Bank of Ethiopia (NBE), constitute the major legal and regulatory framework which is used to regulate and supervise the microfinance industry.

The financing mechanism include: -

Direct ledning to borrowers from their own funds. This depends with request of the individual Where cooperative, associations and group of individuals apply, the MF provided the loan based

on adequate documentation of their agreement. Managing other funds: - based on agreement of other financers the MF provide the borrower as

per the terms of the lender with minimal fee Managing revolving funds: -This may be as per the MF budget or other funder requirement. The

repayment of the loan will be utilized to lend the remain members and cooperatives based on planned round and priority

Being a transfer of media: - Donors and government for areas unreached by banks with high risk of physical transfer of money, the MF are good risk mitigating tools in addition to the efficiency of opperations

B.2 Key characteristics of the financing mechanism:

They are available in every woreda and remote places next to community Development Funds, which operate at grass root community level

Due to their proximity, they actively control the borrower They require no collateral, but personal guarantees if large Now a days they lending level is growing The public increasingly trusted their operation as their performance is visible and poor

friendly Their interest rate is relatively high compared to commercial banks

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Too much office work for small amountsB.3. Impacts of Adoption

By now, the Microfinance institutes already dominate the rural economy including attracting the fund transfers of the dominant players in the water sectors, through the Community Development Funds

The adoption has tremendously improved findings of various sectors of the rural economy. In the water sector the institute assists: -

Provision of finance to business, community and individuals self-water supply developments. This include, small irrigation, pumps, sprinklers, well, water systems, tankers, canal civil works, sanitation.

In addition to their own funds the institute lend borrower from revolving fund which is also benefiting communities for water system construction.

They are being means of alternative government and donor fund transfer means to the rural Ethiopia where commercial banks have no access

B.4. The process of adoption and implementation Provision of funds

In order to avoid duplication, please see Section A: -(CDF) of this report.

B.5. Conclusions: pros, cons and replicability

The establishment of the regulatory framework for microfinance industry has helped to lay out the roadmap for the development of the finance sector. The provision allowing MFIs to mobilize small savings from the public has enabled them to finance a substantial portion of their portfolio from internally generated sources.

However, more issues should be addressed, in that: - Developed knowledge and capacities are not utilized as the huge MFI are working and limited in

respective administrative region, even though they observe good opportunities elsewhere. This defeats the free business purpose and avoided competitiveness and related strategies, which is the key art for creative knowledge.

Weak competition means monopoly, which results in poor choice to borrower and inefficiencies can be concealed by creative profit generated from unreasonably high interest rate. The poor need to have sufficient number of service providers from which to choose.

While the interest rate ceiling on credit has been removed, a minimum on interest to be paid for savings persists, hampering savings mobilization in remote rural areas.

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As foreign investment is not allowed the Ethiopian MFIs still have less way of learning new insights from foreign banks,

The regulatory framework needs to find ways and means of helping the MFIs become more competitive and efficient in delivering flexible financial services to the majority poor, the regulatory mechanism also needs to be better equipped to supervise and monitor the industry.

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C. Loan from Local Commercial Development Banks

There are fifteen banks in Ethiopia, including three government owned Commercial Bank of Ethiopia, which is the largest Bank, with 423 branches, followed by other two government run banks, Development Bank of Ethiopia and Construction and Business Bank

The other commercial banks were being established after the deregulation of banking service. The private sector is growing faster and innovatively opening branches with new facilities

C.1 Financing mechanism

Based on strict adherence of regulations and universal commercial bank operations as well as their policies and procedures, the commercial banks provide loan, advances and overdraft, to individuals, the private and public sector. After observing the request, the banks rely mostly by considering collaterals and guarantee than the strength of the business. As a result the acquisition of depreciated collaterals cannot recover delinquent loans. Banks also observe borrowers capability to administer the loan and the project.

C.2 Key characteristics of the financing mechanism:

The funding potentials of the banks is not to be exaggerated as funding of large project can erode possibilities to other clients. Specially, this is serious to the private banks. Banks have to observe the Nation Bank criterion for the level of reserve they hold, and the level of the lending they can make.

• The government banks, have experience of co-financing of huge projects they though they have still limitation for the fund size,

Since the local banks should strictly follow the rules of the NBE the political risk will be low. The NBE as a regulatory body has its own supervision mechanism for adherence of requirement

C.3 Impacts of adoption

Regarding the water sectors, there are many types of funding mechanisms and projects facilitated by the banks. As noted above the banks provided

To mentions some of the water sector loans based on projects

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No Project type Borrowersa. Hydropower loan for dam and operations Government Several dams

of Ethiopian Electric Corporation

b. Irrigation projects Government Several loans to Ethiopian Sugar Corporation: -many projects

c. Well and Ponds Private floriculture and horticulture

d. Water bottling and beverage industries Private sector loanse. Many types of loans to businesses and

individuals backing for wells, reservoirs, cannels, use and sewerage systemes

Private and public

There is no adequate nationally consolidated information, quantifying the loan fund flow, from local banks, to water projects, at least at current capacity. Even the contributions of regions and communities are not determined for value and incorporated in the consolidated statements of the huge RWSSP and WASH

C.4 The process of adoption and implementation

Key barriers to its adoption and implementation It is being used in the histry of fund flow. The major weakness is distance to the rural

Ethiopia Private commercial Banks are not involved in government project funds transfer

Success factors in its adoption and implementation Strong institutional framework Hundreds of branches in all over the country Low risk bank, never exposed to loss

C5 Conclusions: pros, cons and replicability

The commercial banks served as the water sector fund transfer channel for many years and are still indispensible financing mechanisms in rural areas where microfinances do not perform well.

However, their size and performance is weak e in financing huge irrigation and hydropower thus need to be strengthen

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D. Introduction to Other Regional Financers and Donors

There are unique players in funding the water and other sectors of economy with a recorded performance. This include

a. Regional Endowment funds

Regional Endowment funds are funds which are contributed to perform business related to strategic development works of which profit would be used for diversification and expansion purposes

b. Regional Development Associations

Regional development association are involved in non-business related development works, water, health, education etc.

These bodies are region specific and are very strong in Tigray and Amhara. Their strength includes but not limited to Convince and Managed to collect regular and special massive public free contributions

Conduct enormous public infrastructural development works, including hundreds of huge dams, boreholes, water ponds, irrigation facilities and distant water supply service

Innovatively invest in lucrative and strategic developmental business (recently a public was done for Iron development

They are proved to mobilize public work resulting in recovering, lost forests, wildlife and related natural resources including streams, springs, medicinal and holy water and rivers also extending their seasonal flows.

Have access to the rural society Have play to perform and facilitate ancillary works related to the national projects

This is a good sample for fund raising development project by mobilizing the public. In a repeated farewells and telethons it was observed as the pubic emotionally contributes hundred millions in a few days

To conclude farther and recommend their use in a competent manner, there is a need to critically review their work by official means.

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PART 3 Respective Duties of Implementation Agencies, With Regards To Water Fund Transfer

I. At Federal Level,

The MoFED will be responsible for the overall financial management aspect of the program. It opens special foreign currency accounts for the program, receives funds from the donors, release funds to beneficiaries, collect reports from the beneficiaries and consolidate and report on the use of funds to donors, government and other stakeholders.

The MoFED at the federal level will transfer funds to the Federal implementing agencies and BoFED bank accounts, based on approved plan and bundget

Sectoral Ministries

The sectoral ministries for water supply and sanitation are of water, education and Health As per the FGE procedures All the Sectoral Ministries are to report to MoFED., on

financial maters of the Programme The sectors ministries, MWR, MoH and MoE will be responsible to manage the fund

transferred from MOFED and to prepare regular financial reports to MOFED, in accordance with section VII of this manual. The National Water Sanitation and Hygine (Programme) Coordination Office will facilitate in line with its delegated authority.

Duties and responsibilities of the National Programme Steering Committee for Waters and the Water Fund:

Plan revenues by source of funds. The source of funds federal, regional governments and communities, donors, borrowings from international financers

The Water fund pays every effort to find and match and improve the fund flow to the need from different sources.

However, Except those funds contributed directly to the accounts managed by the water fund namely federal government contribution, world bank and its donors managed funds and AfDB contributions performance of other player such as regional government and community contradictions, USAID, Water Aid, UnICEF. UNISCO, UNDP etc and local NGO are not systematically being consolidated

It also approves budgets or resource distribution for Programme activities and submit to MOFED. The allocation will be as per budget requests and criteria noted above

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The criteria embrace the water supply coverage, proximity, geographic balance, population, prioritization of water supply in the Woredas planning process, and level of commitment as reflected in the collection of the communities’ contribution to the financing of the schemes, and the proposals for O&M cost recovery for the schemes through user charges. It is reported that the selection procedures are working well and are in progress

Through its Programme technical team, ensure that regions have compiled and submitted their physical and financial reports on time.

Initiate financial and physical performance auditing

II. At Regional Level

The BoFED will be responsible to ensure that a suitable accounting System covering both regional, towns and woreda level, is established. Each region will prepare monthly, quarterly and annual reports which will be sent to the Federal level.

Regional Water Programme Steering Committee:

- Approve budget appropriated to each woreda and submit to BoFED

Regional Water Programme Technical team:

- Ensure that money appropriated to each woreda is received on time- Ensure that reports are submitted to respective ministers on time.

III. At Woreda Level

At Woreda level players are Woreda Water Sectoral office: Woreda Water Programme Team and the Communities (Kebeles), with their detailed respective duties

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30



CONCLUSION

The funding challenge is enormous for all water-related sectors: Water resources, management, Irrigation & drainage, Water and the environment, Water supply & sanitation, Hydropower

Even though past funding was not to the adequate level still the financing of the international community is crucial until a with growth in the economy together with the development of the private sector address the demand

In the near future condition though improved the goals of the water sectors cannot be easily addressed by local tapped resources, without external financing and mobilizing the public and private effort through infrastructural development which are proven way boosting the aggregate demands

Existing resources need to be used more effectively for y capacity building improving efficiency. The private sectors especially the microfinances do show their ability to reach the rural community, reducing the exaggerated lead time of money transfer, to a great extent .

Appreciating the achievements and efficiencies, funding agencies are expected to work on leveraging local private capital while the government facilitate what is expected in the arrangements, towards the attainment of its strategic plan.

Communities and Associations

Give incentive for the existing group and encourage the formation of associations to wards development works, including the water sector

Continuously provide awareness kills, s and knowledge transfer programs. to this extent fast civil work training will impact small developments and maintenance

Arrange and provide low interest rate credit Encourage and give incentive for group borrowing made for a common service development Create competitive environment by encourage the private sector microfinance institutions to

reach the rural community Increasingly advocate quality social services to be provided to the community by investors in the

social sector. This can be done by development work assisted by public work or Provide soft loan or contribution to Community Development Fund

In order to facilitate a permanent self-financed water and supply,

Increasingly advocate quality social services to be provided to the community by investors in the social sector.

This can be done by development work assisted by public work or Provide soft loan or contribution to Community Development Fund

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The promotion to this contributions should be communicated to all players in the sectors

Annex I

MAJOR FUND FLOW OF PROJECTS IN ETHIOPIA

Annex1. FGE FM Administrative Structures

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Annex2. Channel I

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Annex 3. Channel Ia

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Annex 4. Channel Ib

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Annex 5. Channel III

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Annex 6 Similar Case Study on Rural Financing

In year 2007 the World Banks sponsored assessment of the systems utilized for transferring Productive Safety Net Programme (PSNP) cash resources within the Ethiopian banking system2. The PSNP is working with communities in food insecured areas, by way of public work, including water development. The payment include payroll for public work and direct payments for disables. The following were the findings of the assessment, among other: -

The commercial Bank of Ethiopia is the only bank allowed to perform the banking transfer.

There is a considerable difference between the branch structures of CBE, which is based on business and former administrative structure and that of woredas, which is based Government Administration.

Commercial bank had only 180 branches in the Country, out of which 24 are in Addis Ababa, while Oromia region alone has over 250 woredas, leave alone the total number in the country. Each woreda have many number of remote Kebele/communities

In all the regions instances are many where there is a single bank which serves many woredas. In some areas CBE branch serve more than seven far away Woredas Finance and Economic Development Offices, (WOFED).

Even though woredas in towns do not share, in all the regions, there is a repeated comment that the Woredas were unable to withdraw timely the amount said to be transferred from regions. However, during a visit it was observed that problems were temporary and there are no outstanding chronic issues

In case of Woredas with no banking infrastructure, the Bank does not inform the exact amount of money, when the woredas call.

There is a need to make a double trip. One to bring the advice to the woredas and then to take the check and withdraw

In some distant areas and instances travel time to Banks can take two to three days and in a risky paths where there are no vehicles transfers, sometime taking up to six hours travel

The following is an example, which express the scale and depth off the problems, at a sample woreda of a region, as narrated by worda officer: -

i. Transfer information is not available until advice is issuedii. A week to bring the slip

iii. Another arrangement to prepare the checkiv. There is a withdraw limit of Ministry of Finance and require many round

trip to withdraw the balance

2 The assesment was conducted by the writer of this report

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v. Many days will take the cahier to go to every kebele. And take 2 to 4 days in one kebele

The following were some of the recommendations, which are still reigning: -

Negotiate and convince the bank to open at least the smallest sub standard, three man branch in woredas where there is no bank. There is a strong reason to advocate since funds run by woredas are so large. The external auditors have found out that a single cashier was managing about 79 separate funds. This is also a national concern for which CBE was established for.

It is to be noted that most of the CBE branches were opened where the national infrastructure was very poor and with very small amount of transaction compared with the current demand and PSNP funds. CBE also has duties to work for national objectives

With its own internal issues Commercial bank of Ethiopia did not show reasonable growth in recent past. One of the objectives of the Bank is to promote banking business in the Country.

Special operations can be negotiated, in order to speedup transfers. This is possible if cost of the bank is covered to reasonable extent.

It is better to use the other Commercial banks in the Absence of CBE. If there are, like Awash Bank in kuni/Dedes Woreda

Special banking service can be negotiated. Projects are temporary to decide opening of new banks

Use of micro finance institutions( this is separately discussed) Establishment of temporary negotiated banks can be established after study. BoFED should take the issue seriously as delay especially in reacting to bank error is

expensive. It is the only one to address the issue as it is a signatory. Employ Advance-Instruction procedures to the banks, based on the budget. Alternatively

the instructions could be done as soon as information is received that the MoARD instructed the MoFED, for allocation of transfers.

Agree with banks to make money available based on a schedule of withdrawal for specific transfers. On the Bank side, advance instruction for next transfer is said to be possible based on negotiation.

In order to reduce risk of loss of unutilized large amount of cash in safe, in areas where there is no bank, study possibilities of adopting revolving fund to be replenished based on the volume of payment transactions woredas can manage, on predetermined period, for example, in a fortnight (fifteen days). Then arrange with bank to make money available every fifteen days.

Negotiate upgrading measures with bank branches which administer large number of woredas,

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The marketing department of the bank is responsible for expansion and new branch opening decision. A contact to this department can immediately resolve inconveniences, if their recent plan would address to cover reasonable number of areas

Annex 7 Community Development Fund (CDF)

As the Woredas are the lower Ethiopian government administrative body, at grass root level communities are organized in associations called Kebele administrations. A Woreda have several kebeles, which are independent of government administration.

The Community Development Fund approach is a pioneered and developed in Amhara and Benishangul-Gumuz Regions.

A.1. Financing mechanism

The following is extract from The WaSH Implementation Framework, a document which is signed by four ministries of the Ethiopian government; the Ministry of Water and Energy, Ministry of Health, Ministry of Education and the Ministry of Finance and Economic Development and by observers: - the Development Assistant Group’s (DAG) Water Technical Working Group and For the Civil Society Organization (CSOs) of the WaSH Sector

The Framework incorporates the lessons learned from a number of water, sanitation and hygiene projects implemented in Ethiopia over the past decade and builds on the foundations these projects have laid. An example of this is the application of the highly decentralized Community Development Fund (CDF) approach that empowers communities to manage funds and to directly manage the construction of water points and school and health post sanitation facilities. It also engages NGOs as partners in WaSH ensuring that their overall contribution including their experiences working with the people imbues the program as a whole.

The World Bank mainstreamed the CDF Approach into the National Water Sanitation and Hygiene (WaSH) Program (WaSH Growth & Transformation Plan/Universal Access Plan (GTP/UAP)) for its wider application.

The WASH objective is interestingly exactly similar to the Rural Water Supply and Sanitation fund of the African Development Fund (AfDB).

A.2. Key characteristics/Features of the CDF Approach

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Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the physical construction of water schemes are transferred directly to the community by way of a micro credit institution.

Community Financial Management: The communities, through water and sanitation committees (WASHCO), are responsible for the full development process through planning, financial management, implementation and maintenance. The unique feature in CDF community management is that the WASHCO manages not only community-generated funds but the government subsidy provided for capital expenditures.3


A.3. Background and Rationale for Mainstreaming

Steps in Mainstreaming

Integration: In this National WaSH Implementation Framework the principles and basic procedures of the CDF approach are built into the WaSH program as part of the Community Managed Project (CMP) funding mechanism.

It is presented as alternative funding mechanism to the existing Woreda Grant which is hereby known as the Woreda Managed Project (WMP) funding mechanism which includes regional and national managed projects on behalf of Woredas or towns.

If the existing Woreda Grants are channelled to the community and community is managing the projects and funds, then this part of the Woreda Grant funding mechanism belongs to the category of Community Managed Projects.

The provision of the Community Managed Project mechanism is, essentially, demand-driven. However, in order to foster this demand it is necessary for regions and woredas to include the introduction and application of CMP in their strategic planning and to undertake a program of CMP awareness building.

As CMP is “taken up” and appears in Woreda WaSH Annual Plans, the Region will transfer the required funds to the intermediary finance institution from the investment budget line (CDF approach) or the Region/Woreda transfers the investment funds to the community directly.

Where pre-conditions are met communities/Kebeles are free to choose which funding mechanism they wish to adopt.

The preconditions, however, are considerable and include:

that the region and the woreda have negotiated fund transfer arrangements with an established financial intermediary at both levels

that the region and the woreda have put in place the necessary capacity building and technical assistance provisions to equip and backstop WASHCOs and to train and support woreda and finance institution personnel for the special requirements of CMP

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that hydro-geological conditions permit low cost technologies

that there is reasonable expectation that a sustainable supply chain for local procurement can be developed

that there are a sufficient number of communities in the region/woreda selecting CMP to make it a viable option

that the applicant communities are sufficiently cohesive to undertake community project management and later to sustain management of operations and maintenance

that the cost and complexities of the preferred or required technologies and the project size fit within the parameters of the CMP

A.4. Awareness & Capacity Building and Technical Assistance:

Recognizing that the pre-conditions set out above could be prohibitive – especially in fast tracking the wider adoption of CMP - provision has been made within the National WaSH Program to:

build awareness among all partners and other stakeholders of the advantages of the CMP for potential scaling up where it is viable;

integrate into WaSH capacity building materials, manuals and training curricula for all WaSH actors the values, skills, practices, tools and procedures required for the effective application of the CMP mechanism;

ensure that in the first years of CMP expanded application special provision is made for technical assistance to the WaSH Management and Coordination Offices at the national

Harmonization of Support:

With CMP as an integral part of the one National WaSH Program and with the harmonization of donor contributions in support of that program through the Consolidated WaSH Account – donors will and have, effectively, become supporters of CMP.

The CDF approach is no longer donor or region-specific. It is an integral, expanding and evolving component of the one National WaSH Program.

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A.5 Impacts of adoptionAt Amara and Benshagul regions it is found to be a user friendly approaches with the above positive attributes.

A.5.1 Financial flows generated

As noted above the CDF approach managed to generate the interests of the World Bank and managed funds of the NGOs and civil society groups. This will materially impact the works of the microfinance institution and the rural Ethiopia, positively.

A.5.2. Other impacts

The approach will creates confidences of other funding agencies to water and other sector. The proximity of this institutions to the users will reduce the time gap between decision making and implementation, absolutely impacting resource efficiency

A.6. The process of adoption and implementation

the acceptance of the fund by the four ministries and the key players in the sector indicate the strength of the links to overarching financing policy or strategy of the country

Criteria used to select the financing mechanism : - As indicated above the criteria to select the financing mechanism include; trust, efficiency, unprecedented proximity to the rural community , experience, political acceptability, etc

Key barriers to its adoption and implementation. The main barriers are already challenged. The transferring mechanisms of the institutions is coherent with the learning curves of two decades, which is not yet discovered by any of the competing credit institute and the age old commercial banks. In an interview with the general manager of one of the subject I understood that they have means and tools of transferring funds even when peace becomes challenging.

Success factors in its adoption and implementation: - the critical success factors are already mentioned in the criteria used in selecting mechanisms. Also include; leadership, community involvement, less corruption history

The lessons learned in its adoption and implementation is noted in the introduction above

A.5 Conclusions: pros, cons and replicability

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The advantage and the disadvantages of the financing mechanisms are sufficiently detailed above. The exceptional importance of the CDF is its user friendly approach and proximity to the project, with fast delivery

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Annex 8 Micro finance institutionsThere are twenty two Microfinance and credit andsaving institutions in Ethiopia. Compared to other credit service providers, these are uniquely granting microcredits to Rural Ethiopia, in addition to their presence in the town

The following is List of Microfinances Outstanding as of 30 June 2011

No NameGross Loan Portfolio

Number of borrowers

USD USD1 ACSI 108,204,381 659,6352 ADCSI 33,520,166 156,1483 AVFS 885,538.00 17,3594 Benishangul 3,250,672 27,8165 Buusaa Gonofaa 3,615,229 42,1466 DECSI 109,399,291 396,6487 Degaf 78,943.00 1,2708 Dire 963,077.00 5,9239 Eshet 2,400,238 24,116

10 Gasha 1,260,218 14,11911 Harbu 1,407,969 17,97412 Letta 283,266.00 92513 Meklit 1,874,083 13,55714 Metemamen 804,205.00 14,15415 OCSSCO 74,595,865 502,54016 OMO 36,813,225 280,23217 PEACE 2,642,360 17,20618 SEYAMFI 280,132.00 2,16919 SFPI 3,004,563 33,33520 Sidama 2,299,867 32,86721 Wasasa 5,072,600 42,27622 Wisdom 7,567,759 56,302

B.1 The financing mechanism

Proclamation No. 40/1996, titled “A proclamation to provide for the licensing and supervision of the business of microfinance institution”, and the directives issued by the National Bank of Ethiopia (NBE), constitute the major legal and regulatory framework which is used to regulate and supervise the microfinance industry.

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In the proclamation, microfinance business is defined as “an activity of extending credit, in cash or in kind, to peasant farmers or urban small entrepreneurs.” The NBE is empowered to license, supervise and regulate the delivery of financial services to the rural and urban poor through microfinance institutions.

The financing mechanism include: -

Direct borrowing to borrowers from their own funds. This depends with request of the individual

Where cooperative, associations and group of individuals apply, the MF provided the loan based on adequate documentation of their agreement.

Managing other funds: - based on agreement of other financers the MF provide the borrower as per the terms of the lender with minimal fee

Managing revolving funds: -This may be as per the MF budget or other funder requirement. The repayment of the loan will be utilized to lend the remain members and cooperatives based on planned round and priority

Being a transfer of media: - Donors and government for areas unreached by banks with high risk of physical transfer of money, the MF are good risk mitigating tools in addition to the efficiency of opperations

B.2 Key characteristics of the financing mechanism:

B.2.1 Unique features of the microfinances institutions includes: - They are available in every woreda and remote places next to community

Development Funds, which operate at grass root community level Due to their proximity, they actively control the borrower They require no collateral, but personal guarantees if large Now a days they lending level is growing The public increasingly trusted their operation as their performance is visible and

poor friendly Their interest rate is relatively high compared to commercial banks Too much office work for small amounts

B.2. 2 Funding potential, predictability of funds, political acceptability, level of complexity to design and administer it, capacity demands, cost of implementation, sustainability, pre-conditions required

The sub-subject is well explained in the following assessment, a historical practical exposure text: -

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An assessment study conducted by us, during year 2007, with respect to possible alternative World Bank fund transfers channels, revealed the following edited experiences and achievements of the dominating five regional MFIs in four regional states. Compared to present status of the institutes, the accomplishments are still active and are not exaggerated as an obvious growth has been observed, since then, in terms of both quantitative and qualitative attributes. The circumstances and features are indispensible input and interestingly account the appetite, objectives and purpose of this report, innovative funding mechanisms: -

I. Tigray Region Micro Finance

The MFI working in Tigray Region is Dedebit Credit and Saving Institute (DCSI) The following information was obtain the following information from the then General manger Our Comment

DSCI was established 13 years ago (now eighteen years) Fast transfer services in communities of 29 woredas Well established uniform system in 120 operational offices and staffed and opened

offices all over Tigray, indicating existence in several communities of a single woreda (average of five office in a woreda) : -

1500 staff members, most of them a finance experts (average of 12 staff member in an office)

Fully decentralized Head Quarter focus only on consolidation work and problem solving Administer loan, savings. Current loan of birr 900 million (June 30 2010 record show

USD 109 Million or Birr 1.7 Billion) The institute is already working on behalf of others (fiduciary and trust works) Managed Up to 70,000 pensioners and no complain and already being requested to

handle Governments payroll. Payroll of many is being be served for a fee charge of Birr 2.5 per individual pensioner. (The larger the exposure unit the rate can be negotiated substantially).

A Regional NGO, REST is implementing a Safety Net Program with DCSI Run special rural package programme of 300,000 people Transfer service can be done within an hour. A fast transfer, claimed to be perhaps the

fastest in Africa rural challenging areas. Transfer fee rates would be per the commercial bank of Ethiopia (CBE), (this excel the CBE as DCSI works in communities beyond the reach and area specific knowledge of CBE,) .

Any negotiation will cover risk and reward Claimed to be the best networked MFI, with woredas and communities in the country,

compared to other Ethiopian MFIs The institute has different investment and money market wings, in addition to the Micro

Finance Management rated its staff as highly committed, loyal and skilled workers An individual staff member serve up to 800 clients

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The institute have intensive experience and is able to design innovative systems for special issues

Statements can be provided to the clients every month

The General Manager suggested that, as we already have being engaged in identical area, are equipped and readily presented to manage transfers if asked for. The institution is very organized and can handle both transfer and payment to beneficiaries with negotiation. And these words are shared by all regional MFIs of Ethiopia, not to re-mention in the following sub sections.

II. Amhara Credit And Saving Institute (ACSI)

The following information was obtained from the them Deputy Manager

Offices are available in all of the woredas and there are woredas where they have over one branch

Owned 90 offices and 30 own buildings are in progress, including the Head Office Building. Other offices are rented

The institute is already in what the commercial banks grade risky area, for security reason Except problem solving operations operations and decision making procedures are

decentralized Arrears, portfolio risk is only 1.5%, while the international is 2-3% 2005 accounts are audited NBE monitored even in November 2006 Quarterly report to NBE is being performed Internal auditors are permanently assigned in all sub-branch office and performing pre-audit It has 2065 workers A minimum of 6 staff members are available in sub-branches offices. The minimum six are: -

a) Coordinatorb) Finance officerc) Two cahiersd) Internal auditor and e) A filed worker

We are going to assign vehicles in all the centers They have confidence and ready to work with PSNP transfers, even at kebele/communities

level. Also ready to open accounts for beneficiary. The public worker can withdraw at any time. This is also a good control mechanism

Currently they are already doing similar transfer work with Food Security by charging 2% Proved to work in what is risk area to Commercial banks Negotiating by as a function of volume of work, ACSI, the Amhara Credit and Saving

Institute is responsible for managing other funds for a fee of 1to 2.5% fee. The microfinance institution can be responsible for receiving money transfer and transfer

directly to the woredas

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III. Southern Nations and Nationalities and People (SNNP) Micro Finance Institutions

Unlike to other regional, there are two micro finance institutions players in the region: - the Omo Credit and Saving Institute and Rural Finance Fund

III.1. Omo Credit and Saving Institute

We obtain the following information from the Deputy manger Our Comment

They run business in 64 woredas out of 104 and plan additional 20 and more. There is cash holding limit at Woreda therefore the Omo use banks over and above the limit Likely that PSNP service can be done through negotiation. OMO is handling pension payments in many Woreda Operationally self sufficient Not yet start own money transfer system. Even not yet planned They working for Netherlands SOS Sahil fund Pension funds for 38,000 beneficiaries at Birr 2/personeach Even though the institute does not cover all areas, it can manage transfer.

However, they have no transfer products, they are using the commercial banks, for risk avoidance as opposed to Amhara & Tigray

III.2 SNNPR Rural Finance Fund

We obtain the following information from the then General manger and the Planning and credit Dept head

At present they have approved plan at Woreda level but not functional At this moment there is no account even at Woreda level It is a Government institute The operation cost is being covered by the Government There is a problem of execution

This was being an institute under establishment. The fund will be a good alternative in future since we have structure in all of the WoredasIt cannot be assigned for the intended purpose

IV. Oromia Micro Finance

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We obtain the following information from the then Finance manger

Out of 253 woredas , 198 offices are being opened at woredas level. Decision is already made to open in the rest of the woredas.

Woredas which have no Micro finance office are served through one man satellite office. There are 17 Zonal Offices and branch woredas as per the Government structure Currently there are about 188,000 loan customers

Experience in other fund management

The focus is on the normal operation of microfinance and insurance operations and managing of fiduciary and other funds were not practiced like the Amhara and the Tigrayregional saving and credit institutes

However, very small funds were managed at Arsi-Bale zones We will start managing others after our part is achieved sustainably We have no our own transfer tool, but use commercial banks for transfer purposes, including

for retransfer of excess fund over a limit of branches. We have no a transfer product Any organ of the state can open account and operate its funds in the Microfinance branch

with negotiation. Even though the institute does not cover all areas, it can manage it in the nearest future.

B.3. Impacts of Adoption

By now, the Microfinance institutes already dominate the rural economy including attracting the fund transfers of the dominant players in the water sectors, through the Community Development Funds

The adoption has tremendously increase varios sectors of the rural economy

B.4. The process of adoption and implementation Provision of funds

In order to avoid duplication, please see Section A(CDF) of this report.

B.5. Conclusions: pros, cons and replicability

The establishment of the regulatory framework for microfinance industry has helped to lay out the roadmap for the development of the sector. The provision allowing MFIs to mobilize small savings from the public has enabled them to finance a substantial portion of their portfolio from internally generated sources.

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Subsequent improvements in the regulatory framework include The revision of the loan size ceiling for individual borrowers, The revision of repayment periods on loans from one year to two years, and Removal of the interest rate ceiling on credit, avoids some of the key regulatory problems

faced by the industry.

However, more issues should be addressed, in that: - Developed knowledge and capacities are not utilized as the huge MFI are working and

limited in respective administrative region, even though they observe good opportunities elsewhere. This defeats the free business purpose and avoided competitiveness and related strategies, which is the key art for creative knowledge.

Weak competition means monopoly, which results in poor choice to borrower and inefficiencies can be concealed by creative profit generated from unreasonably high interest rate. The poor need to have sufficient number of service providers from which to choose.

While the interest rate ceiling on credit has been removed, a minimum on interest to be paid for savings persists, hampering savings mobilization in remote rural areas.

As foreign investment is not allowed the Ethiopian MFIs still have less way of learning new insights from foreign banks,

• Credit for small-scale borrowers• Some institutions offer technical assistance and business development advice• E.g. Grameen Bank, Bangladesh• The role of government in MFIs is to provide the enabling environment for private sector

participation, through (Llanto 1999):• Deregulated interest rates;• Emphasis on long-term sustainability of MFIs;• Provision of the infrastructure to make the local economy viable;• An appropriate regulatory framework for MFIs.

• Relevance to SLM• Cooperation programmes between extension agencies and MFIs to finance SLM

practices• Reaching out to MFIs (as well as traditional FIs) to introduce SLM practices and

their business and development potential

The regulatory framework needs to find ways and means of helping the industry become more competitive and efficient in delivering flexible financial services to the majority poor, the regulatory mechanism also needs to be better equipped to supervise and monitor the industry.

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