英语论文网

repayment of loan since borrowers choose to repay the loan than losing the amount they saved (Getahun, 2001).

2.2.0 Definition and types of financial institutions

According to a study undertaken by AFRACA and INAFI Africa on the various types of financial institutions that are extending financial services to meet the increasing demand for financial services of poor people within the African continent, financial institutions are distinguishable by their legal framework; design features, operational focus (urban and or rural basis); target clientele (women vis-à-vis men or both); age; sustainability levels and in the products (savings/loans) and services that they deliver to their clients. However, all these institutions seem to have one common objective; that of reaching the poor and or reducing poverty through the various products and services that they provide. These financial institutions serving the poor can be categorized in three broad categories as presented in formal, semi-formal and informal. The primary distinction between these three categories is the degree to which they are overseen by the external organizations (AFRACA and INAFI; 2006:14).

Formal Financial Institution

These are institutions that are registered under a given country’s general laws and regulations such as the Companies Act Cap.486 of Kenya and sometimes registered with a specific regulation and supervision body (e.g. the Banking Act in the case of commercial banks). Some of the institutions that fall under this category include: commercial banks (private and public owned) such as the K-Rep Bank; Savings banks and postal savings banks; rural banks e.g. in Ghana that are primarily owed by the local communities; development banks mostly government owed and created mainly to offer financial services to certain sectors within the economy such as farming (AFRACA and INAFI; 2006:15)..

Semi-Formal Financial institutions

These institutions include micro financial institutions like NGOs, Financial Service Associations (FSAs) that offers credit, savings and money transaction services to their members. The basic model is similar in many respects to other types of decentralized financial institution, such as savings and credit co-operatives or credit unions and village bank, with local ownership of share and a strong emphasis on user-owner governance and management.

Informal Financial Providers

Informal financial providers include: Rotating Savings and Credit Associations (ROSCAs), ASCAs, savings clubs, friends, relatives and moneylenders. They are all common in the rural and market places in many African countries. In particular the ROSCAs and ASCAs not only enable its members to accumulate assets but also to deal with cases of financial stress. Funds mobilised through these associations are used as a precautionary strategy not just for managing ill health but also for managing a wide range of other financial crises and risks.

In Ethiopia, the semi-formal and lending institutions are the dominant and sustainable traditional institutions, which meet the financial and social, needs of MSE operators. The combined semi-formal and informal finance in Ethiopia accounts for 78% of the agricultural credit (Dejene Aredo, 1993). According to a study by Dejene and Kibre (1995) the major sources of loans are friends and relatives (6