The role of microfinance in urban youth livelihoods in Ethiopia

Abstract

The financial sector of Ethiopia is not diversified, and the use of digital financial services is at an infant stage. One of the biggest and growing development challenges facing Ethiopia has been an increasing trend in youth unemployment. This has been driven mainly by rural-urban migration and a lack of livelihoods that have exposed youths to the risks of unsafe migration and involvement in social unrest and political instability. Expanding the access to microfinance to the youth has been recognised by the Government of Ethiopia to be one of the ways of addressing youth unemployment and building their livelihoods. This study assessed the role of microfinance in improving urban youth livelihoods in Ethiopia as this subject has not been systematically examined and there is scant information available. That is why this study was conducted to find empirical evidence. A systematic approach was followed in assessing the state of existing youth inclusive microfinance related policies, strategies, microfinance products and services, and the role of microfinance in fostering urban youth livelihoods. The study employed a mixed research methodology with cross sectional data involving a structured questionnaire and a face-to-face interview administered to 400 participants who benefited from a regular microfinance programme, 43 key informant interview participants and 15 focus group discussions. Thematic analysis was used to analyse the qualitative data, while descriptive statistics and inferential techniques including correlation and a multiple linear regression analysis were used to analyse the quantitative data. The results of this study revealed that microfinance had a significant and positive role in improving youth livelihoods that contributes to the achievement of Agenda 2063 as well as the Sustainable Development Goals (SDGs). The model results revealed that credit performance followed by saving performance are the most important variables that have a significant effect on youth livelihoods. With regards to youth capacity building, the overall result showed an insignificant influence on youth livelihood which highlights existing gaps in building the entrepreneurial and technical skill of the youth. In terms of gender, the result indicates that males were associated with improved livelihood compared to their female counterparts, which has policy implications. Regarding the loan size, the result shows that the loan size had a positive and significant influence on youth livelihood that a small loan may hinder the youth from setting up viable businesses and realising the expected improvement in their livelihoods. The collateral requirement by Microfinance institutions (MFIs) is the biggest challenge that has restricted the youth from accessing higher loan size to successfully run their businesses. Accessing higher loan size is linked to the type of collateral held by the youth. As a result, financial inclusion was the lowest for those youth in the lower age category (18-24) who predominantly do not have business experience and cannot offer collateral required by MFIs. Ethiopia has introduced a number of innovative policies, strategies and regulations that promote youth inclusive microfinance which are discussed in detail in this study. However, there are still gaps in the youth inclusive microfinance policy and strategy. These, among others, include a lack of regional focus and gender lens of the financial inclusion strategy and microfinance regulation, following a supply driven approach, the risk of mission drift, unsuccessful implementation of youth revolving fund, weak harmonisation of policies and strategies and evidence based policy making that deters the youth from fully embracing specific interventions that promote inclusive microfinance services. In addition, despite the positive trend in the growth of Microfinance Institutions (MFIs), the study found that MFIs have a long way to go to tap into the huge demand of tailor-made financial services for the youth, including simplifying complex procedural requirements, introducing specific products and incentive schemes for the youth, promoting the use of digital financial services and enhancing the low saving culture. This hinders the youth from running successful business and benefiting from innovative continental business initiatives like the African Continental Free Trade Area (AfCFTA). While there are areas of improvement, the overall result shows positive and significant relationships between microfinance and youth livelihoods. The study proposed a comprehensive youth inclusive microfinance framework which could provide guidance in further transforming access to microfinance services for the youth in Ethiopia and generally in Africa.