Ethiopia’s microfinance sector delivered a record performance in the 2024/25 fiscal year, with rising deposits, stronger capital buffers and improved asset quality driving profitability to new highs, even as underlying inefficiencies and funding imbalances persist.
Net income across microfinance institutions (MFIs) rose to $31 million (ETB 3.7 billion), a 22.6% increase from $25.1 million (ETB 3 billion) a year earlier, according to central data reviewed by Finance In Africa. The surge in earnings was accompanied by record profitability ratios, with return on assets (RoA) reaching 5.3% and return on equity (RoE) climbing to 27.5% by the end of June 2025.
This improved performance reflects a broader expansion across the sector’s balance sheet. Total assets grew by 35.9% year-on-year to $685.0 million (ETB 81.7 billion), while deposits increased 33.1% to $350.4 million (ETB 41.8 billion), underlining stronger domestic resource mobilisation. Gross loans also expanded, rising 23.3% to $410.0 million (ETB 48.9 billion), and continued to account for about 60% of total assets.
This growth trajectory is mirrored in the sector’s widening footprint. The number of MFIs rose to 59 institutions, operating 1,238 branches, up from 56 and 1,138, respectively a year earlier. At the same time, outreach remains significant, with 752,387 loan clients and more than 7.1 million savers, highlighting the sector’s role in financial inclusion.
Despite this expansion, MFIs still represent a relatively small share of the financial system, accounting for just 1.5% of total sector assets, a reflection of their limited systemic footprint.
Capital strengthens, and asset quality improves
Beyond scale, the sector’s financial soundness strengthened markedly over the review period. Capital levels rose 39.9% to $133.3 million (ETB 15.9 billion), pushing the capital adequacy ratio to 30.3%, well above the regulatory minimum of 12% and the highest level recorded in five years.
“The microfinance sector had a low and stable risk level because of its sufficient capital reserves to manage adverse financial shocks,” the National Bank of Ethiopia (NBE) said in its latest Financial Stability Report, underscoring the role of capital buffers in supporting resilience.
Asset quality also improved. The non-performing loan (NPL) ratio declined to 3.3%, its lowest level in five years and comfortably below the central bank’s 5% threshold. At the same time, a provision coverage ratio of 77.4% points to adequate buffers against potential credit losses.
Together, these metrics suggest a sector that has strengthened its fundamentals, supported by improved risk management and a more stable operating environment.
Credit allocation shifts, but trade dominates
Lending patterns, however, reveal a more uneven picture of economic engagement. While the share of credit to the services sector increased from 16.8% to 21.7%, trade continued to dominate loan allocation, accounting for 41.3% of total lending.
Other sectors, including agriculture, manufacturing and construction, saw marginal declines in their share of credit, pointing to a persistent concentration in trading activities rather than broader productive sectors.
This concentration raises questions about the depth of the sector’s contribution to structural economic transformation, even as overall credit volumes expand.
Liquidity strength highlights inefficiencies
Liquidity conditions strengthened significantly, with the sector’s liquidity ratio rising to 53.9%, far exceeding the regulatory minimum of 20% and marking the highest level on record.
However, this strength also exposes inefficiencies in balance sheet management. The central bank noted that high liquidity levels imply “holding idle cash,” which can weigh on profitability.
Meanwhile, the loans-to-deposit ratio stood at 117.2%, indicating that MFIs continue to rely partly on external borrowing, including funding from domestic banks and international programmes such as the International Fund for Agricultural Development, to support lending activities.
This dynamic points to an asset-liability mismatch within the sector. As the report observes, “there was borrowing while idle cash was available,” suggesting gaps in liquidity deployment and internal resource allocation that have prompted policy attention.
Structural gaps persist despite strong headline performance
Operational weaknesses remain another constraint. The report highlights that some institutions continue to underperform due to “operational deficiencies and lack of investment in digitalising their operations and services, thereby limiting their efficiency.”
These gaps underscore a divergence within the sector, where stronger institutions drive aggregate gains while weaker players lag behind.
In addition, the sector’s financial interconnectedness presents a potential channel of risk transmission. Around 82% of MFIs’ liquid assets are held with domestic banks, including the central bank and short-term instruments, creating strong linkages with the broader banking system.
While current risk levels are assessed as low, such interconnections could amplify shocks in the event of stress within the banking sector.
As Ethiopia’s microfinance sector continues to expand its reach and deepen its role in financial inclusion, addressing these structural gaps will be key to sustaining its recent gains.
NB: $1=ETB 119.3 as at June 2025, according to the NBE.
