Financial Performance of National Bank of Ethiopia free essay sample

In recent years, the importance of measuring MFI performance has been growing. An important aspect of this trend has been the increasing use of financial indicators that measures MFIs’ performance. However, it is hard to know the true picture of institutions with out the necessary adjustments. Hence, financial statements of NBE WSACA are adjusted for subsidy, loss provision and inflation to know its true picture. Accordingly, financial performance of the institution is analyzed based on PEARLS monitoring systems and MFI performance indicators (ROA, ROE, OSS, FSS and SDI), in which the overall performance was good. However, unadjusted ratios were misleading. 6 1. Introduction NBE WSACA has been in operation since 1985. It has been paying dividends to its members at the end of every year, after putting aside the reserve requirement and other deductibles. From the outset, the association was established with full financial and technical support from National Bank of Ethiopia and the various supports of the bank continue to date. However, these subsidies have never been considered in preparing the financial statements of the association so that it has not been possible to tell about the true performance of the association. This paper, therefore tries to see the real financial achievements of NBE WSACA in 2004, 2005 2006 and 2007 by including the various subsidies it was receiving, loan loss provision and the effect of inflation. Adjusted and non-adjusted financial performances of year 2005, 2006 and 2007 are also analyzed using PEARLS monitoring tool of WOCCU and selected MFI performance indicators. The results are also compared against each other and peer group result of sub Saharan Africa as well as benchmark of 30 credit unions operating around the world. The appropriate interest rate on loan is also suggested as per the indication of SDI. 1. 1 Background Ethiopia is one on the sub-Saharan African countries with a population of about 73 million. More than 85% of the population lives in rural area and agriculture remains the main stay of the economy. The Government applies agriculture lead development as growth strategy. Agriculture contributes 44% of GDP followed by Service and Industry with a share of 46. 3% and 11. 7% respectively. Table 1- Selected Macroeconomic and social indicators of Ethiopia 2005 Population (2005)* Population growth GNI per capita $ (2005)* GDP $ (2006) GDP growth, annual (2005) 75. 17 2. 8% 150 11 billion 11. 6% 2006 2007 7 2005 General Inflation, annual (2005) 8. 8537 2006 8. 9666 2007 9. 3192 Source: National Bank of Ethiopia Annual report (2006/2007) (*) World Bank Group Data and Statistics (accessed on 18/08/08) 1. 2 Financial sector in Ethiopia Traditional financial system in Ethiopia has long history and paramount contribution to economic betterment and social wellbeing of the society. Traditional institutions organized with a sense of cooperation and risk sharing has enabled Ethiopians to experience saving and financial management within its cultural context. Eqqub1 and Edir2 are some of the informal financial institutions that shaped the social bond and interaction. Formal financial institution started as early as 1905 with the formation of Bank of Abyssinia. However, the growth in number and capacity has been limited so that the service has not reached to the majority of the people. Currently, ten commercial banks, nine insurance companies and one development bank are operating in the market. All are owned by Ethiopian nationals. The banking sector was swinging from nationalization in 1977 to liberalization in 1992, which may contribute to its limitation in providing better services in terms of outreach and products. Their focus on big urban areas and the stringent lending policy they have been following have made there service inaccessible to the common citizens. As an alternative finance source, some enlighten employees started to form saving and credit cooperatives taking their working place as a common bond, based on provisions of proclamation No. 241/58. As of June 30, 2006, about 5437 SACCOs were providing financial services to their members. On the other hand, various NGOs (humanitarian organizations) were providing microcredit services as a complementary to their humanitarian and developmental activities. Although some of the NGOs had tried to provide the services through formation of SACCOs by providing revolving fund to organized groups, it had not been sustainable due to its loose 1 Eqqub is a form of rotation savings association in which e regular payment of weekly or monthly are made for the benefit of a large sum at some point in time. 2 Iddir is an informal financial and social institution of a community that serves as insurance when members face emergency situation. 8 foundation. The life of financial services was limited to the life of projects in particular areas. Absence of institutional framework and related legal problems compounded with clients’ lack of knowledge and attitude towards NGOs (loans were considered as donation) had affected loan repayment, in which outreach and sustainability of the service was not possible. In order to address these problems and bring the activities of micro financing within Ethiopia’s monetary and financial policies, Licensing and Supervision of Microfinance Institution, Proclamation No. 40/1996 was issued. The proclamation strongly prohibited provision of financial services without a license from the central bank. Following this, National Bank of Ethiopia has issued various directives as per the power vested in it by the proclamation. Accordingly, most of the NGOs that were providing credit services plus new government sponsored organizations came into the legal system by including nominal shareholders in their ownership structure. Since the enactment of the proclamation, 28 MFIs have registered to operate as a commercial financial institution as it is clearly stated in the proclamation and subsequent directives. Out of the 28, 7 are government owned MFIs established to assist its development strategy. However, they have been practically operating on a double bottom line approach. As of June 30, 2007, the sector has registered a total asset, total deposit and total capital of USD 0. 3 billion, USD 88. 3 million and total capital of USD 93. 6 million, serving total clients of 1. 5 million. 1. 3 Objectives of the study Though licensed MFIs are recent comers to the financial market, Savings and Credit Associations have been in operation for more than three decades. Most of the institutions have been reporting profit and good performance. The financial reports are based on conventional accounting methods that exclude various transactions that affect the quality of the report. Because conventional accounting usually reports the actual costs, not opportunity costs that reflect the real economic cost to society. Government and donor supports come in the form of tax exemptions, indirect government subsidies, in the form of direct financing, via budget subsidies, grants for specific purposes, and contracts to perform certain work and exchange rate fluctuation, inflation, non-performing loans and deposit requirements are the main factors that could affect the quality of financial reporting. Hence, the objective of this paper is to measure the financial performance of NBE WSCA, by including items that have not been captured by conventional accounting practice and then to: 1. Identify the degree of its dependence on subsidy and how much the society cost in supporting the institutions, if any, 2. Forward useful recommendations for its future prospect, 3. Give some light to microfinance sector in Ethiopia on relatively real performance evaluation method. 4. Recommendations related to future improvements in financial reporting if warranted Comparison to peer group of Africa’s Microfinance institutions will also be made to understand better its level of performance. It is proper to note here that the above Factors that affect the quality of the financial reports would be treated if their influence were believed to be significant and reliable information is secured for the adjustment. 1. 4 Methodology In assessing the performance of the selected institution, mainly, secondary data from reliable sources (audited financial statements) are used. The researcher will also try to complete data insufficiency and information gaps through questionnaire, interview and personal discussions. Though performance measurement tools in the sector are usually debatable, the researcher prefers to use adjusted return on asset (AROA), adjusted return on equity (AROE), financial self-sufficiency (FSS) and subsidy dependence index (SDI). In recognition of SACCOs unique feature, PEARLs monitoring tool is also used to evaluate its financial performance. The results will be compared with the peer benchmark result of the micro banking Bulletin of the MIX. 1. 5 Organization of the paper The paper is organized in six parts. In the first part, brief review of the financial sector in Ethiopia will be made. This part also contains objective of the study and the methodology. The second part deals with literature review on performance measures in microfinance with 10 especial emphasis to FSS, OSS, ROA, ROE, SDI and PEARLs monitoring systems. The third part focuses on SACCOs in Ethiopia and its legal framework. The fourth part gives incite on background of NBE WSACA and its services to members. Part 5 deals about NBE WSACA financial performance with and without consideration to the necessary adjustments as well as comparison to Africa benchmark of MBB. Part 6 gives conclusion based on the finding and forwards recommendations. 11 2. Literature Review 2. 1 Microfinance performance Evaluation Microfinance has attracted a number of attentions around the world and many countries and donors have been using it as a tool of poverty alleviation and development strategy. Microfinance has played significant role in embracing large world population who was forgotten and excluded by the formal financial institutions. It has been serving as a litmus paper to banks to show that it is feasible to do business with the poor. It has also put the poor at a higher moral ground by witnessing that the poor are trustworthy and have ideas, visions, talent and capacity to achieve them, if they are given the chance. Nowadays, many actors in the microfinance sector see finance as an effective tool, which can be used to help humanity and society develop. Significant numbers of people around the world have able to generate income and accumulate savings as their capacity allows them to do due to the availability of financial services. â€Å"Microfinance is much more than simply an income generation tool. By directly empowering poor people, particularly women, it has become one of the key driving mechanisms towards meeting the millennium Development Goals/MGD/, specifically the overarching target of halving extreme poverty and hunger by 2015. 3 In their effort to achieve what is expected of them from various stakeholders, microfinance institutions are required to achieve two major performances, social performance and financial performance. The former is the one, which characterizes microfinance institutions, and it includes outreach to the poor and the excluded, adaption of services and products to the target clients, improvement of clients’ social capital and social responsibility of MFIs. Financial performance on the other han d, deals on economic situations such as portfolio quality, efficiency and productivity, financial management and profitability. Nevertheless, unlike commercial banking with its Basle standards, the microfinance industry does not have widely agreed performance standards. â€Å"Recent years have seen a 3 Mark Malloch Brown, Administrator of the United Nations Development Program/UNDP/ 12 growing push for transparency in microfinance. An important aspect of this trend has been the increasing use of financial and institutional indicators to measure the risk and performance microfinance institutions. However, it is hard to achieve transparency if there is no agreement on how indicators measuring financial condition, risk and performance should be named and calculated. †4 Hence, Microrate, Inter-American Development Bank (IBD), the Consultative group to assist the poorest (CGAP), the united states Agency for International Development (USAID), MCRIL and planet Rating agree on the names and definitions of a set of commonly used indicators. Accordingly, the â€Å"Roundtable group† agreed on performance measures such as portfolio quality, efficiency and productivity, financial management and profitability. SEEP network has also developed MFIs performance measure and reporting guidelines. 2. 2 PEARLS Monitoring System World Council of Credit Unions/WOCCU has also developed its own performance measures for SACCOs. Since 1990, the world council of credit unions, Inc. has been using a set of financial rations known as PEARLS, which each letter of the word PEARLS measures key areas of Credit unions operations. Protection, Effective financial structure, Asset quality, Rate of return and cost, Liquidity and Sign of growth. PEARLS ratios are set to serve as executive management tool for standardize evaluation, comparative ranking and tool of supervisory control. (David C. Richardson, 2002). WOCCU has set the following targets for the main ratios in PEARLS: Protection- protection against loan loss is deemed adequate if a credit union has sufficient provision to cover 100% of all loans delinquent for more than 12 months, and 35% of all loans delinquent for 1-12 months. The system evaluates the a dequacy of the protection by comparing the allowance for loan losses to loan delinquency. Microrate inter-American Development Bank Sustainable Development Department Micro, Small and Medium Enterprise Division, performance indicator for MFIs, Technical guide 2 nd edition, Washington D:C, 2002 5 David C. Richardson (2002), PEARLS monitoring system, World Council of Credit unions, WCCU toolkit series number 4 13 Effective financial structure- 95% of the productive asset should composed of 70-80% loan and 10-20% liquid investment. The remaining 5% is unproductive assets composed of land, buildings and equipments). On the ther hand, 70-80% of Credit union liability should be composed of members’ savings to achieve financial independence. In order to finance non-performing assets, improve earnings and absorb losses, members share capital and institutional capital should be greater or equal to 20% and to 10% of total asset respectively. Asset Quality-keeping delinquency rate belo w 5%, maintaining non-earning asset a maximum of 5% and financing the non-earning asset with institutional capital are set to be measure of asset quality for credit unions. Rate of return and costs- operating expense to total assets ratio is set to be less than 10% and other return and costs to be greater or equal to market rate. However, administrative cost should not be greater than 5% of the average total assets. Liquidity- the liquidity indicators show whether the credit union is effectively measuring its cash so that it can meet deposit withdrawals requests and liquidity reserve requirements. This is a measure of savings deposits invested in National Associations or Commercial banks, the minimum amount set to be 15%. In addition, the idle liquid fund should as much as possible closer to zero. Liquidity reserve to savings deposit is also set at 10%. Signs of growth- growth in Credit unions are measured in areas of total assets, loans, savings deposits, shares and institutional capital linked with profitability. The desired goal in this respect is growth, after subtracting inflation of the year. Nevertheless, the key performance and self-sustainability ratios published by the microfinance industry are deceiving if not adjusted to reflect subsidies. This is mainly because many items that significantly affect measuring real self-sufficiency are excluded by conventional accounting practices, which need to be adjusted. 14 2. 3 Adjustments Financial analysts often calculate a number of adjustments based on their purpose of analysis. In general, the following four groups of adjustments are commonly used but there is no precise standard calculation method so that any kind of adjustment should describe the calculation method used (Microfinance consensus guidelines, 2003). 1. Subsidy Adjustments- subsidy adjustment serves two purposes, first, MFIs vary widely for subsidy they receive. Some MFIs get no subsidy at all. Thus, adjustment that offset subsidy will allow for a more meaningful comparison of performance among MFIs with different amounts of subsidy. Second, the industry has accepted that, in the long term, MFIs should be able to operate without subsidy, relying instead on commercial sources and private investment or market rate. 6 There are two types of subsidy adjustments, subsidized cost of fund adjustment and in kind subsidy adjustment. Subsidized cost of funds adjustment looks at the difference between an MFI’s actual financial expenses and the financial expense it would pay if all of its liabilities were priced at market rates. One common way of doing this is to multiply the MFI’s average funding liability by some shadow price-a market interest rate and then subtract the actual financial expense. The difference is the amount of adjustment and is treated as an expense. No single shadow rate is appropriate in all circumstances. Many analysts use as a shadow the rate that local banks are paying on 90-day time deposits (International accounting standards 2002 in CGAP Microfinance consensus guidelines, 2003). In-kind subsidy adjustment on the other hand is provision of goods and services at no cost or below market cost. The usual in-kind subsidies could be office furniture and equipments, consultancy services, free office space and free staff. The adjustment in this case is the difference between what an MFI pays for the goods and services and what it would have to pay for the same goods and services at market rate. CGAP, Microfinace Consensus Guidelines, definition of selected financial rations and adjustments for Microfinance, third edition, September, 2003 15 2. Inflation Adjustment- The value of fixed assets tracks with the rises in price levels. Their real value increases along the lines of inflationary pressures. As such, the value of the fixed assets rises with inflation. Analysts make two adjustments f or inflation to account for this rise: one to total equity and one to fixed assets. Equity is adjusted downwards with inflation; and fixed assets adjusted upwards. In reporting this separate adjustment for fixed assets, the institution must create two counterbalancing entries, one on the income statement and one on the balance sheet. On the income statement, inflation increases the value of fixed assets, recorded as revenue from a revaluation adjustment. On the balance sheet, this adjustment increases the balance of the fixed assets account. The rational behind the inflation adjustment is that an MFI should preserve, at a minimum, the value of its equity against erosion due to inflation. Inflation produces a loss in the real value (purchasing power) of equity. The inflation adjustment recognizes and quantifies that loss. 7 In order to adjust for inflation, subtract net fixed assets from equity and multiply the difference with the period inflation rate. Year to year inflation adjustments create an expense in the income statement and a reserve in the balance sheet equity account, which is cumulative retained earnings consumed by the effects of inflation. 3. Adjustments for non-performing Loans- MFIs’ differ widely in their treatment of loan loss provision expense and write of policies, which can have a large impact on how sound its financial results appear. Hence, three portfolio adjustments have to be made to generate true financial statement. The three main adjustments are: Loan loss allowance and provision expense, write off and reversal of interest accrual on delinquent loans (CGAP, microfinance consensus guide lines, 2003). The MIX makes provision of 50%, 100% and 50% for loans with payments that are late between 90 and 180 days, for loans late for more than 180 days and renegotiated loans respectively. Loan loss allowance and provision expense increases loan loss allowance in the balance heet and provision expense in the income statement. Write off adjustment reduces gross loan portfolio and loan loss allowance with out 7 CGAP, Microfinace Consensus Guidelines, definition of selected financial rations and adjustments for Microfinance, third edition, September, 2003 16 affecting other accounts in the income statement or balance sheet. Reversal of interest income accrued on non-performing loans reduces interest income net profit and equity with the same amount. 4. Foreign exchange adjustments- this is an adjustment related to MFIs, which have assets and liabilities denominated in foreign currency, but handle their accounting in local currency. The change in exchange rate between the two currencies put an institution in gain or loss position. However, there is no agreement how to recognize the gain or loss. 2. 4 Key performance indicators in Microfinance Performance measure in microfinance has been a point of concern due to their double bottom line operation and their reliance on external source of fund in the form of subsidy. Hence, traditional accounting performance measures that have been used for purely commercial undertaking may give unrealistic picture for MFIs that benefit from any kind of subsidy. The failure of the return on asset (ROA) and return on equity (ROE) in measuring the performance of MFIs is due to their reliance on accounting practices that ignore the subsidies received by MFIs, in which without properly reporting and evaluating the subsidies involved, no adequate cost benefit analysis or cost effectiveness analysis of the MFI can be carried out. Basic financial statement indicators, such as net income, hints about an institution’s level of profitability without taking into consideration whether the income is donated or earned, whether loans received by the institution are priced competitively or subsidized , or whether the institution gets in-kind support. A truly accurate assessment of an institution’s sustainability based on adjusted data can help to anticipate the future, when external support may end (CGAP, MIS for MFIs, a handbook, Technical tool series no. 1). 17 The MFI industry, as represented by MIX, correctly recognizes the failure of traditional accounting ratios to measure the performance of MFIs. Accordingly, the ROA and ROE ratios are adjusted in an attempt to account for subsidies commonly received. 8 Accordingly, the mix developed three key ratios: adjusted return on asset (AROA), adjusted return on equity (AROE) and financial self-sufficiency (FSS). 2. 4. 1 Adjusted return on asset (AROA) and adjusted return on Equity (AROE) The prime objective of any commercial activity is to maximize shareholders benefit through maximizing profit. The process by which the profitability of the shareholders can be measured is through determination of retune on equity. Return on asset is an overall measure of profitability that reflects both the profit margin and the efficiency of institutions. It gives an indication how efficient institutions are in utilizing their assets. ROE makes little sense for comparing microfinance institutions, which have widely divergent liability and equity structures. Many have large equity base built up through donor funds; others have little equity and are funded through soft loans. Hence, return on asset is more appropriate to measure MFIs performance (CGAP, MIS handbook, 1998). However, using such traditional indicators to measure performance of MFIs is inadequate because of this ratios failure to reflect the tremendous impact of subsidies received by MFIs (Yaron, 1992a). Therefore, ROA and ROE are adjusted for subsides received, inflation, loan loss provision and exchange rate difference. Adjusted return on asset is determined as adjusted net operating income net of taxes divided by adjusted average total asset. AROA = Adjusted net operating income-tax Adjusted average total Asset. 8 Ronny Manos and Jacob Yaron (2007), what is wrong with â€Å"adjusted† accounting ratios that are commonly used by MF industry to measure financial performance, school of business, college of management. 18 Adjusted return on equity could also be determined as adjusted operating income net of tax divided by average adjusted total equity. AROE= Adjusted net operating income-tax Adjusted average total Equity 2. 4. Operational self sufficiency (OSS) and financial self sustainability (FSS) According to definition of CGAP MF consensuses guidelines, OSS measures how well an MFI covers its cost through operating revenue. In addition to operating expense, it is recommended that financial expense and loan-loss provision expense to be included in this calculation, as they are a normal (and significant) cost of operating. FSS on the other hand measures how well an MFI covers its costs, taking into account a number o f adjustments to operating revenue and expenses, which is the level of self-sufficiency. The purpose of most of these adjustments is to model how well the MFI could cover its costs if its operations were unsubsidized and it were funding its expansion with commercial-cost liabilities (CGAP MF consensus guidelines, 2003) The FSS measure is the prime sustainability performance indicator provided by the MIX, and is the basis for further calculating the AROE and AROA-the subsidyadjusted profitability ratios. Yaron and Manos (2007) on the other hand, argue that the FSS is an inaccurate measure of financial sustainability and that it causes to distortion due to the following reasons: 1. When measuring the subsidy attributed co concessionary funds, the FSS methodology ignores the administrative cost of mobilizing and servicing deposits, (when financial cost of deposits serves as the shadow price-the practice of MBB) 2. The FSS measure treats equity as a cost free item except erosion of net monetary asset due to inflation, 19 3. FSS does not consider exemption of institutions from reserve requirements, which underestimates subsidy received, 4. The FSS methodology does not distinguish between an MFI that generates income from lending to target clients and MFI that uses subsidies received to generate its income from others sources. 2. 5 Subsidy dependence index (SDI) The subsidy dependence index (SDI) asses and quantifies subsidy dependence. Its assessment and calculation requires the application of a certain procedure as well as judgment. The consistence application of these procedures and judgments from period to period is more important than the absolute accuracy of the figures included in the SDI computation. The SDI is the ratio that measures the percentage increase in the average onlending interest rate required to compensate an MFI for the elimination of subsidies in a given year while keeping its return on equity equal to the approximate non-concessional borrowing cost. 9 Subsidy Dependence index (SDI) is calculated as the annual subsidy received by the MFI divided by the income earned by the MFI on its average loan portfolio. It is normally derived in to two stages. First, the annual subsidy received by the MFI is divided by the average annual loan portfolio. Then, the total annual subsidy received by the MFI is divided by the MFI is divided by the interest and fee income earned on the MFI’s loan portfolio. The amount of the annual subsidy received by the MFI is stated as: S=A(m-c) + [(E x m)-p]+K Where: S Annual subsidy received by the MFI A – MFI concessionary borrowed funds outstanding (annual average) M – The assumed interest rate that the MFI would have to pay for borrowed funds if access to concessionary borrowing was eliminated 9 Jacob Yaron (1992), Assessing Development Finance Institutions a Public Interest Analysis, a World Bank Discussion paper 174 0 E – Average annual equity P – Reported annual profit before tax (adjusted, when necessary, for loan loss provisions, inflation, and so on) K – The sum of all other annual subsidies received by the MFI. Then SDI is defined as: SDI= S___ LP x i Where: SDI – Subsidy dependence Index S –Annual subsidy received by the MFI LP †“Average outstanding loan portfolio I –weighted average interest rate on loan portfolio of the MFI As it is stated above as a sensitivity analysis, an MFI has to increase its interest rate on loan in order to avoid subsidy. However, this is not the only means to avoid subsidy or minimize it. Improving loan collection rate, minimizing administrative costs play significant role in driving an institution towards self-sustainability. Striving to achieve self-sustainability and completely remove all subsidies is not always or necessarily politically feasible or economically desirable. However, calculating the SDI measure is still important for three basic reasons10 a. The SDI may be used as a tool to measure dependency and recommend improvement or justify its continuation, b. Measuring the subsidies received by the MFI is always economically or politically desirable as it would improve resource allocation, c. Computing and disclosing SDI provide basic information on the public debate on the use of scarce public funds. 10 Jacob Yaron and Ronny Manos (2007), Determining the self sufficiency of Microfinance institutions, savings and development No. 2 21 2. 6 Benchmarking In the field of microfinance, an agreed upon set of ratios to measure performance has developed. Accurate data, adjusted along common lines, are a pre-requisite for benchmarking. When comparing its own performance against industry benchmarks, an MFI can identify performance variance and highlight the key factors that influence performance. For managers and board members, such system provides a sign post for identifying institutional strength and weaknesses. It also influences the decision of donors and investors. MFIs with different characteristics have been operating around the glob. MFIs differ in their age, charter, depth of intermediation, lending methodology, scale of operation, operating region, target market and outreach, which makes comparison difficult. The way out for such problem is using Peer group performance as a benchmark. In this regard, Microbanking bulletin of the MIX has been preparing simple peer group benchmarks (bases on single characteristics) and compound peer group benchmarks (complex set of variables). 22 3. SACCOs in Ethiopia 3. 1 Legal framework of SACCOs in Ethiopia Savings and credit cooperatives in particular and cooperatives in general have passed through various changes due to continuous political changes in the country. Every new government came to the country was interested to promote cooperatives in its own way with no deep analysis on strong and weak points. The main reason for such radical change was believed to be that government change in the country has never been made in peaceful way. Hence, activities of the going government were grossly considered disgraceful so that new governments were interested to start afresh. During the command economy, promotion and registration of cooperatives were given to different ministries. Accordingly, promotion and registration of savings and credit cooperatives were given to National Bank of Ethiopia (central Bank). Issuance of proclamation N. 47/98 by the incumbent government has given the power to respective cooperative promotion offices under different regional offices. The cooperative promotion structure in National Regional states have different names and they way they are structured is not uniform either. In some Regions the office is named as Cooperative Agency (Ormia, SNNNP. ), in Addis as cooperative Promotion and regulation Department, in Afar, Somalia and Gambella as cooperative bureau. The accountability of the offices also differs from Region to Region. In Oromia, it is organized under Mass organization ( Hezeb aderejajete) which is one sector that reports to the Regional cabinet meetings, in Amhara it is under the Rural and Agricultural development bureau, while in Addis it is under the bureau of trade and industry. In most of these offices including the Federal cooperative Agency, the activities are departmentalized under Promotion, Market, Supervision and Audit, legal services and support activities. Promotion department is again divided into major teams like Agricultural and non-agricultural cooperatives. Promotion of saving and credit cooperatives is undertaken mostly under the non- agricultural cooperative team. The marketing department again can be subdivided into market development, effort, loan follow up (for agricultural input and crop loans). The promotion department is divided into teams based on the type of cooperatives while the marketing is on major marketing and credit activities. 23 (Dagnew Gessese Half a century development of savings and credit cooperatives in Ethiopia, status, challenges and future prospects, April, 2007) The main contributing factor for such mixed and non-standard structure is that the country has been using one proclamation for different nature of cooperatives. This clearly shows that there no clarity on financial services of savings and credit cooperatives. As performance standard measures has not been developed for SACCOs or WOCCUs standard, PEARLS has not been adapted, inspection of SACCOs has been limited to checking for proper record of their transactions to respective accounts. The other manifestation on lack of clarity on financial nature of SACCOs is that in 1996, proclamation No. 0/96, for licensing and regulation of microfinance institutions was issued that has authorized the central bank to license and regulate MFIs. Following this, National Bank of Ethiopia has issued 18 directives to regulate and supervise SACCOs.