The informal sector and the potential role of microfinance institutions in Ethiopia
Abstract: In Ethiopia, the economic dilemmas facing the country have had various effects on the society at large. Given this situation, the high rates of urbanization and uneployment has resulted in that more and more people end up in small-scale activities within the informal economy. Although the informal sector has become increasingly noticeable in Addis Ababa, it is commonly neglected and separated from the formal economy. In light of the contemporary Ethiopian society, this study has nonetheless argued that the wide range of economic activities found within the informal sector is indispensable and should be integrated with the formal economy. Instead of perceiving the informal economy as an economic malfunction, this study has aimed to explore its future potential through the help of microfinance institutions. It has also looked into how the informal sector can be defined and its main characteristics. To gain an increased understanding of how informal workers perceive their own life situation, semi-structured interviews have been carried out with informal workers from the Meklit Microfinance Institution. The theoretical framework of Friedmann's 'Whole Economy Model' and 'Disempowerment Model' was moreover applied in recognizing the role of the household as well as to which extent MFIs could be said to have increased the social power of the informal sector. The main conclusions of this essay are that there are highly diverse features of informal workers and their businesses, which accordingly implies that MFIs need to reflect this diversity in their general operations. Although MFIs were recognized as carrying a strong potential for the development of informal activities, there were some identified obstacles in for example their organizational structure which consequently affected the profitability of their clients' businesses. The role of Community-Based Organizations (CBOs) was also recognized as having the possibility to develop into a new type of labout union as to empower the informal sector and gradually lead to a natural continuation of the formal economy.
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