Research on micro financing in Ghana

Contents

ACKNOWLEDGEMENT

ABSTRACT

LIST OF ABBREVIATIONS

LIST OF TABLES

LIST OF FIGURES

LIST OF APPENDICES

CHAPTER ONE
INTRODUCTION AND RESEARCH CONTEXT
1.1 BACKGROUND OF THE STUDY
1.2 THE RESEARCH PROBLEM
1.3 OBJECTIVES OF THE STUDY
1.4 HYPOTHESIS OF THE STUDY
1.5 IMPORTANCE OF THE RESEARCH
1.6 LIMITATIONS OF THE RESEARCH
1.7 SCOPE OF THE RESEARCH
1.8 ORGANISATION OF THE RESEARCH

CHAPTER TWO
REVIEW OF PRIOR LITERATURE
2.1 INTRODUCTION
2.2 THE CONCEPT OF MICRO-FINANCE
2.3 THE NEED FOR MICRO-FINANCING
2.4. DEFINITION AND TYPES OF FINANCIAL INSTITUTIONS
2.4.1 Formal Financial Institution
2.3.2 Semi-Formal Financial institutions
2.4.3 Informal Financial Providers
2.5 COUNTRY EXPERIENCES ON MICRO-FINANCING
2.5.1 Experience of Bangladesh
2.5.2 Experience of some African Countries
2.6 TYPES OF CREDITS/LOANS
2.6.1 Short- Term Loans
2.6.2 Intermediate-Term Loans
2.6.3 Long-Term Loans
2.7 PRECONDITIONS OF MICRO-FINANCING
2.8 DEFINITION AND CONCEPT OF SMES
2.8.1 Characteristics of SMEs
2.8.2 The Ostensible Role of SMEs in an Economy
2.9 Empirical Evidence

CHAPTER THREE
RESEARCH METHODOLOGY AND PROFILE OF SELECTED MICRO FINANCIAL INSTITUTIONS
3. INTRODUCTION
3.2 DEFINITION OF THE STUDY POPULATION
3.3 METHOD OF DATA COLLECTION
3.4 SAMPLING TECHNIQUE
3.5 DATA ANALYSIS AND PRESENTATION
3.6 PROFILE OF THE SELECTED MICRO FINANCIAL INSTITUTIONS
3.6. GARDEN CITY SAVINGS AND LOAN LIMITED
3.6.1 Corporate Objective
3.6.2 Vision and Mission
3.6.3 Products and Services
3.7.0 FIRST ALLIED SAVINGS AND LOANS LIMITED
3.7.1 Mission and Vision
3.7.2 Products and Services

CHAPTER FOUR
FINDINGS, ANALYSIS AND DISCUSSIONS
4.1 INTRODUCTION
4.2 PERFORMANCE OF GCSL AND FASL IN RETROSPECT
4.2.1 Loan Beneficiaries and Eligibility Criteria
4.2.2 Additional Services Provided
4.3 IMPACT OF MICRO FINANCE
4.3.3 Supervision and Visits from Loan Officers
4.3.4 Contributions of Micro Financing To Poverty Reduction

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 INTRODUCTIONS
5.2 SUMMARY OF FINDINGS
5.2.1 Summary of Findings Objective 1
5.2.2 Summary of Findings Objective 2
5.2.3 Summary of Findings Objective 3
5.3 CONCLUSION
5.3.1 Conclusion of Objective 1
5.3.2 Conclusion of Objective 2
5.3.1 Conclusion of Objective 3
5.4 RECOMMENDATIONS
5.4.1 Recommendations of Objective 1
5.4.2 Recommendations of Objective 2
5.4.3 Recommendations of Objective 3
5.5 CONCLUDING REMARKS

REFERENCES

APPENDICES

LIST OF TABLES

Table 1 Trend of Deposit and Loans Granted

Table 2 Interest Rate, Average Loan Size and Service

Charge of Selected MFIs

Table 3 Occupational Distribution of SMEs

Table 4 Duration of Enterprises

Table 5 Amount Applied as Loans

Table 6 Terms of loan

Table 7 Supervision and Visits

Table 8 Response on the Accessibility of Basic Facilities

Table 9 Income Earnings of SMEs

LIST OF FIGURES

Figure 1: Trend of Deposits

Figure 2: Total Loans Granted

Figure 3: Trend of increment for GCSL

Figure 4: Trend of increment for FASL

Figure 5: Loan Recovery Rate

Figure 6: Occupational Distribution of SMEs

Figure 7: A bar graph showing the age distribution of respondents

Figure 8: Responses on accessibility of Facilities

Figure 9: Income earnings of SMEs

LIST OF APPENDICES

Appendix 1: Questionnaire for Micro Financial Institution

Appendix 2: Questionnaire for Beneficiary SMEs

Appendix 3: Calculation of Sample Size

CHAPTER ONE

INTRODUCTION AND RESEARCH CONTEXT

1.1 BACKGROUND OF THE STUDY

Poverty within Sub-Saharan Africa can be described as a multi-dimensional problem primarily manifested by factors such as low literacy levels, limited access to resources, health and education services, and high levels of unemployment among the productive population. It can also be described in terms of lack of adequate incomes to meet the basic needs of the poor, vulnerable and powerless people. Poverty is complex in nature and scope and therefore requires multifaceted solutions. There is no single guaranteed strategy or approach to solving the problems associated with poverty.

The Danish International Development Agency admits and therefore outlines that one of the important dimensions along which to study and assess the impact of development interventions is the extent to which they contribute to poverty reduction, or in other words how they enhance the well-being of the poor. This is what most poor people strive after; it is central to the development concerns of many developing countries, and it has increasingly become the overarching objective of many development agencies (Danida, 1996).

The World Bank in its bid to define poverty in its 2006 reports says “Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom. Poverty has many faces, changing from place to place and across time, and has been described in many ways. Most often, poverty is a situation people want to escape. So poverty is a call to action for the poor, wealthy, organizations, agencies, governments and the international community alike; it is a call to change the world so that many more may have enough to eat, adequate shelter, access to education and health, protection from violence, and a voice in what happens in their communities” (World Bank; 2006: 2).

Despite various attempts by Governments, Donors and other Development programs to handle and reduce poverty, this problem has significantly increased in the past decade with approximately 50% of the sub-Saharan Africa living below the poverty line, defined as subsisting on less than 1 US dollar a day. At the national level of many African countries therefore, poverty is a crisis that will require the concerted efforts of different actors. Among the poor persons, women are more vulnerable to poverty than men. For instance, over 68 per cent of the active female population in Africa work as subsistence farmers and hawkers compared to 32 per cent of men (Rose Mwaniki; 2006:4).

It is against this back drop that in assumption of office by the current NPP government, a declaration of the “Golden Age of Business” was made with the private sector identified to be the main engine of growth. A major blueprint dubbed Ghana Poverty Reduction Strategy (GPRS I) was launched under which the major strategies to be adopted were outlined. This coupled with the HIPC initiative in 2001 gave more meaning to government’s quest of reducing poverty since the county’s external debt servicing were withheld hence being in the position to make credit available to small and medium scale enterprises (Ghanaian Times, 13th March, 2003).

In addition, the prudent management of the national economy saw a major stability in the economy thereby reducing interest rate and making the financial sector more lucrative for both domestic and external investors. This brought on board many micro financing institutions whose aim were to be in touch with operators of small and medium scale enterprises (SMEs).

It is also believe that small and medium scale enterprises (SMEs) constitute about 90 percent of all businesses in the country (Daily Graphic 10th Feb.2007 p.3). Dr. Paul Aquah, governor of bank of Ghana in an address to a group of businessmen acknowledged that SMEs have the potential to contribute significantly to employment generation. A move has also been initiated by parliament to see to the passage into law two set of bills: credit reporting bill and the borrowers and lenders bill. This is meant to increase credit to the private sector.

Overall, this research is meant to demonstrate that micro finance in Ghana has a major role of reducing poverty among its participating clients, their direct and indirect dependants and the communities in which they operate in general. Access to financial services protects and empowers the poor by mitigating them from risks and giving them choices. The micro finance industry therefore requires support from all relevant stakeholders. In particular, African Governments will need to create a supportive and favourable environment (legal, socio-economic, political and fiscal) that will promote the development of the micro finance industry.

1.2 THE RESEARCH PROBLEM

With the rising spate of unemployment being so glaring and almost haven become an indelible mark on the economy, one will be wondering what has happened to all the purported efforts meant to propel the private sector to assume its alleged role of an engine of growth.

Micro finance institutions are increasing in number and area of coverage in our country. But the problem is dealing with the poor (especially with credit related issues) is not as easy as poverty alleviation so that this may challenge their contribution to development. That means the rural poor have less organized way of living, widespread illiteracy and the like which hinders from participating in credit and saving programs; and hence the effort of those programs may be challenged.

With the number of MFIs increasing in recent times with close to about 28 emerging micro financial institutions in the country, little has been done to cater for the disadvantage and the poor who should have been the core beneficiaries. These increasing MFIs have not been able to reach out to the marginalized in the society.

So often are individual entrepreneurs turned down by the banks in their bid to source for fund for their respective small and medium scale enterprises (SMEs) on the ground that they do not meet basic banking conditions such as provision of collateral security. In addition, most of these financial institutions are located only in the big cities with majority of SMEs in the villages and rural setting left to deal with their fate. This has a serious effect of thwarting the effort of government in the vein of creating an enabling environment for SMEs.

Aside these stringent conditions set forth by these so-called commercial and development banks, what are some of the efforts being put in place by emerging financial institutions to cater for the ordinary entrepreneur in the informal sector. One would also want to find out what factors really determine lending to SMEs? What are some of the combined roles played by emerging micro financing institutions to making borrowing a little more attractive devoid of the normal hard-to meet measures in the system?.

This undoubtedly justifies the rationale for undertaking this research. The numerous research questions posed in the course of the problem statement would form the basis of the research objective.

1.3 OBJECTIVES OF THE STUDY

Basically this research will seek

- To assess the performance of micro financing institutions as far credit to SME’s is concern.
- To assess the role and impact of micro-finance institutions on the livelihood of SMEs
- To identify the challenges and constraints facing MFIs in their operations.
- To suggest on the basis of the findings of the study, recommendations towards enhancing the capacity of MFIs in financing MFIs.

1.4 HYPOTHESIS OF THE STUDY

The following null and alternative hypotheses have therefore been set and the research will seek to prove the validity of each hypothesis formulated.

H0: Micro financial institutions have not succeeded in meeting the financial needs of SMEs.

H1: Micro financial institutions have succeeded in meeting the financial needs of SMEs.

1.5 IMPORTANCE OF THE RESEARCH.

The significance of this research has to do with the fact that government alone cannot out-do with the issue of unemployment. It is therefore important to bring on board individual with entrepreneurial tendency to augment government’s efforts. It is therefore imperative to adequately motivate small and medium scale enterprises (SMEs) by way of providing credit facilities.

The study will also provide useful information to policy makers to enable them formulate practical policies for developing the SMEs. Again, the study will help identify weaknesses inherent in microfinance programmes which will assist MFIs to design and deliver appropriate, quality and sustainable services to clients

This can only be done through emerging financial institutions with support from government and other prospective investors. The research is aimed at bringing into the spotlight the implicit roles played by financing institutions taking into account operators of small and medium scale enterprises (SMEs) and how these micro financiers have helped in alleviating poverty by way of employment creation.

1.6 LIMITATIONS OF THE RESEARCH

The success of this research was somewhat slowed by the fact that it was very difficult in identifying beneficiaries of micro financing in the metropolis since these SMEs are considered as mainstream customers. Even in situation where they were identified, it was difficult to have a tête-à-tête discussion with them due to the itinerant nature of these SMEs, financial constraint and the quantum of SMEs to have been covered. The researcher therefore had to speak to leaders of the various SMEs association.

Besides, the identified financial institutions were not in positions to make available certain information by virtue of the fact that it is against their code of ethics to put to the public domain information deemed confidential.

The limited time within which the research was undertaken was a major constraint. Things were done in a rush and this can affect the research by way of errors and typographical mistakes as may be evident.

1.7 SCOPE OF THE RESEARCH

Conceptually this research will hover around the implicit roles played by emerging micro financial institutions as far as SMEs are concern. The respective activities of identified financial institutions will also be considered alongside its impact on SMEs.

Geographically, the research will have its boundaries limited to the Kumasi metropolis with some micro financial institutions being the focal point of attention.

1.8 ORGANISATION OF THE RESEARCH

The report has been organised into five main chapters. The first chapter is a general overview of the study with special reference given to the definition of the research problem. The second chapter is a review of literature under which concepts are defined.

Chapter three focuses on research methodology and profile of selected micro financial institutions in the Kumasi metropolis. Chapter four involves findings, in-depth analysis and discussion of data. Chapter five is a summary of major findings and recommendations.

CHAPTER TWO

REVIEW OF PRIOR LITERATURE

2.1 INTRODUCTION

It is an undeniable fact that studies have been conducted on the MFIs and the roles being played in bringing the unemployment menace to a mere social scourge. This chapter is therefore meant to bring various literatures from different authors’ perspectives and views and how relevant these concepts could be borrowed and factored into this research study.

2.2 THE CONCEPT OF MICRO-FINANCE

Over the past two decades, the concept of microfinance scheme has been introduced to developing countries to assist the poor. It is believed to be the provision of small loans to the very poor families to help them engage in productive activity or expand their tiny businesses. Apart from providing credit to the poor, there is a broader range of services which include savings, training in both business management, book keeping and provision of insurance schemes for beneficiaries. Steel and Addah (2004)describe microfinance as small financial transactions with low income household and micro enterprises, using non standard methodologies such as character-based lending, group guarantees and short term loans.

The ‘micro’ in terms of credit, in this sense is relative and varies from one MFI to another and from one country to another. Moreover, Hagen and Martins (2004) also observe that microfinance does not only mean providing very poor families with very small loans to help them engage in productive activities or grow their tiny businesses but over time, microfinance has come to include a broader range of services such as credit, savings, insurance, money transfer facilities, as developers have come to realize that the poor that lack access to traditional formal financial institutions require a variety of financial products.

Micro-finance is, to begin with, finance on a very small scale. That does not mean that micro-finance is necessarily non-bank finance. Some banks, especially in developing countries operate on a very small scale. But on the whole, and especially in developed market economy countries, with highly competitive and cost-conscious banking industries, one observes the gradual withdrawal of banks from individual loan transactions (household and companies) as well as from areas with a high concentration of demand for small scale transactions (inner cities, rural areas). Research in industrialized countries shows that the average capital required for setting up a micro-enterprise is approximately US$ 10,000 to US$ 15,000. This is below the break-even point of most banking groups, including municipal savings banks and cooperative banks (Bernd 1998:6).

Micro-finance also has a qualitative dimension: the relationship between lender and borrower is different, closer (the French refer to “financement de proximité”). The lender is in fact not just a lender, but also a provider of advice and technical assistance, mentor, and tutor. The financial transaction is, in fact, embedded in various non-financial transactions. It is a highly personalized transaction (with all the advantages and disadvantages that this implies). The micro-finance lender is often prepared to forego interest revenue, adjust the lending technology and use collateral substitutes, like group liability or personal, unmarketable belongings. The micro-finance lender wants to help (in French “financement solidaire”). It is this multi-faceted nature of micro-finance, somewhere between the hard-nosed financial market and softer social concerns that makes it challenging to review its applicability to self-employment programs. Not every micro-finance instrument is for micro-enterprise creation.

Micro-finance in industrialized countries often also addresses the problem of household indebtedness. It provides payment, deposit and insurance services where no equivalent banking outlet is available. Even micro-credit is not always used to purchase assets or to ensure the funding of working capital requirements. Quite often it takes the form of consumer loans, and sometimes one cannot even distinguish between consumer and business loans. Self employment/micro-enterprise creation requires capital and advice.

The activities most frequently launched by the unemployed are in the service sector, such as retail, repair and catering activities, personal and business services, all of which do not require much capital hence the gap to bank finance, but more initial investment than what the unemployed individual or welfare recipient can mobilize out of personal savings or liquidation of other assets (hence, the need to find an external funding source). This credit/equity gap exists at the creation of the micro-enterprise and as long as the new entrepreneur fails to establish a stable relationship with a bank. The question: “does micro-finance make sense within self-employment programs? “is therefore related to the entire process of gradual integration into the financial market and it is not a simple question of looking at the availability of micro-finance at the time of enterprise.

2.3 THE NEED FOR MICRO-FINANCING

According to Khandker (1998), the alleviation of poverty requires diverse measures. The most important being those, which expand the income and employment opportunities of the poor, enabling them to enhance their living standards providing the poor with access to financial services is one of the many ways to increase their income and productivity.

Binswanger and Landell-Mills (1995) states that constraints in relation to suppliers that is. Private Banks excludes the poor because small transactions are unprofitable. Providing financial services to the poor and women is not easy. Many borrowers are not credit worthy and don't have profitable projectors. Thus, that the need for micro financing is an undeniable fact.

According to Yanor, Benjamin and Pipren (1997), the issue that should be raised in this context is the importance of the informal sector in Less Developed Countries (LDCs) economy and its constraint to develop by lack of credit. On top of that, Salad Vine and checkering (1991) confirmed this fact by noting that, “the informal sector” which contributed about 35% to 65% and 20% to 40% to employment and GDP in most LDCs respectively, is constrained by lack of credit.

Micro-financing programs are developed to fill this gap. The rural poor in LDCs are in desperate needs of credits, microfinance programs are supposed to make available this credit needs and keep the poor to increase their living standard. Lack of saving and capital make it difficult for many poor people who want jobs in the formal and informal sectors to become self employed and to undertake productive employment generating activities, providing credit seems to be a way to generate self-employment opportunities for the poor.

In this regard, Micro-financial Institutions (MFIs) in relation to other financial intermediaries has special role and distinguishing features which are given as follows:

- The primary objective of MFIs is to address the credit needs of those who are willing and ready to reduce their chronic poverty by engaging in farming and small scale production and service activities (Getahun, 2001).
- Besides provisions of credit facilities, MFIs render managerial, marketing technical and administrative advise to borrowers by reaching borrowers at their place of work.(ibid)
- MFIs do not require collateral to extend credit in cash or kind to peasant farmers and small entrepreneurs. Instead peer group-leading scheme, character based loans and the promise of subsequent loans is main motivations for repayment (Marguerite, 2001).
- Saving requirement is introduced as a compulsory feature of lending activity and this saving requirement seems to serve as a motivator for repayment of loan since borrowers choose to repay the loan than losing the amount they saved (Getahun, 2001)

2.4. 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).

2.4.1 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)..

2.3.2 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.

2.4.3 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 (66%), moneylenders (15%), and other sources (19%). Only 1% of the sample households had bank account.

2.5 COUNTRY EXPERIENCES ON MICRO-FINANCING

2.5.1 Experience of Bangladesh

One of the most successful countries often mentioned in the development of microfinance is Bangladesh. Micro finance organizations like Grameen Bank, Bangladesh Rural Advancement Committee (BRAC), Proshika (PK), Association for Social Advancement (ASA), largest 20 credit NGOs (not including Grameen Bank), and Bangladesh Rural Development Board (BRDB) are operating in the country mentioned

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