Reducing Poverty Through Microfinancing in the WA East District of the Upper West Region of Ghana

DR. ISSAHAQUE MUNAWARU

Doctor of Economics Obtained from Atlantic International University, USA-Hawaii

REDUCING POVERTY THROUGH MICROFINANCING IN THE WA EAST DISTRICT OF THE UPPER WEST REGION OF GHANA

ABSTRACT

The purpose of the study was to determine the impact of micro finance in reducing poverty in the Wa East District of the Upper West Region of Ghana. The hypothesis of the study was “micro loans when used on income generating activities will lead to poverty reduction.”

The spreadsheet programme was used to do the analysis on reducing poverty through micro financing in the Wa East District of the Upper West Region of Ghana. The theoretical frame work was based on the Foster-Greer-Thorberke Class Index. The researcher also used “costs of basic needs” method to calculate head count poverty in order to compare consumption expenditure of MASLOC and Non MASLOC families. The study had a Crounbach reliability Coefficient of .95 after pilot test.

Data were collected from MASLOC records as age, sex, business and household expenditure. The researcher also collected data from some 50 MASLOC applicants who received loans and 50 others who did not receive the loans in order to triangulate the data on household expenditure, number of individuals in household including other bio-data. It was found that poverty reduced slightly for MASLOC families than for Non MASLOC families. The researcher recommends that government, development partners and Non-governmental organizations must collaborate to increase micro loans to the people of Wa East District in Upper West Region of Ghana in particular and the productive poor in general.

ACKNOWLEDGEMENT

The completion of this thesis would not have been possible without the support, cooperation and immeasurable contribution of some key individuals. There is a saying that, “when we express gratitude for what we have, we will have more to express gratitude for”.

I am therefore grateful to the following for supporting me to enable me complete the thesis: my principal academic adviser Dr. Eric Vanquez and the chain of tutors who were assigned to me at various points in time. Special thanks go to my mentor, Dr. A.L. Dare of the University of Cape Coast- Ghana, Mr. Anbataayela Andrews of the Central University , Accra – Ghana, Mssrs Nurudeen Danwanaa and Abdul Wahab Jamal Sessay and Waris Hakeem for their various contributions at collecting, processing and analysis of the data.

1. INTRODUCTION

Todaro (2009,P1) explained that microfinance is the supply of credit, savings, vehicles, and other basic financial services made available to the poor and vulnerable people who might otherwise have no access to them or could borrow only on highly unfavorable terms. Todaro indicated that, microfinance institutions specialize in delivering these services in various ways and according to their own institutional rules. He cited the case of village banking, or group lending schemes as an example of microfinance institution. Village banking refers to situation where a group of potential borrowers forms an association to borrow funds from a commercial bank, a government development bank, an NGO or a private institution. Todaro added that the association borrows the funds and then lends the funds to individual members, whose responsibility is to repay the group or association. But it is the responsibility of the group to repay the loan to the lending institution.

According to Todaro (2009), economic research has consistently found that unavailability of credit is a major hindrance to microenterprise development. Todaro further explained that majority of micro enterprises are operated by women and so the constraint of credit unavailability affects, though not exclusively, women borrowers. He assigned the following reasons for the foregoing constraint; lack of property rights of women, local cultural practices and more importantly, lack of collateral security. What all that means is that the significance of microfinance in reducing poverty cannot be over emphasized.

Todaro also pointed out that some three related factors make it difficult to relax the credit constraints to poor women and micro enterprises in general. These are; little or no collateral, difficulty of conventional lenders determining quality borrowers and the fact that small loans are more costly to process per dollar cent.

After defining and explaining microfinance briefly, the researcher proceeded to explain the rationale for selecting this topic as the first of the three research areas to be submitted for one to be approved as my thesis.

According to Ghana living standard surrey 5 (GLSS 5, 2006) which is conducted by the Ghana statistical service, upper west region is the poorest of the ten regions of Ghana. The last population census of Ghana, which was conducted in 2010, also showed that the population of women in Ghana was 51. 7%, while that of male was 48.3%. Granted that Upper West Region‘s population would show the same proportion of the National figure, there is the need to find how microfinance could be used to reduce poverty particularly that of women, bearing in mind that, 9 out of every 10 people in the region are poor, according to GLSS5.

In other words, the rationale for taking this research topic is based on the urgent need to contribute to knowledge and suggest innovative ways of using microfinance to attempt to reduce poverty in the Wa East district of the upper west region of Ghana. This urgent need stems from the fact that upper west region is the youngest of the ten regions of Ghana and the poorest and anything that will help reduce poverty there must be explored. It is in the light of the foregoing that the researcher sets out to find out to what extent microfinance affects poverty reduction in the Wa East district of the upper west region of Ghana.

2. OBJECTIVES OF THE STUDY

This thesis is on the use of microfinance in reducing poverty in the Wa East district of the upper west region of Ghana. The main objective therefore is to find out the efficacy of micro-credit schemes as provided by MASLOC in reducing poverty. The specific objectives are

(1) Obtain the poverty level of the people in the district to see whether it is less or greater than that of the region; where out of every 10 people, 9 are poor.
(2) Obtain information about the characteristics of poverty in the district – health, hunger, education.
3. Make recommendations to microfinance practitioners, policy makers and government, as well as contribute to literature on microfinance and poverty reduction.

3. SUMMARY OF LITERATURE REVIEW

Boudreax (2008) stated in his artic “the micro magic of micro-credit that “Although the millions of tiny loans to the world’s poor may not work the miracles some proponents claim, they are very beneficial .” The foregoing statement by Boudreax appears to summarize the broad scholarly opinion about the effect of micro-credit or microfinance on the lives of the world’s poor.

Wihile Hulme (2009) showed that there was a positive relationship between impact of microfinance and household income, fisher man (2012) indicated that a study of microfinance institutions in India showed that microfinance improved: political participation and self-confidence in politics, access to government programs, practical skills and knowledge of the wider society (P.5999). Whereas Hulme was reporting on the likely impact of microfinance, fisherman’s studies was reporting on the potential benefits of microfinance whether it reduces poverty directly or not.

Again, while Hoque (2004) reported after a study on micro-credit’s impact on poverty reduction in Bangladesh that it had minimal impact, Khandker (1998) showed micro-credit had significant impact on poverty reduction.

Catherine (1997) (Abstract) explained that micro financing was regarded as a small but important step in alleviating global poverty. She explained also that microcredit programs aimed at providing small amounts of money to the productive poor instead of giving them charity. According to Catherine, “an estimated 10 million people, most of them women, around the world have participated in thousands of microcredit schemes. “Catherine pointed out that these schemes, contributed to production increases in 82 per cent of groups that received support from United Nations Development Program and a rise in income on average of 54 per cent.

Like some other literature have argued, Catherine identified herself with the many voices who feel that, even if micro credit does not directly affect poverty, it certainly is very beneficial to its recipients. Catherine also argued that, micro credit leads to increase production and increase income. What that means is that, there is greater chance for micro credit to result in poverty reduction.

According to Irene Tinker (2000), it is important to reduce poverty by investing in women’s work. Irene explained that, poverty issues and growing income gap affects some areas in US the same way that they affect developing countries. She indicated that these challenges of poverty and growing income gap which caused developing countries to re-allocate resources that were previously used for industrial and infrastructure projects to areas designed to alleviate poverty are beginning to ‘rear their heads’ in US. She further explained that, policies that focused on women and their need for income such as micro credit programs that offered loans and training to the productive poor women had proved to be one of the most successful interventions.

Africa Business Magazine was also certain that the activities of the micro finance institutions in Ghana in terms of providing micro loans to particularly the productive poor women, will not only help fight poverty and probably reduce it but ends up empowering them. Craxton and Wadethke (2011) also agreed with the significance of micro finance by stating that “for many years microfinance has been the sacred cow” of the development world” (P1). They further stated that Mohammed Yunus and his Grameen Bank of Bangladesh won the Nobel peace prize in 2006 for their efforts to alleviate poverty.

Ben (2006) explained that the awarding of the Nobel peace prize to the Bangladesh economist Mohammed Yunus provided a ‘lift’ to the already rapidly growing field of micro finance and bring financial services to a larger percentage of the world’s poor. Ben indicated that, Mohammed Yunus Founded the Grameen Bank in 1976, which made very small loans to poor people in Bangladesh so that they could start their own businesses.

Ben added that the Grameen Bank then had 6.6 million customers and lent $5.7 billion, mostly to women. Ben also pointed out that more 300.00 micro finance organizations now operate in more than 100 countries. The Norwegian Nobel peace prize committee that awarded Mohammed Yunus the prize noted that even though Yunus’s long vision to eliminate poverty could not be realized by means of micro credit alone, it was satisfied Grameen Bank demonstrated that, in the continuing efforts to achieve poverty reduction micro credit must ‘play a major part’.

According to Ben (2006), in 2005 an estimated 100 million people received loans from micro finance organizations and the average of loans people received was about $250.00 this figure coincides with the average of loans given by MASLOC to productive poor people in the Wa East of the upper west region of Ghana. However, MASLOC also provides loans for special projects for say poultry farming and commercial taxis’ and other schemes. These fall out of its core function of providing small loans for the productive poor, particularly women.

The other thing about the Grameen Bank that Ben (2006) looked at was its focus on poor women. He indicated that the Grameen Bank group – lending model has been widely copied by many other finance organizations. The model was such that women seeking loans were placed in groups of five, and initially only two of the five members were given the loans for businesses such as milking cows or making pottery.The other three women only received the loans when the first two had established a strong weekly repayment record. I believe the essence of leaving out the three women was for them to serve as a source of pressure for the first group to demonstrate commitment to repay or actually repay for them too to be given the loan. Ben stated that several experts in microfinance industry say that providing poor people with a shot at economic self sufficiency will make all countries far safer.

In respect of the foregoing, one can say that, the framers of Ghana’s 1992 Republican Constitution took cognizance of this view when it stated in Article 36 clause (e)under the Directive Principles of state Policy that “The state shall in particular, take all necessary steps to establish a sound and healthy economy whose underlying principles shall include (2) (e) The recognition that the most secure democracy is the one that assures the basic necessities of life for its people as a fundamental duty”.

This clearly requires the political hegemony of Ghana to ensure that people from all parts of the country are provided the basic necessities of life. It is therefore worth noting that, the government of Ghana had to introduce MASLOC in 2008 in its quest to provide small businesses and enjoy decent living. Poverty is the breeding ground of desperation and desperation is the breeding ground for terrorism (Christopher as cited in Ben, 2006).

Just like Ben (2006) indicated that multi- national financial institution and more established banks now want to invest in microfinance, Kwateng (2009) also explained that large and more established banks were now attracted by the success of the microfinance institutions that have gone into savings and loans to service the informal sector in Ghana. According to Kwateng the main source of business of Ghana’s microfinance institutions is the informal sector assumes greater importance in the growth of the national economy the more successful microfinance institutions become. This success of the savings and loans outfits or microfinance institutions is what attracts large and established banks to want to invest in these hither to no go areas. (P1)

Kwateng (2009) further explained that economic emphasis on what he called restrictive poverty eradication agenda’ seemed to be shifting and was then angled towards generating domestic economic growth, making it possible for the informal sector to have access to finance. He pointed out that Ghana’s informal sector disserves such attention for the good reason that it provides more jobs than the government and formal private sector combined; this is how Kwateng put it to elaborate the foregoing, “indeed, the biggest slice of the country’s economic pie is largely accounted for by table top traders, street hawkers, small- seller farmers and many other small businesses which operate on the blind side of government statistics” (P).

What this means is that there is no way Ghana’s economy can attain its desired height without adequate financial support to our women folk. What it also means is that an expansion of this sector through microfinance support will have a direct impact on the increase in the volume of goods and services produced in Ghana and consequently an increased economic growth.

The researcher has no reason to disagree with Kwateng as he found that many of the types of businesses who benefitted from MASLOC loans in The Wa East District fell in the category of small scale businesses like Kookoo’ sellers, petty trading and peasant farming.

The foregoing lack of consensus on the actual impact of microfinance on poverty reduction against the back drop of the world’s enthusiasm to use it to support the world’s poor, makes it even more fascinating to do further investigation into the area. Some proponents insist it is the only viable means left to include and support the worlds destitute and deprived to come out of their economic doldrums. In other worlds there is over whelming consensus over the need to use microfinance to reduce poverty. Even though some people question the efficacy of micro financing as a model for reducing poverty.

4. OVERALL OUTCOMES STRATEGY AND TECHNIQUES OR RESULTS

The results of the research are as follows: the hypothesis is that; micro loans from MASLOC when used on income generating activities is likely to reduce poverty through increased household consumption expenditure. Accordingly, the incidence of poverty is expected to be lower for MASLOC families

Poverty level was measured using the elementary consideration of headcount poverty, leaving out poverty gap and severity of poverty and distribution issues of allocation of resources. The focus of the researcher was to establish the fundamental impact of microfinance in reducing poverty.

The foster – Greer – Thorbceke class index was used which is defined as follows

Where x is non negative parameter, z is the poverty line, Ci i0 consumption per adult equivalent of household I, q is the number of households h is the number of individuals in household I and n is the total number of individuals.

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