Microfinance and Poverty Reduction in Ghana: Evidence from Policy Beneficiaries

ABSTRACTPoverty is a concept that applies to all humans and more seriously to people in the developing world. The deadly effect of poverty on the poor necessitated a worldwide research into ways of reducing its impact. An important tool in fighting poverty is microfinance which has gained prominence over the last few decades in countries hardly hit by the menace. Studies have shown that microfinance has produced certain successes in poverty reduction. Other schools of taught argue that microfinance has not had the much touted impact. This study ascertained the impact of microfinance on poverty reduction in Ghana. The study employed economic and social variables such as individual income, household growth, access to education, housing and participation in social and religious activities as benchmarks for measuring the impact. Questionnaires were administered to 60 customers and beneficiaries of microfinance products of two major microfinance institutions in Ghana: Opportunity International Savings and Loans Ltd. and Sinapi Aba Savings and Loans Company Ltd. The study found a positive relationship between microfinance and the benchmark variables and recommended training for beneficiaries to ensure efficient use of funds and creation of sound political and economic environments so microenterprises can thrive.JEL: 015, 016KEYWORDS: Microfinance, Poverty Reduction, Impact Assessment, GhanaINTRODUCTIONPoverty has become an albatross for most countries and individual households especially in developing countries. About one billion people globally live in households with per capita incomes of less than one dollar per day (Morduch, 1999). The grave economic and social impact unleashed on the poor in developing countries led to keen interest on the part of donors, policy makers and practitioners who work very hard to expand access of the poor to microfinance. Even though, microfinance disburse small amounts, if properly harnessed can have a knock-on effect and contribute significantly to the wellbeing of the poor. Microfinance can increase investment among the poor and empower them economically. Currently, the focus of microfinance is no longer on credit for investment in micro enterprises. The attention of the entire microfinance community is on the diverse needs of clients, the broader financial ecosystem and the transformational nature of technology (World Bank Handbook on Microfinance, 2013). The objective of microfinance is not to provide credit for the poor to fight poverty alone, but also to create institutions that will deliver financial services to the poor who are ignored by the conventional commercial banks (Otero, 1999).In Africa and other developing countries microfinance institutions (MFIs) are the main source of finance for microenterprises (Anyanwu, 2004). In Ghana, microfinance institutions fill a gap created by the refusal of traditional commercial banks to give credit to microenterprises. While traditional commercial banks provide credit based on collateral, microfinance institutions (MFIs) provide credit to the poor who do not provide collaterals. Adjei, (2011) observed that for most micro and small entrepreneurs in Ghana the lack of access to financial services is a critical constraint to the expansion of viable micro enterprises.According to Aryeetey, (1994, 1996) only six percent of the population has access to formal financial services while a majority of the population are denied access. Interestingly, about 91% of the economically active population in Ghana is employed in the informal sector (UNDP 2007). Ironically, it is this active and major part of the population that is denied credit. Given the devastating effect of poverty on the people of Ghana, successive governments since the 1980s have introduced medium-term national development policy frameworks to direct the implementation of development plans in sectors and districts aimed at reducing poverty and improving the social wellbeing of the people. …