Evolution of Microfinance and Poverty Reduction in Ghana free essay sample

In more than thirty years it has gained a reputation for being one of the most effective instruments in fighting poverty globally. Ghana’s financial sector in the past two decades has undergone a significant transformation especially with the promulgation of PNDC Law 328 of 1993, that allowed the establishment of different types of non-bank financial institutions, including savings and loans companies, finance houses, credit unions, as well as rural and community banks (RCBs). This policy transformation has given rise to a number of microfinance programmes and activities ranging from Government, Donors and NGOs. The microfinance industry in the early 1980s, was dominated by non-governmental organizations (NGOs) and experimented with innovative programmes in an attempt to address what they perceived as the failure of markets and governments to provide financial services to the poor. These organizations were heavily dependent on external grant funding. Generally, global perspective on microfinance is changing with even the meaning of the term â€Å"microfinance† altered. We will write a custom essay sample on Evolution of Microfinance and Poverty Reduction in Ghana or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page According to Consultative Group to Assist the Poor (CGAP) as recently as a few years ago, it meant, â€Å"†¦ a credit methodology that employs effective collateral substitutes to deliver and recover short-term, working capital loans to micro-entrepreneurs†. Today, the term encompasses a broad spectrum of financial services that includes not only microcredit but also savings, insurance, and money transfers. Perspectives on the target group for microfinance have also expanded in recent years to include low-income men, women and poorest of the poor. Another significant change is that microfinance services are no longer considered a niche market activity that should be confined largely to the development community and carried out solely by specialized microfinance institutions. Today, it is believed that if microfinance is to achieve its full potential, it must be fully integrated into a developing country’s financial system with access to vast amounts of human, physical, and financial resources and management know-how. A paradigm shift toward market-based approaches to poverty reduction is also taking place. In the larger business world, a growing number of established companies including some multinational corporations have achieved impressive results in reaching the poor in innovative ways with their products and services. This reaffirms the feasibility of large-scale commercial microfinance and strengthens private sector interest. Hence the acceleration in the creation of commercial microfinance institutions which is demonstration effect of the profitability of the sector, combined with market forces in the newly-liberalized financial markets. . 1? STATEMENT OF THE PROBLEM The main objective of Ghana’s Growth and Poverty Reduction Strategy (GPRS II) is to ensure â€Å"†¦sustainable equitable growth, accelerated poverty reduction and the protection of the vulnerable and excluded within a decentralized, democratic environment†. The main objective is to eliminate widespread poverty and growing income inequality, especially among the productive poor who constitute the m ajority of the working population. This group is however characterized by lack of access to credit. Littlefield and Rosenberg (2004) argue that the poor are generally excluded from the financial services sector of the economy. The liberalization of Ghana’s financial sector in the past two decades has led to the emergence of a number of Micro – finance institutions (MFIs) with the mission of extending micro-credit and other financial related services to the productive poor. The microfinance industry has now been in existence for over two decades serving the poor through the provision of financial and related services. The industry which has been predominantly run by NGO, microfinance institutions is going through an increasingly growing wave of commercialization. In addition, the transformation of many non-governmental organisations (NGOs) into microfinance banks has led to a strong increase in client deposits and refinancing lines extended under market conditions. Moreover, low default rates and an increasing number of sustainable MFIs, showing a positive return to equity; demonstrate that banking with the poor can be a successful business. While in the past MFIs had to rely almost exclusively on socially oriented non-profit donors and international financial institutions, they have recently been able to tap broader sources of fund considering the social and economic benefits and the large unmet demand for microfinance. This has attracted new investors and encouraged substantial commercial involvement in the industry. Microfinance is becoming more commercial as traditional non governmental organizations (NGOs) dedicated to microfinance are transforming into licensed banks and non-bank financial intermediaries in order to access public funds or small savings deposits. While there has been some research on the general impact of Microfinance on poverty, little has been written about the current trends in the Microfinance industry. There is the need to determine the effects of the current trends in the industry on microenterprises. This study examines the nature of the current trends in the industry commercialization of the microfinance industry and it’s impact on their clients who are mostly the poor in the Awutu Senya West District. 1. 2? OBJECTIVES OF THE STUDY The study which is conducted in the Awutu Senya West District in the Central Region has as its main objective to highlight the nature of the current trends as in the commercialization of the industry and examine its effects on the profitability of microenterprises in the district. The study also intends to give a brief history of microfinance and then attempt to forecast the future direction of the industry. 1. 4? SIGNIFICANCE OF THE STUDY Micro and Small enterprises contribute significantly to national economic development hence the need for their sustainability and growth. Microfinance is an effective development tool for poverty reduction for the simple reason that financial services enable poor to take advantage of economic opportunities, to build assets, and to reduce their vulnerability to external shocks that adversely affect their living standards. Financial services cannot function in isolation as a magic bullet to lift people out of poverty, but the close relationship between financial services and poverty reduction provides strong justification for putting financial systems for the poor at the center of development agenda (ADB report 2004). The transformation of the concept of Microfinance has been an ongoing process making it therefore imperative for both the industry players and their clients to be fully aware of the consequence thereof. There is the need to point out what exactly the changes are and the implications to the poor and low-income clients of Microfinance Institutions. Realizing these effects the industry players may streamline their operations in order to remain in balance. 1. 6? METHODOLOGY The research shall employ survey methodology. It shall combine relevant aspects of quantitative, qualitative, and participatory methods within the framework of impact assessment techniques. Microfinance institutions who are the providers of financial services to the poor and the client form the population of the research. Simple random sampling will be used to select two (2) microfinance institutions, while stratified sampling technique shall be employed to select sixty 60 clients of three microfinance institutions namely Express Savings and Loans, EB ACCION and Last Stop Microfinance in the Awutu Senya West District. 1. 7? SCOPE AND LIMITATIONS The scope of the study is on the state of the Microfinance industry as of today, its effects on poverty alleviation through microenterprise activities and the future prospects of the industry. Quiet a number of constraints are envisaged in undertaking this research, prominent among which is time constraints. This does not make it possible to make use the vast amount of materials available. However, it is hoped that a considerable amount of information would be gathered to enable an in-depth study to be undertaken. 1. 8? ORGANISATION OF THE STUDY The study will be presented in four main chapters. Chapter will include and introduction to the study, the objectives of the study, scope of the study, limitation of the study and methodology. Chapter two will entail the literature review which will give a brief historical background of the Microfinance industry in Ghana, Current trends in the Microfinance industry, Factors which accounted for the commercialization of Microfinance. Chapter three will cover the effects of commercialization of Microfinance on microenterprises in the Awutu Senya West District in the Central Region. The chapter four will essentially center on the conclusion and recommendations.