ABSTRACT
Credit facilities continue to pose a major threat to
the survival of the SME sector. Traditional banks have failed to advance credit
facilities to the SMEs due to challenges with collateral securities and
information. This study sought to assess the relevance of microfinance in terms
of meeting credit needs and reducing poverty among the small business owners of
Jukwa in the Central Region. Thirty-one (31) respondents were sampled for the
study. Descriptive statistics were used for the presentation of the findings.
Questionnaire was also used to collect data for the study. Analyses of the
responses revealed that majority of the respondents have felt positive impact
of microfinance activities. It is found that, through microfinance credit,
considerable amount of business capital has been accessed either for start-up
or for expansion. Family burdens among the respondents were seen to decrease
owing to microfinance credit. Others also felt the positive impact as it helped
them in support of their children’s education. The key problem associated with
microcredit, according to the respondents was the exorbitant interest rate
charged by the microfinance institutions. This situation prevented many
potential beneficiaries from subscribing to microfinance credit. It is
recommended that the microfinance institutions lower their rates so as to
attract more clients for their businesses.
CHAPTER ONE
INTRODUCTION
Micro, Small and Medium Enterprises (MSME’s) are,
collectively, the largest employers in many low-income countries, yet their
viability can be threatened by a lack of access to such risk-management tools
as savings, insurance and credit. Their growth is often stifled by restricted
access to credit, equity and payments services (McCourtie, 2015).
Microfinance involves extending small loans, savings and
other basic financial services to people that do not readily have access to
capital. It is a key strategy in helping people living in poverty to become
financially independent, which helps them become more resilient and better able
to provide for their families in times of economic difficulty. These people can
be classified under MSMEs. Considering nearly half the world survives on less
than $2 a day, the relevance of microfinance cannot be over-emphasized.
Background of the Study
The Small and Medium Enterprises (SME’s) have not received
the outermost attention it deserves. The SME’s have not received the attention
of policy makers for a long time, even though it has been established beyond
doubt that they contribute enormously to the development of the country. This
critical sector needs funding to grow to the levels that can be beneficial to
the economy of Ghana. Over the years the funding needs of the small business
sector have not been forthcoming. This acute lack of credit to the informal
small business sector has stifled their growth and consequently reduces the development of the country at large. For a long time, this
credit deficit has been dealt with through the informal financial services in
the form of money lending by individuals, borrowing from relatives and friends,
financial gifts from relatives and friends, as well as credit from savings and
loans associations. These sources of credit cannot provide enough and
sustainable funding for the informal small businesses.
The informal small business sector constitutes a critical ingredient
for eradication of poverty and for that matter promoting national development,
and as such, has forced governments, donors, and non-governmental organizations
to promote the sector in a bid to reducing poverty and inequality (Cook, 2001).
Several programs have been instituted by governments of Ghana such as the Ghana
Center for Entrepreneurship, Employment and Innovation (GCEI), the Ghana Youth
Employment Development Agency (GYEDA), the Youth Enterprise Support (YES) and
others, with the aim of revamping the small business sector of the economy.
There is also support from other local and international entities such as the
West Africa Social Entrepreneurs Network (WASEN) and Hill Foundation to enhance
the development of small businesses in Ghana and other African countries.
In addition to the above, Micro finance services have emerged
as a sustainable, and competitive source of credit for the informal small
businesses sector. Leikem (2012) believes that the micro finance approach
offers a better prospect since it employs effective collateral substitute for
short-term and working capital loans to micro-entrepreneurs. During the past
decades, many developing countries including Ghana have seen their financial
system undergo some transformation and innovation due to the
emergence of micro finance institutions (MFIs).
The need for microfinance credit is necessitated by the fact
that the mainstream banks do not want to grant credit to small businesses, most
especially those located in the rural communities, as a result of their
inability to provide collateral. Small businesses in the rural communities of
the country are usually assessed to be high-risk businesses by the mainstream
banks and as result, lending credit to these small businesses is always seen as
a 'waste of time and effort'. Microfinance operators however are prepared for
the risk associated with doing business with the informal small businesses
sector. In the words of Khawari (2004), microfinance is a small-scale financial
services provided to people into petty businesses in both rural and urban
communities. The concentration of micro finance operation is solely on the
operations of the informal business sector, which is characterized by
inadequate funding and more. Micro finance institutions are primarily
established to provide credit or bring financial services to 'poor and
vulnerable' groups in society with the ultimate goal of improving living
standards or by eradicating poverty.
Statement of the Problem
The need for microfinance as a development tool became more
pronounced when it was recognized that the poor businesses and individuals are
excluded from formal financial institutions and forced to depend on expensive
and often exploitive informal sources of credit. Exclusion from formal
institutions is a common and constant problem for the 'poor businesses and
individuals' in the society. High transaction costs, information barriers, collateral issues, and more are the reasons for exclusion by
the so-called commercial banks. Thus micro and small businesses lack access to
credit from the formal financial institutions.
Microfinance attempts to overcome these barriers so that the
poor can have reliable and affordable access to credit. However, the
microfinance system in Ghana is not without problems. For example, some
microfinance institutions run into the problems of liquidity and insolvency and
in extreme situations run away with clients' savings or charging too high
interest that rather over-burden the very people they claim they want to help.
During recent years the very purpose of the microfinance
industry has come under scrutiny with critics arguing that MFIs do not go far
enough. The institutions concerned do not necessarily reach the households that
would benefit most from their support, because the financial services they
provide, small loans in particular, do not match the most pressing needs of
these poor households (Zeller, Sharman & McClafferty, 2010). High interest
charged by some MFIs are exorbitant and bolting away with clients' savings and
deposits is on the increase. It is against this background that this study is
being undertaken to assess the poverty reducing impact of microfinance credit
to the informal small businesses in Jukwa in the central region of Ghana.
Purpose of the Study
The general objective of the study is to assess the relevance
of microfinance credit in poverty reduction to the informal small businesses in
Jukwa in the central region of Ghana.
Objectives of the study
Assess whether small businesses in the Jukwa area get the
needed financial service from the micro finance institutions in the country
Ascertain how microfinance loans impacts on poverty reduction
of the beneficiaries in Jukwa.
Ascertain problems associated with microloans.
Research Questions
Based on the above objectives the following research
questions are formulated:
Do small businesses and individuals get the needed financial
service from the micro finance institutions in the Jukwa community?
What are the poverty reducing potentials of microfinance
programmes?
What problems are associated with microloans?
Significance of the Study
The study helps reveal better practices in microfinance
operations and helps microfinance institutions in reviewing their policies
towards clients in order to achieve greater efficiency and offer better
services. The findings also provide for policy recommendations and will
contribute to knowledge.
Organization of Study
This dissertation is structured in five chapters: chapter one
gives a background introduction on microfinance benefits and some problems associated with microloans; statement of the problem;
research objectives; significance of the study; limitation and organization of
the study. Chapter two reviews the relevant literature on the subject matter.
Chapter three explains the methodology employed to achieve the objectives. The
presentation of findings and analysis is captured in chapter four. Chapter five
presents the summary of the discussions, conclusions and recommendations.
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