Globally, microcredit has risen to prominence at a rapid speed after its large-scale success in the 1970s in Bangladesh with Grameen Bank. Its central idea is that traditional banks find the poor too costly to serve due to their lack of steady income and collateral. To address the issue of a lack of collateral to secure loans, some rural banks and microfinance companies have taken to group guarantees as a form of social collateral to provide loans. This study delves into the group lending model of the Bonzali Rural bank in Tamale. It aimed at obtaining data on the forms of social collateral, borrower benefits, challenges and the prospects of the group lending approach in microfinance services delivery. A sample of 201 women was used for the study. Structured Survey questionnaires were the main data collection instrument used. Tables were used in the presentation of data. SPSS has been used in producing the charts and Tables and to carry out a paired sample analysis. Group guarantee was the singular collateral security base upon which women were granted loans. The benefits of group lending to the borrower were found to include; improvements in personal finance, easy access to credit, and so on. The paired sample results indicated a statistically significant impact of loans to the beneficiary women through profit increment. Borrower challenges were found to include; peer pressure, conflict among members, etc. Majority of the women were positive about their future relationship with the bank. Based on the findings of this study, it recommends among others that, the Bank of Ghana should adopt a discriminatory policy rate in order to lessen the cost of borrowing to MFIs that support women groups and entrepreneurs.

Background to the Study
The terms ‘microfinance’ has become a common household word in recent years in Ghana. It is an age long tradition of people saving and/or sourcing small loans from individuals and groups within the context of self-help to start a business including farming ventures. Available evidence suggests that the first credit union in Africa was established in Northern Ghana in 1955 by Canadian Catholic missionaries. However, susu, which is one of the microfinance schemes in Ghana is thought to have originated from Nigeria and spread to Ghana in the early twentieth century (Asamoah, 2005).

Microfinance encompasses the provision of financial services and management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low-income clients. According to (Attanasio, Augsburg, De Haas, Fitzsimons, & Harmgart, 2013), microfinance creates access to productive capital for the poor and enables people to move out of poverty. By providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society (Otero, 1999).

Micro-credit (or microfinance) institutions refers to a wide range of organizations dedicated to providing micro financial services, including non-governmental organizations, credit unions, cooperatives, private commercial banks, non-bank financial institutions and some state-owned banks. Although most countries have had long experience with informal community-based financial systems, the commercial provision of financial services to poor populations has expanded rapidly only in recent years.

In the words of the former UN Secretary-General, Kofi Anan “microfinance is an integral part of our collective effort to meet the Millennium Development Goals. Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives”.

Microfinance is broadly defined as the provision of small-scale financial services such as credit, savings and other basic financial services to poor and low-income people. Micro-credits are usually secured through the mutual guarantee of solidarity groups. Such loans were used for various purposes, including investments in micro enterprises and petty trading activities and agricultural production. Most micro-credit clients are female heads of households, pensioners, displaced persons, retrenched workers, small farmers, and micro-entrepreneurs (Asamoah, 2005).

Micro-credit schemes may take three different forms or a composite of all the three forms namely, the capacity building approach, the channelling approach and the institutional approach. The capacity building approach focuses on the very poor, the landless, the powerless, the voiceless or the ‘assetless’, especially women. The aim is to raise awareness, organize the clients and build their confidence to enable them to believe in their own ability to transform their lives and to develop savings culture. The channelling approach may be used by rural banks and nongovernmental organizations to assist the ‘not-so-poor’ or productive poor. These groups may have the courage to take some minor risks but may lack financial support because of the lack of collateral security.

Microfinance in conceived to be an alternative to the formal financial sector and some informal sources such as moneylenders which serves less than 20% of the population in most developing countries (Gallardo, Ouattara, Randhawa, & Steel, 2005). The 1970s represented a turning point to in the history of microfinance after the failure of the formal sectors and government subsidized credit. Bangladesh, Brazil and other countries started giving small loans to the poor based on group guaranteed repayments method. After the 1970s, many banks and financial institutions like the Grameen Bank formed by Muhammad Yunus adopted the group lending method.

Micro Finance Institutions (MFIs) have two major lending methodologies; group lending and individual lending. Group lending involves lending to a group of borrowers who are jointly liable for a loan. Group lending creates its own type of collateral and has received a lot of attention from economic theorist and policymakers. Group lending uses joint liability to secure high payments rates. Joint liability helps to overcome adverse selection, moral hazard and enforcement that impedes lender from providing credit to borrowers since group members are jointly liable for a loan. Joint liability, inducing borrowers to carefully select their group members provide a solution to adverse selection faced by lending institutions (Armendariz Aghion De & Gollier, 2000; Ghatak, 1999; Van Tassel, 1999). At the same time, peer monitoring mitigates moral hazard (Armendariz De Aghion, 1999; Banerjee, Besley, & Guinnane, 1994; Stiglitz, 1990; Wydick, 1999). Equally, group lending facilitates enforcement of penalties on defaulters when borrowers have close ties (Besley & Coate, 1995; Wydick, 2001).

Group lending creates incentives for individual group members to screen out risky borrowers, monitor each other’s’ action and enforce payment. The incentives to get a large loan size and the threat to cut off any future lending if loans are not repaid can improve repayments. Group lending received a great attention from economic theorist and policymakers for its ability to solve asymmetry of information and enforcement problems that face the financial institutions in developing countries. In the developed world, larger loans are necessary to accommodate a relatively high cost of business operations. Group lending has proven to be effective in ensuring high repayments rates for MFIs abroad by providing peer support and a form of loan collateral.

However, due to the absence of adequate collateral, conventional lending to the poor has been considered not feasible because of the riskiness of loans. In such instances, group lending; where the entire group is considered responsible for default by any member have had some success in lending to the poor. The results have been mixed according to existing literature.

As stated by (Conning, 2005), referring to (Pitt & Khandker, 1998), “group lending programs have been quite successfully implemented in the United State of America(USA), Cameroon, Malawi, South Korea, Malaysia and Bangladesh. But similar schemes have had problems in India, Egypt, Venezuela, Kenya and Lesotho”.

The Bonzali Rural Bank was formed in 1990 in response to the needs of hundreds of rural populations in the north who did not have access to the main commercial banking services. Among other things, the bank was established to provide general banking services to the people of the northern region. Since its formation, the bank’s main branch has been located in Kumbungu with 2 branches in Tamale and 1 branch in Yendi.

In 2005, the Bank started a lending service modelled on the idea of a group liability. The Bank’s target group for its group lending service has been mainly women. These women engage in mainly petty trading with a few others engaging in farming and shea butter extraction.

Statement of the Problem
The Northern region of Ghana has been found to have a higher concentration of poverty. Out of the 18.2% total population that live in extreme poverty in Ghana, 53.7% live in northern Ghana, which commands only 17.2% of the total Ghanaian population, an indication that the poor in Ghana continue to be concentrated in the northern savanna ecological belt. In 2007, five out of ten in the Northern Region was said to be poor (Ghana Statistical Service, 2007). Among the population in the north, women are the greatest victims of poverty (Emmanuel, 2012). Poverty in Ghana has been reducing since 1991, but the northern region had not received a commensurate share of the reduction in poverty. The development disparities between the North and the Southern half of Ghana continued to manifest in all spheres of life, including business, human capital development, health and education, and investment portfolios. As a result of these, many non-governmental organizations (NGOs) and MFIs have designed programs and policies that are meant to fight poverty among the people of the north. One of such MFIs is the Bonzali Rural Bank (BRB). There has been a significant expansion in the activities of microfinance companies in recent times. While some industry players find this development to be positive, others are sceptical. There has always been the question of the effectiveness of micro-credit in empowering the poor.

Giving credit to individuals require some level of collateral security to guarantee repayment. This tendency of microfinance companies demanding collateral before giving credit has always been a challenge to accessing credit especially by the extremely poor. In the past few years, a new model called group borrowing is being employed by the Bonzali Rural Bank in giving credit to their customers in some parts of the Northern Region. This model does not require collateral from individual members but rather demands the formation of groups as a condition to accessing credit. Even though the group borrowing model has operated for some time now, there have been no studies to examine its effectiveness or otherwise in delivering credit to its targeted clientele i.e. the extremely poor or the not-so-poor. This study intends to close that gap by providing an investigation into the new group borrowing model of the Bonzali Rural Bank and to provide a practical recommendation to enhance credit delivery to the poor.

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Item Type: Ghanaian Topic  |  Size: 87 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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