CHAPTER ONE

INTRODUCTION
Background of the study
Empowerment of women is one of most important issues in developing country. Women
are an integral part of the society, their participation in decision making through their
participation in the economic activities is very low. Microfinance plays a significant role
in the improving women decision making through participation in economic activities.
This study is an attempt to explore the socioeconomic determinants of women
empowerment, focusing on the rural women who have availed to micro-credit. Putty
(2003) defines women empowerment as developing them as more aware individuals, who
are politically active, economically productive, and independent and are able to make
intelligent decisions in matter that affects them and their nation. Women workforce
throughout the world contributes to the economic growth and sustainable livelihoods of
their families and communities. The role and importance of women in the national
economy through child nurturing and other household obligations cannot be over
emphasized in terms of their contribution to Gross Domestic Product (GDP) and the
development of the nation as a whole. Most financial institutions are reluctant to lend
money and mobilize savings for women. This is based on the perception that women are
unable to control household income, have limited access to property and fewer source of
collateral. According to the Financial Women's Association (FWA 2007) "Microfinance
generally targets poor women because they have proven to be reliable credit risks and
when they have the financial means, they invest that money back into their families,
resulting in better health, nutrition and education as well as stronger local economies.
Microfinance programmes are currently being promoted as a key strategy for

simultaneously addressing both poverty alleviation and women's empowerment.

Microfinance plays an active role as a financial service for the poor in developing
countries, and is considered a powerful tool in the battle to reduce poverty. Most
microfinance institutions (MFIs) are socially motivated, and attempt to provide loans to
the poor (wide outreach) and maximize the number of customers (length outreach).

Achieving wide outreach in particular can be considered especially important for poverty
reduction, since credit constraints on the poor is one of the reasons for the deteriorating
conditions in developing countries. Wide outreach measures how poor-borrower MFIs
provide loans, and it is a core indicator that recent studies have analyzed. In order to
increase wide outreach, socially-motivated MFIs take advantage of external subsidies and
cross-subsidies. Cross-subsidy is the use of gains from profitable borrowers to subsidize
loans to unprofitable borrowers (McIntosh and Wydick, 2004). Here, we suppose that the
profitability of clients differs based on their initial wealth, and that the widest outreach
(loans to the poorest) is the least profitable. The poor tend to have higher default rates
since they are more susceptible to external shocks. On the other hand, the wealthy
generally take larger loans, which is more profitable for MFIs through scale of
economies. Therefore, we can conclude that socially-motivated MFIs use the gains from
wealthier borrowers to subsidize loans to poorer borrowers. Thus, cross-subsidies and
external subsidies from donors enable socially-motivated MFIs to lend to unprofitable
poorer borrowers, thereby increasing their wide outreach.

Recently, however, MFIs have faced difficulties achieving wide outreach. One reason is

that, now there are many MFIs in the market and competition among MFIs is fierce; this
affects the cross-subsidization and profitability of MFIs adversely. According to
McIntosh and Wydick (2004), competition in Bangladesh, East Africa, and Latin America
is particularly severe. Normally, incumbent MFIs tend to be socially motivated, while
many newcomers to the MFI market are profit motivatedthey attempt to maximize
profit by entering the market (McIntosh, de Janvry, and Sadoulet, 2005; Navajas,
Conning, and Gonzales-Vega, 2003). Profit-motivated MFIs are willing to enter the
market where socially-motivated MFIs are already present. This is because they want to
take advantage of the effect of training and screening already conducted on clients by the
incumbent lenders. McIntosh, de Janvry, and Sadoulet (2005) show a clustering effect
and point out that newcomers are willing to enter the market where pre-existing MFI
penetration is high. These recent market entries have affected wide outreach adversely.

The concept of microfinance can be defined to include the entire spectrum of financial
services for broad sectors of the population but particularly for the poor. It refers not only
to the small and micro-loans, but also to the savings products, insurance, leasing and
money transfer services. Besides the provision of financial services, microfinance also
involves the provision of basic skills and vocational training, health and other
information, which distinguish them from other financial service providers.

Robinson (2001) defines microfinance as small scale financial services for both credit
and deposits that is provided to people who farm or fish; provide services; work for
wages or commission; gain income from renting out small amounts of land, vehicles,
animals or machinery and tools; and to other individuals and local groups in developing
countries, in both rural and urban areas. Ledgerwood (1999) defines microfinance as the

provision of financial services to low-income clients, including the self-employed.

Undoubtedly, microfinance is not a new concept in Ghana. It has always been common
practice for people to save and/or take small loans from individuals and groups within the
context of self-help in order to engage in small retail businesses or farming ventures.

Anecdotal evidence suggests that the first credit union in Africa was probably established
in Northern Ghana in 1955 by the Canadian Catholic missionaries that were there at the
time.
However, Susu, which is one of the current microfinance schemes in Ghana, is thought
to have originated in Nigeria and spread to Ghana from the early 1900s.

Inclusive growth refers both to the rate and pattern of growth, which is considered
Interlinked, and therefore need to be addressed together. The idea that both the pace and
pattern of growth are critical for achieving a high, sustainable growth record, as well as
poverty reduction, is unswerving with the findings in the Growth Report: Strategies for
Sustained Growth and Inclusive Development (the World Bank Commission on Growth
and Development, 2008). On one level, growth that is pro-poor can be defined as that
which results in a significant increase in the incomes of the poor. Indeed, this is the
official definition adopted by the United Nations.
Attaining the Millennium Development Goals (MDGs) will necessitate rapid and
sustained growth in developing countries. Pro-poor growth is growth that is good for the
poor. There is widespread agreement that higher rates of growth usually result in more
rapid poverty reduction, especially over periods of a decade or more.

Galor and Zeira (1993) however argue that the credit constraints? associated with high
levels of inequality restrain growth. Developing a shared understanding of what we mean
by pro-poor growth is important for improving such analysis and for clarifying dialogue
with policymakers.

Kraay (2004) essentially says that poverty will be best addressed by maximising general
income growth; Ravallion (2004) however demonstrates that this is a specific and not a
general case as Kraay puts it.
Current and successive governments in Ghana have embarked on pro-poor development
strategies such as the: Economic Recovery Programme (ERP), Programme of Actions to
Mitigate the Social Cost of Adjustment (PAMSCAD), Ghana Vision 2020, Ghana Poverty
Reduction Strategy 1 &2 (GPRS), Strategy for Ensuring Macroeconomic Stability
(EMS), Strategies for Increasing Production and Gainful Employment (IPGE), Strategy
for Human Development and Provision of Basic Services (HDPBS), Strategy for Special
Programmes for the Vulnerable and Excluded (SPVE), Strategy for Good Governance
and the Livelihood Empowerment Against Poverty (LEAP) etc. These strategies were
formulated to facilitate an all-inclusive and sustained pro-poor economic growth.
However, according to Asenso-Okyere et al., (1993), some of the policy reforms or propoor strategies rather adversely affected vulnerable groups especially women, children
and rural dwellers. Poverty in Ghana is measured through periodic Ghana Living
Standards Surveys (GLSS). In 1991/92 GLSS 3 found that 51.7% of the population were
living below the national poverty line. By 1998/99 (GLSS 4) this had fallen to 39.5% and
by 2005/06 (GLSS 5) it had fallen to 28.5% (Ghana Statistical Service 2007). In absolute
terms the number of poor people in Ghana has fallen from 7.9 million in 1991/92 to 6.2
million in 2005/06. However, the fall in poverty has not been experienced equally around

the country. GLSS 5 figures show poverty headcount rates in the five southern regions of
the country between 12% (Greater Accra) and 20% (Ashanti, Central, Eastern, Western);
these regions have all seen dramatic falls in poverty since 1991/92 due to urban growth,
minerals extraction and, in the recent survey period, a boom in the cocoa sector in
response to higher world prices and domestic market reforms and production support.
The transitional regions, Brong-Ahafo and Volta, have also witnessed impressive falls
in poverty to around 30% in 2005/06.
Poverty in the three northern regions - Northern, Upper East and Upper West remains
stubbornly high at 52-88%. In 2005/06 the three northern regions accounted for just
under 22% of the population, but 45% of the headcount poor, 57% of the headcount
extreme poor and 80% of extreme poverty severity in the country (Ghana Statistical
Service 2007). The livelihood classification used by GLSS shows poverty to be
concentrated amongst food crop farmers, who are encountered disproportionately (but
not exclusively) within the three northern regions. This group accounted for 43% of the
population in 2005/06, but 69% of the headcount poor. Whilst the poverty rate amongst
food crop farmers (68%) and export crop farmers (64%) was similar in 1991/92, by
2005/06 it had fallen to just 24% amongst the latter group, but was still 46% amongst the
former.

1.1 Problem Statement

The facts and figures remain obvious that, the feminine class (women) in Ghana is still
sadly leading the poverty index of Ghana with most people living below the poverty line.
According to the 2010 Population and Housing Census (PHC), the Ghanaian population
is predominantly female; however, women also formed a large proportion of the
vulnerable group languishing in abject poverty.

Despite the fact that micro-finance development in recent years have targeted women in
their operational methodology, most women still face financial exclusion in the various
products and services offered by MFIs. Indeed, factors such as high interest rates, shorter
maturity period of microcredits/loans, inadequate microcredit to poor/vulnerable women
are among other factors that further deepen the woes of women in the microfinance
industry. This study sought to establish the role of microfinance in empowering women in
the private sector.
1.2 Research question
This study therefore sought to unravel the following:
Do the resources of MFIs in Ghana necessarily reach out to the productive women in the
private sector?

1.3 Research Objectives

This research seeks to delve into the following specific objectives:
To assess whether the operational methodology used by MFIs in making their lending
decisions is private sector deriven.
To examine whether the resources of MFIs necessarily reach out to the core-poor in
Ghana.
The general objectives of the research will cover the following:
To examine the challenges MFIs face in reaching out to the core-poor in Ghana.
To explore the various avenues of making the activities of MFIs in Ghana poverty
reduction-driven.

To quantitatively measure the impact of interest rates and loan amounts of MFIs on the
income levels of their clients.

1.4 Significance of the Study

The significance of the study was viewed from the fact that: it would add to the pool of
knowledge on Microfinance and poverty reduction issues across the globe and serve as a
reference document for future researchers in this line of study and policy makers in the
country.
In addition, the study has the potential of providing key solutions to the many operational
challenges that bedevil the entire outreach and sustainability of the Microfinance
enterprise in Ghana and beyond.

Moreover, given the war waged against poverty and its concomitant effects by the United
Nations (UN) as enshrined in the Millennium Development Goals one (MDGs), the
findings of this study will facilitate a rethinking of pragmatic means of reducing poverty
through microfinance.

Furthermore, this study has the potential of igniting more research interest by academics;
hence establishing a wide horizon of policy options to development policy makers.
Lastly, it was envisaged that the findings of the study would help donors and
governments know whether their funds earmarked for pro-poor development which are
channeled through Micro-Finance Institutions (MFIs) are properly used by MFIs.

1.5 Scope and limitation of the study

The study covered a broad range of issues pertaining to MFIs and poverty reduction and
the extent to which government strategies geared towards poverty reduction are
complemented by the MFIs. The researcher will consider the array of operational
strategies deployed by MFIs in their outreach to women in the priate sector. It also
considered and discussed into detail the challenges that affected the entire microfinance
enterprise in Ghana.
The study also delved into the gender reflection in the distribution of microfinance funds
among men and women.
However, the research envisages some limitations in the exercise of soliciting for
information and data from the various MFIs and individual respondents who will matter
in this study.
The following are some limitations envisaged by the research in the course of the
research:
Inadequate finance is a major limitation envisaged by the researcher; this obstacle stands
to limit the researchers frontiers of researching across the nooks and crannies of Ghana
since poverty is multifaceted.
Also, the researcher anticipates a language lacuna since he will be unable to speak the
native languages of some respondents; this might lead to some amount of information
lost through interpretation.
Furthermore, time is yet another anticipated limitation since the research will be
conducted and submitted with a time frame coupled with the fact that, the researcher will

need to meet several academic commitments within the one year span of the masters
programme.
Lastly, the general negative Ghanaian perception towards academic research poses a
strong limitation to this research as most individual or institutional respondents decline in
completing the researchers questionnaire.

1.6 Organization of the study

Chapter one was titled introduction; it covered the background of the study, statement of
the problem, research objectives, significance of the study, scope and limitations of the
study and as well as the organization of the study.
Chapter two (literature review) captured both the theoretical and empirical literature that
were relevant to the subject matter.
Chapter three was titled methodology, and sought to describe the modus operandi that
was used to carry out the study. The methodology encapsulated the research design,
sampling design, data collection procedures and as well as the data analysis techniques.
Chapter four described how the data was analyzed and presented.
Chapter five will draw conclusions from the summaries of the research and make
recommendations from the findings of the study.