ABSTRACT
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.
CHAPTER ONE
INTRODUCTION
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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