MICROFINANCE PARADIGM: INSTITUTIONAL PERFORMANCE AND OUTREACH A thesis submitted to The University of Manchester for the degree of Doctor of Philosophy in Economics in the Faculty of Humanities 2010 Samuel Kobina Annim School of Social Sciences/Economics Discipline Area LIST OF CONTENTS ABSTRACT ................................................................................................................... 9 DECLARATION .......................................................................................................... 10 COPYRIGHT STATEMENT ........................................................................................ 10 DEDICATION .............................................................................................................. 11 ACKNOWLEDGEMENT ............................................................................................. 11 THE AUTHOR ............................................................................................................. 12 CHAPTER 1 ........................................................................................................................... 14 INTRODUCTION ........................................................................................................ 14 1.0 Background ........................................................................................................ 14 1.1 Microfinance Knowledge Gap ........................................................................... 14 1.2 Objectives ........................................................................................................... 17 1.3 Contribution ...................................................................................................... 18 1.5 Structure of Thesis ............................................................................................. 19 CHAPTER 2 ........................................................................................................................... 20 FINANCE AND DEVELOPMENT: MAKING A CASE FOR MICROFINANCE PARADIGM ................................................................................................................. 20 2.0 Introduction ....................................................................................................... 20 2.1 Historical Overview ........................................................................................... 20 2.2 Financial Intermediation ................................................................................... 22 2.3 The Microfinance Paradigm .............................................................................. 29 2.4 Conclusion .......................................................................................................... 32 CHAPTER THREE ............................................................................................................... 34 TARGETING THE POOR VERSUS FINANCIAL SUSTAINABILITY AND EXTERNAL FUNDING: EVIDENCE OF MICROFINANCE INSTITUTIONS IN GHANA........................................................................................................................ 34 3.0 Introduction ....................................................................................................... 34 3.1 Related Work ..................................................................................................... 38 3.2 Methods of Study ............................................................................................... 42 3.3 Results and Discussion ....................................................................................... 55 3.4 Conclusion .......................................................................................................... 69 CHAPTER FOUR .................................................................................................................. 72 SENSITIVITY OF LOAN SIZE TO LENDING RATES: EVIDENCE FROM GHANA’S MICROFINANCE SECTOR ...................................................................... 72 4.0 Introduction ....................................................................................................... 72 2 4.1 Debates ............................................................................................................... 76 4.2 Microfinance Industry in Ghana ....................................................................... 83 4.3 Methods of Study ............................................................................................... 85 4.4 Results and Discussion ....................................................................................... 93 4.5 Conclusion ........................................................................................................ 109 CHAPTER FIVE .................................................................................................................. 112 ECONOMIC GOVERNANCE AND MICROFINANCE INSTITUTIONS’ FUNCTIONALITY ..................................................................................................... 112 5.0 Introduction ..................................................................................................... 112 5.1 Conceptual Framework ................................................................................... 115 5.2 Data .................................................................................................................. 119 5.3 Econometric Analysis ...................................................................................... 120 5.4 Results and Discussion ..................................................................................... 129 5.5 Conclusion ........................................................................................................ 143 CHAPTER SIX .................................................................................................................... 145 MICROFINANCE EFFICIENCY TRADE-OFFS AND COMPLEMENTARITIES .... 145 6.0 Introduction ..................................................................................................... 145 6.1 Conceptualizing Efficiency .............................................................................. 150 6.2 Measurement of Efficiency .............................................................................. 153 6.3 Efficiency in Microfinance ............................................................................... 160 6.4 Method of Study .............................................................................................. 167 6.5 Results and Discussion ..................................................................................... 174 6.6 Conclusion ........................................................................................................ 187 CHAPTER SEVEN .............................................................................................................. 189 CONCLUSION ........................................................................................................... 189 7.0 Introduction ..................................................................................................... 189 7.1 Summary of Results and Policy Recommendations ........................................ 189 7.2 Caveats ............................................................................................................. 192 7.3 Future Considerations ..................................................................................... 193 APPENDICES ............................................................................................................ 196 APPENDIX I - Raymond W. Goldsmith’s (1969, pp. 44-48): Stylized Facts on Financial Structure ................................................................................................ 196 APPENDIX II - Poverty Conceptualization, Contextualization and Measurement ................................................................................................................................ 198 Introduction ........................................................................................................... 198 3 Nature of Poverty .................................................................................................. 198 Measures and Types of Poverty ............................................................................ 200 Measurement of Poverty in Ghana ....................................................................... 202 Poverty Headcount in Ghana ................................................................................ 203 APPENDIX III - Estimating Poverty Index - Microfinance Poverty Assessment Tool ........................................................................................................................ 206 Appendix IV - Table IV- 1: Scope of MFIs Inputs/Outputs based on Sustainability and Outreach ......................................................................................................... 208 APPENDIX V - Table V-1 Geographical Spread of Microfinance Institutions for Chapter Six ............................................................................................................ 208 APPENDIX VI – Ghana’s Key Macroeconomic, Financial and Microfinance Indicators ............................................................................................................... 209 REFERENCES ........................................................................................................... 211 LIST OF TABLES TABLE 2.1 -