MICROFINANCE IN RURAL GHANA: A VIEW FROM BELOW BY ERIC HENRY YEBOAH A THESIS SUBMITTED TO THE UNIVERSITY OF BIRMINGHAM FOR THE DEGREE OF DOCTOR OF PHILOSOPHY INTERNATIONAL DEVELOPMENT DEPARTMENT SCHOOL OF GOVERNMENT AND SOCIETY UNIVERSITY OF BIRMINGHAM SEPTEMBER 2010 University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT The thesis investigates, from a contextual and user perspective, the implementation processes of microfinance interventions and the effect of the implementation processes on households and businesses. The thesis‘ central argument is that microfinance discourse has neglected the perspective of microfinance users and this can negatively affect microfinance interventions as development tools. The study examines two microfinance interventions, Nsoatreman Women Empowerment Programme and Sinapi Aba Trust, in Nsoatre, a rural community in Ghana. Data for the study is from secondary sources, 26 interviews and 100 questionnaires. The study was guided by the philosophical ideas underlying the Sustainable Livelihood Approach and the Interpretive Approach. Using qualitative, cross-tabulations and ordinal logistic regression, the analysis found that the microfinance institutions studied essentially employ top-down approaches and that the perception of microfinance as non-paternalistic is not supported by this study. The mode of group formation has significant ramifications on subsequent group activities and peer monitoring played a limited role in mitigating moral hazard. Service users exhibited noticeable lack of knowledge on intervention activities. Microfinance interventions contribute to household consumption more than it does to household asset accumulation. Poorer service users reported more household and business benefits. The findings suggest a reappraisal of the design of microfinance interventions, especially in rural areas. Dedication This work is dedicated to my dearest, Theresa and to the memory of my father, Major J.K. Yeboah (Rtd) ACKNOWLEDGEMENT My gratitude first of all goes to the Almighty God for his protection and guidance throughout my academic endeavour in Birmingham. My very special gratitude goes to the forbearing and indefatigable Dr. Hubbard, my supervisor, whose unwavering confidence in me and his excellent supervision has made the completion of this thesis possible. His concern for my academic as well personal wellbeing is what has sustained me through this arduous exercise. My appreciation goes to my co-supervisor Dr. Leurs for his insightful comments and guidance. I also wish to thank staff of the department for their contribution to the thesis during the department seminars. I am very much grateful to the International Development Department for the financial support I received for this programme. I wish to thank the management, staff and service users of Sinapi Aba Trust and Nsoatreman Rural Bank for their assistance and cooperation during the fieldwork period. My appreciation goes to Mr. Sarpong of the Apex Rural Bank and staff of GHAMFIN for their support during the data collection stage of the thesis. I wish to acknowledge the contribution of these special people to my academic career: Mr. J.Y. Appiah, Ms. Gifty Appiasi, Ms. Paulina Hamilton, Mr. Bobby Micah Jnr., and Mr. Kyeremeh. I also acknowledge the critical and insightful contributions of my research colleagues to this thesis. Finally, I say thanks to my family members, Yaw Hinneh, Manu Darteh, Akoto, Ken, Mary, Johnson Kyere, Kofi Ameyaw and Adwoa for their prayers and support during this academic endeavour. TABLE OF CONTENTS CHAPTER I ............................................................................................................................... 1 INTRODUCTION ..................................................................................................................... 1 1.1 Introduction and Statement of the Problem ..................................................................... 1 1.2 Aims and Objectives of the Study ................................................................................... 3 1.3 Main Research Questions and Sub-Questions ................................................................. 3 1.4 Scope and Delimitations of the Study .............................................................................. 4 1.5 Justification of the Study ................................................................................................. 5 1.6 Structure of the Study ...................................................................................................... 8 CHAPTER II ............................................................................................................................ 11 THE NATURE OF MICROFINANCE INTERVENTIONS AND IMPLICATIONS FOR POVERTY REDUCTION ....................................................................................................... 11 2.1 Introduction .................................................................................................................... 11 2.2 What is Microfinance? Disaggregating the Concept ..................................................... 12 2.3 Changing Perceptions and Theories of Microfinance .................................................... 16 2.3.1 Changes in Development Thinking and Microfinance: The Parallelisms .............. 16 2.3.2 Theories of Microfinance ........................................................................................ 20 2.4 The Role of Impact Assessment in Understanding Implementation Process and Perspectives of Service Users .............................................................................................. 22 2.4.1 Conventional Impact Assessments ......................................................................... 24 2.4.2 Randomised Control Trials- Nouveau Impact Assessment Studies ....................... 30 2.5 Group Lending ............................................................................................................... 32 2.5.1 Group Formation ..................................................................................................... 35 2.5.2 Peer Monitoring ...................................................................................................... 36 2.5.3 Enforcing Loan Repayment .................................................................................... 38 2.5.4 Peer Support/Joint Liability .................................................................................... 39 2.5.5 What is the Relationship between Group Lending and Poverty Reduction? .......... 41 2.5.6 Are There any Costs to Group Lending? ................................................................ 42 2.6 Why do most Microfinance Institutions Target Women and what are the Implications for Poverty Reduction? ........................................................................................................ 44 2.6.1 Why Do Most Microfinance Institutions Target Women? ..................................... 45 2.6.2 Are There any Downsides to Targeting Women?................................................... 49 2.6.3 Characteristics of Women‘s Business ..................................................................... 51 2.7 The Microloan Trajectory: Does it Reduce Poverty? .................................................... 52 2.7.1 Fungibility of Microloans ....................................................................................... 52 2.7.2 Loan Disbursement Process .................................................................................... 53 2.7.3 Size of Loan ............................................................................................................ 55 2.7.4 Loan Use ................................................................................................................. 58 2.7.5 Loan Repayment ..................................................................................................... 59 2.7.6 Loans and Poverty Reduction ................................................................................. 61 2.8 How useful are Emergency Loans? ............................................................................... 64 2.8.1 Factors Warranting Emergency Loans.................................................................... 65 2.8.2 To What Extent do Service Users Value Emergency Loans? ................................. 66 2.8.3 Why Microfinance Institutions are reluctant to offer Emergency Loans ............... 67 2.8.4 Emergency Loans and Poverty Reduction? ............................................................ 68 2.9 Savings ........................................................................................................................... 69 2.9.1 Why do the Poor Save? ........................................................................................... 70 2.9.2 How Do the Poor Save? .........................................................................................