Microfinance and Poverty

By Isabella Gyau Orhin
An Adjunct Professor at the Institute of Statistical Social and Economic Research (ISSER) William F. Steel has called for capacity building in the micro finance sector to increase credit to the poor especially those in poor rural communities.
“The rural poor lack business and financial skills and this leads to poor repayment of loans, loans taken as gifts and interest that do not cover costs,” he said.
Commercial Banks he also said do not know how to do business with low income self employed people and as such the poor depend on their own savings and loans from family members.
Thus training in the sector should include not only the Rural Micro Finance Institutions (RMFI) comprising the Apex bodies, specialized licensed bodies, grass roots micro finances schemes, and clients but also at the level of commercial banks so that they can both service and drive the system.


Speaking at the annual ISSER-Merchant Bank lectures series on the topic “Extending Financial Systems to the Poor: What strategies for Ghana?” Prof. Steel said Internationally, Micro Finance has moved through phases, from high cost, heavily subsidized operations reaching limited numbers to financially self-sufficient microfinance institutions reaching millions.
Micro Finance can be defined as small financial transitions sustainable available to the poor whether formal or informal.


Special microfinance methodologies he said can help overcome many of the constraints that have generally blocked the extension of formal financial services to the poor.
This he said is done through the use of traditional banking practices or methodologies.
These methods can be applied along with skill strengthening at all levels to develop pro-poor financial systems that make small financial transactions such as savings, loans, insurance , money transfer and leasing among others available to the poor.
Government he said can subsidise micro finance through provision of equipment for farmers such as irrigation machines or pumps.
“If the poor farmer interested in irrigation can get a pump to help him, that farmer can get himself out of poverty,” he said.

Ghana according to Prof. Steel has the advantage of a wide range of different types of rural and micro finance institutions serving different niches such as Rural and Community banks, Savings and Loans companies, Credit Unions, Financial NGOs, Susu collectors and groups as well as informal savings and credit associations.
“One advantage is that most of these bodies are based on local savings mobilisation,” he said adding, “Rural Microfinance Institutions depositors are growing at an average of 40 percent a year” especially between 2001 to 2004.”
He said the number of borrowers which is now about half a million has grown over 20 percent and the total Micro Finance loan portfolio has more than tripled in three years.
In spite of all these, Prof. Steel said the operating cost to provide and monitor these small transactions remain even higher in Ghana. He explained that this is higher than the average of 28 percent for loan portfolio in other African countries.
Many of Ghana’s micro finance institutions cannot stand on their feet without financial subsidies. Prof. Steel further said it is important for Ghana to integrate rural micro finance institutions and micro finance methodologies into the financial system to extend its out reach to rural areas, the poor and to clients of Small and Medium scale Enterprises.

While subsidies are limited, Prof. Steel said expanding micro credit to thousands of poor people requires sustainable Micro Finance institutions generating their own resources and accessing commercial funds.
Again he said Micro finance development must be complemented by other challenges to address related challenges, particularly agricultural finance and targeting the very poor.
Prof. Steel also said government-directed credit at restrictive interest rates has been counter productive over the years worldwide in addressing challenges of micro finance.
Supporting Prof. Steel, the Deputy Minister for Finance and Economic Planning Prof. George Gyan Baffour said access to capital is a problem for several businesses particularly small ones.
“As we look for help, the difficult aspect is how to get help for he poor in he rural communities and informal sector who the banks say are not bankable.
The Director of ISSER Professor Ernest Aryeetey said despite the fact that there are several micro finance institutions the practice varies from one to the other.
It is against this background that methodologies suitable for Ghana are being sought, he said.