Exploration of Microfinance and its Effectiveness in Promoting Small Business Growth and Sustainability in Ghana

Abstract

This research explores microfinance and examines its effectiveness in promoting the growth and sustainability of Small, and Medium Enterprises (SMEs) in Ghana. The study was conducted in six districts of the Greater Accra Region of Ghana. Based on a qualitative multi-case study approach, purposive sampling techniques were employed to select six districts, 15 microfinance institution (MFI) cases, 12 key informants from government and private microfinance agencies and 95 small business owners. <br/> The stated aim of the commercialisation of microfinance in Ghana was to make financial resources available to a greater number of those excluded from the traditional financial institutions. However, it was found that MFIs in order to defend their own sustainability did so at the expense of the SMEs’ growth and sustainability in that they were prone to lend only to existing businesses and not to high risk start-ups. The MFIs performed better in mobilising savings deposits, but this dependence on local savings left them open to severe liquidity problems as they did not have the market power of the tier one banks to access cheaper money. The study found low levels of outreach among tier two MFIs, part of a cycle caused by exorbitantly high interest rates which deters SMEs from accessing loans. <br/> Four crucial factors were identified as major obstacles that reduce the capacities of MFIs to promote the growth and sustainability of SMEs. These are market and government failure, corruption, and the low internal capacities of MFIs and SMEs alike. The market has failed to effectively intermediate funds for SMEs’ growth and sustainability due to high interest and administrative cost charges. The competitive prices at which MFIs borrow from the open market for onward lending to SMEs are not favourable enough to enable them to charge low interest rates and take the risk of providing low-cost start-up capital funds to the SMEs. When SMEs do borrow, the resultant losses from interest repayments erode profits and working capital and make repayment of MFI loans difficult. While some positive results were shown for the impact of microfinance on some SMEs in terms of income generated, assets accumulated and business expansion, the broader accounting of negative impacts of reduced profitability, erosion of working capital, loss of retained earnings in MFI deposit accounts, absence of any effective employment generation, and loss of trust in MFIs, significantly outweighs the positive impacts. At best many of the SMEs were seen to be satisficing by coping with the situation in a static manner due to lack of alternatives. <br/> The challenges of microfinancing in Ghana are compounded also by Government [Bank of Ghana] failure, demonstrated in its inability to adequately enforce microfinance rules, especially among tier two MFIs. Also, there was little determined effort by the government or government agencies to establish state guaranteed micro finance delivery channels to lend to the microfinance institutions at reasonable rates of interest for on-lending to SMEs. <br/> The combined effects of market and government failures, subtle corrupt practices of some lenders and borrowers and low internal capacities of MFIs and SMEs represent debilitating obstacles limiting the capacity of microfinance institutions to promote sustainable growth of SMEs in Ghana. Thus, these factors necessitate policy reviews and government action to strengthen the market position and operations of MFIs so they in turn can promote SMEs to achieve the national objectives of economic growth.