Microfinance and poverty reduction (II)

By Abdul-Mansuur IBRAHIM

With more than twenty percent of the country’s population living in poverty, the government of Ghana clearly faces an enormous challenge to reduce poverty – especially in the five northern regions where there is the greatest concentration of poor people. To achieve rapid and sustainable reduction in poverty, it is necessary to have an integrated policy strategy with the various elements reinforcing each other.

It is therefore evident that rapid and sustainable poverty reduction depends on the interaction of a wide range of policy measures. The presence of microfinance – defined as provision of financial service facilities in the form of small and repeat loans, savings and insurance products, as well as skill training to poor household – is neither an essential nor sufficient intervention for rapid poverty reduction.

For instance, countries such as Egypt and Malaysia have achieved huge poverty reduction with relatively less emphasis on microfinance. On the other hand, for microfinance institutions in Bangladesh and some African countries such as Kenya, Uganda, Mali and Ghana, progress in reducing poverty has been slow. Thus, it is evident that microfinance is only a single component factor for poverty reduction.

Nevertheless, microfinance can play an important role, since one element of an effective strategy for poverty reduction is to promote productive use of the poor’s labour. This can be done by creating employment opportunities, raising agricultural productivity among small and peasant farmers and increasing opportunities for self-employment.

For most small entrepreneurs in Ghana, lack of access to financial services is a critical constraint to the expansion of viable micro-enterprises. The ability to access microfinance may enable small peasant farmers to purchase inputs they need to increase productivity.

According to the World Bank, micro, small and medium-sized enterprises together account for over 92 percent of total employment in Ghana. Microfinance institutions are therefore needed since commercial banks often have little interest in offering microfinance services to the poor and vulnerable who have no collateral such as land and buildings, equipment and machinery.

Microfinance institutions have been developed with the aim of reaching the excluded population or undermining the monopoly power of local moneylenders who charge usurious interest rates.

Microfinance institutions have a very important role to play in the delivery of financial services to a large number of SME clients in rural and urban and peri-urban areas. Among their objectives is enabling target clients to access financial services sustainably and affordably.

In the next article I will be detailing the impact of Microfinance on poverty since its inception in Ghana.

About the writer

The writer works with Consolidated Bank Gh. Ltd.