THE IMPACT OF MICRO FINANCE ON RURAL SOURCES OF LIVELIHOODS: A CASE OF AGOTIME IN THE VOLTA REGION OF GHANA

1.1 Introduction The extension of small loans to rural folks and the underprivileged in society as a strategy to create wealth and give livelihood to the poor has gain currency since non-governmental organizations (NGOs) started the first experiment in the 1970s. Indeed, the concept known as micro finance, has been adopted by a number of developing countries to which Ghana is no exception (Awusabo-Asare, et al., 2008). Besides, the realization that people who are relatively poor can borrow, use and repay loans has generated a great deal of interest in microfinance among policy makers and development practitioners as strategies for poverty reduction (Consultative Group to Assist the Poor (CGAP), 2005). The importance of micro finance was reechoed by the United Nations when it declared 2005 as a micro credit year (United Nations 2003).

Indeed, the Poverty Reduction Strategy Papers (PRSP) of Ghana, including the most recent Growth and Poverty Reduction Strategy (GPRS) and other documents emphasize, among other things, microfinance as a good entry point in achieving development objectives as well as curbing the dangerous trend in poverty and meeting the United Nations Millennium Development Goals (MDGs) (GoG 2006).

The rural folks need sustainable access to financial services to be able to cope with the exigencies of rural life. Livelihood strategies are those implicit principles that guide household members when seeking household goods for coping with life (Shahadat 2004). To concur, Meert 1

et al (1997) observed that livelihood strategies are deliberate socio-economic acts by the household with the ultimate motivation to satisfy the most elementary human needs, at least on a minimal level, according to the universal social and cultural norms, and without a full social integrating character. These suggest that people make choices depending on the socio-economic constraints they face. By pooling resources, by working in informal economies, by the selfconstruction of shelter, by self-provisioning, and by the skilful use of social networks, families in rural areas try to avoid entrapment in a self-perpetuating culture of poverty (Roberts 1994).

With the growing interest in micro finance, it has become clear that the socio-economic transformation of rural source of livelihood will become easier for rural dwellers through access to finance. And, to make micro finance services available to the rural folks, diverse methodologies are used to provide financial services such as savings, credit, and insurance to relatively poor clients. In fact, depending upon the country, a number of institutions have emerged to provide services to the poor. These now include rural banks, postal services, credit unions, financial non-governmental organizations, savings and loans, as well as mutual funds such as susu1 in West Africa (Aryeetey, 1998). The important roles that micro finance institutions and schemes play in the economy of Ghana have made it not only important but crucial to investigate how their activities impact on rural sources of livelihood.

1.2 Statement of the problem The advent of globalization has seen the various modes of livelihood especially of those in rural communities becoming difficult with each passing day. Indeed, the situation becomes more difficult as most rural economies in Ghana are largely agrarian and the modes of livelihood are
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Is an informal financial identification for daily or weekly deposit collection.

related to agriculture. In the study area, tomato farming has become the mainstay and lucrative source of livelihood as well as Kente weaving. In order to finance these sources of rural modes of livelihood, substantial evidence exists in rural lending markets of how traditional money lenders, susu schemes, self-help groups and social networking are financing the operations of rural sources of livelihood.

The need for financing the sources of rural livelihoods has been given expression to by the setting up of rural banks all over Ghana in the 1980s. Recently, MASLOV in the district assemblies was set up to cater for small scale enterprises that the rural folks may set up. These agencies have since made substantial contribution to the sustenance of rural sources of livelihood through advancing of financial facilities.

These laudable efforts notwithstanding, the cheap and facile credit provided by institutional sources was not utilized property for the purpose it was granted and intended too. As a result, the recovery performance of institutions has been poor. This leads to weakening of credit transactions between banks and quasi financial schemes on one hand and economically poorer sections of the rural people on the other. Though the government made strenuous efforts to convince bankers and quasi financial schemes to cover these groups of people, it failed to make these groups to repay their loans promptly (Dasgupta, 2001). When the financial scenario of rural poor in Ghana is simplified, it appears relying on landlords and money lenders to meet the credit needs with higher rates of interest are not the way out. Besides, organizing the rural folks into small thrift and credit groups, popularly known as Self Help Groups (SHG) is thought as an 3

alternative credit institution to combat the crisis of petty credit requirements but this is also to no avail.

The question that follows as a matter of natural sequence is whether the situation should left as it is? The answer is definitely no. It is therefore imperative to interrogate the impact of micro finance activities of on the sources of livelihood of the rural folks.

1.3 Objectives of the study Though micro finance institutions have play many positive roles in aiding rural folks, it must be recognized that loan repayment creates a cordial relationship between the rural banks and the quasi financial schemes on one hand and their clientele on the other in their day-to-day businesses. However, the inability of most rural folks to repay their loans or use it for purposes not intended for has led to a frosty relationship. The researcher therefore intends to find out the impact of their activities on rural livelihoods. The researcher intends to achieve this over-arching aim by examining the following specific objectives: To examine the nature of rural sources of livelihood, To assess the contribution of microfinance to rural sources of livelihood, To find out ways to minimize the difficulties associated with the operations of rural microfinance. 1.4 Research questions 4

The research questions that will guide this study include: What is the nature of rural sources of livelihood? What contributions have microfinance made to rural sources of livelihood? What are the ways to minimize difficulties associated with operations of rural microfinance? 1.5 Conceptual framework Figure 1. Model of loans and rural livelihoods Accessibility tofinance - Entrepreneu rs own capital - rural banks - Credit Associations Government Support agencies Constraints - Higher cost of capital (high interest rate) - Inexperience - Lack of managerial skills - No social intermediation - Decrease quality and quantity of factors of production.eg. Capital, equipment and machinery, labour, etc Factors of production Production and marketing efficiency - Inability to purchase bulk productive resources - inability to enjoy economies of scale - ineffective marketing Livelihood Performance

Worse performance eg. low profits, no growth in sales, inability to repay loans

Adapted from Olutunla and Obamuyi (2008)

The main problem of rural sources of livelihood is finance because all small enterprises set up by the rural folks live under tight liquidity constraints (Da Silva et al., 2007). Finance, whether owned or borrowed, is needed to expand so as to maximize profit. The pecking order theory states that firms prioritize the source of financing from internal (cash flow or entrepreneurs own capital) to external, according to relative availability and (opportunity) cost. For most small rural enterprises, the internal funds are always insufficient to undertake the required level of transactions for profitable projects. This calls for external finance to fill the finance gap. This could be accessed from rural banks and other quasi financial institutions.

When the sums so borrowed are invested by the rural folks and the investment has proved a failure due to lack of managerial skills, high interest rates, absence of social intermediation, additional assets cannot be created, thus lost of security for further borrowing. Indeed, inaccessibility to finance is expected to negatively influence the availability of factors of production such as land, labour, capital, equipment and machinery. For instance, interest rate, being cost of obtaining credit, is inversely related to the profitability of the enterprise, since rising interest will force the producers to incur higher costs of production thus unable to repay loans.

All things being equal, decreased quality and quantity of factors of production available to rural enterprises will generate less production, and through ineffective and inefficient marketing strategies reduces small enterprise performance. Again, the inability to purchase goods in bulk and from cheaper sources will deny rural enterprises the enjoyment of economies of scale thus increases in unit cost. High cost of production coupled with ineffective marketing strategies will 6

lead to low performance, drop in sales, low or no profits leading to inability to repay loans. This model is to be used as heuristic tool in asking questions.

1.6 Rationale of the Study This study will empirically examine the potential impact of microfinance on rural sources of livelihood. This will be done by investigating the chain of events how the loan portfolio is operated by the rural bank and other quasi financial schemes. The chain of events will be tested to determine if the results are consistent with claims that microfinance has played a major role in aiding rural sources of livelihoods.

Indeed, a cordial relationship between rural banks and other quasi financial schemes holds the key to easy accessibility to loans and sustainable livelihoods in the rural economy of Ghana. Not only this but also, rural banks will be galvanized to offer loans to rural entrepreneurs at affordable interest rates. These could be achieved if the bottlenecks associated with the operations of rural enterprises are reduced to the barest minimum if not totally eliminated.

It is against this backdrop and the important role that microfinance plays in the rural economy of Ghana that this study attempts to find out first, the nature of operations of rural banks, problems faced by rural enterprise in repayment of their loans. Findings from the study will help to direct micro funds to the people/sectors that really need it and are ready to invest

1.7 Limitations of the study Major constraints expected to be encountered in the course of conducting this research is finance. The cost involved in printing all the relevant documents and the transportation for gathering the needed data will be enormous. However, the researcher will try to seek finance for the completion of this work.

Time is also a limiting factor since more time is needed to go round in administering questionnaires and conducting interviews. Despite the time constraint, the researcher hope to stick to the time frame allocated for each stage of the dissertation hoping to complete the work on time.

The study is limited only to Agotime for the sake of time and cost constraints. However, the implications of the study will generally hold for all rural economies in Ghana and the developing world.

1.8 Methodology 1.8.1 Selection of the study area The research will be conducted in two communities of Agotime Traditional Area in the AdakluAnyigbe District in the Volta Region of Ghana. These are: Kpetoe the district capital where Kente is woven and Akpokope where most people grow tomatoes. The choice of these two 8

communities as the focus of the study is based on the leading role they have played and continue to play in the rural economy of the area. 1.8.2 The case study approach A case study method will be selected to gauge the impact of micro finance for the following reasons. This approach is more appropriate because of the contemporary nature of the study as opposed to a historical phenomenon. It also allows for the use of multiple sources of evidence. Impact of micro finance which the study seeks to address in the rural economy is a contemporary phenomenon within real life context and an understanding of the issues requires careful and critical inquiry or examination in order to make decisions that take into consideration the special and peculiar circumstances surrounding the issue. Even though the use of a case study method is often limited to an area, it could be used to make generalization when the data collected has a wide scope and is highly representative of the population. 1.8.3 Population The population of the research will be in two-fold, namely the staff of the local rural bank and operators of the other quasi financial schemes as well as traders and farmers who have access to loan facilities from these financial institutions. The Adaklu-Anyigbe District has been chosen since it represents a typical rural economy with diverse sources of livelihood.

1.8.4 Sample For this study both stratified and convenience sampling techniques will be applied. The sample units will be households from Kpetoe and Akpokope. The two communities constitute strata from which a proportionate sample will be chosen. The sampling elements will be obtained by 9

means of executing a convenience sample at each community. The target population for this study includes 40 Kente weaving entrepreneurs and 40 tomato farmers from each community and 5 members of staff of the local rural bank and 15 operators of quasi financial institutions respectively.

1.8.5 Research instrument The empirical research component of the study will consist of the completion of semi-structured questionnaires through personal interviews. The questionnaire to both Kente entrepreneurs and tomato farmers will consists of a structured format incorporated with two types of questions, namely closed-ended questions to gather demographic data on the profile of respondents and five point Likert-type statements to test respondents current and ideal application of identified variables that may affect operations of their enterprises.

Questionnaires will be completed with the help of three research assistants within one week period with the intention of gathering detailed information which will help contribute to the successful outcome of the research study. The items on the questionnaire will be compiled from each section and sub-section of the literature.

1.8.6 Data gathering Personal interviews will be used to collect primary data for the research. These interviews will be conducted with both farmers and Kente entrepreneurs. The research assistants will be available to the respondents during the interview to clarify unclear questions on the questionnaire. After completion of the interviews, follow up telephone interviews will be conducted amongst fifteen 10

percent (15%) of the respondents. The purpose of these interviews will be to determine the accuracy of the information provided on the questionnaire. Through this process the reliability of the information on the questionnaire will be enhanced.

Secondary data will be obtained through extensive review of written documents, which include but not limited to articles in newspapers, textbooks, articles on the internet and publications.

1.8.7 Data analysis The collected data will be analysed using statistical and analytical techniques. The statistical software package SPSS Version 11.5 as well as Microsoft Excel will be used to analyze the data to obtain descriptive statistics mainly in the form of frequencies and percentages. For the statistical analysis, bivariate data will be used.

Quantitative and qualitative data from the semi-structured and in-depth interviews will be analyzed within the framework of the research questions. For discussion of results, tables and graphs will be used to present the data. The study will also use proportions generated from simple cross-tabulations as part of the analysis. This technique will be employed to examine variables considered to be of relevance. This will be made with 99% level of confidence i.e., p= 0.01 or 95% level of confidence i.e., p= 0.05.

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1.8.8 Validity and Reliability The researcher will maximize internal validity by exercising tight controls over extraneous variables and conditions. Data on particular issues, collected from different sources will be double checked while ensuring that the data are related to the operational objectives of the study. The two main issues of external validity are the representativeness of the sample and the reactive arrangements in the research procedure. In order to ensure that this study can be reliable, care will be taken to select the sample using a sampling method that assures representation.

Indeed, the questionnaire will be first pre-tested on respondents chosen from Ziope (another rural community who undertake similar trades) by a convenient sampling method. This will be done to evaluate the validity and reliability of the instrument used. This will serve as a means of identifying and solving unforeseen problems in the administration of the questionnaires. It is hoped that a few of the original items will be reworded while some may be completely deleted when the need be.

1.8 Structure of the study This dissertation will be organized into five chapters. Chapter one will be introductory and will deal with the background to the study, problem statement, rationale of the study, objectives of the study, research questions, methodology, as well as the limitations of the study.

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Chapter two will look at review of relevant literature on microfinance practices and rural sources of livelihoods. Chapter three will cover the background of the study area and methodology employed by the study.

Chapter four will be devoted to presentation and discussion of results, while chapter five will conclude the work with a summary of the findings, conclusion and recommendations.

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