A framework for understanding microfinance as a tool for poverty reduction in Ghana

Abstract

Microfinance has globally dominated the development agenda and debates as a tool for poverty reduction for over two decades. However, the issue of whether or not microfinance is a potent tool for poverty reduction in developing countries in general and Ghana in particular has still not been settled by literature. This study therefore investigates the relationship between microfinance and poverty reduction, microfinance and employment generation, and microfinance and business growth, aiming to develop a framework for understanding microfinance as a tool for poverty reduction in Ghana. Using grounded theory methodology and mixed methods approach, data was collected from 337 clients of microfinance and 10 MFIs through questionnaires and semi-structured interviews respectively. Ordinary Least Square (OLS) regression and Binary Logistic regression were used to analyse the quantitative data. The study found that although factors like high interest rates, inadequate loan sizes and lack of training hinders the growth of some microenterprises, causes some microenterprises to collapse and actually worsens the poverty situation of some clients, the net effect is that microfinance does generate employment and leads to business growth in Ghana. As its contribution to theory and practice, the study found that whilst microfinance creates employment and enhances business growth, it is not a panacea for poverty reduction in Ghana. This study also contributes to the financing constraint theory by Modigliani and Miller (1958) which postulates a positive relationship between favourable credit terms and business growth. This study is the first to combine microfinance, grounded theory and mixed methods to investigate the relationship between microfinance and poverty reduction, microfinance and business growth, and microfinance and employment generation in Ghana. The study contributes to a better understanding of microfinance as a tool for poverty reduction and offers a framework of relevant recommendations for Ghanaian government and policy-makers.