Microfinance Clients’ Get Worse-Off With Longer Stay With Institutions – Report

Clients of microfinance institutions are estimated to become worse-off financially, by way of longer stay with these institutions, a report has revealed.

A draft report by the Directorate of Research, Innovation and Consultancy (DRIC) University of Cape Coast, on the assessment of poverty outreach and impact of rural and micro finance institutions shows that, although evidence from the research is promising in the case of the poverty reduction effect of the scope of outreach, findings on the relationship between length of outreach and poverty reduction is counterintuitive.

Thus, the longer clients of micro-finance companies (MFC) stay with the institution the worse-off they become.

Actually, overall, the finding on length of outreach and poverty reduction was not promising for the microfinance industry in Ghana.

The report is a response to a request by the Rural and Agricultural Finance Programme (RAFiP) of the Ministry of Finance (MoF) to the Directorate of Research, Innovation and Consultancy (DRIC), University of Cape Coast (UCC), to undertake an assessment of poverty outreach and impact of rural and microfinance institutions and government credit programmes in Ghana.

Again, size of loan was found to relate significantly to poverty reduction. From the Tobit estimation, a 100 per cent increase in the size of loan yielded 0.6 per cent reduction in poverty among the microfinance clients.

The Tobit model is estimated to identify the extent to which loan size affects the poverty levels of the household.

Remarkably, the effect was greater in rural areas with 0.8 percent than urban areas of 0.5 percent.

It also emerged from the Tobit estimations that microfinance institutions are only able to reach out to poorer clients after approximately 18 years of operation.

Data from the research demonstrated some variations in the depth of outreach between the coastal and forest zones on one hand and the savannah zone on the other.

These patterns were very alike to those observed in the 2004 study, implying that over time, not much has changed in terms of how some of the MFIs operate.

Another observation worth noting is the rapidity with which Rural and Micro-financial Institutions (RMFIs) entered and exited.

Of the 46 institutions initially sampled, for study, three had collapsed within the same community and period a similar number were established. It was also observed that a number of these RMFIs had changed either their name or status, making it difficult to be traced and monitored.

As part of the report’s recommendation, the MFIs are to intensify their efforts and introduce locality specific innovative products, taking into consideration challenges relating to loan affordability, access and loan prerequisites.

Since size of loan was found to be significantly associated with poverty reduction, the MFIs should as a matter of policy consider reviewing upwards their loan portfolios to clients while at the same time strengthening their monitoring mechanisms.

Thus, the concept of providing small amounts to poor clients to get them out of poverty will need to be re-considered.

While this might have been useful some time ago, it is no longer tenable given the cost in goods and services

It further called for a second look at the regulatory framework of microfinance institutions based on the rapidity with which some MFI’s entered and exited the market.