Implications for Poverty Reduction in Rural Households in Ghana: Microfinance Impact Studies

Microfinance is hailed by many as an important tool for poverty alleviation. This is so for a number of reasons. Microfinance allows poor people to protect, diversify, and increase their sources of income. Microfinance enables poor people to overcome their liquidity constraints and undertake some investment in a micro-enterprise or in improved farm technology and inputs, thereby leading to increased incomes or agricultural production. Furthermore credit helps the poor people to smooth out their consumption patterns during the lean periods of the year. This is believed to be the most promising path out of poverty and hunger. Bank branch networks

Gobezie & Garber using matured clients and incoming clients as the treatment group and control group respectively in a study of microfinance clients in the Amhara region of northern Ethiopia, found improved household diet, resulting from higher household income, this was measured in food condition, quality and quantity of food, among others. Results from the Impact survey showed that clients were eating more frequently and increasing the quantity of food eaten. The study specifically indicated that, relatively higher proportion (83%) of mature clients were said not to have any problem of food security in the household during the last 12 months, compared to only about 73% of new clients. Though the performance of mature clients was quite impressive, it was not clear if the issue of randomization in terms of participation in the programme was done. This creates sample selection bias with its attendant problems of over estimation of the programme impact. Also the issue of endogeneity was not tested. These two problems have the effect of bias estimation of the project effects. Failure to account for this therefore implies that the benefits of the programme alluded to can not be wholly attributed to the programme participation as some confounding variables may simply be responsible for the impacts found. On the other hand the use of matured and incoming clients creates another problem of the control group and participating group having pre-existing differences which may explain why one group chose to participate in the MF programme earlier. These pre-existing differences if not effectively dealt with then the project impact can not be entirely attributed to MF.
In a study in Bangladesh, Imai & Azam used household panel data covering rounds from 1997 to 2005. The study employed the treatment effects model and propensity score matching (PSM) for the participants and non-participants of microfinance programmes. With the treatment effect model the study found that simple household access to general loans from MFIs did not increase per capita household income significantly but household access to loans for productive purposes from MFIs significantly increased per capita household income. The study therefore emphasizes the importance of the purpose and monitoring of how clients use the loans in a bid to increase household income and for that matter decreasing household poverty. The study further found that, with the application of treatment effects and PSM to each cross-sectional component of the panel data, the poverty reducing effect of MFI on poverty was significantly reduced over the years.
In a related study by Imai, Arun & Annim in India found that loans for productive purposes were more important for poverty reduction in rural than in urban areas. However in urban areas, simple access to MFIs had larger average poverty-reducing effects than the access to loans from MFIs for productive purposes. Again using Propensity Score Matching to control for sample selection bias in a study in Pakistan, Ghalib, Malki & Imai confirmed that microfinance programmes had positive impact on the welfare of beneficiary household in terms of expenditure on healthcare or clothing, monthly household income, and certain dwelling characteristics such as water supply and quality of roofing and walls.
Even though scores of studies have shown positive impacts of microfinance on poverty, other studies point to the contrary. Kiiru has noted that microfinance can not be expected as a “magic bullet” against poverty. These controversies have therefore led to the criticism of microfinance as a catalyst of poverty reduction. Again Kiiru & Mburu have argued that microfinance can not improve welfare unless there is effective demand for goods and services, which ensures that the products of micro-entrepreneurs are consumed. The most-noted studies on the impact of microcredit on households according to Roodman & Morduch are based on a survey fielded in Bangladesh in the 1990s. They noted that the contradictions among them have produced lasting controversy and confusion.

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