CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Poverty is a problem for all the countries irrespective of their level of development, it can be observed that in many forms since it has both income and non-income dimensions. In consideration of poverty line, people in each country can broadly be divided in to 2 categories namely poor and non-poor. The non-poor are living above and the poor are living below the poverty line. A first step in a poverty reduction agenda is the ability of the poor to borrow a small amouth of money to take advantage of a small business opportunity, to pay for school fees or to bridge a cash-flow gap (littlefield, Murduch & hashemi, 2003). In the last decade or so, microfinance institutions (MFIs) have sprang up across Camerron many of them professing poverty reduction as part of their vision.

The United Nations (UN, 2005) defines microfinance broadly encompassing the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients. Microfinance institutions thus engage in such financial products as loans, savings, insurance, transfer services among others. This makes microfinance institutions critical agencies in poverty reduction. In Ghana, the practice of people saving and/or taking small loans from individuals and groups within the context of self-help is not new. Throughout the ages, Ghanaians have saved with or taken ‘soft’ loans from individuals or groups in order to engage in small businesses or farming activities. Indeed, the first credit union in Africa was probably established in Jirapa in the Upper West region in 1955 by the Canadian Catholic missionaries. Susu, another form of microfinance schemes is believed to have spread to Ghana from the early 1900s from Nigeria (Asiama and Osei, 2007). Asiama and Osei (2007) notes that microfinance creates access to productive capital for the poor, which together with human and social capital enables people to move out of poverty. For instance the role of microfinance in the achievement of the Millennium Development Goals (MDGs) as well as the Ghana Poverty Reduction Strategy (GPRS) goals cannot be over emphasized. Quainoo (2009) in support of this stated that microfinance could be used as a strategic tool in poverty reduction, eradication of hunger, universal primary education, promoting gender equality, empowering women, reducing child mortality, improving maternal health and ensuring environmental sustainability if applied effectively.

Microfinance allows poor people to protect, diversify, and increase their sources of income, the essential path out of poverty and hunger (Littlefield et al, 2003). Former UN Secretary General Kofi Annan during the launch of the International Year of Micro Credit (2005) confirmed this when he stated that “…Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs.”

Littlefield, et al (2003) posit that poor people in most countries, especially in the developing world have virtually no access to formal financial services. Microfinance institutions thus offer the potential for a self-propelling cycle of sustainable growth, while providing a powerful impact on the lives of the poor. Co-operative Credit Unions as an arm of microfinance in reducing poverty is not an exception. Co-operatives are organization’s owned and managed by low income people who are also themselves patrons of the organization. According to Rosner (1983) and Henzler (1962), co-operative institutions are self -managed and democratic organizations; and that all members whatever the level of their skills or contributions to the resources of the organization have an equal right to participate in decision making. As such this would lead to their overall control over the affairs of their organization.

 In addition Cooperatives enable people to raise themselves above poverty level and accumulate economic advantages. For instance, Johnston (2003) posits that cooperatives raise whole classes of people out of poverty and prevent them from slipping back into it. According to Johnston (ibid), cooperatives are designed as tools of poverty reduction by which groups of people can gain economic advantages that they could not achieve individually.

The issue of credit union concept as a strategy for poverty alleviation traces its background to Germany in 1847. According to a write up on the history of Credit Unions in the CUA Biennial Conference (2010), a mayor of a small town in Germany organized the citizens to put their few monies together and gave loans to each other at low interest rates. This benefitted them a lot and led to the formation of more than 425 Credit Unions by the year 1888 and later spread to North America in 1909. As a result of the overwhelmingly increase in number of Credit Unions in 1934, a national union movement was formed to see their viability and sustainability. Chavez (2002) reported that the world has about 27,000 Credit Unions dotted around hundred countries of the world, and that over $ 6 billion dollars was earned in United States alone. This reflects how Credit Unions are affecting peoples’ lives positively across the world.

In spite of the critical role of microfinance in poverty reduction, some schools of thought remain skeptical about its role in development, especially in real poverty reduction. For example, Hulme and Mosley (1996) argued that microfinance is not a panacea for poverty alleviation and that in some cases the poorest people have been made worse-off. However, as Quainoo (2009) notes, although microfinance is not a panacea for poverty reduction and its related development challenges, when properly harnessed it can indeed makes sustainable contributions to the empowerment of people, hence reducing poverty.

1.2 Problem of the Statement

Generally, microfinance institutions contribute to poverty reduction in many ways. Thus, there is no need questioning whether they are relevant in the poverty reduction agenda or not. Indeed an outstanding feature of microfinance programs is that the end users of the services are by definition the poor, the ones who benefit (Khawari 2004). The challenge lies in the ability of microfinance institutions to find the level of flexibility in their products that could make them match the multiple classes of the low income clients without imposing unbearably high cost upon the clients. Despite the success of microfinance institutions, only about2% of world’s roughly 500 million small entrepreneurs is estimated to have access to financial services (Barry et al, 1996, cited in Vetrivel & Kumarmangalam, 2010). In Ghana, microfinance institutions like credit unions are playing a vital and vibrant role in economic growth and poverty reduction. They are key agencies in the country’s Growth and Poverty Reduction Strategies and the Millennium Development Goals (MDGs).

Asiama and Osei (2007) suggest that the absence of specific policy guidelines and goals for the microfinance sub-sector have led to a slow growth of the sub-sector, and the apparent lack of direction, fragmentation and lack of coordination. Asiama and Osei (ibid) further identified that the microfinance sub-sector is beset with many constraints, including inappropriate institutional arrangements, poor regulatory framework, inadequate capacities, lack of coordination and collaboration, poor institutional linkages, lack of linkages between formal and informal financial institutions, inadequate skills and professionalism, and inadequate capital.

Globally, rigorous empirical analysis of the impact of microfinance began in the1990s. However, the studies so far remain few and the results of these studies are highly provocative. One school of thought questions the relevance of microfinance as a poverty reduction policy in the first place. Adam & Von Pische (1992) argued that “debt is not an effective tool for helping most poor people to enhance their economic condition be they operators of small farms or micro entrepreneurs.” In effect, microfinance has made the poor worse off for the fact that their interest rates are very high and government action may be required to protect and assist the poor (World Bank, 2000a). Although the activities of Microfinance institutions have expanded significantly since their inception in Ghana, data on MFIs in the country are not readily available (Khawari 2004). Similarly Asiama and Osei (2007) submit that there is lack of information on microfinance institutions, their operations and clients in the country. Besides, approaches to and methodology for data and information gathering at the national level are not uniform, making it difficult to centrally monitor progress of the microfinance sector. Asiama and Osei (2007) then conclude that this lack of information on microfinance institutions has affected targeting of clients and ultimately, poverty reduction.

Many questions remain unanswered on the true position of microfinance institutions such as WACCU in reducing poverty. Key among them is the extent to which the Union contributes to poverty reduction in its operational area. Thus, the problem that prompted this study is the lack of empirical information on the extent such as the Wa Co-operative Credit Union contributes to poverty reduction in its operational area.

However, despite the ups and downs in the Micro Finance market they still have a major rule to play in the reduction of poverty in the Cameroon economy thereby leading us to research topic the roles of Microfinance institution on poverty reduction. The research questions outline below will help us address the significant impact played by these institutions in the reduction of poverty in Bamenda.

1.3 Research Questions

1.3.1 Main Research Question

What are the roles of microfinance institution on poverty reduction in Bamenda?

1.3.2 Specific Research Questions

1. What is the role of micro loans on poverty reduction?
2. What is the role of micro social development on poverty reduction?
3. What is the role micro training and education on poverty reduction?
4. What is the role of low interest rate on poverty reduction?

1.4 Main Research Objectives

1.4.1 Main Objective

To investigate the role of microfinance institution on poverty reduction

1.4.2 Specific Objectives

1. To determine the role of micro loans on poverty reduction
2. To access the role of micro social development on poverty reduction
3. To examine the role of micro training and education on poverty reduction
4. To explore the role of micro  low interest rate  on poverty reduction