Impacts of Microfinance on Grassroot Development a Case Study Uf the Ketu North District free essay sample

The question however, is that, how best is microfinance contributing to development especially among those who are influence by decisions of governments art the grassroots development. To answer this question, this research was conducted to assess the impact of microfinance in grass-root development in the Ketu North District of the Volta Region. Relevant literatures were reviewed to portray the idea of microfinance concepts, theories, approaches and its evolution in Ghana as well as International standards that that could be used to assess the impact of microfinance in the country. Information was gathered using structured questionnaires that were administered using a sample size of 100. The data was analysed using tables and percentages to assess the impact of microfinance in grass-root development in the Ketu North District of the Volta Region. It was found that, microfinance programs in the district have positively impacted the lives of beneficiaries and their communities. The program has been able to reduce poverty levels from 56% to 44. 8%. Also in terms of education, enrolments shot up both at the primary and junior high levels while drop-out rates keep falling. Literacy rates have also increased from 59. 1% to 67. 9%. Microfinance has also been able to create over 168 indirect jobs and 975 direct jobs in the district among the youth and women. It was however recommended that the Microfinance Institutions include Advisory services and Micro insurance to widen the impact base of their activities. Again they should consider refinancing existing loans and businesses instead of granting more loans. The The chapter ends with a look at the performance standards of microfinance in general. 2. 1 THEORETICAL ISSUES IN FINANCIAL SECTOR REFORM This section attempts to explain the financial sector reforms from theoretical point of view. Many developing countries have adopted various measures aimed at financial liberation in the recent past. The theoretical justifications are found in the writings of many economists starting from the works of McKinnon and Shaw in early 1970s. McKinnon and Shaw contends that the financial markets in the developing countries are repressed as a result of setoffs policies that  often take the form of various administrative controls and distort the domestic financial markets. Some of the widely used instruments of the financial repressions are ceilings on interest rates and credit, high reserve requirements, foreign exchange controls and many more. The adverse effects of financial repression are further aggravated by inflation. The major argument of the financ ial repression hypothesis is that, repression is mainly attributed to government interventions quantity rationing devices such as the use of selective credit policies to maintain low interest rates in situations of high inflations. In the 16 views of McKinnon and Shaw, the salient feature of a financially repressed economy is the interest rate control. The objective of low interest rate policy is to encourage investment particularly in the so called sectors of the economy. This is done directly by setting ceilings on loan rates, or indirectly, through ceilings on deposit rates, because banks which option funds cheaply will be able to lend cheaply. The real cost of low interest policy is however high. Interest rate controls create a distortion in the financial market by creating a gap between the supply and demand of loanable funds and creates incentives from nonproductive hedges such as gold jewelry, real estates and commodities. This causes a decline in money savings and therefore, in funds available for investment (Syed and Kabir 1996) MacKinnon (1973) suggests that, establishing positive real interest rates will lead to a higher rate of investment. Potential investors depend on their own finance in the absence of organized financial markets and must accumulate adequate money balance prior to their investment. High real deposits make the process of accumulation of money balance and physical capital complementary. (Syed and Kabir 1996) Thus, as stated by Acheampong and Mensah (2006) the adoption of low interest rates policy coupled with selective policies and expansionary monetary policies are indispensable for governments seeking to allocate resources to implement planning as well as to finance public sector deficit at low cost. Financial repression also stifles competition in the financial sector and limits the flow of loanable funds to sectors without regard to productivity and development. Some of the other effects of financial repressions according to Syed and Kabir (1996) are as follows: First, since there is an excess demand for funds at the prevailing interest rates, none economic consideration (political connection, bribery and corruption amongst others) takes priority over economic consideration in the allocation of available funds. Secondly, a ceiling on the loan rates encourages the banks to lend often to low quality investments. Thirdly, specialized institutions are created by governments to channel its financial resources to the 17 so called priority sectors of the economy. This also drains resources from the regulated banking sector. The McKinnon-Shaw school argues that financial liberalization and deepening enables interest and exchange rates to reflect relative scarcity, stimulates savings and discriminate more efficiently between alternative investment opportunities. This trend induces replacement of capital intensive processes but also provide elasticity of substitution between labour and capital. Financial deepening will therefore generate positive employment and distribution effects in favour of labour thus contributing to both high growth rate and more equitable distribution of income. (Fry 1998) In their view, the most important steps for the success is to attain a competitive free market equilibrium level of deposits rates that will maximize growth. First, it leads to an increase in real supply of credit and achieve a higher economic growth rate. Second, even if the loan rates were raised, it will mean greater efficiency per unit of investment thereby raising output sufficiently to upset the declining share of output allocated to investment that financial liberalization should be incorporated as part of the liberalization package emphasizing the benign effects of interest rates policy as a stabilization device, when an economy is repressed. They maintain that there is double advantage in initiating financial liberalization policies as part of liberalization because it avoids or at.