CREDIT UNIONS: A POVERTY REDUCTION TOOL IN GHANA

CREDIT UNIONS: A POVERTY REDUCTION TOOL IN GHANA ABSTRACT The main objective of this study is to examine the effectiveness of Corporative Credit Unions in poverty reduction. The study examined the potency of Credit Unions’ philosophy and practices in helping members, hence the society to effectively deal with poverty reduction. Fifty four questionnaires were administered to selected members of Redemption Cooperative Credit Union in Accra. The study revealed that members of the Credit Union benefited positively, however, the benefits fall short of the expectations of members due to the excessive financial responsibilities. The financial responsibilities include school fees, medical expenses, funeral expenses, rent advance, land and building, and acquisition of vehicles. The credit unions were able to meet most of these challenges of members with educational and working capital being the highest; the lowest was loans for means of transport. It was found out that all (100%) of the respondents agreed that credit unions have significant impact on standard of living of their members. These militating factors which may be common to most if not all of the Credit Unions, if addressed properly, would put credit unions at a pedestal of being one of the most effective tools in poverty reduction. 1.0 Introduction One of the fastest growing sectors of the Ghanaian economy, over the last decade was the financial sector. As a result, many new banks have entered the market offering very competitive terms of credit retailing. This resulted in the banks reviewing their minimum saving balance position. The competition also affected the Non-Bank Financial Institutions forcing them to adopt very innovative strategies as financial intermediation. Despite the stiff competition, the credit union movement also continues to record a phenomenal growth in both the number of primary societies as well as membership. The study, therefore, seeks to assess the effectiveness of credit unions as a poverty reduction tool through microfinance in Ghana. Study of Redemption Credit Union The general purpose of the study is to assess the effectiveness of Credit Union schemes as a poverty reduction tool in Ghana. Specifically, the study attempt to: Establishes the effectiveness of Credit Union as poverty reduction tool through microfinance. Identify the roles of the Credit Union members in the poverty reduction process. Identify important issues, inefficiencies and weaknesses on the Credit Union system that are militating against its effectiveness as poverty reduction tool. Make recommendation to improve their performance in dealing with poverty situations in the country. The study was guided by the following research questions What impacts has Credit Union made in the lives of the member? What are the benefits available to member? What are the challenges facing members (customers)? What are the challenges facing Credit Unions? What recommendations can be made to improve the management of Credit Unions? Questionnaire was the main instrument used to collect the data. They were designed to include (solicit) both closed and open-ended responses. Questionnaires were used in order to get standard form of answers from respondents. Interview questions were also designed to enable the researcher to get similar information where it was more applicable. 2.0 LITERATURE REVIEW 2.1 The Impact of Microfinance on Poverty Reduction Poverty is more than just a lack of income. Wright (1999) highlights the shortcomings of focusing solely on increased income as a measure of the impact of microfinance on poverty. He states that,” there is a significant difference between increasing income and reducing poverty”. He argues that by increasing the income of the poor, MFIs are not necessarily reducing poverty. It depends on what the poor do with this money, most of the times, it is gambled away or spent on alcohol, so focusing solely on increasing incomes is not enough. The focus needs to be on helping the poor to “sustain a specified level of well-being” (Wright, 1999:40) by offering them a variety of financial services tailored to their needs so that their net wealth and income security can be improved. It has become a common assertion that MFIs are not reaching the poorest in society. However, despite some commentators’ scepticism of the impact of microfinance on poverty, studies have shown that microfinance has been successful in many situations. According to Littlefield, Murduch and Hashemi (2003:2) “various studies document increases in income and assets, and decreases in vulnerability of microfinance clients”. They referred to projects in India, Indonesia, Zimbabwe, Bangladesh and Uganda which all shows very positive impacts of microfinance in reducing poverty. For instance, a report on a SHARE project in India showed that three-quarters of clients saw “significant improvements in their economic well-being and that half of the clients graduated out of poverty”. Mayoux (2001) states that while microfinance has much potential, the main effects on poverty have been: Credit making a significant contribution to increasing incomes of the better-off poor, including women Microfinance services contribute to the smoothing out of peaks and troughs in income and expenditure thereby enabling the poor to cope with unpredictable shocks and emergencies. We can therefore conclude that, while much debate remains about the impact of microfinance projects on poverty, we have seen that when MFIs understand the needs of the poor and try to meet these needs, projects can have a positive impact on reducing the vulnerability, not just of the poor, but also of the poorest in society. 2.2 Debates on the Impact of Microfinance Increase in Income J. Remenyi and B. Quinones (2000:8), conducting a case study in Asia and the Pacific, concluded that, household income of families with access to credit is significantly higher than for comparable households without access to credit. In Indonesia a 12.9% annual average rise in income from borrowers was observed while only 3.0% rise was reported from non-borrowers (control group). In Bangladesh, a 29.3% annual average rise in income was recorded and 22.0% annual average rise in income from no-borrowers. Sri-Lanka indicated a 15.6% rise in income from borrowers and 9.0% rise from non-borrowers. In the case of India, 46.0% annual average rise in income was reported among borrowers with 24.0% increase reported from non-borrowers. In 1996 the United Nations Children’s Fund found evidence from a case study conducted in Vietnam, that 97% of borrowers significantly increased their household income between 1994 and 1996. In general, the evidence is overwhelmingly in favour of microfinance as a tool to increase household income, smooth consumption, and enable the poor to sustain gains over time. Microfinance enables many impoverished families to earn enough income to rise above the poverty line and is therefore an effective method of poverty alleviation. Higher School Attendance According to Murdoch et al (2002) many poor children and adolescents do not have the chance to obtain an education because their parents cannot afford to send them to school. The cost of transportation and educational materials are too high for some impoverished families. Adolescents in particular are often forced to drop out of school to find a job to supplement the family income. Microfinance, by contributing to an increase in household income and better financial stability, enables poor families to bear the costs of sending children to school. MFIs are known for encouraging families to keep children in school and in some cases, school attendance is mandatory in order to participate in the microfinance programme Two case studies, one conducted in Bangladesh by Khandker (1998) and the other in Indonesia, by Panjaitan-Drioadisuryo, et al (1999), conclude that microfinance has a significant and positive effect on education, especially in boys. 2.3 Other Benefits of Credit Union An article on EzineArticles.com outlined the following as the benefits of credit unions. Easy Membership: credit unions has minimal shares and savings limit that even those perceived to be poor can afford, making them members. The common bond also holds them together irrespective of the level of education making them comfortable to transact financial and other transactions with credit union than the banks, which are perceived to be for the affluent. They offer numerous financial services: Just like a bank offers savings accounts, checking accounts and ATM cards, so do Credit Unions. In fact, most are extremely competitive with the list of services that a bank offers. While Credit Unions obviously offer accounts to save and check with, one of the biggest reasons to join are low cost loans. Better Loan Rates and Lower Fees: Since the credit union is not for profit, owned, and operated by members, they are usually able to give extremely attractive rates on most loans, such as car loans and even mortgages. They are usually at the low end when it comes to interest rates and other charges. In many situations, the ability for a family to afford a car loan or mortgage is based upon a lower interest rate and a reduced amount of fees. Credit Unions are Safe Financially: You can receive all the perks of a good bank including lower interest rates and lower fees and still save and grow your money safely. Credit unions are just as safe as banks to save money and have plenty of oversight to ensure that they are solvent. Volunteer Board of Directors: The main difference between credit unions and banks is their ownership. Shareholders own both the banks and the credit unions, but with credit unions, the shareholders are also the members/customers. As such, a credit union has a fiduciary responsibility to its members. Additionally, credit unions are non-profit institutions. Unlike banks, which are for-profit, they do not have to focus on producing returns for shareholders. Instead, they can focus on providing as much value as possible for members. This Board of Directors are unpaid, resulting in lower operation cost compared to the regular banks. This indeed made them survive in areas that the banks would not dare to tread. Flexibility in operating process: With limited membership, much bureaucracy does not bind credit unions as large national banks. For instance, it’s not unusual to renegotiate the terms of a loan with a simple phone call to a credit union while it could take several levels of approval from a national bank. 3.0 METHODOLOGY 3.1 Population The target population was members of Redemption Cooperative Credit Union Limited at New Mamprobi (Banana-Inn) in the Greater Accra Region. They were made up of both males and females who were mostly petty traders, artisans, private and public sector workers. Most of the members are Global Evangelical Church, Redemption Chapel, Mamprobi (Banana-Inn) members and the rest community members. 3.2 Sample and Sampling Technique This study included a pilot phase, which provided an advance opportunity for the investigator to check the data collection form to minimise errors due to improper design elements, such as question wording or sequence. It helped in discovery of confusing instructions, indicated time to be spent by respondents on questionnaire, and uncovering other such field errors. The researcher used both the probability and non-probability sampling in his sampling techniques. The researcher however, relied more on simple probability sampling. Thus, the names and contacts numbers of all the members of the population (Redemption Cooperative Credit union of 600) were obtained and included in the box and the desired number of sixty-five (65) was randomly selected administered questionnaires. However, the questionnaires received and worked on was fifty-four (54). In addition observations and interview were conducted on some selected members and the staff of the Union Observations of the credit union operational processes, thus, enable the researcher to determine the level of compliance with best financial and accounting principles and practices. 3.3 Data Analysis Statistical Package for Social Sciences (SPSS) software and Microsoft Excel were used. Frequencies, percentages, bar graphs, means, regression analysis and correlation coefficient were used to analyze the data. Descriptive analysis was used in evaluating the impact of the credit union scheme on members. 4.0 DATA ANALYSIS AND INTERPRETATION OF THE FINDINGS 4.1 Personal data of respondents The study used a sample of fifty four (54) respondents. This section provides a brief socio- demographic background of respondents in this study. The credit unions as micro or non-banks financial institutions also play some other vital roles in the country. Included in other services they provide are; advisory, safe custody, mortgage financing and network for business. All the fifty four (54) people interviewed know about credit union through either friends or credit union education but not through media or internet. Conversant with the numerous benefits associated with credit union membership, given any opportunity they will not hesitate to recommend credit union to others. In their opinion, they all (100%) at least agreed that credit unions are the most effective tool in poverty reduction through micro finance compared to other banking and non- banking financial institutions. Table 1 Gender Distribution of Respondents Source: Field Survey, 2011 As far as sex distribution is concerned, there were more female respondents than males. From Table 1, 24 (44%) of the respondents were males and the other 30 (56%) were females. Even though there are slight variations in the sex distribution of respondents, the involvement of both males and females is significant because it provides a fair balance in views expressed in relation to the phenomenon under investigation. Table 8 Average monthly Savings of Respondents Source: Field Survey, 2011 Majority of respondents (30 representing 56%) indicated that their monthly contributions were between the range of GH¢21.00 – GH¢50.00. This was followed by 16 (30%) respondents making a monthly contribution of below GH¢20.00. 5 (9%) respondents indicated that their savings were within the range of GH¢51.00-GH¢100.00 whiles only 3 (6%) made contributions above GH¢100.00. Financial Challenges The change of emphasis within credit unions from tackling poverty through the provision of low cost loans to promoting financial inclusion has undoubtedly been influenced by equivalent changes in Government policy. Improving access to financial services is at the heart of New Labours attempts to provide integrated solutions to social inclusion and to promote renewal in deprived neighbourhoods (HM Treasury 1999a, Kelly 2002, Marshall 2004). Table 22 Level of Credit Union Impact on Members Source: Field Survey, 2011 From Table 22, on the average, all (100%) of the respondents at least agreed that credit unions have significant impact on standard of living of their members. 4.5 Critical Factors for effective Poverty Reduction From the interviews and the findings from the research process the following critical factors were identified as what made credit unions stand out as microfinance in poverty reduction: Its main target market population in the provision of financial services is the poor that the banks see as too poor to save hence shy away from. Credit union recognises that, every village on the planet no matter how poor or remote, has the basic financial and human resources it needs to build its own financial institution, to enable them have adequate and uninterrupted access to financial services in the future. Credit unions’ approach to microfinance service delivery involved the provision of training and technical assistance needed for the communities to mobilize and put to work their own capital. Credit unions perceive external financial support to be helpful only when it assist the community groups to pursue objectives to which they had already demonstrated a commitment. Credit unions frowns on any support, when it moulds local objectives to suit pre-determined program. These types of supports are perceived as damaging and create dependency syndrome consequently perpetuate poverty on the people rather alleviating them form poverty. The members are therefore thought how to fish for themselves rather than fishing for them or giving them fish. The later is enslavement and defeatist in nature. It provides financial independent through easy and convenient access to timely financial facility in the form of loans or savings withdrawal, in times need. Through credit union education, financial discipline is acquired that enabled them live within their means and improve on their savings for a brighter future i.e. inculcate the habit of savings in members. It gives the opportunity to the poor to prove that given the opportunity they can manage their own finance and have enough money to save. Credit union members are the same time owners, managers and customers. Due to its operational structure, it has a very low cost of operation making them survive in the remotest part of the country where banks dared to go or are folding up. Profit (excess of income over expenditure) from credit unions operation generated from interest on loans to members and other investments income are exempt from and are available for distribution to members (in the form of interest and dividend on members savings and shares respectively) and retention to guarantee the unions continuous effective and efficient operation. Unlike the banks who derives huge profit from their voiceless customers for the enjoyment of the owners (the shareholders) the credit union makes moderate profit and is enjoyed by members who are the same time customers, making it a win win affairs. Unlike other financial institution, credit union respects the poor and allows for small contribution in the form of savings. It teaches the people to believe in God, have trust and confidence in themselves and take their destiny into their own hands. Thus, I can do it attitude irrespective of the present circumstances is inculcated in the people. 4.6 Working on Operational Deficiencies for Better Performance Despite the critical factors enumerated above which made credit unions stand out as microfinance in poverty reduction, there are other factors militating against its effective operation in achieving its stated objective. For the credit union to meet the aspirations of its members, need to work on the following areas: General operation: The board and other committee members should be encouraged to participate in relevant CUA meetings, also request/participate in training programmes (workshops and seminars) periodically organised by CUA for development of its members. This would enable them update themselves on current business practices for better performance. Recruit competent bookkeeper for timely bookkeeping and bank reconciliation to enhance the union’s financial accuracy and reporting system. The manager and other staff should be given the necessary support to attend CUA seminar and training programme to update skills. Supervisory committee should be up to task and perform their internal audit role appropriately. Customer service: credit union staff should be trained in customer service to enable them give timely, efficient and quality service that would exceed members’ expectation. Financial service: The high rate of loan delinquencies needs to be re-examined and methods put in place minimised its occurrence. Some ways to go about it are: Due diligence to be followed before granting the loans based strictly on ability to pay evaluated by the savings habit of the borrower. Educate members on the benefits of loans repayment and that though credit union is not for profit organisation is likewise not a philanthropist organisation either. Monitor loan repayments schedules for every borrower to ensure that they comply with the agreed repayments schedules and any default promptly identified and follow up. Recalcitrant borrowers should be prosecution of to serve as a deterrent to others; they cannot be acceptable members of the happy family but black ship, which needed to be treated as such. The credit union should make periodic payment of interest on members’ savings as to encourage them to increase their savings. Improvement in financial records keeping and periodic reconciliation to prevent, avoid discrepancies in the records or detect error(s) as and when it occurs. Monitor members who took business loan to ensure they used it for its intended purpose. Monthly management report should be prepared on timely basis to aid management decision, and for CUA’s monitoring and evaluation. Preparation of timely annual financial statements for audited and presented to members on schedule to enable declaration of dividend or otherwise payable to members. Financial innovations needed to meet or exceed members’ aspiration. To improve on its revenue generation management needs to explore other high return but low risk investments. To avoid unnecessary expenditure cost control mechanisms should be put in place. Membership education: This would enable members acquaint themselves with the credit union operation. There need to be periodic and frequent meetings organised for members, which would give the members and the potential members the opportunity seek clarification on issues bothering their mind. To enable the credit union to affect many more lives positively, membership educational drive needs to be intensified. The long awaited proposed credit union bill be promulgated into law to enable CUA the supervisory body and the credit unions to be more effective in their operations. 4.7 Impact of credit unions on women Women have been shown to spend more of their income on their households; therefore, when women are helped to increase their incomes, the welfare of the whole family is improved. The basic theory is that microfinance empowers women by putting capital in their hands and allowing them to earn an independent income and contribute financially to their households and communities. This economic empowerment is expected to generate increased self-esteem, respect, and other forms of empowerment for women beneficiaries. Involvement in successful income-generating activities should translate into greater control and empowerment. The ability of a woman to transform her life through access to financial services depends on many factors; some of them linked to the individual situation and abilities, and others dependent upon the environment and the status of women as a group. Control of capital is only one dimension of the complex and ever-changing processes by which the cycles of poverty and powerlessness replicate themselves. In order for a woman to be empowered, she needs access to the material, human, and social resources necessary to make strategic choices in life. Not only are women been historically disadvantaged in access to material resources like credit, property, and money, but they are also excluded from social resources like education or insider knowledge of some businesses. Running a successful business does not only contribute to improving women’s welfare, it contributes both directly and indirectly to their empowerment. The study showed that through the granting of loans, women’s businesses became more successful in the following ways: an increase in working capital, improved relationships with suppliers and customers, more strategic planning and pricing, and diversification and expansion into more profitable product lines. All thirty (30) women indicated that their working capital had increased as a result of benefiting from loans from the credit union. For half of them, their loans and earnings have been enough to break their dependency on supplier credit, and the rest were able to purchase more stock using a combination of cash and credit. In almost all cases, the increase in capital has given women more options and greater control over their businesses—and their lives. Women respondents indicated that they have gained a reputation for trustworthiness and responsibility that enhanced their relationships with their suppliers and customers and improved their businesses. As women used the loans, business training, and advice they received they have been able to expand into more profitable lines of business and build their customer bases, they reported feeling that both men and women respected them more. In many ways, the women interviewed have been able to capitalize on the increased respect they have received as successful businesswomen and breadwinners to increase their influence in community and household affairs. The women interviewed were particularly proud of their financial contribution to their children’s education not only because it helped them earn the respect of their husbands but also because it gave them the opportunity to ensure the best possible education for both their daughters and their sons. Women placed a high priority on being able to provide adequately for their children. They reported that their children accorded them more respect, now that they are able to provide for their needs and for their participation in social functions, even if they are now able to spend less time with them. Several women also commented that being able to provide for their children gave them more confidence to get involved in their lives. The women believed that their financial contribution had helped them earn greater respect from both their husbands and their children. Many of the women were not only happy to have reduced their dependency on their husbands but were also pleased to be able to help them. What is of key interest though is that, whether credit is rationed or not, many of the women who learned and have associated with microfinance institutions have indicated that they have benefited somewhat from their association with the credit union to a large extent. 4.8 Improvement in the Financial Asset Base of Members Table 23 shows significant impact on the Standard of Living of the Union members. From the Table, membership, share holding, savings balance, net loan balance, total assets and highest loan granted increased during the years under review (from 2002 to 2009). As at 2009, the number of female members was 307 as against 215 for men. This is a strong indication that women are more likely to embrace the benefits of credit unions. From Table 23, it appears Redemption Corporation credit union is a highly profitable credit union since total assets of the union increased during the period under review. This is a strong indication that management of the union have invested the funds of the union to gain additional returns on investment, also improvement in members’ periodic savings and improvement in members’ share holding. This probably resulted in increase in loans granted members over the period 2002 to 2009. It may also due to the increase in membership. Table 23 Secondary Data: Redemption Coop. Credit Union Performance over 8 years Source: Audited Financial Statement of Redemption Coop. Credit Union, from 2002 to 2009 5.0 Conclusion The study revealed that, members of the credit unions are faced with certain financial challenges like school fees, medical expenses, funeral expenses, rent advance, land and building, and acquisition of vehicles. The credit unions were able meet most of these challenges of members with educational and working capital being the highest and the lowest was loans for means of transport. It was found out that all (100%) of the respondents at least agreed that credit unions have significant impact on standard of living of their members. Thus, the Null hypothesis (HO): that Credit Unions operations have no effect in poverty reduction through microfinance in Ghana is rendered untrue. Hence the Alternative hypothesis (H1): with the accession that Credit Unions operations have significant effect in poverty reduction through microfinance in Ghana holds true. 5.1 Recommendations In view of the fact that credit unions, as microfinance institutions in a way are in keen competition with the banks as well as non-bank financial institutions, there is the need to build the capacity of their staff, especially in areas of risk and investment management. The study therefore recommends the following: Central Government should support capacity building of credit union to enable them live up to or above the challenge in the present circumstances. Improvement in public education on the relevance of credit unions in both print and electronic media hence made the credit union a household name. More credit unions should be set up especially in the localities that banks would not be able to survive due to their high cost of operation. This would improve the quality of life of the marginalised and excluded in society. The high rate of loan delinquencies needs to be re-examined and methods put in place minimised its occurrence. Government should promulgate the credit union bill into law without feather delay to help improve credit unions effectiveness in poverty reduction. For effective poverty reduction the Central Governments should find a way of making stimulus packages available credit unions.  REFERENCES America’s credit unions. http://www.creditunion.coop/history/index.html Asiamah, J.A (2007) Note on Microfinance in Ghana Ashe, Jeffrey. “Introduction to a symposium on savings-led finance and the rural poor”. 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