1. Background Of The Study
The concept of micro-finance is not new in Ghana. There has always been the tradition of people saving and/or taking small loans from individuals and groups within the context of self-help to start businesses or farming ventures. For example, available evidence suggests that the first credit union in Ghana was established in Northern Ghana in 1955 by Canadian Catholic missionaries. However, Susu, which is one of the micro-finance schemes in Ghana, is said to have originated from Nigeria and spread to Ghana in the early twentieth century (Asiama & Osei, 2007).
Over the years, the micro-finance sector has thrived and evolved into its current state due to various financial sector policies and programmes undertaken by different governments since independence. A Micro-Finance Institution (MFI) is an organization that provides micro-finance services, ranging from small non-profit organizations to large commercial banks. Micro-finance is the provision of financial services like insurance, savings, transfer services, loans and other financial products targeted at low income clients. It is based on the concept of a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services including not just credit but also savings, insurance and fund transfer. As part of the MFIs, which are recognized world-wide as one of the effective tools by which poverty can be reduced; savings and loans companies play an important role in poverty reduction in Ghana.
However the central issue which has assumed important heights in academic and policy circles is the sustainability of MFIs. The sustainability of an MFI is important to the development of financial intermediation at the micro level. The principal issues with regards to sustainability have to do with how MFIs manage the dynamic situation between lenders and small credit borrowers and institutional staff productivity in the provision of efficient and productive loans. A well managed lender borrower relationship translates to the ability of the institutions to manage the associated problems of moral hazard and adverse selection. This eventually helps the institutions to obtain more yields on loans to generate revenues and reduced reliance on grant subsidy.
Despite the concern for sustainability issues, the focus in developing economics seems to be only on the advantage of micro finance, hence the promulgation of such institutions with little attention to sustainability issues. In Ghana, it has been noted that financial institution play a pivotal role in growth and development and indeed studies conducted in Ghana by (Aryeetey & Gockel, 1991; Aryeetey, 1992) shows that MFI can help provide the vital and much needed credit for development. In the volume one of the Social Investment Fund’s operations manual, 1999, it is asserted that under the Ghana Poverty Reduction Project (GPRP), the use of micro-finance and other tools to enhance the capacity of the poor to engage in sustainable productive activities has been recognised as a poverty reduction strategy. In this light a number of MFIs have sprung up in Ghana especially in the early nineties and have been engaging in administering small loans. About 50 active Non Governmental Organisation (NGO) MFIs credit have been operating in Ghana, with Sinapi Aba Trust being the most widely spread with 16 branches countrywide (GHAMFIN 2003). It is however not clear as to what determines the sustainability of these institutions. Indeed (Steel & Andah, 2003) noted that the increased reliance on subsidized loans in provision of micro-finance in Ghana could threaten the long run sustainability of MFIs. More importantly, studies on the performance on MFIs in Ghana have not empirically tested the sustainability or determinants of sustainability...