Microfinance in Ghana: A Comparative Study of Performance of the Formal versus Informal Rural Financial Institutions

This paper uses survey data from a wide range of rural financial institutions (FIs) in Ghana to compare the performances of formal banks with traditional MFIs.

A growing number of commercial banks are showing interest in financing the vast underserved and untapped market of microenterprises in Ghana. Most are, however, still hesitant to venture into microlending. The study compares the performances, incentives and disincentives of formal and informal FIs in Ghana. Findings include:

• Main incentives for banks to get into microlending include profitability and changing market conditions;
• Disincentives for banks in microlending include high transaction costs and perceived high risk of microentrepreneurs;
• Asset-based collateral does not affect the performance of FIs but collateral leads to a reduction of non-performing loans (NPLs);
• Informal FIs perform better than formal FIs in reducing default rates;
• Formal FIs with clients dominated by women are more likely to perform better;
• Rural FIs are more likely to have higher NPLs;
• Higher scope of outreach is significant for performance;
• Higher lending rates of FIs lead to higher levels of default rates.