The Competitiveness Of Microfinance Firms In Ghana Finance Essay

The emergence of MFIs in Ghana is phenomenal. The popularity of MFIs is encouraging other businesses into investing in the sector thus increasing the numbers yearly. These MFIs are surprisingly able to attract and maintain clients. Their successes could be attributed to the innovations employed. This study investigated what the main forms of innovations that the MFI employed were the effects on the performance of MFIs and what the challenges were therefrom.

The study finds evidence that MFIs in Ghana do not generally innovate through products and supply chain. This is because MFIs simply provide loans at various rates payable over a period of time and also because the sub sector is emerging one which is still growing.

The study revealed that MFIs in Ghana innovate through process and marketing. Marketing innovation has been pursued excessively by MFIs because they compete for clients. Process innovations have also been undertaken with focus on improving speed of delivery and quality of services. The impact of innovations on performance of MFIs was not properly identified in this study. This is due to the limited forms of innovations adopted by the firms. However marketing innovation was identified as having a highly positive effect on increasing the customer base of respective MFIs. Process innovation also ensured that MFIs provided satisfactory services to clients by cutting down costs and putting MFIs in a favourable position.

The challenges identified were competition and high default rates. The implications of these findings for stakeholders are that MFIs in Ghana should pursue product innovations aggressively. Process innovations should also focus on credit analysis of customers to ensure low default rates. MFIs in other countries like the Grameen bank in Bangladesh have improved tremendously through the adoption of various forms of innovation. MFIs in Ghana therefore need to continuously innovation in other areas to ensure profitability.

THE EFFECTS OF INNOVATION ON THE COMPETITIVENESS OF MICROFINANCE FIRMS IN GHANA

CHAPTER ONE

1.0 Background

In recent years the microfinance sector has been growing rapidly in Ghana. The provisional register of microfinance firms by the Bank of Ghana has listed ninety-nine microfinance firms with thirteen money lending firms as at 2007 (bog.gov.gh). They have significantly increased their lending portfolios as well. Anecdotal evidence seems to suggest that this growth in the sector is due to a high level of innovation among the microfinance firms in Ghana. Microfinance is a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no means of gaining financial services (Morduch, 2000). Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance (ibid).

According to Asiama and Osei (2007) microfinance consists mainly of providing financial services to micro-enterprises and to low-income households. These services include savings, micro-credit, micro insurance, micro leasing and transfers in relatively small transactions designed to be accessible. Microfinance has also been complemented in Ghana by non-financial services, especially training; to improve the ability of clients to utilize the facilities provided them effectively. In terms of the evolution of the microfinance sub-sector in Ghana, Asiama and Osei (2007) state that the concept has always been in Ghana. It used to be called 'susu' which anecdotal evidence suggest evolved from northern Nigeria to Ghana. Over the years it has evolved from subsidized credits provided to small business to the establishment of rural banks and currently the establishment of private microfinance firms with an act of Parliament underway to control the operations of these microfinance firms. The role of microfinance firms in reaching poor people with funding for their private endeavours is well documented (Robinson 2001). Steel and Andah (2003) have noted that, the diversity of microfinance firms is facilitated by the availability of a flexible regulatory regime which places fewer restrictions than is the case with commercial banks. Complex decisions have to be made in Ghana's circumstance as to the timing and complexity of regulations in order to encourage orderly growth without excessively stifling innovation.

Innovation has played a key role in the development of the microfinance sector in many countries. Hoque et al (2011) have found that increases in cost of capital leads to higher cost of borrowing, higher default rate and increased risk. Again, increased use of commercial debt and equity financing lowers productivity for client-maximizing microfinance firms. This is through lower conversion of savers to borrowers or the yield rate. This suggests that mission drift experienced by MFIs due to commercialization is a wrong turn for the industry. This has led to microfinance firms adopting a non-commercial approach to financing as an alternative to commercialization. This is the case in Ghana where official credit schemes have been used to drive the microcredit schemes in the form of the Masloc programme and PAMSCAD credit line. These non-commercial approaches are innovative methods that differentiate the microfinance sector from the banking and other non-bank financial institutions.

Megicks et al (2005) have also found that the attitudes and behaviours of managers, along with institutional characteristics, are identified as influences on market orientation, service innovation, customer satisfaction and outreach performance within microfinance firms. Dusuk (2008) also states that microfinance requires innovative approaches beyond the traditional financial intermediary role. Among others, building human capacity through social intermediation and designing group-based lending programmes are proven to be among the effective tools to reduce transaction costs and lower exposure to numerous financial risks in relation to providing credit to the rural poor.

1.1 Problem Statement

There are currently 25 banks in Ghana yet the percentage of the Ghanaian populace banked remains at less than 20% (Ghana Banking Report, 2011). Despite the fact that most Ghanaians are unbanked most people are trooping to microfinance firms for services. Narteh and Owusu-Frimpong (2011) suggests that banks are afraid of the risk associated with banking the informal sector that constitutes a large chunk of the unbanked in Ghana. Abor (2005) has opined that the reason for the fear is the poor addressing system and a new credit reference bureau system in the country. In the midst of all these risks micro finance firms have lent funds to risky individuals and firms in the same economy with same environmental conditions the banks dread. Asiama and Osei (2007) mention that microfinance firms have loaned out GH¢70.63 million in 2003 to GH¢72.85 million in 2004, suggesting 3.1 per cent growth and extended GH¢160.47 million to clients in 2006 alone, representing 48.8 per cent higher than the previous year's total loans and advances granted by them. Anecdotal evidence seems to suggest that microfinance firms are being more innovative than the traditional banks. As the 2011 Banking Report suggests the banks are making more from lending to government, hence, there has been no need to lend to the risky sectors of the economy. In order to confirm or disconfirm the anecdotal evidence that seems to suggest that innovation is the reason for the growth in number of microfinance firms in Ghana, there is the need to conduct a study. This study addresses this issue. The growth has not also been investigated in the academic literature yet and more especially in less developed economies like Ghana. The question in the academic literature remains what models of innovation account for the growth of microfinance firms. This study therefore seeks to identify the various forms of innovative strategies adopted by MFIs in Ghana and how such innovations contribute to performance of such firms.

1.2 Research Objectives

The objectives of the study are as follows:

To determine the main forms of innovation among microfinance firms in Ghana.

the effects of innovation on performance To determine.

To identify the challenges MFIs in Ghana face in the adoption of innovation.

1.3 Research Questions

The following questions will be explored in the course of this study to be able to arrive at the objectives stated below:

What are the main forms of innovation among microfinance firms in Ghana?

What are the effects of innovation on performance of microfinance firms in Ghana?

What challenges do MFIs in Ghana experience in the use of innovation?

1.4 Significance of the Study

The study will bridge the knowledge gap on relationship between innovation and performance among non-bank financial institutions especially microfinance firms in Ghana.

1.4.1 The findings will inform microfinance firms as to what innovative strategies best work in the external environment and how these impact the performance of the microfinance firms in order to aid competitiveness.

1.4.2 The findings may be beneficial to the mainstream banking sector in helping them identify innovative strategies that can enable them provide credit to clients in the low income bracket. 1.4.3 For customers, the findings will enlighten them on the innovative mechanisms of microfinance firms in Ghana with a view to enable them demand more by way of customer service from those entities.

1.4.4 The findings will be beneficial to the Bank of Ghana in its monitoring and regulatory functions of microfinance firms in Ghana. It will enable it regulate and bring sanity into the operations of MFIs in Ghana.

1.4.5 The study will also contribute to the debate of microfinance as engines of development in less developed countries in general, and Ghana in particular, as sources for funding for micro-enterprises and finally, form the basis upon which future research will be conducted in academia.

1.5 Limitations of the Study

The research was encumbered by a number of factors. These are;

1.5.1 Finance. The budgetary constraints for the study limited the study to the extent that the sampling techniques employed may not be reflective enough of the population.

1.5.2 Time. Time was of great essence. The urge to complete the work on schedule militated manifestly against the ability to conduct a more meticulous and comprehensive work.

1.5.3 Access/Privacy of data. Respondents were reluctant to offer information because they did not want information about their businesses to get to third parties, the Bank of Ghana and their competitors. This in a way affected the findings and subsequently, the recommendations.

1.6 Organisation of the Study

The study was structured into five chapters. Chapter one presents the background, problem statement, objectives, significance of the study, limitations and organization of the study. Chapter two reviews related literature on both theoretical and empirical grounds. Chapter three provides the details of the methodology used for the study; this includes how data was gathered and analysed. In chapter four the results of the analysis were presented and discussed. Finally, chapter five includes the summary, conclusions and recommendations drawn from the study.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

In this chapter, extensive review would be carried out on the existing literature on innovation and its adoption in the microfinance sector. Attempts would also be made to discuss the theoretical and conceptual framework underpinning innovation in the microfinance sector of the Ghanaian economy. Academic literature generally (Asiama and Osei, 2007; Morduch, 2000) have espoused microfinance as providing the innovation needed to serve poor markets. This section of the thesis presents literature review of innovation within the microfinance sector and develops a conceptual framework that will guide the study.

In recent years, since the Grameen Bank was established by Mohamed Yunus in Bangladesh, microfinance has come to the fore of poverty reduction in many countries. This financing approach has been mooted by supranational institutions such as the World Bank and the International Monetary Fund (IMF). MFIs have not overcome traditional banks in terms of credit mobilisation and that may not happen considering the fact that most MFIs bank with traditional banks and have their accounts with these banks. The total of mobilisation by MFIs will therefore be a subset of the traditional banks. However, when the MFI mobilisations are disaggregated from that of the traditional banks it is most likely that these will be close to those of the traditional banks. It will take possibly the next decade for them to exceed the banks; even that becomes a remote possibility when we consider that some of these MFIs may grow to become banks in themselves especially the well structured ones. However, formal mobilisation by MFIs seems to suggest strong mobilisation of funds as Asiama and Osei (2007) provide the fact that most MFIs in Ghana seem to work in the informal sector.

2.1 Innovation

Innovation may be defined as exploiting new ideas leading to the creation of a new product, process or service (Trott, 2008). It is not just the invention of a new idea that is important, but it is actually "bringing it to market", putting into practice and exploiting it in a manner that leads to new products, services or systems that add value or improve quality. It possibly involves technological transformation and management restructuring. Innovation also means exploiting new technology and employing out-of-the-box thinking to generate new value and to bring about significant changes in society. While many organizations acknowledge that innovation is important to their growth and success, the term "innovation" is still without a consistent, agreed-to definition in the business world.

There is a difference between innovation and invention. 'Invention' is an act or instance of creating or producing by exercise of the imagination while 'Innovation' is the act of innovating; that is, introduction of new things or methods. So, the real difference between Innovation and Invention is that any organisation would need to build a culture of learning first in order for their people to invent, only then can the organisation innovate or introduce new things or methods.

2.2 Types of Innovation

Researchers (Liddle and Kafafi, 2010) have identified many types of innovation such as Product Innovation that entails the introduction of a new product or a service that is new or considerably improved; Process Innovation comprising the implementation of a new or a significantly enhanced production or delivery method, Supply Chain Innovation in which innovations transform the sourcing of input products from the market and the delivery of output products to customers and Marketing Innovation which results in the evolution of new methods of marketing with enhancements in product design or packaging, its promotion or pricing, among others.

2.2.1 Product Innovation

This is the development and market introduction of a new, redesigned or substantially improved product. Examples of product innovation by a business might include a new product's invention; technical specification and quality improvements made to a product; or the inclusion of new components, materials or desirable functions into an existing product.

2.2.2 Process Innovation

Process innovation means the implementation of a new or significantly improved production or delivery method (including significant changes in techniques, equipment and/or software). Minor changes or improvements, an increase in production or service capabilities through the addition of manufacturing or logistical systems which are very similar to those already in use, ceasing to use a process, simple capital replacement or extension, changes resulting purely from changes in factor prices, customisation, regular seasonal and other cyclical changes, trading of new or significantly improved products are not considered innovations.

2.2.3 Supply Chain Innovation

Supply chain innovation is about applying best practices and technological innovations to improve a firm's supply chain in order to reduce such cycle and wait times and other waste (to use a Lean term) in in-house processes. This should have an ultimate goal of improving the customer experience. This gives customers more choice, more accuracy, faster order fulfilment, increased visibility and better service by looking at areas in a firms supply chain that can be improved.

2.2.4 Marketing Innovation

It is defined as a part of business exchange which covers how the industry is evolving in the face of new technology and ways of communicating. This covers the new innovation in marketing from new tools to how people rethink how to get their messages out. Marketing innovation helps to retain old customers and also to attract new customers.

2.2.5 Models of Innovation

Traditional arguments about innovation are centred on two arguments: the deterministic and individualistic schools of thought. The deterministic school of thought emphasizes the role of external influences such as demography, economics and culture in the realisation of innovations while individualistic thought emphasizes the unique individual talents as basis for innovations. Over the last two decades however the literature on what drives innovation has been either market-based view or resource-based view (Trott, 2005). The market-based view holds that market conditions form the context within which innovations take place. The resource-based view however contends that markets are dynamic and cannot form a strong basis for innovations and that the unique competencies, resources, capabilities and skills of the firm are what drives innovation. Within these debates however; there are general models of innovation that have come to be accepted as strong basis and sources of innovation. These are:

2.2.6 Serendipity

Serendipity is the ability of making accidental but fortuitous discoveries, especially while looking for something entirely unrelated. Many innovations are related to chance, a set of fortuitous conditions (happy or unhappy). However, chance is not enough. Knowledge and experience are necessary to transform the set of conditions into innovation. This is the concept behind the word "serendipity". Three types of Serendipity can be identified. These are:

Discovery that was not sought (eg. Velcro)

Discovery that was being sought, but found in an unexpected way (eg. vulcanization)

Discovery, whose use is different than originally planned (eg. Post-It)

Serendipity is a manifestation of creativity in which inspiration comes from outside. Thus, the open approach of innovation for a company increases serendipity and thus innovation. Large companies have begun to systematize this approach. For example, Procter & Gamble, one of the leaders in terms of open innovation, have deployed their "Connect & Develop", which allows the group to connect its internal research with unexpected opportunities offered by an external network of experts.

2.3 Linear Models

One of the first (theoretical) frameworks developed in history for understanding science and technology and its relation to the economy has been the linear model of innovation. The model postulated that innovation starts with basic research, followed by applied research and development, and ends with production and diffusion.

Basic research â†’ Applied research â†’ Development â†’ (Production and) Diffusion. (Trott, 2008)

According to the linear model, innovation takes place in distinct and sequential phases. Research is considered to be the initiating step and the source of all innovations. The linear model suggests that the sequence from research through development to production is a standard and predominant path of innovation in both firms and national economies, and no feedback role is built into the system. The linear model has also been used as a justification for doing basic science research globally and provides the conventional wisdom which underlies most policy thinking about technology development and economic growth.

The Linear model is the foundation of present models for collecting statistical information on research activities, for organizing economic research on the social benefits of scientific research, and for explaining the role of science in industrial innovation (Rothwell and Zegveld 1985). Consistent with the linear model of innovation, science and technology (S&T) policies have evolved which have long focused primarily, perhaps exclusively, on government-funded R&D, whether conducted at government laboratories or in universities. Combined with the economic rationale of 'market failure' and Keynesian economic policies, which justified government intervention to lift and sustain the level of output and employment and to prevent another depression, government grants for research and development remain a popular policy in keeping with the Linear model.

Nonetheless, there is growing criticism of linear model. As a framework for categorizing the process of knowledge creation, the linear model diverts attention from the economic and social determinants of scientific research activity. As a theory of knowledge production, the linear model ignores the role of technology in shaping the aims, methods, and productivity of science and neglects the non-scientific origins of many technological developments. As epistemology, the linear model creates distinctions that closer examinations of scientific and technological activity fail to confirm. In addition, the linear vision of innovation dominates also the regional innovation capability evaluations.

2.4 Simultaneous Coupling Model

This model recognizes interaction between different elements and feedback loops between them, emphasis on integrating R&D and marketing. A simultaneous coupling model, the third generation innovation model, was created during 1970s, when many studies showed that the innovation process was much more complex than previous linear models had described (Trott 2005, Figueroa and Conceicao 2000). The simultaneous coupling model suggests that the innovation process is the result of simultaneous coupling of knowledge within all three functions: R&D, manufacturing and marketing (Trott 2005).

2.5 Interactive Model

This model combines push and pull models, integration within firm, emphasizes on external linkages. The interactive model of innovation (also known as the chain-link model presented by Kline and Rosenberg), is a modification of the previous linear models and combines both the technology push and the market pull views (Rothwell and Zegveld 1985). It also contains similar elements as the simultaneous coupling model (Kline & Rosenberg 1986). The model is a logically sequential - though not necessarily continuous - process that can be divided into functionally distinct but interacting stages. Although this interactive model resemble the linear models, the flow of information is not necessary linear. There are complex links and feedback relationships within the company and also between the company and the surrounding science - technology system (Roberts 1998). The generation of ideas is based on three basic components: organization capabilities, needs of the market, and science and technology. The overall process is complicated and through efficient management companies will be able to create successful innovations (Trott, 2005).

2.6 The Idea of Microfinance

Microfinance (MF) is the product of new thinking and practice in development economics. Microfinance movement is nothing short of a revolution in developmental finance (Hans, 2009). For the developing countries, it has come as a breakthrough in the philosophy and practices of poverty eradication, economic empowerment and inclusive growth. Their role is nobler as they do "banking for the poor". They have also contributed to monetary liquidity and stability in the economy. But we need to re-examine their role and performance not only in terms of the avowed objective of poverty eradication but also in terms of the goal of human development. They need to testify their functionality and performance in the realm of social capital. They need to justify their presence and functions for socio-cultural development of the country and how they can do this through social intermediation.

The distinction between microfinance and micro credit has to be underlined. Specifically, microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients whereas micro credit refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending. Christen et. al. (1984) have viewed the microfinance movement as an environment 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 transfers. It is thus the provision of a board range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low income households and their micro enterprises (Sriram and Kumar, 2007).

The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income (the Microfinance Gateway).

In the simplest terms, microfinance is "banking for the poor" and covers micro credit, micro savings, micro insurance and remittances (Kandelwala, 2007). Asian Development bank defines Microfinance as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their micro enterprises (ADB, 2000). Ledgerwood defines microfinance as the provision of financial services like savings, credit, insurance and payment services to low-income clients, including the self-employed (Ledgerwood, 1999). Even the World Bank feels that the poor, i.e. the target clients of microfinance, need and use more financial services than just micro loans. In a situation financial crisis or financial market failure compounded by moral hazard, the MFIs come in handy. MFIs overcome financial market imperfections through group lending practices in which borrower's associates become co-signers to the loan. The numerous mechanisms of a MFI facilitate effective credit provision. The MFIs are able to offer non-credit financial services such as savings arrangements to poor people.

2.7 Challenges of Microfinance

Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. The fixed cost of processing loans of any size is considerable. as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make (Ledgerwood, 1999). Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people.

In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by De Soto (1989), even if they happen to own land in the developing world, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers. Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development. However, the efforts of national planners and experts to develop financial services for most people have often failed in developing countries, for reasons summarized well by Adams et al (1984) in their classic analysis "Undermining Rural Development with Cheap Credit".

Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high. An analysis of 28 studies of informal moneylending rates in 14 countries in Asia, Latin America and Africa by Robinson (2001) concluded that 76% of moneylender rates exceed 10% per month, including 22% that exceeded 100% per month. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. While moneylenders are often demonized and accused of usury, their services are convenient and fast, and they can be very flexible when borrowers run into problems. Hopes of quickly putting them out of business have proven unrealistic, even in places where microfinance institutions are active.

Since the 1970s (proponents of microfinance such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people (Helms, 2006). While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. Some economists therefore favour the group-based approach. This particular model (used by many Microfinance institutions) makes financial sense, they argue it reduces transaction costs. Microfinance programmes also need to be based on local funds.

Although much progress has been made, the problem has not been solved yet, and the overwhelming majority of people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to formal sector finance. Microfinance has been growing rapidly with $25 billion currently at work in microfinance loans (Deutsche Bank Report, 2007). It is estimated that the industry needs $250 billion to get capital to all the poor people who need it (Deutsche Bank Report, 2007). The industry has been growing rapidly, and concerns have arisen that the rate of capital flowing into microfinance is a potential risk unless managed well. As seen in the State of Andhra Pradesh (India), these systems can easily fail. Some reasons being lack of use by potential customers, over-indebtedness, poor operating procedures, neglect of duties and inadequate regulations (Khandker, 1999)

2.8 Innovation in Microfinance

Democratisation and decentralisation in decision-making have given a boost to local participation. Members are using the modern tools and techniques like smartcards, financial management, environmental management, disaster management (as was witnessed during the Tsunami) etc. The MFIs have moved from financial security to social security. The new instrument is social intermediation. Increasing attention in recent years has been paid to the ways in which microfinance fosters social capital formation among the poor (ABN-AMRO; World Bank, 1999). Through social intermediation MFIs can ensure a certain minimum of social capital in the first phase of economic growth, and enhance its quantity and quality subsequently and sequentially.

Social intermediation is the process which combines the functions of social organisation and financial linkage carried out through an NGO, or local government organisation, though self-help groups or through individuals, as locally appropriate (Hulme and Paul, 1996). In India the self-help group (SHG) movement is seeking to provide social intermediation through the Rashtriya Mahila Kosh (RMK) and Women's Development Corporations, howsoever small they are compared to the erstwhile Integrated Rural Development Programme (IRDP). Using 'trust' as the base the MFIs have been able to foster group cohesiveness through networking. The benefits of networking also include low cost marketing, knowledge diffusion, easy access to timely health care etc.

Social intermediation through a range of activities and capacity-building has enabled people to become good borrowers and savers, better manage their own finances or their own financial groups and helped them to put whatever 'social capital' they have to more productive use. No doubt such an intervention is not likely to be financially self-sustainable. This gives a new responsibility to the banker too (as in the case of SHG-Bank Linkages). But the banker must accept that this is a role which the NGO, as a committed social engineer, is better suited to execute. Social engineering is a full-time activity which has no substitute for the limited community contacts that a committed banker might indulge in. The Microfinancial Sector (Development and Regulation) Bill, 2007 with all its legal aspects aims to ensure that NGOs use their social mediation skills to ensure financial intermediation (Shylendra, 2007).

What is needed, however, is to explore the two-way relationship between financial intermediation and social intermediation before making any alterations to the prevailing structure of microfinance. After all unrestrained access to public goods and services is the sine qua non for an open and efficient society (Ray and Singh, 2006). Today the MFIs want the government to empower them for mobilising savings. With increasing demand for rural finance, and the inadequacies of formal sources, the MFIs have immense opportunities in the new avatar of micro credit in India. However, in the light of recent experiences, and the need for qualitative growth, MFIs should be managed with better scrutiny in terms of finance and technology as well as social responsibility. This is of utmost importance in order to upgrade MFIs from thrift and credit institutions to capacity-building and livelihood-sustaining associations of people (Dinesha, et.al., 2008). Client-specific and role-specific MFIs can do a lot in enabling people; reach the realm of inclusive growth. Such tasks should be taken up with a knowledge that social exclusion is something that cannot be solved through reservations, subsidies and grants only. A balance between physical growth, social growth and cultural growth should be maintained, always (Hans, 2009).

2.9 Some Empirical Studies in Microfinance Innovations

Dusuki (2008) reviewed the microfinance scheme and discuss how Islamic banks can participate in such an endeavour without actually compromising the issue of institutional viability and sustainability. He found that Islamic banks may benefit from the spectrum of Shariah-compliant sources of funds and offer a wide array of financing instruments catering for different needs and demands of their clients. Furthermore, the use of a bankruptcy-remote entity like SPV can protect Islamic banks from any diverse effect of microfinance activities. Cull et al. (2008) analysed the tensions and opportunities of microfinance as it embraces the market and found that there remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit-maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.

Hudon (2008) studied the role of norms and values in the microï¬nance sector. The study found that the private sector will tend to produce the operating rules of the microï¬nance system while the not-for-proï¬t institutions that are using an inclusive decision-making process are more likely to inï¬‚uence the ethical norms in the sector. Hartungi (2007) aimed to provide a deep understanding of success factors contributing to a micro-ï¬nance institution (MFI) in a developing country, e.g. Bank Rakyat Indonesia (BRI) and how MFI in developing country might learn from this success. He found that well-trained and dedicated staffs operating a simple, transparent system, clear incentives to staffs and clients, tight internal supervision and audit capacities and ï¬nancial procedures and sound ï¬nancial risk management contributes to its success as well. Mersland and Strom (2009) examined the relationship between ï¬rm performance and corporate governance in microï¬nance institutions (MFI) using a self-constructed global dataset on MFIs collected from third-party rating agencies. They Found that ï¬nancial performance improves with local rather than international directors, an internal board auditor, and a female CEO. The number of credit clients increase with CEO/chairman duality. Outreach is lower in the case of lending to individuals than in the case of group lending. De Aghion and Morduch (2004) focused on the innovations that have made microfinance possible. We then deliver an overview of recent trends. We argue that the future of microfinance institutions is ultimately in the hands of international donor agencies and local governments, which have been recently promoting competition and stressing financial self-sustainability. Finding the appropriate division of labour is the most difficult but critical step in navigating trade-offs between reaching financial self-sustainability as an institution and helping customers escape poverty and make better lives. Obaidullah and Mohamed-Saleem (2009) highlight the need for creativity and innovation in poverty alleviation efforts using Shariah compliant mechanisms. Contemporary mechanisms in use by mainstream Islamic banks and financial institutions may indeed be grossly inappropriate in the context of local economies and for financing micro livelihood projects. The study also highlights the need to move beyond the "popular" Islamic banking instruments, such as, murabaha and to search for innovative and appropriate solutions. This study on financing paddy cultivation for impoverished and displaced farmers is demonstrative of one such innovative solution that is also Shariah compliant, involving use of value-based salam and mudharabah in a benevolence-driven framework as distinct from a prohibition-driven framework.

2.10 The table below presents studies in microfiance sector and the methodologies that have been used to achieve findings presented.

Author

Question

Method

Finding

Scope

(a)

(b)

(c)

(d)

(e)

Hartungi (2007)

What are the success factors of micro-ï¬nance firms in a developing country

Case study research with semi-structured interview questions

Factors contributing to the success of MFI lay on the decision to keep adapting its practice with environmental changing. Also BRI is very innovative in choosing collaterals so in one hand, the credit is still interesting for lower class community, but at the same time they work as compensation in case the clients fail to repay their credit and thus ensuring the sustainability of the MFI. Well-trained and dedicated staffs operating a simple, transparent system, clear incentives to staffs and clients, tight

internal supervision and audit capacities and ï¬nancial procedures and sound ï¬nancial risk management contributes to its success as well.

Conducted in Jakarta and some rural cities mainly in Java and South Sulawesi in Indonesia between August and

September 2003

Obaidullah and Mohamed-Saleem (2009)

What is the nature of Islamic Microfinance

Case study research with semi-structured interview questions

There is the need to move beyond the "popular" Islamic banking instruments, such as, murabaha and to search for innovative and appropriate solutions. This study on financing paddy cultivation for impoverished and displaced farmers is demonstrative of one such innovative solution that is also Shariah compliant, involving use of value-based salam and mudharabah in a benevolence-driven framework as distinct from a prohibition-driven framework.

Sri Lanka

Hoque et al (2011)

Is commercialization and changes in capital structure in

microfinance institutions an innovation?

Quantitative techniques using panel data for

six-year period 2003-2008

Results are generally robust and indicate that leverage decreases the relative level of outreach to the very poor. This is expected as increases in cost of capital leads to higher cost of borrowing, higher default rate and increased risk. The study suggests that MFIs can adopt a non-commercial approach to ï¬nancing as an alternative to commercialization. Such models are available in practice. Findings suggest that mission drift experienced by MFIs due to commercialization is a wrong turn for the industry.

The panel data consist of MFIs in various parts of the world including: Central and South America, Africa, Eastern Europe, and Asia.

Hans (2009)

How can innovations help MFIs overcome the financial success cage

Case study research using documentary analysis

MFIs by releasing the true potential of its members through social intermediation can ensure building an inclusive society. MFIs have the advantage of combining the good features of both formal and informal credit, even improving productivity and credit-worthiness through the ethics of repayment. The plight of farmers in India and the scenario of suicides need to be examined in this context.

India

2.11 Conceptual Framework

There has been some treatment of microfinance as an innovation itself, and of innovations that can support microfinance. But there is surprisingly little material readily available, at least not in the public domain, which explores the implications of microfinance for innovation. The conceptual framework presented in this study seeks to explore the idea of innovation in microfinance. The figure below presents the conceptualisation that will guide the data collection, analysis and discussion of findings in following chapters.

2.11.1 Figure: Conceptual Framework

Model of Innovation

Types of Innovation

1. Product Innovation

2. Process Innovation

3. Supply Chain Innovation

4. Marketing Innovation

5. Financial Innovation

Microfinance Firm Success uccess

Target Characteristics

Firm Profile

The author conceptualizes that the type of innovation (product, process, supply chain, marketing and financial) adopted by the firm has an impact on the success of the microfinance firm. This success is however mediated by the model of innovation (simultaneous coupling, serendipity, linear, and interactive) employed by the firm, the target characteristics and the firm level characteristics. This framework will help explain innovation adoption within microfinance firms in Ghana.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter show the problem statement, research objectives and research questions were addressed. By definition, methodology can be seen as a way of thinking about and studying reality, whilst methods can be defined as "a set of procedures and techniques for gathering and analyzing data" (Strauss and Corbin 1998). Specifically, this chapter will provide in broad outline, the strategy and methods that were employed in addressing the research questions "what are the forms of innovation among microfinance firms in Ghana, what are the effects of these innovation methods on performance of microfinance firms, and what the challenges are in adopting such innovation methods.

3.1 Research Design

A study's research design is its fundamental framework; it specifies the methods and procedures for collecting and analyzing the information required for conducting a specific research project. Consequently, the choice of research design becomes very critical since it will influence a large number of subsequent research activities (Churchill and Iacobucci 2006). There are several ways in which one can classify different research designs (Miles and Huberman 1994; Saunders et al. 2003; Yin 1994), but a widely accepted method is to classify them according to the fundamental objective of the study as being exploratory, descriptive and/or, causal (Churchill and Iacobucci 2006; Hair et al. 2003).

In deciding which type of research design to adopt for the current thesis, the nature of the study and its specific objectives were carefully deliberated. The study design was a cross sectional survey of micro finance firms operating in Accra based on both qualitative and quantitative methods. The decision to employ these methods was because the study seeks to investigate the views and opinions of Micro finance operators on the various innovations employed their impact on performance, and the challenges that confront them as a result. This method was time consuming; however it enabled the researcher win the respondent's cooperation

3.2 Data Sources

Sources used for data collection can take two forms: primary and secondary. Primary sources of data are collected and accumulated specifically for the research problem at hand, whereas secondary sources contain data that have been gathered and assembled at a previous time for other purposes than the current research problem (Hair et al. 2000; Tull and Hawkins 1993; Yin 1994). The advantage of secondary data is that it can usually be collected at a lower cost and more rapidly than primary data. On the other hand, since it was usually collected for a different purpose, its content might correlate poorly with the researchers' current needs (Hair et al. 2000; Yin 1994). This is one of the reasons why primary data sources were utilized in this study. Moreover, considering the relative complexity and depth of the information required by the current study, no presently available secondary sources were located that were sufficient. Having decided on primary data, the next decision deals with what research strategy to pursue.

3.3 Research Strategy

Research strategy is the road map for undertaking a systemic research of a phenomenon of interest (Marshall and Rossman, 1999). Saunders et al (2007) identify six research strategies; these are experiment, survey, case study, action research, grounded theory, ethnography, and archival research. Each strategy can be used for exploratory, descriptive and explanatory research (Yin, 2003). These strategies either belong to the inductive or deductive schools of thought, this is however not to say that one is better than the other. Rather, the emphasis should be on the one that enables the researcher meet his/her objectives and answer the research questions. These strategies should not be thought of as being mutually exclusive but rather can sometimes be used together. By first looking at the objectives of this study and applying them to the above reasoning, it is apparent that most of the strategies could be more or less applicable.

3.4 Data Collection Method

The study employs the survey method of quantitative primary data collection because it cannot control the independent variables while observation is too time consuming and expensive (Saunders et al. 2007). According to Babbie (2004), this is probably the best method available to social scientists for gathering primary data from a population too large to be observed directly; accordingly, the survey strategy is also the most common research strategy when it comes to collecting descriptive, cross-sectional data (Hair et al. 2007; Kent 2007; Zikmund 1994). Considering the sizeable population anticipated for this study in addition to the inability of an observational method to collect the information required in a timely and cost-effective fashion, the only data collection method deemed appropriate for the study at hand was the survey.

Having selected the survey method, the next decision involved choosing the actual means of obtaining information from the informants. The options available were personal interviews, telephone interviews, or self-administered questionnaires (Malhotra and Birks, 2007). The study adopts the personally administered questionnaires as telephone interviews are not conducive for the purposes of this study while personal interviews are expensive. Compared to the two interview options mentioned above, questionnaires are usually much cheaper, especially if data is to be collected over a wide geographic area. In addition, for the respondents, there is a sense of anonymity and much less time constraint associated with self-administered questionnaires than for other primary data collection methods. This might lead to answers that are more honest and information that is more correct, since the respondents have been given sufficient time to search for information on complicated questions. The standardized nature of written questionnaires also facilitates comparisons of different respondents' answers in subsequent data analysis (Churchill and Iacobucci 2006).

3.5 Questionnaire Design

Having decided that the data collection method for this study would take the form of a self-administered survey, the next step was to design an appropriate questionnaire. Since the quality of the data collected depends on the questions asked when obtaining it, it is of crucial importance to design a very high quality questionnaire. There are a number of experienced researchers who, through their accumulated knowledge, have managed to establish guidelines that are useful (Bagozzi 1994; Churchill and Iacobucci 2006; De Vaus 2002; Fowler 2002; Hair et al. 2006). The combined knowledge of these researchers can be synthesized into a number of relatively sequential steps one can follow in designing a high quality and coherent questionnaire. Based on the combined observations of previous researchers, the questionnaire for this particular thesis was created with the guidance of seven decision points, namely: (1) preliminary decisions, (2) operationalization of variables, (3) variable measurement, (4) question wording, (5) question sequencing, (6) physical questionnaire design, and (7) pretesting. The following subsections deal briefly with each of the individual decision areas throughout the survey construction phase previously mentioned.

3.6 Sampling

Collecting and analyzing data from every potential case or group member included in a research problem is known as a census. However, for many research questions and purposes, it becomes impossible to either collect or analyze all the data available in a population due to restrictions in time, money, and often, access. Saunders et al. (2003) emphasize that a census investigation does not necessarily provide more useful results than a well planned sample survey. As long as the study sample is representative, generalizations about the underlying population can still be drawn (Churchill and Iacobucci 2006; Zikmund 1994). Consequently, considering the fact that there are about 200 registered microfinance firms in Ghana (bog.gov.gh accessed July, 2012) in addition to the limited time and financial resources allocated for the thesis, a sample investigation was deemed more appropriate than a census.

3.6.1 Sampling Frame

Although the survey would be based on a sample, it was still important to define the population from which the sample was to be drawn (Churchill and Iacobucci 2006). The population for this study comprises of registered microfinance firms (with Bank of Ghana) in Ghana.

3.6.2 Sample Selection

The sample was selected using non-probability sampling techniques. Non-probability sampling techniques do not rely on chance based selection but on researchers own judgement (Malhotra and Birks, 2007). A combination of the convenience and judgemental sampling techniques were employed. This is because convenience and judgemental samplings are least expensive and least time consuming.

3.7 Data Analysis Techniques

When the fieldwork was finished and the data had been collected, compiled, edited, coded, and computerized, the next stage involved statistical analysis. In this stage, the choice of the most suitable statistical techniques was based on the type of measurement scales used in the research instrument and the nature of the hypothesized relationships (Hair et al. 1998). The main statistical packages utilized for this thesis were SPSS 18 and Microsoft Excel 2007. In order to achieve completeness and consistency of responses, data editing was done daily by the researcher. This enabled the researcher to identify mistakes and data gaps for rectification as soon as possible. The data was coded once editing was completed. The questionnaire responses and analysis were then carried out using the SPSS software.

3.8 CONSTRAINTS AND PROBLEMS

Some of the constraints encountered during the study are as follows:

3.8.1 Some Microfinance operators were reluctant to respond to questionnaire based on the fact that they did not want information regarding their businesses to be divulged to third parties.

3.8.2 Literature on the operations on Microfinance in Ghana was difficult to come by. Most of the records and materials available related to operations of microfinance business elsewhere.

The Competitiveness Of Microfinance Firms In Ghana Finance Essay

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