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:
(1)

Establishes the effectiveness of Credit Union as poverty reduction tool through

(2)
(3)

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

(4)

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

(1)
(2)
(3)
(4)
(5)

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
0

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 nonborrowers (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.
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In 1996 the United Nations Childrens 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
2

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, its 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 sixtyfive (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 sociodemographic 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.
3

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 GH21.00 GH50.00. This was followed by 16 (30%) respondents
making a monthly contribution of below GH20.00. 5 (9%) respondents indicated that their
savings were within the range of GH51.00-GH100.00 whiles only 3 (6%) made contributions
above GH100.00.
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.
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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 predetermined 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
5

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 unions 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 CUAs 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.
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4.7

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.

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 everchanging 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 womens welfare, it contributes both directly and indirectly to
their empowerment.
The study showed that through the granting of loans, womens 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
businessesand 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
childrens 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
7

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.
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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.

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