Loan Refusal, Household Income and Savings in Ghana

Koomson, Isaac and Annim, Samuel Kobina and Peprah, James Atta (2014): Loan Refusal, Household Income and Savings in Ghana.

Abstract

Loan refusal has been a problem facing many loan applicants at the household level and this problem is not new to loan applicants in Ghana. Despite this knowledge, researchers passively discuss loan refusal and do not consider the intensity of this problem. This study analyses the effect of household income and savings on loan refusal and the intensity of loan refusal in Ghana using the fifth round of the Ghana Living Standards Survey (GLSS-5). The study employs the direct elicitation approach to identifying credit constrained (loan refused) households and makes use of the Logit and Poisson regression to regress the loan refusal variable on other covariates. The Logit model is applied to loan refusal as a binary variable (refused and not refused) while the Poisson is applied to loan refusal as a count variable (number of times of loan refusal). The econometric analysis of 1,600 and 1,591 households for the loan refusal and intensity of loan refusal respectively shows that income and savings inversely relate to loan refusal and the intensity of loan refusal at their respective significance levels. It is also shown that low-income and low-savings households are more likely to be discouraged from loan applications than their counterparts in high-income and savings households. Financial institutions are called upon to generally widen their coverage and to extend their activities more into the rural areas so as to increase the stock of loanable funds available to rural dwellers. This will reduce the vulnerability of rural dwellers when it comes to loan refusal.

• Item Type: MPRA Paper
• Language: English
• Keywords: Loan Refusal, Credit Rationing, Discouraged Borrowers, Income, Savings
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Abor, J. (2007). Capital structure and financing of SMEs: empirical evidence from Ghana and South Africa. Stellenbosch: Stellenbosch University. Retrieved on 2/10/2013 from http://scholar.sun.ac.za/handle/10019.1/21522.

Adjei, J., Arun, T., & Hossain, F. (2009). Asset building and poverty reduction in Ghana: The case of microfinance. Savings and Development, 265–291.

AFONSO, A., & AUBYN, M. S. (1998). Credit rationing and monetary transmission: evidence for Portugal, Estudos de economia. Estud. Econ.), Lisboa, 19(1), 5–19.

Amu, N. J. (2005). The role of women in Ghana’s economy. Friedrich Ebert Foundation. Retrieved from http://library.fes.de/pdf-files/bueros/ghana/02990.pdf

Annim, S. K., Dasmani, I., & Armah, M. (2011). Does Access and Use OF Financial Service Smoothen Household Food Consumption? Retrieved on 20/11/213 from http://mpra.ub .uni-muenchen.de/29278/

Beegle, K., Dehejia, R., & Gatti, R. (2003). Child labor, crop shocks, and credit constraints. National Bureau of Economic Research. Retrieved from http://www.nber.org/papers /w10088

Benati, L. (2001). Some empirical evidence on the “discouraged worker”effect. Economics Letters, 70(3), 387–395.

Bencivenga, V. R., & Smith, B. D. (1991). Financial intermediation and endogenous growth. The Review of Economic Studies, 58(2), 195–209.

Berger, A. N., & Udell, G. F. (1992). Some evidence on the empirical significance of credit rationing. < Em> Journal of Political Economy</em>, 100(5), 1047.

Bigsten, A., Collier, P., Dercon, S., Fafchamps, M., Gauthier, B., Gunning, J. W., Söderbom, M. ans. (2003). Credit constraints in manufacturing enterprises in Africa. Journal of African Economies, 12(1), 104–125.

Blank, R. M., & Barr, M. S. (2009). Insufficient funds: Savings, assets, credit, and banking among low-income households. Russell Sage Foundation.

Cheng, Y. (2009). Credit constraints under interaction of supply rationing and demand depression: evidence from rural households in China. Retrieved on 01/01/2014 from http://smartech.gatech.edu/handle/1853/36659

Crook, J., & Hochguertel, S. (2005). Household debt and credit constraints: evidence from OECD countries. Working Paper Series-University of Edinburgh Management School, 5.

De Meza, D., & Webb, D. C. (1987). Too much investment: a problem of asymmetric information. The Quarterly Journal of Economics, 102(2), 281–292.

Demirguc-Kunt, A., & Klapper, L. (2012). Measuring Financial Inclusion: The Global Findex Database. Retrieved on 18/04/2014 from https://openknowledge.worldbank.org/handle/ 10986/6042

Diagne, A., Zeller, M., & Sharma, M. (2000). Empirical measurements of households’ access to credit and credit constraints in developing countries: Methodological issues and evidence. International Food Policy Research Institute.

Eswaran, M., & Kotwal, A. (1990). Implications of credit constraints for risk behaviour in less developed economies. Oxford Economic Papers, 42(2), 473–482.

Fernando, N. (2007). Low-income Households’ Access to Financial Services. International Experience, Measures for Improvement and the Future. Retrieved on 18/04/2014 from http://www.microfinancegateway.org/gm/document-1.9.26149/Low-Income%20 Households%20 Access%20t.pdf

Freel, M., Carter, S., Tagg, S., & Mason, C. (2012). The latent demand for bank debt: characterizing “discouraged borrowers.” Small Business Economics, 38(4), 399–418.

Grundling, I., & Kaseke, T. (2010). FinScope Ghana 2010. Launch Presentation (FinMark Trust).

Gujaratı, D. N. (2004). Basic econometrics. McGraw-Hill New York.

Gyemibi, K. A., Mensah, G., Opoku, C., Appiah, T., & Akyaa, A. (2011). Credit Management Practices of Micro Financial Institution (Case Study of Multi Credit Savings and Loans). Christian Service University College Department of Business Studies.

IMF. (2006). Household Credit Growth in Emerging Market Countries.

Jappelli, T. (1990). Who is credit constrained in the US economy? The Quarterly Journal of Economics, 105(1), 219–234.

Kedir, A., Ibrahim, G., & Torres, S. (2007). Household-level credit constraints in urban Ethiopia. University of Leicester, Nottingham Trent University and Catholic University of Uruguay.

Keeton, W. R. (1979). Equilibrium credit rationing. Garland New York. Retrieved from http://www.getcited.org/pub/101893360

Kimuyu, P., & Omiti, J. (2000). Institutional impediments to access to credit by micro and small scale enterprises in Kenya (Vol. 26). Citeseer.

Kon, Y., & Storey, D. J. (2003). A theory of discouraged borrowers. Small Business Economics, 21(1), 37–49.

Levenson, A. R., & Willard, K. L. (2000). Do firms get the financing they want? Measuring credit rationing experienced by small businesses in the US. Small Business Economics, 14(2), 83–94.

Leyshon, A., & Thrift, N. (1996). Financial exclusion and the shifting boundaries of the financial system. Environment and Planning A, 28(7), 1150–1156.

Mensah, M. M. (2009). The Role and Challenges of Savings and Loans Companies in Ghana. Kwame Nkrumah University of Science and Technology. Retrieved on 11/11/2013 from http://dspace.knust.edu.gh:8080/xmlui/bitstream/handle/123456789/686/Mercy%20Muriel%20Mensah.pdf?sequence=1.

Mohamed, K. (2003). Access to formal and quasi-formal credit by smallholder farmers and artisanal fishermen: A case of Zanzibar. Mkuki na Nyota Publishers.

Morris, G. A., & Meyer, R. L. (1993). Women and financial services in developing countries: a review of the literature. Ohio State University.

Mukiri, W. G. (2011). Determinants of access to Bank credit by micro and small enterprises in Kenya. Beacon Consultant Service.

Owuor, G. (2009). Can Group Based Credit Uphold Smallholder Farmers Productivity and Reduce Poverty in Africa? Empirical Evidence from Kenya. In 111th Seminar, June 26-27, 2009, Canterbury, UK. European Association of Agricultural Economists.

Peprah, J. A. & Koomson, I. (2014). Economic Drivers of Domestic Violence among Women: A Case Study of Ghana. Globalization and Governance in the International Political Economy, 166.

Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3–37.

Rosenberg, R., Gonzalez, A., & Narain, S. (2010). The new moneylenders: are the poor being exploited by high microcredit interest rates? (Vol. 92). Emerald Group Publishing Limited.

Sebu, J. (2013). Farm households’ access to credit: who needs and who gets? Evidence from Malawi. Journal of Economic Literature.

Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393–410.

Storey, D. J. Understanding the small business sector, 1994. International Thomson Business Press, London.

United Nations. (2000). Microfinance and Poverty Eradication: Strengthening Africa’s Microfinance Institutions. United Nations, New York.

Vos, E., Yeh, A. J.-Y., Carter, S., & Tagg, S. (2007). The happy story of small business financing. Journal of Banking & Finance, (2648-2672), 31.

Weller, C. E. (2009). Credit access, the costs of credit and credit market discrimination. The Review of Black Political Economy, 36(1), 7–28.