Question

a)
i. Describe the term “financial inclusion”.
ii. Explain the four (4) dimensions you would employ to measure financial inclusion.  
b) Discuss the role of government in promoting financial inclusion in Ghana.

Explain the role of subsidies in the sustainability of microfinance institutions (MFIs) in Ghana.

b) Discuss the benefits of deposit mobilisation as a source of funding for microfinance institutions (MFIs).

Answer 1

A1) Financial Inclusion:

Financial Inclusion focuses on all individuals and businesses having access to financial products and services at a reasonable price. These products and services should be such that they meet their needs and they should be delivered in a manner that is responsible and sustainable.

(Eg. Everyone should be able to access basic banking transactions, use of debt financing, etc.)

A2) Four Dimensions that I would employ to measure financial inclusion are:

There are 3 main types of indicators which are used to measure Financial Inclusions. Dimensions under them can be several.

- Access Indicators: These focus on increase in access to the basic financial services and products to those people who live in rural areas or those who live in areas where costs associated with access to these services is too high.

Examples: Bank Branch Penetration, Point of Sales Devices, Lower cost of information, etc.

- Usage Indicators: These indicators help us to identify how clients use the financial services and products. They focus on being either Credit Penetration (increase in use of credit products, frequency of use, average usage per customer, etc) or Deposit Penetration (increase in new accounts opened, new deposits opened, duration, amount, etc)

- Quality: It measures how well the financial services and products meet customer requirement, option range available to customers, etc.

As per World Bank, a fourth indicator that can be used to assess Fin Inclusion is firm level performance or human capital investments which helps to assess the impact that the Fin Inclusion measures have had on the businesses and households.

B) Financial Inclusion in Ghana:

Governement Role: Role of Government in Ghana in Financial Inclusion is very crucial. Government regulations may force banks and financial institutions to offer products at reaosnable costs and to grow their presence in rural regions alongside growth in urban regions. Awareness campaigns undertaken by the Government help people understand the concept of Fin Inclusion and why it is important, thus encouraging more and more people to adapt to the changing financial ecosystem.

The role of subsidies in the sustainability of microfinance institutions (MFIs) in Ghana: Microfinance institutions are those which focus on lending to the smallest scale businesses and individuals. Their loan sizes are relatively very small but transaction volume is high which increases operating costs for the MFIs. Due to the nature of the loans (highly risky loans given to steet hawkers, start-up plans, etc), high NPAs are expected which create stress on the MFIs. Government Subsidies play a huge role in helping cover these losses and allowing MFIs to provide access to capital for all.

C) The benefits of deposit mobilisation as a source of funding for microfinance institutions (MFIs):

Here is how Deposit Mobilisation as a source of MFI Funding can be beneficial:

- Deposit mobilisation crowds out subsidies.

- Due to access to increased fund base, the MFI Interest Rates tend to come down, making the loans more affordable for the poorer sections of the economy.

- This lower rate also makes the loan seem more affordable and so borrowers are more intent on repaying it.

- Subsidies reduce repayment rates while deposit mobilisation has no direct impact on repayment rates.