CHAPTER ONE
INTRODUCTION
- Background of the study
Several studies have acknowledged the contribution of financial sector development towards economic progress of countries (eg. Kaburu, 2012; Khan et.al, 2006; Amaral & Quintin, 2006). In spite of plethora of evidence endorsing the importance of financial sector development which consist capital markets and the banking sector in the less advanced countries, usage of financial services is skewed towards the rich individuals and those who are already better off, neglecting the poor and those who in the remote areas (see Classens, 2004; Singh & Tandon, 2012; Bold, 2011; Martinez & Mckay, 2011). Over 2.5 billion were not included in the banking sector (Kenya Bankers Association, 2012). Mpuga (2004) reported that most of the financial institutions in Africa can only be found in the cities. According to Akpandjar et.al (2013), the highly concentration of financial institutions in urban areas depicts why majority of people are excluded from banking in Ghana.
Bawumia et.al (2008) also reported that most people are excluded from the formal banking sector in Ghana. More than 35% of banks in Ghana largely have their branches in Greater-Accra Region although the region’s population was not more than 13% of population in Ghana (ISSER, 2008). According to Dercon et.al (2014, p.3), financial inclusion (FI) “can enhance household ability to gather resources and increase their ability to generate more income as well as enhancing their ability to deal with risk”. Financial inclusion refers to individuals, households that can access formal financial products. According to United Nation (2006, p.14), inclusive financial system is
“ensuring that all bankable individuals and firms get access to financial services such as credit and savings”. Utilization of financial services consolidates activities like insurance, pensions and security market, deposits accounts and many more. The term “financial services” is very wide as it combines activities of insurance and banking sector.
FI has increasingly gained attention among researchers, academia and other stakeholders (see Chikalipah, 2017; Ravalion, 2014; World Bank, 2014). The increasingly gained attention demonstrates a better comprehension on the importance of FI to economic progress a country. Access to formal financial services contributes in eradicating severe poverty, supporting inclusive and sustainable development and boosting shared prosperity (World Bank, 2014). There is enough literature that demonstrates that the poor gains a lot from banking activities such as savings, insurance and payments. Without FI, people would need to rely upon their little savings (e.g World Bank, 2014; Dermiguc-Kunt et.al, 2014; Nimal, 2007). Firms would need to rely upon their little profits to grow their business (Nimal, 2007). Most studies have explored the contribution of FI to economic development (Dermiguc-Kunt et.al, 2014; Ravalion, 2014). There are likewise some studies that have clarified how FI and absence of access to finance can result in poverty (Barnejee & Newman, 1993).
Despite all the gains that people, organizations and countries obtain from financial inclusion, many individuals are still unbanked, particularly Sub-Saharan Africa (World Bank, 2014). Dermiguc- Kunt et.al (2014) revealed that proportion of bank accounts people own internationally in 2011 rose by 700 million in 2014. Likewise, the proportion without bank accounts reduced to 2 billion grown-ups.
Mahmood and Mahmood (2011) likewise asserted that more than 80 percent of grown-ups in Africa do not own account with banks. Dermiguc-Kunt et.al (2014) reported that only 29% of grown-ups in SSA own an account with banks. Whiles the greater part of these individuals may not intentionally own a bank account, larger part of them are excluded as a result of travel distance, cost and complex documentation processes (Dermiguc-Kunt et.al 2014). Again, Dermiguc-Kunt et.al (2004) reported that only few companies (34%) in less advanced countries get access to loan facilities from banks.
In Ghana, the contribution of financial inclusion cannot be disregarded. Statistics from Ghana Statistical Service (2016) revealed that Ghana’s GDP was increased by 3.89% in 2015. The highest growth rate of 5.8% was recorded by the service sector, agriculture sector was second with a growth rate of 2.4% and the industrial sector recorded the third growth rate (1.2%). In terms of service sector, the contribution from insurance and banking accounted 22.9% (Bank of Ghana, 2015).
Despite the benefits provided by financial inclusion to individuals and the nation at large, many Ghanaians lack the accessibility to financial products. For some time now, Ghana government has introduced several financial policies that aims at getting more unbanked to the banking sector. For example, government took away the 17.5% valued Added Tax on financial services so as to make access to banking more affordable. Based on the proportion of Ghanaians that do not have access to formal banking, it is important to conduct a study that will enable us to unravel the reasons why most Ghanaians are still not included in formal banking as well as the factors that determine financial inclusion.
Problem Statement
Because of the ongoing crisis in the banking sector across the globe, a lot of nations have started prioritizing stability via regulations, also trying to offset the needs of such policy with inclusive growth advancement, particularly in underprivileged nations (Aryeetey and Kanbur, 2008; Gockel and Akoena, 2002; Mensah, 1997). Ghana has also introduced a lot of financial reforms that aims at enhancing access of small enterprises and low-salary families to financial services (Aryeteey and Kanbur, 2008). Whiles FI has essential advantage to the economic progress of a country, if policymakers are not meticulous, in their journey to advance FI, they may likewise build the rate of bank defaults, which will affect the banking sector in general. Reaching out financial services without due perseverance may have serious adverse results on the financial soundness of the country.
Whiles there has been some advancement in bringing a lot of people into the formal financial sector; majority are still not included (Aryeteey and Kanbur, 2008; Beck and Cull, 2015). Just around 40% of people in Ghana own accounts with banks, depicting that greater part of the population are unbanked. Dermiguc-Kunt et.al (2014) revealed that nearly 30% of bank accounts in developing countries are inactive. They also reported that over 6 million accounts were opened within four years in South Africa and about five hundred were dormant. Opening new account may not necessarily result in regular usage. A lot of studies have examined the factors that drives FI in Ghana and beyond (Chikalipah, 2016; Wale & Makina, 2017; Akpandjar et.al, 2013). Wale and Makina (2017) revealed that sex, income and educational level are major determinant of bank account ownership in 18 SSA countries. Also, studies conducted by Akpandjar et.al (2013) revealed that number of people in a household, sex, age, marital status, income and occupation are the main drivers of household participation in the banking sector. Unlike, Wale and Makina (2017)
who further unraveled why individuals fail to participate in the financial sector, Akpandjar et.al (2013) did not consider that in Ghana. And to the best of my knowledge, limited study on such issue have been conducted in Ghana. However, the researcher believes that for any financial inclusion policy to be effective in Ghana, it is necessary for a study to be conducted in Ghana to find out why Ghanaians are still not included banking services.
A large portion of these policies that look to attract those who do not have account with banks to the financial sector have fizzled in light of the fact that policymakers neglected to discover from the unbanked their purposes behind not using it. For us to achieve or promote financial inclusion in Ghana, we have to structure a package that will suit the unbanked. With their concerns in mind, policy makers can implement policies that will suit their desire. Also, some studies have shown that religious affiliation and disability has significant influence on financial inclusion (see Joy et.al, 1991). However, limited studies have been done in Ghana to ascertain how religious affiliation and disability influence FI in Ghana. Hence, the decision to include these variables in the study.
Research objectives
The sole purpose of this research work is to comprehend or investigate the factors that influence the probability of owning bank account in Ghana. The study will specifically look at:
- To investigate the main drivers of FI in Ghana.
- To investigate why Ghanaians are reluctant to possess bank account in Ghana.
- To investigate why Ghanaians seek for credit from financial institutions.
- To investigate why Ghanaians are declined credit from banks.
Research questions
- What are the main drivers of FI in Ghana?
- Why are Ghanaians reluctant to possess bank account in Ghana?
- Why do most Ghanaians seek for credit from banks in Ghana?
- What are the reasons why Ghanaians are declined credit from financial institutions?
