CHAPTER ONE
INTRODUCTION
Background to study
The measure of wellbeing in Ghana is a survey approach. Any attempt to define the wellbeing of an individual or a household involves their perception of what a good or quality life is made up of. The Ghana Statistical Service (GSS) is responsible for conducting surveys to determine the wellbeing of households. It does that by conducting the Ghana Living Standard Survey (GLSS). The Core Welfare Indicators Questionnaire (CWIQ) is also a tool that has been used by the Ghana Statistical Service to measure wellbeing. It has gone through 2 rounds, thus 1997 and 2003.
There are a number of indicators that can be used as a measure of wellbeing. It can be a subjective measure (economic research on reported happiness such as education, healthiness, life expectancy, and literacy) or a conventional measure (income and consumption). Both approaches for the determination of wellbeing are correlated, with some of the determinants of one being the determinants of the other (Kingdon & Knight, 2004). A decline in poverty is an indication that wellbeing has risen (Teal, 2006). According to Kingdon and Knight (2004), to measure poverty in developing countries, income and consumption measures are used and behind these measures is the concept of wellbeing which is assumed to be derived from consumption and income.
Consumption as a measure of wellbeing has been criticized by some researchers on the grounds that it does not allow for economies of scale when it is divided by the household size. Households choose their size for a number of reasons such as the value of the children and the value of additional labor for farm activities, getting opportunities such as employment and security when
the household is large and exist in a risky environment and other non-economic reasons including higher status associated with large household size (White, 2002). However, it is more reliable when compared to income, especially where there is a problem of measurement and often used as a measure of poverty in Ghana.
Consumption as a measure of well-being is different from a happiness function as an indicator of wellbeing in the sense that consumption is a money metric measure that can be linked to wellbeing in terms of opportunities available to the household but not outcomes (Teal, 2006). According to Mussa (2014), household consumption expenditure is a more reliable wellbeing indicator because consumption expenditure is a smoother measure compared to income that can be lumpy in some months and very little in other months in the year. For instance, individuals who work as farmers and using or considering consumption expenditure as a measure of wellbeing allows the role of fiscal policy in reducing poverty. Additionally, in a country where most of the businesses are self- employed or self-oriented agricultural production, it is difficult to assign income values to the earnings from such businesses (Hentschel & Lanjouw, 1996) and this makes using income as a measure of wellbeing, problematic.
Murkherjee and Benson (2003) considered consumption expenditure as a realized wellbeing measure whereas income is a measure of a potential wellbeing. However, choosing a resource measure (consumption or income) is not the only variable, necessary for measuring wellbeing or poverty but also choosing the equivalence scale and how to update the measure, are equally important since they also have a significant effect on the standard of living. Both measures can be used together to measure wellbeing or poverty. Therefore, both measures are to be considered when one wants to examine the trends of poverty and the composition of the poor (Johnson
, 2004). Consumption expenditure in the surveys when compared with macro, shows that the macro data suggest higher growth and also consumption estimated from the surveys is lower than consumption in the national accounts (Teal, 2006).
In the macro sense, consumption expenditure is one of the determinants of Gross Domestic Product (GDP) of a country and forms the largest component of GDP in most countries including Ghana. Pradhan (2012) has shown that the consumption pattern can explain the standard of living of a household and also, an important measure of household welfare or wellbeing in any country. In 2016, the value of household final consumption expenditure of Ghana’s GDP was 28.43 billion USD representing 66.6% of GDP compared with 25.44 billion USD (or 67.8% of GDP) in 2015. This suggests an 11.8% increase over the period. Over the past 56 years, the lowest share of household final consumption expenditure in GDP was 59.8 % in 2012 with the highest share of 90.82% recorded in 1983 (World Bank, 2016). Thus the large share of household final consumption in GDP shows how much household consumption expenditure influences economic growth in Ghana.
Household consumption expenditure is normally influenced by the incomes or earnings of a household and it is used as an indicator in measuring the economic well-being at the households and national level. Studying household consumption expenditure over a period is considered as a basis for which inequalities and the overall well-being of households can be explained. But, the expenses of households cannot be met by only their income; they often borrow to finance these expenses that are not met by their regular income (Thavornton, 2009).
The role of financing is particularly important in improving the well-being of the household. Some households, particularly those in the rural areas are financially constrained and the lack of access
to finance constitutes a significant constraint to improving the living standards or welfare of those households. Individuals, regardless of their income, can distribute their consumption in an appropriate manner irrespective of their current income and this can be possible by borrowing (Pardo & Santos, 2014). In addition, for individuals whose wages are not increasing, in order to maintain their standard of living, they rely on borrowing (Foster & Magdoff, 2000). A broader access to credit removes the constraint associated with income and increases the purchasing power of individuals in the middle-low income groups (Brown, 2004). Obtaining loans from the banks and other financial institutions by households may be difficult considering the requirements to qualify for the facility including the demand for collateral. Therefore, the informal credit often takes care of poor households and borrowers in the rural areas who cannot meet the requirements demanded by formal financial institutions. These informal credits are from sources such as family/friends, money lenders, employer and suppliers/customers. Access to credit, enable the individual or households to smoothen consumption even when their incomes vary. It also helps them to engage in activities that will increase their value and move them out of poverty (Annim & Alnaa, 2013).
Household debt in the broader sense can be detrimental to economic growth. However, when households borrow to finance their expenditure, consumption increases thereby, improving economic growth in the long run. Ekici and Dunn (2010) have shown that although borrowing stimulates the economy, high levels of debt may restrict spending in future and slow economic growth. When banks find out that households are not creditworthy, they impose credit constraints that deter households from borrowing. Although lack of credit collateral prevents households from getting access to credit, other reasons why a household will not borrow is when it has lost trust or
confidence in the banking system because of imperfect credit system or high transaction cost governed by asymmetric information. Also, when the interest rates on loans increase, households will reduce their consumption and will rather re-allocate funds to repaying their debts. A poor household, with constraint income and do not borrow, cannot smooth its consumption and its standard of living will continue to be low.
Problem Statement
Household consumption expenditure depends mostly on the income of the household. If the household income is insufficient to cater for the consumption needs of the household, getting access to credit through formal or informal means, can help households achieve their basic needs since credit increases the income of the households. Credit access can relax liquidity constraints and boost the household’s ability to engage in risk-bearing activities. Providing credit to farmers can increase their income both on-farm and off-farm and promote food production and encourage them to use risky technologies which they would not have used in the absence of credit (Diagne et al., 2000; Simtowe & Zeller, 2006).
According to Kedir (2003), although there has been significant improvement in the provision of credit by microfinance institutions, there are still other ways in which the provision of credit can further be improved. Amin et al (2003) argued that poverty reduction in developing countries is better explained by understanding how the financial institutions, whether formal or informal, work and also by the determinants of household’s access to credit.
In addition, the impact of credit has been assessed on various indicators of well-being such as household investment, income, physical infrastructure, healthcare (Karen et al, 2011; Viljoen,
1998; Baye, 2013). But (Heady et al, 2012) made it clear that income measures of poverty do not define the meaning of poverty by economists and that, poverty is best defined by using consumption. Moreover, Pradhan (2012) made mention of the fact that the household standard of living can be understood from the pattern of consumption and that consumption is an important measure of the household welfare level.
As a result of endogeneity and self-selection problem, evaluating the impact of credit has become a problem and agreement has not been reached on the suitable method for its estimation yet (Nguyen, 2007). For instance, the fact that a household that takes a loan perform better than a household that does not take a loan does not mean that taking the loan has a positive effect. It could rather be due to exposure of the performing household to certain resources that the other household lacks, such as good roads, good transportation system, good educational system, low dependency ratio, etc. To know the actual effect of credit, the problem of endogeneity due to non-randomness of the observations, the problem of self-selection, resulting from the process of granting a loan and other unobserved characteristics should be controlled.
Several econometric methods have been used in estimating the impact of credit and different outcomes have been achieved. Pitt and Khandler (1998) used fixed effect cross-sectional analysis to analyze a household data from Bangladesh using landholding size to create a control group. Other studies such as Khandker (2003), Morduch (1998) looked at the impact of credit but those that consider the endogeneity problem are few.
Studies have been done on the determinants of credit in Ghana (Quach, 2005; Baye, 2013) and the impact of credit on some wellbeing indicators for various groups including farmers (Al-Hassan, 2008 and Quaye et al, 2010; Abdul-Jalil, 2015). Others looked at the impact of microfinance and
the determinants of credit from microfinance institutions (Ayamga et al, 2006). To the best of my knowledge, though there has been works on household loans in Ghana (Annim & Alnaa, 2013) there has not been any study that considered the factors that influence the probability that households will be granted a loan and assessed the impact of the loans on household’s total consumption expenditure in Ghana.
This study adds to existing literature by looking at the factors that influence the probability that households will be granted a loan and further look at the impact of loans on household well-being by using household consumption expenditure as a proxy for welfare.
Objectives of the study
The main objective of the study is to examine the determinants of household loans and access the impact of loans on household wellbeing using consumption expenditure as a proxy.
Specifically, the study seeks to:
- examine the factors that influence the probability that households will be granted a loan.
- estimate the impact of household loans on household wellbeing in Ghana.
Methodology and Data Source
The study employs Heckman probit selection model to be able to cater for selectivity biases in the data. To analyze the impact of loan on the welfare of households, the study employs a Propensity Score Matching (PSM).
The main source of data for the study is the sixth round of the Ghana Living Standards Survey (GLSS 6) conducted in 2012/2013.
Justification and Significance of the Study
Irrespective of the impact that access to loans have on the welfare of households, less attention has been paid to the factors that influence their access to loans. According to Pardo and Santos (2014), access to loan is equally affected by the willingness of the lender to satisfy the demand by households. There is therefore the need to investigate the factors that influence the probability of a household getting access to a loan, which is derive for this study.
This study will help individuals to have an idea about the factors that influence their probabilities of being granted loans. With this knowledge they will work towards improving these factors to ensure their chances of securing loans. This knowledge will also help policymakers to formulate policies that will help improve households’ probabilities of securing loans to help them undertake risky ventures. The work will further analyze the impact of loans on the welfare of households which will help policymakers to implement policies to improve the supply of loans to households or otherwise.
Organization of the study
The study is divided into five chapters. The first chapter covers the introduction of the study which outlines the background of the study, research objectives, brief methodology and data source, the significance of the study. The second chapter covers the overview of the study. The third chapter reviews literature, both theoretical and empirical on household loans and household well-being.
Chapter four presents the methodology and empirical results followed by chapter five, which presents the summary and conclude by recommending policies and further research areas.
