Effect of microfinance on small scale businesses in Ghana: The case of Keta Municipality

Abstract

The study sought to empirically investigate the effects of microfinance on small scale businesses in Ghana using Keta municipality as a case study. An ordinary least squares method was used, based on primary data of 200 small scale business entrepreneurs, 100 of whom have taken loans and 100 without loans. A Cobb-Douglas production function was first estimated to find the effect of microfinance loans on productivity. Afterward, a profit function was used to estimate the effects of microfinance loans on business level profits. For the profit function, it was found out that, the business level profit depends on sales, level of education of entrepreneurs, training of entrepreneurs education interacted with training, and credit received by the entrepreneurs. For the effects of microfinance loans on productivity, it was found out that, assets, business age, business age interacted with assets, training, assets interacted with training, gender, education interacted with training, and credit were significant in explaining productivity of the enterprises. In the estimations, it was found out that, the loans which are to aid increase in both profit and productivity rather reduced this outcome variables. In the light of that relationship, to increase productivity and profit through microfinance loans, it is recommended that, the microfinance institutions educate their clientele on how to use their loans. It is again recommended that, the microfinance institutions step up training of their members on basic business ideals.