Designing a Pro-poor Credit Risk Management System for Financial Inclusion: An Empirical Analysis

Purpose –By drawing upon the institutional theory, the purpose of this study is to investigate the adoption of pro-poor credit risk management techniques by microfinance institutions (MFIs) in Ghana to promote a financially inclusive system. Design/methodology/approach–Using primary data collected from 141 MFIs in Ghana, this study adopts a quantitative approach concentrating on a multiple regression analysis. Firstly, financial inclusion as the dependent variable was measured using 5 sub-variables. Secondly, a four-factor construct namely loan product flexibility, dynamic incentives, managerial training and collateral substitutes were designed to measure the pro-poor credit risk management techniques of MFIs as the independent variables. Finally, the cost of capital, operational zone and lending methodology were used as control variables. All items were measured on a Likert scale of five levels anchored by strongly agree (5) and strongly disagree (1). Findings –Firstly, the study indicates that the adoption of suitable pro-poor credit risk management techniques such as loan product flexibility, dynamic incentives and managerial training is positively correlated with financial inclusion for the poor. Secondly, the study also found that the acceptance of collateral substitutes is still found to be flawed by MFIs in Ghana since it correlates negatively with financial inclusion. MFIs still request unfavourable collaterals from the poor which have the potential to exclude several individuals from engaging meaningfully in the financial system in Ghana. Research limitations/implications – This study was carried out in the Greater-Accra region of Ghana. Even though the sample is large enough, it could not be generalised to all MFIs operating in Ghana. Therefore, its generalisation to the whole of Ghana could be limited as far as the findings are concerned. Secondly, this study depended heavily on quantitative analysis to come out with the results. The study could therefore benefit immensely from a triangulated method where the qualitative dimension could provide a deeper meaning to the findings in this study. Originality/value –Empirical studies which focus on illuminating the determinants of financial inclusion using pro-poor credit risk management techniques is limited (Cámara et al. 2015). Therefore, research on pro-poor credit risk management practices of MFIs is new in the microfinance industry. The nature of credit risk management practices of MFIs regarding the poor determines to a large extent how financial inclusion is achieved in a country.