A number of empirical studies have investigated the determinants of households’ demand for the financial services of the growing microfinance sector in developing countries (Muradoglu and Taskin, 1996; Jabbar et al., 2002; Pal, 2002; Bhat and Jain, 2006; Gine et al., 2007; Swain, 2002; Barslund and Tarp, 2008). Most of these studies concentrate on either loans, or savings or insurance, with the first having clear prominence. This goes hand in hand with the past concentration in policy-making and academic circles on (micro)credit: ‘Whereas savings were called the forgotten half of finance during the 1980s […] one may consider insurance the forgotten third of finance during the 1990s’ (Zeller and Sharma, 2002: 39).
Yet, there has been a recent transition towards a more holistic concept of (micro)finance as practitioners have come to realise that ‘low-income households can profit through access to a broader set of financial services than just credit’ (Armendáriz and Murdoch, 2005: 147). Many financial institutions have thus established deposit accounts to the extent that the number of deposit accounts is more than double the number of outstanding loans in sub-Saharan Africa today (Lafourcade et al., 2005)and (micro)insurance has entered the market in many countries.
Therefore, we believe that the study of the demand for financial services in developing countries leaves out part of the story if it only looks at one of the three elements of the so-called finance trinity. More than that, we assume that households’ choices for loans, savings products, and insurance are strongly interconnected for several reasons. First, users of one service may simply have an informational advantage over non-users, in the sense that they learn about additional services ‘by accident’ when visiting their respective financial institutions.
Second, users may have a higher level of financial literacy than non-users, that is, a better understanding of how financial services function, and may therefore better recognise the utility they may gain from using another service as well. And third, the determinants of the demand for loans, savings and insurance may be similar, much more so than the existing literature suggests. As will be shown below, several determinants have only been considered in studies on one of credit demand, savings demand, or insurance demand, even though they may potentially influence the demand for the respective other services as well. This is not to say that the effect of certain determinants is necessarily of the same sign for credit, savings and insurance demand.
In fact, this would be an implausible assumption, since households’ motivations for demanding a financial service can be quite different, both for the same service and between the three services. As Zeller (2001) points out, financial services can be used for income generation, on the one hand, and for income and consumption smoothing, on the other hand. Investment credit and savings deposits that earn interest income fall into the first category, while insurance, consumption credit, and short-term savings products fall into the second. While insurance and savings are ex ante that is, preventive strategies for consumption smoothing, consumption credit is typically used ex post to a calamity.
Therefore, a household which has recently experienced a sudden drop in income due to a serious shock, such as the illness or death of an income-earning household member, could be expected to be more likely to request a loan but less likely to request savings and insurance. The experiencing of a shock would then be positively correlated with credit demand and negatively with the demand for the other two services. It is the objective of this paper to examine such differences and similarities in the determinants of demand for formal loans, savings and insurance in rural Ghana.
The analysis is based on a comprehensive survey of 350 households, conducted in February 2008 in the Ghanaian Central Region. In Ghana, as in many other developing countries, the financial market is highly fragmented (Aryeetey et al., 1997). Only five to six percent of the population are reported to have access to the commercial banking sector (Basu et al., 2004), while 16 percent have access to an account with a financial intermediary (Demirgüç-Kunt et al., 2008). Several providers outside of the commercial sector have evolved and are generally serving a larger share of the population, but access nevertheless remains restricted, particularly in rural areas.
In fact, little is known in the academic and policy-making communities about the Ghanaian rural financial market and, especially, about what drives different types of households to demand different types of financial services. A few related studies show a strong focus on informal credit sources and are partly further confined to the demand for finance by small enterprises (La Ferrara, 2003; Schindler, 2007). To our knowledge, an investigation of the determinants of rural households’ demand for formal savings, loans and insurance has not been undertaken.
In this paper, demand is understood as satisfied demand, or in other words, the demand for services is here equated with their actual use. Although we focus on the demand for formal services, we attempt to derive some conclusions on the access to these services and the demand for informal services as well: households which do not use a particular formal financial service either have no access to it, do not demand it, or both. Due to a lack of adequate data, we cannot tell which households demanded formal services but did not receive them, and why this is so, and which households did not demand formal services, even though they had access. It is likely that there are certain supply-side factors, such as requirements for collateral or certain procedural specificities, that lead to rationing in the rural financial market and restrict some people from using one service or the other. Zeller and Sharma (2002) point out that many of the Ghanaian households which do not apply for formal loans are indeed discouraged by such constraints. But it is equally likely that households do not want to use formal services because they prefer informal services, for reasons such as lower transaction costs and greater flexibility.
In any case, we assume that households which do not demand a particular formal financial service use this service informally; for example, they borrow money from relatives and friends, keep savings at home, or receive help from different types of social network. Since our period of interest covers the past five years, we consider this to be a realistic assumption. The interpretation of the estimation results below will take this complexity into account to the greatest extent possible.
The paper is structured as follows. Following this introduction, Section 2 offers a short review of the literature on the determinants of demand for financial services in developing countries. Section 3 outlines the structure of and the main actors in the rural financial market in Ghana. Section 4 describes the data, introduces the explanatory variables, and discusses our expectations. The estimation strategy is presented in Section 5, and the results in Section 6. Section 7 concludes.
