Choosing Not to Borrow: An Evaluation of Perception and Sociocultural Factors Underlying Voluntary Self-Exclusion

The purpose of this study is to investigate the underlying sociocultural factors that drive the majority of microentrepreneurs to voluntarily exclude themselves from seeking external finance, despite complaints of severe financial constraints. Using structured questionnaire, data on some 176 microenterprises in Ashanti region of Ghana were collected. A simple conceptual framework was utilized to classify various forms of financially constrained and unconstrained microenterprises. A logistic regression technique was then applied to a utility function model of credit demand. The findings suggest that voluntary self-exclusion is not only driven by microenterprise or owner’s socioeconomic status, but also most significantly by their perceived difficulties in accessing external finance and negative cultural-religious biases toward credit use or borrowing as well as financial illiteracy. The study further finds that most microentrepreneurs are interest inelastic or insensitive suggesting that they are more interested in easier and faster access to finance rather than the cost of borrowing. The evidence implies that policies directed at building all-inclusive financial system by focusing on supply side alone are unlikely to be successful. Complementary target policies that tackle the fundamental issues of negative perceptions and mistrusts on the financial institutions by creating awareness through extensive financial literacy programs and social mobilization would be a holistic approach in solving the problem. Besides, innovations in religion-compliant financial institutions should be promoted to meet the financing needs of those who exclude themselves because of religious beliefs.