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.

There have been newfound interests in microenterprise financing to ensure their sustainability and growth, particularly because of the role the sector plays in poverty reduction through its income and employment generation effects. However, despite wide-ranging efforts by governments and development agencies at building an all-inclusive financial system, access to finance in most developing countries, especially in Sub-Saharan Africa remains limited (World Bank, 2008). Several previous studies (Aryeetey and Udry, 1997; Kimuyu and Omiti, 2000; Bigsten et al., 2003; Ofei, 2004; and Abor, 2008) from Africa, on the subject have shown that mainstream formal financial institutions are reluctant to lend to micro and small enterprises largely because of high risk associated with the sector. Consequently, majority of the microenterprises (hereinafter referred to as MEs) are denied access because of their inability to present viable business plan and worthy collateral as well as high transaction and monitoring costs due to small borrowing and their widely dispersed nature. Similarly, Beck et al. (2007) contend that without broad access, financial market imperfections such as informational asymmetry, transaction cost and contract enforcement cost, which are associated with credit, are more binding on the poor households or small entrepreneurs, who lack collateral, credit histories and connections.

However, efforts at addressing access constraints have so far focussed more on the supply side with very little attention being paid to the demand side constraints. In as much as constraints emanating from the supply side are important, it should also be acknowledged that the problem of financial inclusion is a crucial issue of both demand and supply sides of finance and does not rest only with the supply side or financial institutions (Beck and Torre, 2006). There are demand deficiency problems, particularly when poor households or MEs, despite reporting of severe financial constraints, and sometimes even when having physical access to a bank, voluntarily exclude themselves or feel disinclined to borrow. Many MEs often cite finance as the most binding constraint, yet the majority make no effort to apply for loan (Bigsten et al., 2003). In Ghana, although the financial sector has experienced tremendous growth and expansion in recent times, and banks are frequently rolling out varied products to attract the new and vast market of the `unbanked' within the informal economy, the demand for external finance is just about 10%, according to the latest round of Ghana Living Standard Survey (GLSS 5), 2008. Out of this, less than 2 out of 10 actually borrow from banks. The rest (over 70%) borrow either from friends and relatives or other forms of informal financing sources. The fundamental question therefore is, what are the sociocultural factors that underlie voluntary self-exclusion by MEs from seeking external finance? In particular, does perception of access difficulties and attitude toward credit inherent in some cultural and religious beliefs drive self-exclusion?

Financial Economics Journal, Sociocultural Factors, Social Mobilization, Financial Literacy Programs, Development Agencies, Financial Sectors, Governments Agencies, Financial Markets, Corporate Finance, Credit Market, Financial Services, Banking System.