The Microfinance sector has experienced some positive gains in Ghana over the past decade, yet the intended results have not been achieved. While the practice and engagement of Microfinance were present in the country, the period between 2004 and 2010 could be described as the “golden age” of the industry in Ghana.
That was when economic growth spurred the Rural Banks (RBs) and the Savings and Loans Companies (S&Ls) in the country to serve as a conduit for the enhancement of the living conditions of the economically active poor. These MFIs innovated and created products to suit almost every need that customers who fall under their jurisdiction required. So much so that some commercial banks created desks, sections, and departments to downscale their activities to get a part of the microfinance pie.
From 2010 to date however, the honeymoon has tanked. Worsening economic conditions like fiscal imbalances, stagflation, power/energy crisis, and near industry collapse have compelled both the RBs and S&Ls to change their strategy. It has become increasingly expensive to process smaller loan amounts. As a result, majority of these MFIs have transformed themselves from microfinance into SME finance, leaving a huge vacuum.
Nature, by nature, abhors vacuum. When the RBs and S&Ls left the microfinance business, a proliferation of micro Susu/investment/ finance houses appeared to cater for the lower market. These players became so profitable and enticing to the extent that the Bank of Ghana (BoG) was compelled to register and regulate them. By the last count, there were over 600 BoG approved such companies in Ghana. The BoG also adapted to the change in the landscape by amending the banking rules.
The Universal and Commercial Banks are in a class of their own. For the Non-Bank Financial Institutions (NBFIs), the RBs and the S&Ls fall under the tier1category while deposits taking Susu/Investment/Finance houses and Financial Non-Governmental Organizations (FNGOs) are under tier2, with the Money Lenders and Non-deposits taking FNGOs categorized in tie three.
The confusing aspect of this whole well intended and market response policy is that at every point in time, any of these categories can call themselves MFIs. The NBFIs that fall under tier1 in Ghana are regulated and inspected as Commercial Banks, though their mandate and activities are supposed to be non-bank.
Also, the tier2 institutions who are required to have “Microfinance” as part of their corporate identity have gradually shifted their focus from the micro customers in terms of deposits and loans. By law, these institutions are not supposed mobilize deposits totaling more than $ 2,500 from a single client, yet after the collapse of several “Microfinance Institutions” in 2013, 2014, and 2015, it came to light that some individual customers of these failed institutions have as much as $ 10,000 and above with these institutions. Their loan books also revealed huge average loan sizes.
The BoG is not in a position to inspect the over 600 approved institutions that are currently are in their books. Also, many unlicensed “Microfinance Institutions” are springing up like mushrooms all over the country.
The word “Microfinance” is gradually becoming synonymous with the phrase “misplaced finance” or “lose your money”. A concept and phenomenon that has lifted so many around the globe out of poverty is on the verge of pushing many Ghanaians into further despair and poverty. Worse, none of the sponsors of these failed institutions have been prosecuted, let alone sanctioned for their deeds.
In response to people losing their savings through these failed “Microfinance Institutions” and the potential of losing faith in the banking system by the populace, the BoG has increased (in succession) the minimum capital requirement of the “Microfinance Institutions” from $25,000 to $50,000 to $ 125,000 then to $ 500,000 in a space of 3 years.
Laws and regulations alone cannot stop the trend. There is the need for conscious effort by the government in particular, and stakeholders in general to ensure the numerous registered “Microfinance Institutions” are up and running. Like it them or hate them, these players have come to stay so the earlier a solution comes, the better.
For instance, could there be a way the over 600 institutions should be compelled to merge into say, 50 strong institutions with well-resourced and well trained staff to manage and stick to their mandates?
Also, is there a way to entice the RBs and the S&Ls (who are recording huge net incomes in their financial statements) to have certain percentage of their loan books catering for the micro customers?
Again, are there still some donors around to support these private entities to the next level like the countries in East Africa and South East Asia had some year back?
Author: Kwaku Dua Berchie, MFI Consultant
