“… Things are never as complicated as they seem. It is only our arrogance that prompts us to find unnecessary complicated answers to simple problems.” The preceding words by Professor Muhammed Yunus, a Nobel laureate and the originator of the microfinance concept, could not have been more sensible. More often than not the solution to most of man’s headaches and seemingly intractable problems are ironically more linear and closer to the problem than imagined.
In recent times, the microfinance industry of Ghana has been hard hit by some of the worst nightmares recorded since the take-off of the ‘microfinance revolution.’ The recent unfortunate scandal that hit the DKM Diamond Microfinance Company, God is Love, and Jastar Motors seem to have brought the industry under a cloud and knocked it off its pedestal. More worrying was the fact that the story got into the grubby hands of the tabloid press who twisted it to the delight of their readers. Not more like in other jurisdictions where over-indebtedness (double loans) and very high default rate on the part of borrowers has been a major problem, the case of Ghana in most of the scandals recorded appears to be the converse. In almost all cases, it so happened that operators and managers of microfinance institutions (MFIs) rather wittingly and cunningly bolts away with investments and savings mobilized from their depositors. In the DKM saga, investigations revealed managers of the company imprudently invested a very huge chunk of mobilized funds into their own private long term maturity ventures and subsidiaries with the hope to recoup it anon and quickly replace it. This was done with so much avarice and greedily orchestrated that it left the company almost completely illiquid. The resultant effect was a toe-curling panic withdrawal with the company’s inability to honour withdrawal demands of customers. This is never in any way different from the Pyram and R5 scandals that hit the microfinance industry in 1995 to which thousands of Ghanaians fell victims. In much semblance to the DKM scandal, Pyram and R5 had only been in operation for just about two years when those woes began to rear their ugly heads. Given the free terrain by the Central Bank’s lack of supervision, these two phony non-bank financial institutions started operating a Savings and Loans scheme without license from the Central Bank and succeeded in luring unsuspecting members of the public and top government officials to deposit billions of cedis with them in return for unsustainable interest rates. In all of these instances, the accounts of the dubious companies involved were frozen and eventually led to hundreds of people losing their source of livelihood. In a most recent fiddle which took every shape and form like the two just described, several hundreds of aggrieved investors took to the streets of the Ho capital of the Volta region to demonstrate against and plead with the government to help them retrieve their lost investments from the Clear Image Investments Ltd., Little Drop Investment Club, JODEQ, Divine Rain, and Royal Foundation among others. Prior to this very unfortunate incident was also a revocation of the licenses of seventy microfinance companies by the Bank of Ghana (BoG). In Ghana, supported by the Microfinance and Small Loans Centre (MASLOC) and the Ghana Microfinance Institutions Network (GHAMFIN), the Central Bank (BoG) has the legal mandate and the overall responsibility to supervise and regulate the microfinance sub-sector. And so, even though these institutions in themselves are heavily bedeviled with a number of constraints, one cannot also be any charitable at lashing out at these institutions particularly the Central Bank, especially when it has the legal backing to execute its regulatory and supervisory mandate. Thus, in what appears to be chasing its own tail, the Central bank, even though almost invariably stepped its foot on the ground and acted in all of these scams mentioned, one would not be far from right in admitting that its response has only been reactive rather than proactive, knee-jerk rather than conscious, and ad hoc rather than permanent.
Clearly, some questions seriously beg for answers in the light of all these difficulties. What are the real challenges of the Ghanaian microfinance industry? What could be the panacea to addressing these challenges? As a sequel therefore to my previous feature which was titled “Ghana’s Microfinance’s Biggest Challenges: Any Hope For the Future?” let me then delve straight into the second question.
Based on observation and personal engagements in my few years of practice consulting for some microfinance firms, I can confidently thumb my chest that a major impediment to the growth of the microfinance industry in Ghana has been what I term as a perversion of the concept’s core objective(s). As a means to enhancing financial inclusion, microfinance’s cardinal objective is to help in the alleviation of poverty with particular focus on the poor or low-income earners and the unbanked. Sadly, the focus has been redirected to the already rich and more affluent. Instead of giving out microcredit to help establish, grow and sustain micro-enterprises, operators and managers of most MFIs have rather greedily diverted their attention to big fish investments in infrastructure, international trade, construction, transportation, etc. The question is who are these managers alleviating out of poverty when the very category of individuals who operate these kinds of capital intensive businesses are already way out of the operational definition of poverty? Who are they working to include into the financial system when operators of such ‘non-micro’ businesses are already major players of the formal banking system? It is therefore high time managers of MFIs began to conduct their businesses with the basic tenets of microfinance in mind. Thus, whilst the challenges saddling the Ghanaian microfinance sub-sector may not be completely extirpated, it could be overcome to a large extent if conscious efforts are made towards practicing it in its pure sense of the word.
For instance, basic practices of microfinance requires but not limited to the following:
i. conscious efforts should be made towards the economic empowerment of the financially deprived. Thus, much emphasis should rather be placed on expanding outreach by giving out microcredit to small business owners than dishing out huge loans to business magnates. And so, instead of loaning out say GH₵5,000 to the owner of a big business, basic microfinance will rather support giving out GH₵1,000 each to five owners of micro enterprises. This eventually minimizes risk as recovery rate is improved.
ii. Borrowers and customers of MFIs must never be left as orphans. There is always the need for managers and staff of MFIs to follow up on their borrowers to check if loans acquired are really committed to viable profitable ventures. It is even more appropriate that where necessary, clients to MFIs should be coached on basic management skills and record keeping.
iii. The services offered by MFIs must fit into the needs and preferences of the economically disadvantaged. Loans given must be small and on short term basis.
iv. The business of microfinance is largely based on trust. It therefore behoves on managers and officials of MFIs to strike very positive and cordial relationship with their customers. In this way, the tendency and deliberate intention to default on loan repayment is reduced as clients can be easily motivated to repay their loans.
v. and finally, interest rates and fees charged should only be a little higher to the extent that it can recover the transactionary costs of the loan, plus a very moderate profit.
Additionally, pulling the breaks for a while on the intensity of activities within the industry will be very key to introducing some sanity into the troubled Ghanaian microfinance sub-sector. Even though I have, and continues to hold the opinion, that every country has its unique and peculiar challenges, and hence, generalized studies may not satisfactorily address country-specific challenges, I believe Ghana can emulate and tap from the rich experience and highly praised success story of the age-old microfinance industry of Bangladesh due to the similarities of the latter’s economic demographics with Ghana. The major players of the former’s microfinance industry sensed and averted a looming microcredit crisis that would have had very dire consequences on the country’s economy and could have completely crippled the industry. Bangladesh’s microfinance industry, which grew large in the 1990s, continued to expand well into the new century, adding 15-28 percent active borrowers annually from 2004-2007. Then in late 2007 MFIs began to worry with a heightened suspicion that continued rapid growth and a saturated market could have negative consequences. In a remedial measure that has been rapturously applauded, the country’s big four MFIs-ASA, BRAC, BURO, and Grameen Bank, which constituted two-thirds of microfinance supply for more than a decade-in aggregate stopped adding branches and staff around 2008. The beauty with this action of slowing down on activity is that it was never a directive or order from the state regulatory and supervisory body, but rather a deliberate move by the major players to save a crushing industry. In no time, the aggregate number of borrowers stopped growing, the active borrower totals contracted modestly as the sector pulled back gradually, and some ancillary loan products were closed; the slight contraction of branches and staff, and the levelling off of customer numbers in turn affected the loan portfolios. There was also the effect of a reduction in non-performing loans, a control on the proliferation of MFIs, and the introduction of some stability into the sub-sector. In the end, an imminent crisis was averted-Bangladesh’s microfinance industry was rejuvenated for a fresh take off in 2010 after about two years of a deliberate halt on the intensity of industrial activities.
The challenge with the issue of regulation and supervision is that it is ticklish as well-an over-regulated attempt at resolving the issues without much tact and caution could yield counterproductive results. Even though there have been arguments that have tried to downplay the importance of regulation and supervision because of its small place in the financial system, the disastrous consequences of its absence could be unimaginable. The operation of a tiered structured financial system by the BoG is laudable. By compelling financial institutions to only operate within their acceptable capacity, it also creates room for a stage-by-stage progression and growth of financial institutions through strict adherence to some prudential regulations. The tiered system also allows for the establishment of specialized financial institutions (such as Rural Banks) with capitalization requirements much lower than those for traditional commercial banks. The revocation of licenses of MFIs that are not up to the task, and the swift responses to scandals by the BoG lends credence to the level of recognition and importance attached to microfinance. The Central Bank seem to be playing its part. Unfortunately, all of its efforts appear to be yielding just very little.
The following points are therefore worthy of note for effective regulation and supervision;
• There is the need to beef-up the human resource and technical capacity of these agencies: the BoG, the GHAMFIN, MASLOC, and the Office of Microfinance Policy Coordination in the Ministry of Finance. Whilst it may be considered expensive doing this, the cost of turning a blind eye could certainly be more devastating.
• The arduous task of supervision should not only be left on the shoulders of the BoG and its auxiliary agencies. Governing boards of financial institutions, their networks, apex organizations and associations should be actively involved.
• The BoG must be very keen on seeing to it that both newly established and already existing MFIs satisfy the minimum paid-up capital requirements. The recent 100% increment from GH₵1,000,000 to GH₵2,000,000 for tier 2 and 3 financial institutions is a step in the right direction. It may also be necessary to increase the mandatory liquidity reserve since this will allow the MFIs to stand unwavered in the event of bad news and wrong signals that has the potential to trigger banks runs and panic withdrawals.
• The proliferation and daily springing up of MFIs in every corner of this country is a clear indication of the necessity for the Central Bank to decentralize its regulatory and supervisory function. This could be done by dividing the country into four (4) zones (Northern, Southern, Eastern and Western) and engaging empowered institutions and experts who will in turn report to the BoG.
• And finally, it has come to a stage where the media, particularly the electronic, must help by taking active involvement in setting microfinance on its intended path. This is due to the fact that the majority of micro-entrepreneurs who form the core customer base of MFIs are not so much lettered, hence, electronic audio-visual content may be more preferred to printed literature. It is therefore very important that enough space and content is devoted for a massive financial literacy drive.
The fact that there is still a great percentage (about 70%) of the Ghanaian population being unbanked makes the need for specialized financial institutions such as MFIs indispensable in our financial space. Even though the sub-sector has experienced a few glitches in recent times, it cannot be said to be all gloom since it is out of these challenges that very important lessons and experiences have been gathered. Going forward, the BoG may have to revisit its policy document for regulating and supervising MFIs. There is certainly the need to bring more hands on deck by the decentralization of its supervisory function. For some sanity and stability within the sub-sector, the BoG can also begin to look at supervising and enforcing a temporary period of less intensive activity within the microfinance industry if it cannot be deliberately initiated by the MFIs themselves. MFIs must be more watchful of their liquidity position at any day, they must begin to explore other varieties of microfinance services and products, and conscious efforts must be made towards practicing real microfinance.
Author: Lartey Stephen Sarpong
Microfinance/Development Finance Practitioner