With a little over a month remaining, Microfinance Institutions (MFIs) are racing against the clock to meet the December 31 deadline for their new minimum capital requirement of GH₵2 million.
In August of 2019, the Bank of Ghana announced a GH₵2 million new capital requirement for microfinance companies. They were to meet the requirement by February 28, 2020. The deadline was however extended to June 30, 2020, and further extended to December 31, 2021, to allow room for financial institutions to meet the requirement.
About the new capital requirement for Microfinance
During the financial sector clean-up from mid-2017 to the end of December 2018, 347 Microfinance Institutions had their licenses revoked, leaving only 137 Microfinance Institutions in right standing.
Out of the 137, over 22 have requested voluntary liquidation because of their inability to meet the December 31 deadline.
In an interview monitored by Ghana Talks Business, Dr Philip Opoku Mensah, Business Manager for Other Financial Services at the Bank of Ghana noted 3 categories under which the Microfinance Institutions fall in meeting the December 31 deadline. The categories include:
- Voluntary Liquidation: A self-imposed dissolution and winding up of a company approved by shareholders.
- Capital impairment: A company’s total capital becoming less than the per-share value of its stock. This is a result of negative earnings spurred by excessive loan losses.
- General inability to meet requirements: This is where MFIs are nowhere close to meeting the requirement.
“We have started engaging all members that have been licensed, not only the microcredit institutions but even the microfinance companies. Now we have three categories, those that are going through voluntary liquidation, they have come forward to do so because they are not able to meet the minimum capital requirement,” said Dr Philip Opoku Mensah.
“There are some that are capital impaired by virtue of that though they have GH¢2 million, this money is impaired by losses, and we expect it to be unimpaired. Now there are some that have not met it at all, but we will still look at their financials to ensure that they are complying with other requirements. This is about the second time the deadline has been extended, so we are urging all to try and get new investors for their business or merge so that we can still have our institutions with us going into 2022,” he further added.
Why the MFI Recapitalization?
Over the years particularly during the 2000s, Microfinance Institutions increased rapidly. This has increased financial inclusion for the hitherto unbanked population, especially in the informal sector. Given this rapid growth, the sector has witnessed the proliferation of unregulated players with increasing incidences of fraud, loss of savings by low-income households and insolvency. The influx of such unregulated players contributed to the crippling of the financial sector. This led to the financial sector clean-up and the new capital requirement for microfinance by the Bank of Ghana to create a strong and vibrant sector.
One of the regulatory responses to the sector’s stability challenge was to increase the minimum capital requirement.
Bank of Ghana has over the years increased the minimum capital requirements for financial institutions to;
- Limit entry
- Provide an adequate cushion against insolvency
- Stabilize the financial sector
- Better help MFIs meet the demands of their clients with greater capitalization
The financial sector mop-up has led to fewer players, and perhaps a more sustainable industry. However, time will tell if the latter outcome can be achieved. In post-clean-up research by PricewaterhouseCoopers (PwC), 55% of banks’ executives acknowledged the positive impact of the exercise, whereas 45% of respondents indicated it has impacted them negatively.