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You Are Here: Home » Feature Articles » Putting Ghana’s informal sector in business

The present and past governments of Ghana, like their peers in rest of Africa, have always known that the answer to the questions of unemployment, extreme poverty and other socio­economic challenges lie in making financial services available to the informal economy, particularly microfinance and credit. In the following special report, Mark A. Kwateng writes on how Ghana’s non-bank financial sector is engaging the country’s informal economy and how it is faring in the business of providing microfinance and credit, as well as the possible threat it faces from the evolving universal banking industry.

After many decades of official development assistance from Ghana’s Western benefactors, emphasis seems to be shifting from poverty eradication hand-outs to making finance accessible to the informal sector. This is for good reason. The informal sector provides more jobs than government and the formal private sector combined. Indeed, the biggest pie of the country’s economy is largely unaccounted for because many Ghanaians who make a living from the informal sector – such as farmers, traders, private transport services, artisans and others operate on the blind-side of government officials that keep track of the amount of goods and services produced in the country each year.

By making finance accessible to these informal sector operators, the country is to some extent able to on the blind-side of government officials that keep track of the amount of goods and services produced in the country each year.

By making finance accessible to these informal sector operators, the country is to some extent able to provide the needed fuel to turn around their means of livelihood and possibly take them out of poverty – whilst as the same time bringing them into the formal setting, at least as far as their need for finance and credit goes.

At a UN World Summit, held in New York in 2005, to review progress in reaching the Millennium Development Goals, the former president of Benin, Mathieu Kerekou, said: “Acess by poor people to financial services is a powerful tool to fight poverty. Microfinance is an important element of the financial sector and must be treated as such.” He added, “It makes a huge difference when poor people have access to a broad range of financial services, whereby they can invest in income­ producing activities and meet their vital needs such as health, education and nutrition.”

In Ghana, financial services to the informal sector have been made accessible largely through non-bank financial institutions, many of whom started operations in the mid-1990s,  and the rural banks. The country’s banks have long considered the informal sector un-bankable and for the better part shunned it, because of the perceived risk of high loan defaults and low savings mobilisation potential.

Actually, the banks can hardly be blamed for their rather dismissive attitude towards the informal sector because, traditionally, banking operations work with formal set ups where proper books are kept and have a defined management structure with a deep sense of appreciation for accountability. All of these are lacking in the informal economy, and what is worse is that – in the case of Ghana the personal residential address system is nearly non-existent and many people do not have proper title to their assets to afford them the opportunity to use them as collateral for loans.

With the entry of non-banking financial institutions, particularly the deposit-taking ones, into Ghana’s financial services industry, businesses and individuals that were hitherto considered un-bankable simply on account of being an informal sector or low-income player, now have access to finance and credit through the country’s non-bank financial institutions. And the sector has produced remarkable results in recent years through their all-important role of providing financial intermediation to Ghana’s informal sector – which accounts for the biggest piece of the pie in terms of the nation’s economic activity.

At the end of 2008, for example, the total assets of all savings and loans companies in the country was more than GH¢247 million and, altogether, savings and loans companies in Ghana mobilised a total of GH¢130 million from the public in 2008. The industry also disbursed a total of GH¢61 million in loans to private enterprises and as much as GH¢81 million to individuals.

No doubt, the sheer size of the savings and loans market will get the mouth of any bank watering, and it is not surprising that some are beginning to take advantage of their universal banking licence to enter the ever-more lucrative microfinance and credit market. Much as the microfinance players concede the market is big enough to accommodate the universal banks, they are determined to grab as much share of the market as they can before the anticipated big competition takes full effect.

The Big Players

Already, big savings and loans players like Procredit, Opportunity, Ezi and up-and-coming ones like Garden City and others, are making efforts to further spread their operations to anywhere that they can find an attractive concentration of economic activity. ProCredit, Ghana’s biggest savings and loans company in terms of assets, client base and deposits, currently has 20 branches spread across six of the country’s 10 regions and plans to roll-out more outlets this year, The company originally traded as Sikaman Savings and Loans, later changing its identity to ProCredit. This resulted from it becoming part of the ProCredit international group of banks and financial institutions, which comprises of 22 financial institutions and is led by ProCredit Holding AG, a holding company headquartered in Germany. In Ghana, ProCredit currently has more than 170,000 clients and over GH¢31 million in deposits, accounting for nearly 24 percent of the total market share.

Opportunity International Savings and Loans, which emerged from Sinapi Aba Trust – a private non-governmental organisation set up in 1994 to provide microcredit and training to the poorest of the economically active population ­currently has 16 branches and accounts for about 12 percent of total deposits in the savings and loans industry. The company’s total assets as at the end of December 2008 was GH¢32 million and it currently has over 50,000 borrowers and more than 100,000 deposit account holders,

Ezi Savings and Loans, like its peers mentioned earlier, also recently underwent restructuring and recapitalisation and changed from its original trading identity of Johnson Savings and Loans to its present name, with a much-broadened scope and mandate. Currently, the company has six. networked branches, five in the Greater Accra Region and one in the Ashanti Regional capital, Kumasi, and plans to have a branch in all regional and district capitals of the country by 20 15.

Garden City Savings and Loans which has largely dominated the Ashanti regional market with its five branches so far, is resolved to remain the banker of choice for the region’s many informal sector players; particularly those in the business of hairdressing, dressmaking, artisans, and other service providers.

Apart from these, there are other savings and loans companies playing very effective financial intermediary roles in Ghana’s informal, economy – such as Midland, First Allied, Unicredit, Women’s World Banking and Pacific.

And there are special-purpose ones, too, like First Ghana Building Company whose activities even predates Ghana as a nation. The First Ghana Building Company was set up by the British Colonial Government in1955, modeled on the UK Building Societies, to provide financial assistance to its members to acquire, build or renovate their houses. This objective was achieved with great success for decades through the company’s nine branches in seven of the ten regions of Ghana – namely, Accra, Tema, Koforidua, Hohoe, Kumasi, Suame, Sunyani, Tamale and Takoradi.

As the founder of mortgage financing in Ghana, it has to date supported individual Ghanaians to acquire 12,515 homes across the country. The company financed a good number of the private properties constructed by the then State Housing Corporation in the Ringway, La, Awudome and Dansoman Estates in Accra; Kwadaso, Suntreso, Patasi and Buokrom Estates in Kumasi; Effia Nkwanta and Anaji Estates in Takoradi; Edweso and Nsukao Estates in Koforidua; Kalpohin and Vitim Estates in Tamale; Bolga Estates in Bolgatanga; and the TOC properties in Tema.

First Ghana Building Company still mobilises deposits, grants mortgage loans and provide other financial services to its customers. However, its mandate largely restricts it to doing business with formal sector salaried workers, thus effectively cutting off anyone operating in -the informal economy.

Altogether, Ghana’s savings and loans industry has made very significant progress in regard to working at reducing extreme poverty and empowering women, which are two of the UN’s Millennium Development Goals. The industry has in the last decade-and-half successfully engaged the informal sector – to the point it is now common knowledge that finance and credit is accessible through savings and loans companies, rural banks and other formal financial institutions that provide intermediary services to the informal sector.

Some two decades ago, very few small-scale enterprises dared to approach a bank or any formal financial institution for credit. Ghana’s informal sector largely depended on traditional moneylenders for credit – which came at very exorbitant interest rates. Today, the biggest proportion of loanable funds available in the savings and loans industry goes to market women, hairdressers, dressmakers, taxi-drivers, carpenters and many others who may belong to one association or another. Opportunity International, for example, allocates as much as 93 percent of its loan portfolio to commerce, while Ezi Savings and Loans allocates 80 percent. Those in small-scale manufacturing are able to attract 10 percent of Ezi’s loanable funds and 2 percent of Opportunity’s.

Perhaps meeting the Millennium Development Goal of increasing financial access to women has been the easiest for all the savings and loans companies, as none of them have been found wanting in this regard. On average, about 90 percent of loan clients in the savings and loans industry are women. This is not surprising, since commerce – which takes the lion’s share of the industry’s loans – is predominantly a female activity in Ghana.

Instructively, nearly 70 percent of loanable funds in Ghana’s savings and loans industry are raised from local sources through savings mobilisation. This means the industry will not be affected much by the global financial turmoil that has made it increasingly difficult to borrow from cheaper external sources to on-lend to local customers.

For 2008, the total liabilities of all savings and loans companies was GH¢189 million, of which GH¢130 million came from deposits from the public and GH¢26 million from foreign borrowings. The remainder was raised from, mainly, the universal banks.

Interestingly, however, competition in the universal banking industry has forced players to begin looking further downstream. The universal banks have come to realise that deposits in the retail and small and medium-scale sector are more stable and cheaper. At the corporate banking level, where most of Ghana’s universal banks play, they have to contend every day with aggressive corporate treasury professionals – who want to bag as much returns as they can find for their surplus funds kept with the banks.

By moving down to attract deposits from the small and medium-scale sector, the universal banks will be hoping to moderate their usually huge cost of funds. This explains why many of the banks, especially since competition became keener with the entry of new players from Nigeria, started aggressively branching out. Some have even gone further, by setting up special purpose subsidiaries to compete in the microfinance and credit sector. HFC Bank’s Boafo Microfinance Company and Ecobank’s EB-Accion are some examples.

However, the savings and loans companies are not ruffled by the entry of banks; neither do they appear in the least alarmed by some of the possible strategies the banks could deploy – such as denying access to relatively cheap sources of credit.

“Competition is not a bad thing. Competition is needed within the banking landscape to ensure the existence of affordable yet innovative products for clients,” a statement from Opportunity International in response to a B&FT questionnaire said.

“Many traditional banks that are downscaling into the microfinance sector do not have the know-how to deliver innovative solutions as the microfinance companies do, and therefore do not pose a major challenge to the microfinance sector. Surely, as more new players enter the market, the competition becomes a bit stiffer; but there are still a large number of untapped markets, especially in the rural and peri-urban areas. Most of the microfinance operators are realising this, and are planning to move away from the big cities where the market is saturated.”

Certainly, if efficiency in the delivery of other value-added services in the financial services industry is anything to go by, the banks no doubt have a fair idea what the savings and loans companies can do. In the business of money-transfer, for example, the savings and loans industry is increasing its share of the market – especially since it moved away from third-party role to dealing directly with remitting companies.

Moreover, savings and loans companies continue to design more innovative products to tap into the susu market, which is widely believed to hold massive growth potential in savings mobilisation. But, certainly, there is more room for growth for the savings and loans industry, and indeed for Ghana’s financial services industry. As competition grows keener, players in the industry are expected to focus attention on developing and diversifying the rural economy.

Growth in rural productivity – a Green Revolution for example – would catalyse increased demand for microfinance and credit. Should this be instituted as a priority, it would lead to increased food production in the country. This in turn would help achieve several other important targets of the UN MDGs, and possibly trigger the much-needed structural change in Ghana’s economy.

Source: B&FT

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