New era of microfinance: Prospects and challenges accompanying regulation

Microfinance in Ghana has proven to be a powerful tool for promoting inclusive economic growth and employment generation.

The last decade has seen micro-credit loans improve the economic lives of at least three million Ghanaians.

The fact on the ground is that microfinance in Ghana is actually in its infant stages, but the sector has shown positive signs of growth. This is largely seen in the number of microfinance companies that have sprung up over the last three years.

According to Mr. Settor Amediku, Deputy Head of Financial Stability Department at the Bank of Ghana, as at the year 2000, Ghana had only eight savings and loans companies, but by December 2010 the number has grown to 19.

Ghana is, however, yet to achieve the objectives of microfinance — which include increasing outreach, impact and sustainability.

It is therefore important for regulators and stakeholders to help the industry achieve these objectives.

The current recognition received by microfinance as an alternative financial inclusion strategy for the poor and the low-income earner better-places the microfinance sector under the watchful eyes of microfinance players and actors, and every facet of the economy, to assess and gauge happenings within the sector.

The interest shown by politicians, government, religious leaders, etc will largely aid the development of quality infrastructure to efficiently help growth of the sector to achieve the desired impact.

The effect of the concern and confidence in the microfinance sector is going to deepen further as a result of the Bank of Ghana releasing guidelines and policy operations for microfinance institutions which are aimed at regulating the entire microfinance sector.

The regulation of the sector has a bearing on the prospects of the sector, just as it does on the entire financial sector. The regulation of the microfinance sector will bring prospects and challenges.

According to Roderick Okoampah Ayeh, Microfinance Technical Officer at Accra-based ARB Apex Bank, the quality of the human resource in the microfinance sector will be improved to ensure that the sector adopts up-to-date skills; thus ensuring that Microfinance Institutions (MFIs) not only profit from their operations but also help to ensure the capacity of their clients is impacted positively for the reduction of poverty.

Okoampah Ayeh explained that the security and protection of deposits or savings of poor clients will be guaranteed.
Therefore, the incidence of people with ‘tainted’ characters setting up microfinance institutions with the objective of duping poor clients will be reduced, since the Central Bank as part of certifying the establishment and continuity of MFIs  will conduct background investigations of directors of all the regulated MFIs.

However, Okoampah Ayeh said one of the key challenges facing the entire microfinance industry in Ghana is lack of adequate funding for investing in infrastructure and granting of quality loans.

“In an unregulated sector, the funding sources for these MFIs are limited since there is no legal charter guaranteeing their establishment.

“This therefore makes it difficult for MFIs to access loans from banks and other individual and corporate investors interested in supporting the microfinance activities,” he noted.

But with the regulation in place, he believes there will be high opportunity of funds flowing from traditional banks, Microfinance Investment Vehicles (MIV) and private investors to help in providing liquidity to the sector.

Apart from the regulations increasing the confidence of the industry, he says that it will in addition  enforce the use of appropriate prudential management tools like proper accounting practices or tools, hiring qualified human resources, good governance, etc — which all  better-places the microfinance sector to attract funding and assistance.

Currently there are some universities in Ghana, for example the University of Cape Coast, which are developing modules in microfinance to help in building the technical capacities of prospective microfinance workers.

This is needed since microfinance requires special mindsets and skills to effectively contribute to reducing poverty.

Okoampah Ayeh observed: “High operating and funding cost is one of the main issues leading to high cost of loans by microfinance companies.”

“Most MFIs borrow at high interest rates from the banks and other investors and then pass on the cost to their clients.”

With regulation, he stressed, it is anticipated that cost of funding to MFIs will go down, since the associated risk of dealing with MFIs as an investor or a bank will largely be reduced by the effect of the regulation.

The microfinance sector in Ghana is made up of the rural banks, savings and loans companies, credit unions, Susu and Non-financial NGOs.

Although there has been a sharp increase in numbers of the Susu or microfinance companies, the regional spread of these institutions is not even; particularly in the case of rural banks, not to mention savings and loans companies.

“This is largely due to the expensive nature of procedures accompanying regulation,” said Mr. Ayeh.

In this sense, he noted, promoters and investors behind these MFIs are much concerned about locating their banks in areas where they will have the ability to recoup their investments quickly.

This therefore explains why there are more microfinance companies in the district capitals and fewer in the less economically active districts.

“With regulation, it will further delay the accessibility of poor clients in less economically endowed areas.

“Regulation will also delay or slow-down the growth of the entire sector since new players will be required to meet the needed mandatory requirements — like acquiring software for accounting purposes which can be expensive for start-ups.

“This can therefore reduce the incentive for more players to come on board; as it happened within the unregulated regime.”

One of the main challenges within the Ghanaian microfinance sector is the fact that most of the investors or owners are more inclined to making profit, instead of considering both profit and social returns.

In this vein, most players are downplaying the importance of other non-financial services like training, talks on health-care etc, aimed at building the capacity of their clients to make them better users of loans and efficient managers of their lives and enterprises.

This challenge, if not addressed, may delay the achievements of the microfinance sector compared to what has happened in places like Kenya, Uganda and Bangladesh.

There is also too much over-reliance on micro-loans — neglecting other equally important products like micro-savings, micro-insurance and micro-housing.

It is important to diversify the current product-base of MFIs to enable them provide the solutions to lifting people from poverty.

By Michael Sarpong Bruce