Is Ghana’s financial inclusion agenda on course?

The clean-up of Ghana’s financial sector continued last May with the revocation of the licences of insolvent microfinance companies (MFC) and microcredit/money lending companies (MCC). The Bank of Ghana (BoG) classifies both MFCs and MCCs together as Microfinance Institutions (MFIs).

A total of 347 MFCs had their licences revoked, comprising 155 insolvent institutions that had already ceased operations and 192 other insolvent ones. For the Microcredit companies, a total of 39 insolvent MCCs had their licences revoked with 10 of them already not operational. This represents 72 percent and 56 percent of MFCs and MCCs respectively licensed to operate across the country.

While the BoG acknowledges that these institutions were licensed to promote Ghana’s financial inclusion agenda, it contends that they do not expect the collapse of about 70% of MFIs to affect the agenda. I discuss and examine what the effects of the collapse of these institutions and the impending ones in the other Non-Bank Financial Institutions (NBFIs) will have on the financial inclusion agenda of the country.

The World Bank defines financial inclusion to mean that individuals and businesses have access to useful and affordable financial products and services that meet their needs. This implies that people do not rely on or transact solely in cash or keep their cash in their bedrooms.

The larger effect is that as people have basic financial accounts they are able to access other financial services including credit and insurance which allows them to start and expand businesses, invest in education and health, manage risks and deal with financial uncertainties leading to an improved overall quality of life.

Access to the poor and those living in rural areas (especially women) is key and central to achieving the financial inclusion agenda. This is recognised in the government’s National Financial Inclusion and Development agenda as well as its Digital Financial Service (DFS) policy.

The NBFIs are a critical component of the financial inclusion agenda as their geographical footprints cover a larger area than traditional banks and they provide services that target the poor and those who live in rural communities. The NBFIs are largely made up of MFIs, Rural and Community Banks (RCBs), Savings and Loans (S&Ls) and Finance Houses (FHs).

The table below shows the regional breakdowns of NBFIs before and after the recent revocation of licences of 386 MFIs. The regional structure used here is based on the former structure before the newly created regions as available data is not in the new format.

It is important to note that most S&Ls and FHs operate beyond where their regional offices are located unlike the MFIs and RCBs who operate mainly within their base regions. In terms of size, S&Ls and FHs are relatively larger and focus on consumer lending while RCBs are typically owned and run by local communities and have broader outreach offering savings, credit and payment services to relatively less included segments of the populace such as the poor, women and rural residents.

With 70% of MFIs collapsed, a lot of customers have been affected. In a BoG banking sector report in May 2017, the BoG estimated that about a third of MFIs and RCBs were distressed or folded with more than 700,000 depositors at risk of losing their money.

These customers had practically lost their funds through a system they were believed to be regulated and protected.
The current intervention by the BoG although late is very much welcomed. However, trust issues are key to the viability of any financial system. These depositors were hitherto reluctant to keep their monies in financial institutions and haven’t gone through this ordeal will surely be sceptical about trusting the financial system.

There is an even bigger issue with the operations of S&Ls and FHs with lots of reports of locked up depositor funds. It is expected that the BoG will be moving to the clean-up affected RCBs next then move to the S&Ls and FHs.

Additionally, the financial inclusion agenda thrives on access to people who live in parts of the country that are difficult to access by traditional banks. With nearly a third of registered MFIs collapsed their footprints is seriously damaged. Their footprint is already skewed towards the Greater Accra region with over half of all MFIs operating in the region. With the exception of RCBs who are spread uniformly across the country the rest are mostly skewed towards the Greater Accra, Ashanti and Western regions.

Some industry experts will argue that the with fast pace growth of mobile money (MoMo) transactions, access to financial services are being created digitally and we don’t need physical presence NBFIs as it was a decade ago.

I contend that MoMo’s role in the financial inclusion agenda is currently limited to payments and funds transfer. It will still require the physical presence of NBFIs to leverage on MoMo platforms/technology to deliver intermediary services beyond just payments to access to credit and other financial services.

Consequently, the current intervention to clean up the system cannot be said to enough in and of itself without an active engagement to restore the confidence in the system. The financial inclusion agenda is gravely compromised if all that is the needed is what can be described as routine reform measures proscribed by the BoG in the May 31st, 2019 press release.

We require some level of honesty from the BoG on their own failures and not a defensive posture as we continue to see. In the list of expected reforms to be implemented to improve the financial system the BoG says it will embark on strict supervision of licenced institutions and enforcement of regulatory requirements as well as increase resources available for these activities.

They fail to tell us what reforms they are implementing internally to improve their own structure, operations, and governance.

Finally, we cannot underestimate the level of mistrust resulting from this crisis as we require an active public engagement across the country to restore the lost confidence in the system if the financial inclusion agenda is to succeed.