Banking Experts and microfinance practitioners have insisted that the microfinance sector which was once praised as a cutting edge “business solution to poverty” still has a significant role to play in Ghana’s economy despite facing numerous challenges.
According to them, getting microfinance to the level of effectiveness and impact will require a holistic approach which must kick-start with a strict supervision and structured regulatory framework by the regulatory body, Bank of Ghana.
Microfinance institutions have been under serious public critiques for their shortcomings in the recent years.
Between the year 2013 and 2016 more than 100 microfinance companies folded-up and 70 were stripped of their provisional license for failure to meet the basic banking requirements.
Sadly, customers with huge deposits and savings lost them without a tiny hope of getting a refund. This made customers lose complete confidence in the sector.
Mr. Patrick Kohn Arthur who is the Deputy General Manager-Operations of Equity Focus Microfinance based in Accra, explained to Business World reasons why some microfinance operators entrap themselves with challenges leading to their collapse.
He said “these microfinance operators do not understand the system or lack adequate knowledge in operating within the sector of which they make certain impractical decisions.”
As a result “they venture into multiple projects, some not allowed by bank of Ghana regulations. Moreover some do too much long term investment and have high capital expenditure and that affects their liquidity.” He added.
This, he noted, causes funds leakage which means money is not readily available when depositors want to withdraw their cash. This sends a bad signal.
He reminded Ghanaians that the economy needs the microfinance institutions since the 70% unbanked population usually transact businesses with the sector.
“Microfinance has come to fill a gap in the country. We microfinance serves as an intermediary between the small and medium companies, the petty traders and the high street banks. These people do not possess that volume of collateral for loans, so we go for loans and lend it to them.
We must tackle the trend with a matter of urgency to sharpen the sector and win back the clients confidence.” He said.
Arthur suggested “strict supervision will always be a starting point in tackling the challenges surrounding microfinance crisis. This will ensure proper management practices within the sector.
Microfinance has been in existence for years in Ghana, but only came under Bank of Ghana’s regulation in 2011, in pursuance of the provision of the Non-bank Financial Institution, Act 2008 (Act 774) and Banking Act, 2004 (Act 678) as amended by Act 738. It falls under Tier 2 of the central bank categorization purposely for deposit taking and granting of credits.
This sector has experienced a rapid growth in recent years. According to Bank of Ghana’s website, 468 microfinance institutions are registered and 86 have approval-in-principle out of which 70 have been revoked of their license.
Unarguable, the figure from the site is just a small percentage of the saturated microfinance market in Ghana.
Some say the regulations failed to keep up with the growth of microfinance in the country.
Arthur observed that the rapid increase in the sector will always be a good development to the 70% unbanked Ghanaian population but it will come with a huge workload for the Bank of Ghana in terms supervision.
However, he recommended that District Assemblies could be integrated to carry-out a supervisory role due to their vast presence.
The chairman of Ghana Association of Microfinance Companies (GAMC), Mr. Collins Amponsah-Mensah noted that more could be done in addition to regulation to help put the microfinance sector on the right footing.
He called on the general public to be very vigilant when dealing with MFIs that promise huge interest rates
“Anything more than a 30% interest rate is questionable; people need financial education to foresee some of these basic dangers” he exclaimed.
Bank of Ghana recently announced an increase in the minimum paid-up capital of microfinance from GH¢1,000,000 to GH¢ 2,000,000. Operators have been given up to 2018 to raise the stated amount.
The central bank however explains that, the 100% increase in the minimum capital will serve as a means of protecting customers’ deposits.
Additionally, the regulatory body has hinted of a banking bill which is yet to be passed into law by parliament this year.
According to the Deputy Governor of the Central Bank, Mr. Nashiru Issaku, the bill will compel banking and non-banking institutions to conform to the global standards of banking.
“Moreover it would offer supervisors a better review of assessment to reduce risk and also strengthen the regulatory body to help it effectively discharge its function accordingly,” he added.
Turbulences within microfinance have often been the case in an economy when this sector saturates. Countries like India, Mexico and Argentina have experienced similar situations years ago – Ghana could learn something from them.
The earlier we tackle the challenges with microfinance, the better. A downturn in the microfinance sector can affect the Ghanaian economy massively since the sector has been a powerful tool for poverty alleviation and creating a financially inclusive society. The productive poor, who are the main patrons of this industry, constitute the majority of the population.