Microfinance without a social objective is not microfinance

The move to regulate the Ghanaian microfinance sector has come to allay the fears of many microfinance developmental watchers in Ghana and the world over. This development is expected to streamline the activities of the entire microfinance in order to ensure safety and soundness of the sector.

The refreshing thing about this regulation is that it will forestall   any happenings in the microfinance sector which might have a negative effect on the entire banking sector. This is especially important because most of the clients being targeted by microfinance institutions are the same clients who may graduate to become clients of the traditional banks. These clients, therefore, may carry the impression they have about the services of microfinance companies on the overall banking sector depending on the experience they have with these companies. For instance some of the negative activities encountered by some microfinance clients as a result of the self styled microfinance Institutions can affect the confidence levels of these people and further keep more people outside the formal financial sector.

It is important for all to be guided by the fact that  trust is a very important ingredient in any   banking  environment and these cannot be toyed with especially in the Ghanaian case where there are close to about 70%  of the  population yet to be drawn into the formal financial sector.

The Microfinance Regulation as I indicated earlier is great move which must be made to work. Inspite of the several advantages it will bring on the sector it cannot be said to be without some challenges. This challenges  I think  should be raised as red flags to guide and ensure that the regulation produces  the best results to  ensuring that microfinance in Ghana becomes an effective  tool for the  reduction  poverty amongst the many under/non – banked population.

 In this vain, it is important for all stakeholders to find ways on how to enable microfinance in Ghana to keep their social objectives    under the regulation in order to support governmental and donor agenda in reducing urban and rural poverty.

Social return started microfinance  

 Going through the development of microfinance in Ghana it can be noticed that the initial stages had developmental or social objective with most of the actors acting as Non Governmental Organizations (NGOs). This was when these NGOs had several sources of funding in the form of grants or aid to support their activities. In view of this, the NGOs at the time were not bothered about profitability since that was not a requirement for their sustainability. This, therefore, allowed most Financial NGOs to concentrate on providing capacity building to their clients through client education, business empowerment, family health education, etc. This era also did not give micro credit and savings the needed attention it deserved because it was perceived during this state of microfinance development that the poor could not save and they did not have the capacity to manage commercially priced credit extended to them.

One of the things that went wrong during this era was that all poor people were considered to be the same or that the degree of poverty amongst the target clients was the same. This opinion, however, in today’s concept is not the case because it has been proven that the degrees of poverty amongst poor people are not the same that is to conclude that the incidence of poverty varies among the poor even for the poor within the same economic jurisdiction.

 The new revelation, therefore, infers that the poverty reduction strategies directed at these clients should be different because their situations and conditions are not the same. Developmental expert now acknowledge that poor people can be categorized into absolute or hardcore poor and economically active poor. For the hardcore poor, a commercial microcredit loan cannot be relied on  to help them to move out of poverty. Their conditions are such that they are so poor that their “debt capacity is zero” meaning that they are unable to manage and pay any amount given to them as a loan. Their state are mainly worsen by the absence of any economic activities that can enable them to repay any amount of loan granted them. This people according studies would need grants/ aid or subsidizes credit instead of commercial micro credit to better their livelihoods.

Although there are still a number of financial NGOs around, it can be observed that current number of microfinance companies in Ghana far outnumber   the financial NGOs that have largely social objectives. The current developments indicates that financial NGOs who even have social objective as their core mandates are now adding financial objective to ensure  operational  sustainability mainly as a result of the decline in donor support for the microfinance sector.

Microfinance today

The current state of microfinance is now largely dominated by the commercial microfinance institutions or microfinance companies. The companies are mainly focused on putting their assets into profitable investment in order to achieve appreciable   returns on their assets. These microfinance companies are looking beyond covering their cost in order to make profits to support their existence. To sum it up commercial microfinance institutions have a singular objective to make money for their investors and other shareholders and this is very normal desire for any business.

Achieving financial objectives for microfinance companies are very important especially if microfinance institution need to attract external capital from Microfinance Investment Vehicles (MIV) as well as from private investors who may be interested in either profit or social returns or both to support their operations.

The strict adherence to achieving financial returns can be described as a necessity to safeguard the activities of microfinance especially in the decade of decline in grant for microfinance across the world.  The danger, however, that may arise when the microfinance sector becomes engrossed in achieving only  financial return  is that it  can lead to a situation where these institutions will reduce the investments in   non -financial services they provide to their clients. However, it is these non – financial services like training in financial or business management and others that have been found to enhance the client (women’s) feelings of self-worth as well as courage and have further   helped a number of women clients to contribute more to household well-being through providing improved nutrition and home care.

Today majority of Ghanaian microfinance companies are quick to form groups and quickly disburse loans to clients without first of all orienting them on basic things that can help their day to day activities. This “quick goal” to provide credit to microfinance clients is either to beat the competition or start recording returns on the funds which might have been contracted at a high cost and for a short term period. It is important to note that credit alone cannot necessary support the reduction of poverty that is why current development in microfinance has come up with  certain indicators for measuring social performance in order to promote the development agenda of microfinance which if not taken seriously will soon be on “extinction” within the Ghanaian  sector.

Why social return?

The positive impact of social return is enormous both for the microfinance Institutions (MFIs) and the client themselves. For the MFIs it can lead to high repayment rates due to the fact that these clients have improved ability to be efficient users of the microcredit they received. This can also reduce the high non-loan performance that majority of the microfinance companies around have started recording. Social benefits to the clients within a group, can also serve as an additional binder for the group and every member within that group now sees the group as another family that can help them to face the various challenges within the communities they leave in.

This can, therefore, help to prolong the life span of the group and further help to increase the level of the members of the group which include timely repayment of loans.  There are several examples in Ghana where some well organized groups provide support to bereaved members to enable them to bury their dead relatives by assisting in cash or kind towards the burial ceremony. In Bangladesh as indicated by Mohammad Yunus in his book and title ; banker to the poor, some microfinance groups have provided support to women who have been abused by their husbands by confronting such men to resolve such abuses  and this  have led to low incidence of wife abuses  amongst women who belong to Grameen  groups.

Conclusion

The current microfinance regulations across the world and that to be implemented in Ghana mainly focus on financial discipline of the microfinance companies without much focus on social performance. Regulation, however, should be used to protect and enforce the social contribution of microfinance so that microfinance does not become a prototype of traditional banking because the two financial models are not the same.

Additionally in order for the microfinance sector to keep up with supporting  developmental agenda, there is the need  for  skill orientation of all  key microfinance players to approach  microfinance as a developmental tool and not only as a business of  giving credit and taking deposit. It is therefore important for microfinance actors to become aware of the social importance of microfinance in order to enable the sector to achieve the full benefit of microfinance on it target client.

The absence of social return in microfinance will only make microfinance beneficial to microfinance investors and shareholders at the expense of the microfinance clients who have been the reason behind this financial revolution across the world.

Roderick Okoampah Ayeh

ARB Apex Bank

Microfinance Technical Officer

roayeh@gmail.com

THE MICROFINANCE INTEREST RATE DEBATE - WHICH WAY TO GO?

The microfinance industry has come under criticism for the high cost of loans or interest rates Microfinance Institutions (MFIs) charge on their loans to the target clients - who mainly are the poor and low-income earners.

The criticism is somehow fair since it is logically trying to connect the objective of microfinance - which involves the reduction of poverty by empowering the poor, especially women - to the high interest rates charged on the loans meant for this purpose.

These critics conclude that considering the high interest rate charged by MFIs, poor clients after taking microfinance loans are in most cases pushed further below the poverty-line, and this worsens their already sorry state. This, they say, is mainly because the economic opportunities available to the productive poor cannot guarantee adequate returns or profit on their investment to enable them to repay the very expensive loans that they contract from the MFIs.

The reasons supporting some of these claims are linked to the stories that purport to indicate that some clients of microfinance committed suicide after being harassed by the officers of MFIs for defaulting on the repayment of their loans. In Ghana, such stories are not widespread but some of such incidents have been reported in parts of Asia.  The microfinance critics again associate the causes of the suicides to high interest rates that lead to high default rates by some microfinance clients.

This and other reasons has prompted a proposal to introduce interest rate control or a ceiling for MFIs to help ensure that microfinance clients do not pay too much for the loans they borrow, and also to introduce uniformity in the pricing of microfinance loans. The achievement of this directive is expected to support the theoretical reasoning that cheap or affordable loans can increase uptake of loans by the poor and low-income earners, and will further improve the rate of loan repayment.

In an attempt to protect microfinance clients from the high interest rates charged, some countries have passed regulations as to the acceptable interest rate or interest rate margins MFIs in those countries can charge.

In the wake of the debate on high interest rates charged by MFIs, some people or governments have stepped in to propose the capping of interest rates. This according to proponents will prevent over-indebtedness and further prevent poor people from becoming poorer. There are current examples of some countries that have bought into the interest rate control debate and have moved to enact such regulations. For example, the Andhra Pradesh (AP) Region in Indian has enacted regulations to protect microfinance clients. Among the key regulatory issues is the introduction of an interest rate ceiling or interest rates capping for all MFIs.

The big question, however, that keeps coming up in the interest rate debate is: “is capping interest rates the way to go for the microfinance industry?”

Are micro loans too expensive relative to their operations?

The claim that interest rates for micro loans are high may only be true when looking at the interest rates as a figure without taking a critical look at the operative mechanisms of the microfinance institutions.
  Most MFIs operate in economies that have serious developmental challenges characterised by low levels of infrastructure development that do not easily and effectively support their operations. The environments in which these MFIs operate are largely undeveloped, requiring very innovative but expensive means of improving access to financial services for the target-clients.

In order to improve access to financial services, MFIs must strategise to send their services to their target-clients, who mostly live in the least developed part of the countries where microfinance is helping to fight poverty. These  strategies may include hiring mobile staff which may have to use  motorbikes or other means to get to the clients for loan disbursement, collections, withdrawals and deposits mobilisation (if allowed by the country’s law). All these constitute high operating cost for MFIs.
In view of this, it is only normal for MFIs to adopt appropriate pricing of their services to ensure that it covers cost and leaves them with a margin or profit to satisfy their shareholders (that is, if it is a commercial MFI). It is important to state that the objective of commercial MFIs, like any other business, is to become sustainable by making profits from their operations. Sustainability is not only important for the MFIs but the entire  objective of fighting poverty, since it is the only ingredient that will guarantee the existence of the MFIs to continue to assist the productive poor to participate in the process of wealth-creation. 

The making of loans in small or micro amounts to clients is another important factor that adds to the operating cost of MFIs. Making and recovering small loans is costly on a per unit basis. Making micro loans is more expensive compared with advancing traditional loans. In microfinance, loan-recovery is largely executed by staff visits to clients (whether individual or group), and this is also a source of cost for the MFIs. These challenges are not the case with traditional banking, since the majority of their clients either walk to the bank to honour their loan payments or have standing orders for them.

The other issue that leads to high costs for MFIs is the cost of on-lending funds. In Ghana, for example, most of the MFIs finance their activities by loans from commercial banks or private investors. Ghanaian MFIs in most cases are only able to secure the funds they need at commercial rates from the universal banks. The truth is that MFIs in Ghana do not receive any special rate from the traditional banks.
They are treated just like any bank customer - irrespective of the fact that they on-lend the funds they contract from the traditional banks. In the case of MFIs raising funds from interested private investors, the decision to put their funds into these MFIs is only based on rates that are above what other banks will pay if they invest the same amount.

The lack of adequate funding with considerate rates and terms is one of the several challenges facing the microfinance industry in Ghana. In the absence of grants and aid that characterised the industry some decades ago, MFIs are sourcing commercial funds to meet their loan demands. In instances where MFI funds are largely from commercial loans, the MFI is obligated to repay the loans and its interest to improve their credibility. The cost of the funds is in this case passed on to the clients.

It is important to point out that the majority of MFIs in Ghana are yet to be successful in accessing funds from microfinance investment vehicles (MIVs) due to reasons which include the absence of clear legal regulations supporting their operations (susu companies), and lack of a clear and acceptable governance structure.
There are several additional reasons that make microfinance programmes expensive. For instance, the training and capacity-building performed by MFIs for their clients is economically expensive. This is one thing that most traditional banks do not invest in, since the majority of their clients are illiterates. Another reason is that granting loans to the poor and the low-income earners is known to be associated with high risk, and therefore MFIs - in order to safeguard their investment - mostly compensate for the high risk by ensuring that the price of their loan safeguards their investments.

From these and other reasons, it is evidently clear that the cost of loans from MFIs will be naturally expensive. In view of that, those people who think that programmes meant for poverty alleviation should be free or below the rates of the traditional banks should reconsider their position: rather, they should call for the education of microfinance clients to enable them take independent decisions that will enable them to shop for the best offers on the market before contracting any loan from competing MFIs.

Why capping or controlling interest rates is not the way out
Literature on interest rate control seems to express the fact that capping interest rates will pose a negative challenge to the microfinance sector as it did for the traditional banking sector some years ago. Such a regulation can also affect the ability of using credit to reduce the effect of poverty. 
MFIs as lenders will incur losses if a ceiling-rate is set at a level less than what is required for cost-recovery. Implementing interest rate controls can reduce an MFI's willingness and ability to expand operations, and would further discourage potential investors from supporting the industry.
Furthermore, capping interest rates would reduce the creditworthiness of MFIs, thereby reducing their ability to borrow from the market to finance their operations. The long-term effect of this on the industry is that it would prompt a decline in the supply of credit, contrary to expectations of policymakers or governments who seek such a policy.
Adequate pricing of micro loans will partly ensure the sustainability of the microfinance industry and thereby sustain the various efforts in improving access to financial services for the poor to aid the fight against poverty.
Supporters of interest rate controls for the microfinance industry should support the industry to rather innovate in systems that will reduce the cost of their operations and further lobby governments to provide the needed environment for setting up more microfinance organisations that will inject competition into the industry, since competition can naturally help force interest rates down. 

THE WRITER IS A MICROFINANCE OFFICER, ARB APEX BANK LIMITED
roayeh@gmail.com

Microfinance Delivery in Ghana: The ARB Apex Bank Experience

ABSTRACT

The Ghanaian microfinance sector is made up of Financial NGOs, Credit Unions, Susu Collectors, Savings and Loans Companies and Rural Banks. Rural banks have 60% of the informal financial market and also account for about 5% of the total assets of all the financial institutions in Ghana.  They in addition contribute   about half of all banking outlets across Ghana.

The paper reviews the achievements and lessons learnt within the rural banking sector and conclude that, these achievements have been influenced largely by the establishment of the ARB Apex Bank. It further reveals some important lessons that the rural banking sector brings to bear on the development of the entire microfinance sector in Ghana, Africa and the world at large.

Lessons  in the rural banking sector suggest  that the  regulation of the sector, capacity building, government and donor support, strategic linkages and performance rating have all aided in improving  outreach, sustainability and impact of the sector.

 To grow the entire microfinance industry in Sub - Saharan Africa, it is expected that stakeholders would build effective and efficient apex bodies within the required legal framework to enhance its operations and further adopt the key lessons that have aided the growth of the rural banking sector in Ghana.

1.0 INTRODUCTION

Microfinance institutions (MFI) now play a key role in the fight against poverty by helping poor households build their income and assets to enable them to improve on their livelihood According to the State of MicroCredit Summit Campaign Report (2005), as of 2004, some 3,200 microcredit institutions had reached more than 92 million clients of which approximately 73% were living in poverty when their first loan was made.

Several MFIs in their bid to increase outreach and improve impact are finding more efficient and innovative means of getting their products and services to their clients. According to Helmore et al, most Africans (well over 50%) live on less than $2 a day. Moreover, all of the 21 countries listed in the United Nations’ low human development ranking are located in sub-Saharan Africa. These statistics calls for a more pragmatic approach to consolidate the lessons learnt through   the usage of microfinance as a tool for eradicating poverty in Sub-Saharan Africa.

Without access to basic financial services like savings, credit, insurance, most Ghanaian will remain at the margins of economic opportunity with little hope of realizing their tremendous creative potential. Microfinance is not a new phenomenon in Ghana.  Some of the informal practices such as money lending, ‘Susu’, Rotating Savings and Credit Associations (ROSCAS) can be traced to ancient communities in the country.

The challenge to evolve innovative strategies that would strengthen such traditional approaches has led to the development and operation of formal institutions like the Rural Banks, Credit Unions, Savings and Loans Companies, some commercial and development banks like the Agricultural Development Bank, Women’s World Banking, Ghana Commercial Bank and Non-Governmental Organisation (NGOs).

The Government of Ghana has also embarked on a sustainable development of the microfinance sub-sector with its Development Partners as a strategy, among others, for reducing poverty.

A review of the microfinance industry indicates that stakeholder in the microfinance industry are contributing to achieving a common goal of reducing poverty. However it is recommended that for a broader and more aggressive means of ensuring an improved impact of the use of microfinance, there is the need for players in the sector to compare and exchange notes on the workable tools as well as the non-effective innovations. This therefore highlights the need for a common platform that will stimulate the   sharing of knowledge and experience amongst individuals, government, donors, institutions and other stakeholders involved in using microfinance as a tool for poverty reduction.

1.1 Objectives  

The objectives of this presentation are:

• To identify the  key lessons   within the rural banking industry in Ghana
• To share the lessons and draw  policy recommendations  

2.0 TYPOLOGY OF MICROFINANCE INSTITUTIONS IN GHANA

The microfinance sector in sub-Saharan can be put to 5 main categories and each  category has its own strengths and weaknesses. These categories are as follows:

• Rural and Community Banks (RCBs):These banks are registered to operate mainly in the rural and semi –urban areas and are fully regulated

• Credit Unions:  CUs are not regulated but have an apex body controlling or partially regulating the activities of all credit Unions in Ghana

• Financial NGOs: FNGOs can be international network affiliates or stand-alone local NGOs. Largely credit-only Institutions.

• Non-banking financial institutions (NBFIs) are “for profit” enterprises that are not registered as commercial banks and are typically characterized by lower capital requirements than those of commercial banks.

It is important to indicate that knowledge and experience sharing is a sure bet to get the MFI industry within the sub Saharan African working to achieve  the needed impact, outreach and sustainability.

2.1 Operators in the Microfinance Sector in Ghana

There are normally 3 groups of operators in any microfinance sector.  These are:

i.          The Target Beneficiaries or Clientele;

ii.         Suppliers of Financial Services; and 

iii.        The facilitators.

2.2 The Target Beneficiaries

This is made up largely of the following:

Ø    The productive poor

Ø    Women in the informal sector

Ø    Unemployed youth

Ø    Subsistence and small scale producers in the agricultural sector.

Ø    Vulnerable groups in certain areas of the country due to inaccessibility.

Ø    Disabled persons.

2.3 Suppliers of Financial Services

Ø    These include both banking and non-banking institutions which operate as formal, semi-formal and informal providers/suppliers of financial services.

Ø    Providers of formal financial services like  the savings and loans companies, rural banks and some commercial banks.

Ø    Providers of semi-formal financial services are NGOs such as Action Aid Ghana, Grameen Ghana, Cedi Finance, Sinapi Aba Trust and the Credit Unions.

Ø    The informal operators are the “susu” collectors, money lenders and rotating savings and credit associations.

2.4 The Facilitators

Ø    The agencies in this category play a facilitating role in the microfinance sector through technical support services, regulations and financing.  They include:

Ø    Government agencies which are involved in policy making and regulation e.g. Ministry of Finance, Ministry of Agriculture, Ministry of Local Government and Rural Department and Bank of Ghana.

Ø    Capacity Building- These include NGO’s such as Freedom from Hunger, Association of Rural Banks, TechnoServe CARE International and the University of Cape Coast(UCC).

Ø    Donor agencies such as World Bank IFAD, CIDA, USAID, UNDP, DANIDA and AfDB.

3. 0 THE IMPORTANCE OF KNOWLEDGE SHARING

The benefits of sharing experience far outweigh the gains expected since an effective knowledge platform will help MFIs in the following ways:

• Foster innovation by encouraging the free flow of ideas
• Help in understanding markets and customers
• Development of product and services
• Development of vision and strategies
• Building competencies, skills and knowledge
• Improve customer service by streamlining response time
• Boost revenues by getting products and services to market faster
• Enhance employee retention rates by recognizing the value of employee’s knowledge and rewarding them for it
• Streamline operations and reduce costs by eliminating redundant or unnecessary processes
  
  

3.1 Knowledge sharing framework

Source(Sethumadhavan,2007)

4.0 ACHIEVEMENTS AND LESSONS WITHIN THE RURAL BANKING INDUSTRY

4.1 The Significance of Rural Banking in Ghana

The significance of rural banking cannot be overemphasised considering the fact that its inception has remained an important step towards bridging the wide rural –urban financial gap which has stifled rural economic development in Ghana. The formalization of rural financial services in Ghana has taken three major forms namely:

• The introduction of  Rural Banking from 1976
• The formation of the Association of Rural Banks in 1981
• The establishment of the Association of Rural Banks Apex Bank in 2002.

The objective of all these activities was to improve access to financial services in the rural areas in an efficient, reliable and sustainable manner which has not been achieved in other earlier approaches.

4.2 History of the Rural Banking Sector

The first rural bank was established in 1976 in Nyakrom, a farming community in the Central Region of Ghana. A second bank was opened in the following year at Biriwa, a fishing community also in the Central Region. By 1980 the number of rural banks had reached 20. Managers and directors of the established rural banks founded the Association of Rural Banks (ARB) in 1981 to promote the exchange of information and also to improve the performance of rural banks as a whole. Over the period 1980–84 the number of rural banks rose rapidly and reached 106.

The ARB Apex Bank Limited (Apex Bank ) was incorporated in 2000 and licensed in 2001 by the Central Bank. The Apex Bank then commenced business on 2^nd July 2002 to provide the rural banks with technical, managerial and financial support services which was formally provided by the Bank of Ghana but was later withdrawn in 1994.

There are at the moment 131 rural and community banks in  the ten regions of Ghana with over 600 agencies located across the country. As at the end of 2008 rural banks accounted for about 5% of the total assets of banks and non bank financial institutions in Ghana and they also account for about half of all banking outlets across Ghana (IFAD 2008).

4.3 Nature of Rural Banks in Ghana

The main characteristics of all rural banks in Ghana are as follows:

•      RCBs are limited liabilities

•      Shareholding structure  is  that individual shareholders can acquire shares up to   30% of the total shares and corporate bodies are mandated to hold up to  50% of the total shares

•      No financial institution is  allowed to hold shares in any rural bank

•      Capital requirement(Stated Capital) needed is GH¢150,000.00 (USD

•      RCBs are required to keep Statutory liquidity as follows:

Ø  8%  primary reserve with Apex Bank (Clearing account) and cash in till

Ø  5% of deposits with the Apex Bank

Ø  30% secondary reserve for  Treasury Bills ( through the Apex Bank)

•      Capital Adequacy Ratio 10% ≥10( Adjusted capital / Adjusted Assets x100)

4.4 Microfinance Activities of the Rural Banks

Microfinance activities in the Rural Banks may be categorised as follows

i.                    Own microfinance programmes.

ii.                  In partnership with NGOs/Donor Institutions/Government Agencies programmes.

iii.                Linkage banking programmes.

4.5 Rural Banks’ Own Microfinance Programmes

The approach under this programme can be classified as follows:

i.                    Banking-on-wheels programme;

ii.                  Women-in-development programme;

iii.                ‘Susu’ Micro Savings and Credit programme.

4.6 Banking-on-Wheels Programme

Some of the banks have developed this product to deepen outreach.  Peripatetic teams on a vehicle move from village to village within the catchment area to deliver banking services - savings and credit delivery.  They go to these communities mainly on market days or traditional holidays – i.e. on taboo days when they do not go to the farms or go on fishing.

4.7 Women-in-Development Programme

The scheme, which is in operation in some of the rural banks, offers 3 services to women in the rural areas:-

a.             Community-based financial services providing saving and credit opportunities.

b.            Non-formal education that offers guidelines in family survival skills.

c.             A forum for peer group support.

4.8 ‘Susu’ Programme

This is one of the delivery channels which have proved very popular with the clients.  The banks either engage their own staff or agents to go to the markets, shops, churches and homes of clients to collect their savings.  The size of the savings is from GH¢1 (about USD 0.71) to any amount the client is willing to save.

4.9 Rural Banks in Partnership With NGOs/Donor Institutions And Government Agencies

The following partnership programmes are currently being undertaken by the rural banks:

·         Community Based Rural Development Project

·         Rural Enterprise Development Project

·         Root and Tuber Improvement and Marketing Programmes

·         Social Investment Fund

·         Urban Poverty Reduction Project

5.0 KEY ACHIEVEMENTS OF THE RURAL BANKING SECTOR IN GHANA

5.1 Deposit Mobilization

The rural banking sector has contributed to the mobilization of excess funds, making it available to other sectors of the economy. Through the RCBs’ deposit mobilization drive; most rural folks have been introduced to formal savings which has contributed to building their financial assets thus enabling the creation of wealth.  By developing simple and appropriate savings products which enable mobilization officers of the rural banks to visit farms, shops, market places, etc, more rural folks are now experiencing banking at their convenience.

 5.2 Access to Credit and Non -Credit Products

Rural banks have contributed to the improvement of banking culture amongst rural clients. These banks have succeeded in demystifying the act of banking and have contributed to increasing the amount of money in circulation through the formal banking systems. Rural banks are supporting the growth and development of rural enterprises  by providing rural entrepreneurs with the needed financial and non financial products. For example some rural banks have instituted ware housing receipt facility that enables these banks to buy certain produce directly from the farmers they finance thus creating reliable and ready markets for the produce of the farmers.

5.3 Investment Opportunity for the Rural Population

The concept of rural banking hinges  on  community ownership which requires that the head office of every rural bank should be located in the rural community. These banks now provide opportunity for the rural people to pool their resources to set up and own banks. By this rural people in Ghana now have the opportunity to create wealth by investing in banks which were hitherto the preserve for people living in the towns and cities. Through the rural banks, rural clients can invest in government papers, Treasury Bills, Fixed Deposits and other products which provide them with higher returns rather than keeping their monies in their homes or with the traditional Susu agents who mostly do not pay any interest on the amount saved.

5.4 Financial Linkages and Strategic Alliance

The Current developments in the rural banking sector indicate that the total number of rural banks (131) and their agencies or branches (600) put together forms the largest banking network in Ghana. These banks are now present in virtually all the district capitals of Ghana. The efficient network of these banks have been made possible by the activities of the Apex Bank which has provided  an operational platform that has enabled the development of institutional linkages with  governments, donors and other  projects that intend  to expand services to the rural communities. The presence of these banks in the remote places of Ghana provides an opportunity for strategic linkages with other providers to make available financial and non-financial services to rural Ghana. The rural banking network now serves  as a convenient platform for money transfer services from overseas or local sources to any place in Ghana. It is worth noting that before the establishment of an efficient rural banking system most rural folks had to travel several hours to receive monies remitted by their relatives or even to receive their salaries.

 5.5 Women Empowerment through Microfinance

The rural banks by their location serve clients who may not necessarily have assets to serve as collateral in order to secure loans. Majority of such category of clients are women especially in the context of the Ghanaian tradition where properties or assets are owned mainly by men. Through the microfinance technologies employed by the rural banks, more women have been assisted financially to enable them to take advantage of economic opportunities to improve on their lives and that of their households. Such beneficiaries are also provided with financial training, business management and general life skills training programmes aimed at ensuring that the women clients are empowered to improve on their day to day activities.

5.6 Community Development

 Rural banks in Ghana have identified the importance of giving back to the communities that had supported their operations since their inception.  Most rural banks, therefore, have contributed positively to the development of their communities by supporting social development projects which include the building and refurbishment of schools, hospitals, community centres, support to brilliant but needy students, etc. by providing financial assistance and other relevant support to ensure that the communities in which they operate benefit  directly from their operations.

6.0 KEY LESSONS FROM THE RURAL BANKING SECTOR IN GHANA AND ITS IMPLICATION ON THE MICROFINANCE SECTOR

6.1 Formation of an Apex Body

The establishment of the Apex Bank for the rural banks has contributed immensely to the overall growth of the rural banking sector in many diverse ways. The Apex body has given the rural banking sector the much needed strength to deliberate and negotiate on issues and policies that are relevant for the advancement of the rural banking sector. The Apex body has aided in improving the business image of the rural banking sector in Ghana and has succeeded in achieving high usage of rural banks cheques for the payment of services and goods within the economy.

The policy implication is that it is important for the sector to consider building effective apex bodies or institutions that will function to ensure that the felt needs of its members are addressed to allow the MFIs to concentrate on their core activities. It should further help provide a united front to negotiate and also lobby other agencies and governments to support the growth of the sector.

6.2 Capacity Building 

The capacity dimension of the rural banks in terms of human, structural and technological resources are important constraint to improving financial access to the rural poor. The Apex Bank in its bid to improve these structures has instituted capacity training activities aimed at improving the quality of the human resource base within the rural banking sector. The Bank’s Professional Development and Training Department organises training and refresher courses for the staff, management and board members of the various rural banks.

 The Apex Bank in addition, with the support of the World Bank and other donors is currently computerising the rural banking system to create a single platform to speed up transactions within the rural banking sector that include but not limited to money transfer services, cash withdrawals, etc.

This lesson implies that the microfinance sector in the region will not be effective if efforts are not put in place to improve on human, structural and technological resources. It is therefore important for the industry to place emphasis on developing the capacity of its staff and also develop the necessary structures to support the growth of the industry. The UCC is doing extremely well in supporting the industry with capacity building programmes.

6.3 Regulation of the industry

The prudential regulation of any financial institutions rests on the need to protect depositors from the loss of their savings and to preserve confidence and strengthen the financial system.  Regulation of the financial sector has often proved ineffective in developing countries due to information and data collection problems, weak accounting standards, lack of professionalism and political interference.

In order to improve on the regulation of the rural banking sector, the Apex Bank has legally been mandated to undertake onsite and offsite supervision of the rural banks to ensure adherence to prudential requirements. In view of this, rural banks are required to send prudential returns on monthly basis to the Bank of Ghana with a copy to the Apex Bank. Regulation of the rural banks has impacted greatly on the performance of the rural banking systems and this is supported by the growth in the key financial indicators recorded over the years.

These lessons, therefore, imply that the regulation of  microfinance activity is crucial to the sound development of the sector to ensure that the objective of reducing poverty across the sub region is achieved. Regulation   from the Apex Bank’s  point of view indicates that the sustainability of the unit rural banks has been improved since regulation requires full disclosure which enables the Bank to identify flash points within each rural bank for the necessary attention or otherwise. An effective regulation of the microfinance sector can improve the ability of the MFIs within the context of the countries to receiving investment funds to support or improve their activities. This is because a clear regulation act seeks to improve the confidence of microfinance investment vehicles (MIV) in regulated markets.  Regulation may also improve MFIs governance and ownership structure.

The regulation of the microfinance sector should be encouraged and the various experiences and successes of the countries that have successfully achieved full regulation of its microfinance sector should be shared to aid other countries that are now implementing microfinance regulation laws.

It is important however to indicate that the focus of regulation should be that the regulation should be sufficient to protect depositors interest but not so prescriptive to hamper poverty alleviation.

 6.4 Performance   rating of rural banks   

The Apex Bank has initiated a performance report based on the returns submitted by the rural banks to the Bank of Ghana and the Apex Bank. This report is analysed by the Efficiency Monitoring Unit (EMU) of the Apex Bank and further developed into a composite performance report on quarterly basis. The EMU report serves as a bench mark that allows each rural bank to compare its performance with other rural banks in the same or different regions and also on a national basis. The report further allows rural banks to compare their deposits, loan portfolio size, capital requirements, reserves, etc to enable them to improve on their weak points or further strengthen their positions. This report is now being used by boards of some rural banks in setting targets for the senior management, serving as a performance management tool. The usage of this information to a large extent has helped in improving the performance of rural banks in their bid to reposition the rural banking sector to complement other developmental partners in the fight against poverty.

The lesson drawn from the experience of the rural banking sector implies that to improve performance, sustainability, outreach and impact of MFIs , there is the need for the establishment of performance review format that will introduce competitive rating for  all MFIs  in order to do  enable  them to enhance the agenda of  poverty reduction in the sub region .

6.5 Annual Manager’s Conference

Information and knowledge sharing has been identified as a key ingredient in improving the frontiers  of financial services and products to the informal sector. In view of that the ARB Apex Bank in 2002 instituted the Annual Rural Bank / Apex Bank Managers’ Conference that brings together managers or senior officers within the rural banking industry to exchange ideas, share experiences, review operational issues, etc. This conference is aimed at equipping participants to improve on the performance of their banks.

The microfinance sectors is evolving and therefore players need to meet to review and follow up on the evolving nature of the industry to ensure an improved and sustained effort to reducing poverty across the sub region.

6.6 Institutional /Government and Donor support

Deepening financial access to the informal sector through microfinance cannot be fully achieved without the support of Governments, developmental agencies and donors. The creation  of an enabling environment which include infrastructure development  are directly the roles that governments need to undertake in order to enable financial actors to efficiently improve outreach to rural or informal clients.

The Apex Bank in performing its role has received tremendous support from Government and other donors in prompting the rural banking industry in Ghana. For instance the passing of the Apex Bank regulation, the setting up  of the Data Centre, capacity training of its staff ,etc have all been achieved through government and donor support .

It is important to indicate that the success of the microfinance sector cannot be achieved without the active involvement of government and donors. However it is also important to eliminate government and donor interferences to ensure effective operations of the MFIs.

6.7 Strategic linkages

To improve outreach and impact, the Apex Bank has developed strategic linkages with institutions and projects to extend financial and non financial services to the rural areas. For example the Apex Bank is collaborating with the World Bank to extend financial assistance to clients of some selected rural communities without access to electricity to purchase solar equipment. Developing these linkages further reduces transaction cost and further enhances outreach to these areas since most of these areas have the presence of rural and community banks.

The microfinance sector should develop strategic linkages to enable other providers to ride on the back of the industry to efficiently impact on the lives of the poor.

7.0 RECOMMENDATION

To improve Microfinance delivery in the Sub – Saharan Africa through Knowledge sharing and policy implications the following recommendation are made:

• Governments must offer their support to the microfinance industry in helping to build infrastructure, human and other needed resources to enhance the activities of the microfinance sector.  
• The regulation of the sector should be taken seriously and it should be done to ensure that it does not stifle the growth and impact of the sector.
• The various actors or individuals involved in the industry should consider training and retraining of their staff to enable them to perform their roles in an efficient and professional manner.

8.0 CONCLUSION

Microfinance delivery in Sub-Saharan Africa has gone through several changes over the past years. Although the sector has performed well, there are still more poor people without access to financial and non financial services within the sub region. The objective of improving access to finance can only be achieved through the strengthening of the microfinance sector which has proven to be a suitable tool for reaching the large unbanked population in the sub region.  To realise the goal of financial inclusion, the microfinance sector should wake up to the task of knowledge sharing across borders to enable the industry to offer a more pragmatic and efficient service to improve the livelihood of the poor. This is one reason why the ARB Apex Bank has started a cross-border collaboration in the African region with the view to introducing rural banking to other countries in the Sub-region.

 by Roderick Ayeh and Richard Addo

REFERENCES

• Business and Financial Times 2010: Global microfinanciers resutructure to adapt to the chaning economic enviroment
• Fiona Dwinger,2010 : Lessons in microfinance ; can the Asian Success   Story be repeated in Sub Saharan Africa?  www.consultancyafrica.com.
• Ghana Rural Finacial Services Project: Project Appraisal Document,2000
• Kristian Helmore, Sybil Chidiac and Lauren Hendricks,2009: Microfinance in Africa: state  of the sector report
• Sethumadhavan,2007) www.indianmba.com/faculty_column/fc653/fc653.html