REAPING THE BEST OUT OF MICROFINANCE

One of the positive impacts that microfinance tends to bring on the developmental table is its ability to be sustainable compared with other tasted approaches. The positive results of microfinance applications over the years has therefore caught  the attention of governments, donors, investors, entrepreneurs, etc to get involve directly or indirectly in microfinance to help in the fight against poverty.

Today, in Ghana there is a sharp increase in the number of institutions with the mission and objective of providing financial services to the poor in order to support the reduction of poverty through the provision of credit and other related services. The growth in the number of Microfinance Institutions (MFIs) in itself is good for the sector but it is not the only most important thing that can happen to the microfinance sector. For instance, if the increase in the number of MFIs in Ghana does not translate into achieving outreach, impact and sustainability (either for the MFIs or the clients) then the country and its poor population cannot benefit from the positive contribution of these MFIs.

This article therefore seeks to address some of the important consideration that actors in the sector needs to consider as the microfinance sector in Ghana moves  from a non-regulated sector to become a regulated one.

Outreach

It is not just automatic that an increase in the number of microfinance institutions (MFIs) will directly lead to reaching more of the targeted clients. These clients are not only located in the big cities, thus Accra, Kumasi, etc but they can be found in every part of the country mostly in the rural areas.  The trend in the establishment of MFIs in Ghana shows that there are more MFIs being established in major cities than in the rural areas. This trend is not entirely erroneous because there are still several productive poor people leaving in the urban (urban poor) centers. These urban poor clients have high economic opportunities yet they are still outside the main financial system. It therefore expected that the MFIs within the major cities  can be able to provide services to these clients in order to also fight urban poverty which is a challenge for most developing countries.

The main challenge accompanying an increase in the number of MFIs in the cities and regional capitals is that it can lead to unequal distribution of financial services to majority of the poor dotted in the rural areas. The outcome therefore is that rural poverty is left unsolved.

Achieving outreach involves reaching the majority of the people who need the services or who are the target  of the microfinance intervention. Outreach can be measured based on the  growth in client numbers recorded by MFIs. The average loan size granted by MFIs can also be used to determine the depth of outreach. This can be deduced by comparing the average loans granted to the Gross National The smaller the average loan size to the Gross National Income (GNI) the deeper the depth of outreach. The depth of outreach can give a clue to indicate whether the poorer clients in the country are being reached.

Currently loan amount advanced by majority of the MFIs in Ghana is  making it difficult to conclude whether these institutions are necessary MFIs or are undertaking microfinance program. More and more MFIs are advancing loans in larger amount to clients who have stable sources of income by  using their salaries as collaterals. Another diversion from the norm is that most of the characteristics of the supposed microfinance clients of most MFIs necessary do not fall into any of the characteristics of microfinance clients which includes client without tangible collateral, high illiteracy levels, unguaranteed source of income, etc. From this development, the definition of micro loan in Ghana is varied with the various institutions having their own set of definition.

One important thing that the microfinance sector in Ghana should seek to do is to agree on what amount in Ghana can be acceptable as microfinance and who qualifies to be a micro client based on agreed and acceptable characteristics. In the absence of these, more MFIs will start operating as traditional banks rather than adhering to the mission for which they were started. In short, MFIs will exist and operate in the “shadows” of the traditional banks and this will not help address the issues of poverty reduction through financial inclusion.

Impact

The importance of the existence of the MFIs is to contribute immensely to poverty reduction by building the capacity of the clients through enhancing access to financial and non-financial services. The improvement in the lives of the poor microfinance clients was one of the main strengths that trumpeted the achievement of microfinance. It is also the impact and the contribution of this economic development concept that contributed to Prof Muhammed Yunus and Grameen Bank jointly wining the noble price award in 2006 for their efforts to create economic and social development from below.

If one development concept has caught the attention of institutions, like the World Bank and the United Nations, then microfinance would come to mind. The United Nation in 2005 declared that year as; international year of microcredit. That at least, demonstrates the importance of microfinance in international developments.

Today the over 3billion poor people who have been cut off from the formal financial sector are gradually being included into the financial sector through what has come to be known by microfinance players as financial inclusion for all. Research has it that majority of the microfinance clients have seen some improvement in their livelihoods after accessing financial services and this  have translated into other areas of their lives which includes improvement in their nutritional intake, increased school attendance of client children, women contribution to household activities, improved health, improved  family lifestyle, etc.

The importance of microfinance is not only to disburse loans but to ensure that the access to loans translate into building the social and economic lives of the clients. This can only be achieved by a calculated attempt by MFIs in ensuring that they  take steps to ensure that their actions of loan granting does not lead to loan over indebtedness. Loan over indebtedness can only be prevented if the MFIs have a good approach to assessing the cashflow needs of their clients by developing formal or informal approach to capture and study the income and expenditure pattern of the clients to ascertain their repayment abilities. The difficult aspect of cashflow analysis for microfinance clients is that, the information is not documented on paper but rather documented in the minds of the clients. It is therefore important for microfinance actors to develop this documentation by asking appropriate questions.

The main problem with over indebtedness is that it entangles the clients in poverty because the results are that over indebtedness mostly leads to the loss of the economic assets for the clients. This therefore emphasise the fact that any microfinance programme concerned with achieving impact should be concerned about the actions of the institutions or the clients that can lead to over indebtedness. These actions include multiple borrowing by the clients, using inappropriate collection practices by MFIs, developing transparency in loan pricing (no hidden charges), educating clients on the cost associated to borrowing, the implication of accessing loans, etc. A more effective  collaboration amongst  all the microfinance actors to developed systems that can enable them exchange information or data on their clients to avoid the incidence of multiple borrowing which can also damage the quality of loan portfolio for the MFIs should be pursued.

In achieving impact, all microfinance methodologies should be able to ensure that clients that walk in with financial or non –financial needs thus lacking without economic confidence should literally walk out with their shoulders high after months of  accessing and utilizing  microfinance assistance. It should be the objective of all MFIs not to worsen the plight of the poor clients by throwing loans at them. Rather they should develop appropriate products that will address the need of the clients. In view of this it is important for the sector to consider recruiting trainable staff who can be assets to the MFIs as well as to the clients. The sector should also relook at the development where traditional banking officers are directly recruited as microfinance officers without prior technical orientation to customize their banking skills to that of microfinance .As indicated earlier, microfinance is not only about who can deliver loans but one who can understand the peculiar nature of the clients they are serving. This is not to say that we cannot employ main stream banking staff to manage microfinance programs. It can be done but it is important to subject such officers to the concept of microfinance through constant training in order to achieve a considerable impact inspite of the various challenges associated with microfinance administration.

Sustainability

One of the difficult aspects of microfinance is how to strike a balance between profit and social impact. For a lot more people, microfinance is a non-profit activity that only seeks to address the incidence of poverty. Even though there are non-profit microfinance institutions around their numbers cannot be compared with microfinance institutions that are profit oriented. Today the reality is that, we have more entrepreneurs with one major objective of making profit in order to be in business. The most important thing to know is that whether a MFI is a profit or non –profit they have a common objective of being sustainable.

All MFIs are faced with two kinds of sustainability challenge which are operational and financial sustainability. The achievements of these objectives are the key importance of the microfinance industry to sustain outreach and impact. Without sustainability, outreach and impact cannot be achieved and sustained. It is therefore important to build systems within the microfinance institutions that will support the sustainability of the MFIs. These includes increasing efficiency of the staff, charging appropriate interest rates of loans, adopting prudential operational tactics, etc

Currently Ghana is  experiencing  an increase in the establishment of MFIs across the length and breadth of the country. The big question that  microfinance and development actors need to ask  is ; how many of these MFIs will  still be around  in a year , two or five years from now to continue to support the call for poverty reduction and also serve as avenue for employments?

The need for sustainability can only be met if steps are taking to reduce the high cost associated to managing microfinance programmes by developing efficient tools and systems to support operations. Going forward MFIs need to become concern about their staff to client ratio ,loan officers to loan portfolio, group size per loan officer, income per loan officer, etc. It is the achievement of efficiency that will help reduce the cost or expense of operations and further lead to profit growth.

The sustainability of the entire industry is very important and therefore must be given the necessary attention. In Ghana Snapi Aba Trust and Upper Manya Kro Rural Banks are just some of the few categories of MFIs whose operations can be understudied to model their efficient practices to address the challenges of financial and operational sustainability of grassroot microfinance.

Conclusion

Using Microfinance principles to address the incidence of poverty without knowing the underlying principles is like having the right tool for a job without knowing how to efficiently us that tool. The results will not be the same as having the knowledge of the tool you are using. If the tool is used very well, its leads to efficiency in executing the said job and the impact are mostly quickly achieved without much effort. Let all microfinance actors drop what they know about banking and finance and wear the heart and hat of the men and women who have devoted their time, energy and knowledge in promoting the principles of microfinance for the betterment of the livelihoods of the poor and the low income earners.

By

Roderick Okoampah Ayeh

Microfinance Technical Officer

roayeh@gmail.com

ARB Apex Bank