Commercialization of microfinance funds; a necessity for sustainable microfinance

Introduction

The microfinance industry is one of the fasters growing industry in most developing countries or economies.  The industry was just one the few sectors within most economies that did not experience the ripple effect of the well known credit crunch that squeezed out a lot of huge banks and insurance firms.  When most major banks were experiencing huge losses as a result of bad or delinquent loans most microfinance banks  were still making loans and were recording profits as a results of healthy loans ; thereby providing  their shareholder’s value for their investments.

It is also on record that whiles most traditional banks across the world suffered during the economic down turn, most Microfinance Institutions (MFIs) were insulated from the negative effect of the credit crunch since there was a good spread of the loans made by MFIs which at least reduced the covariant risk that is high with most  traditional banks. For instance there are  evidences to support the fact that whiles two thirds of the banking system collapsed during the financial crisis of 1999 in Ecuador, MFIs and cooperatives  grew at a fast pace and  maintained a high levels of portfolio quality.  

Today the microfinance industry has proven a point that the poor can save and the poor can use credit to better their lives. These and other successful achievements has attracted private entities to consider providing services to the poor and the low income earners. It is not surprising today to see multinational and local traditional banks venturing into microfinance either directly or through creating partnerships with already established MFIs. At least for now the impression that the   poor can not be the source of a bank’s profit has been defeated and most endowed financial institutions or individuals are reviewing their notes about doing business with the poor. This explains why some commercial microfinance banks and finance companies are attracting great interest amongst investors. A clear case is the successful public offerings by Compartamos Bank in Mexico and Equity Bank in Kenya, all microfinance banks.

 One of the striking  features of MFIs is that they are financial entities with double bottom line, that is to say that, every penny of services provided by an MFIs is intended  to impact socially on a client’s livelihood  aside  the MFIs making some  profits to support its operations. This is what is missing in the operations of most traditional banks. This is not to say that the traditional banks do not consider programmes and projects that will socially benefit its clients. Currently almost all the traditional banks have adopted a concept of corporate social responsibility (CSR) as a core part of their operations. However, MFIs over the years have sought to include social responsibility  as an integral component of its operation alongside achieving  financial returns for their investment.  This seems to explain why most socially responsible investors (SRI) have been attracted to MFIs and not  to the traditional banks when it comes to channeling  funds to the poor and the low income earners.

Why commercial funds?

Demand for microcredit is growing across the continent and particularly in Ghana. This development is making most MFIs to consider other sources of funds other than subsidies and deposits in order to enable them to meet the high demands being made by productive clients who are determined to improve on their livelihood by the judicious use of the credit and training they received from the MFIs. 

MFIs depending on their typology; that is whether it is an NGO (with only  social impart ),MFI  with double bottom line and  Cooperatives( Credit Unions as in Ghana and Savings and Credit Cooperatives (SACCOs) as in  Central and Eastern Africa) This type of MFI is mainly  membership based. These MFIs   have depended on several source of income to finance their loan portfolio and other operational cost.

Financial NGOs which are mainly for the purpose of reducing poverty, women empowerment, etc, has  in time past mainly  depended on donor and governmental assistance in the form grants and subsidies  to finance their operations. Most of them operate sorely on grants and their main aim includes helping governments and international donors to achieve their objectives of helping to improve the livelihood of the poor and the low income earners.

MFI’s with double bottom line that is for profit and social impact  have financed their loans from deposits mobilization, (that is for the regulated MFIs) donor assistance in the form of subsidies and borrowing. Credit Unions or Cooperatives mainly depend on saving mobilized from members and loans are strictly given out to members. 

Although most MFIs irrespective of it typology, have benefited from donor assisted funds (grants and subsidies), these source of funds have declined over the past ten years and is expected to decline further with the onset of the world economic crisis.   The reasons for the reduction in donor funds for microfinance apart from the world economic crisis can be attributable to several factors which include donor fatigue, commercialization of most MFIs and the transformation of most financial NGOs into profitable MFIs. Another point  about donor funds is that it comes with restrictions as well as guidelines which may not be suitable for MFIs with double bottom line objectives .  MFIs that sorely depended  on donor funds had  in the long run “burnt their fingers” especially when  donors exit without any prior arrangement to make such  MFIs continue with their operations.

Donor assistance or support cannot be overemphasized in providing financial assistance to the poor. However, there is a new trend as to how donors are providing these assistances.  Most donors involved in enhancing the development  of  MFIs  now approve  funds to support  the capacity building of  MFIs  to make them more effective and efficient  rather than providing funds or subsidized credit   to on lend to its  clients.  With the decrease of grants or funds from donor organizations across Africa, more MFIs are now turning  to commercial borrowings  to support their operations and make them more sustainable.

The need for external or commercial funding for  MFIs  is making more MFIs to become very efficient and very sustainable as compared to the era of grants and subsidies .Subsidies have formed an integral part of microfinance in its early stages of development and its contribution to the development of the whole sector cannot be overemphasized. However in recent times some MFIs have started decreasing the number and amount of subsides they take to ensure operational efficiency and less interference from donors. These  MFIs are reducing their over dependency on donor assistance to ensure their survival in the event of donor fatigue and the world economic crisis. This is the surest way to ensure that MFIs acquire funds to continue with their operations which mainly involves the granting of microcredit.

Importance of commercial funding:

Providers of commercial funding put significant emphasis on assessment, ratings, standardization of financial ratios reviews and comparisons which are geared towards a sustainable and viable sector. This is to say that MFIs wishing to borrower from any microfinance investment fund is at least required to show good governance and transparency in its operations. This statement is further explained by   Clark, as he indicates  that   “MFI willing to access commercial funding should posse the following”:

• Should have perfected their service delivery methods and product design to respond to the demands of their market in a rapid and efficient way, ensuring an increased volume of operation and repeat borrowing
• The MFI should have a strong sense of mission and a sound governing structure that is free from political interference, so that they can make  policy decisions that protect their financial health
• Should have a management team that focuses on efficient service delivery and productivity, on profits rather than volumes, and sets productivity goals and incentive schemes
• Have information systems that produce clear, accurate, timely and relevant information for management decision making and that is focused  in well-developed loan tracking and financial reporting systems, reporting on cost and income
• Maintain a low level of delinquency(that is below 5 percent  to 8 percent outstanding portfolio ) to ensure optimum income and prevent asset erosion.
• Have a record of achieving high levels of financial performance or incorporating appropriate pricing policies based on the full cost of delivering their services.

The list as outlined by Clark seems to be the very challenges pertaining in the microfinance industry. These characteristics  for assessing commercial funds are therefore indirect initiatives aimed at standardizing the reporting format of most MFIs in order to contribute to greater transparency which is currently missing in the industry.

Conclusion

Commercial investment for microfinance is on the rise. Several traditional banks  and individual investors  in Ghana are financing some MFIs to enable them to improve on their outreach.  These investments or source of fund can help MFIs to grow and develop to realize their potential to become full-fledge domestic financial intermediaries to improve financial access to the poor or the low income earners over a long sustainable period of time. According to CGAP(Consultative Group to Assist the Poor) the future  of microfinance lies with sustainable financial institutions that mobilizes public deposits and tap domestic banks and capital markets to finance their expansion and serve the poor or the low income earners over the long term. MFIs in Ghana should, therefore, position themselves by improving on their basic operations system to enable them to take on commercial funds to support their operations in the wake of the decline in donor funding for on-lending activities. 

TAG YOUR LIFE

Do you know how much you are worth? How much would you price yourself  assuming you are  to sell yourself on the world commodity market?

One of the mistakes people make in life is they don’t put any value on their lives and even if they do, they under price themselves below what they are worth. The main reason behind this is that we don’t know ourselves so well to give it any price.
The lack of the knowledge of who we are and what we have is the main reason we give up when we are faced with certain challenges in life. People have lost their great future because of current challenges that has engulfed and blackened their vision for their life.

The truth is that  there is so much value and power that has been invested in all of us. We have ONLY failed to spend time to develop and tap into the power within us. Some ordinary men in time past discovered the values of their lives and gave it a price tag.  This self discovery  attitude changed their destiny for good and  today we all describe these people  as great men  and  women  . The secret is that it took a lot of self valuation and self knowing for such people to hang on to their dreams and vision. As  Nelson Mandela said ” Greatness is not in some of us but greatness is in all of us”. He admitted that the power and intelligence of a man has nothing to do with the colour of the skin. You and I have destroyed the self confidence we have because of life challenges. People have lost confidence because they are darker than their colleagues or shorter than a friend.  Someone has described himself as a failure because of a subject he failed to pass . A lot of people have  allowed  an examiner or teacher or a 2 hour examination  to give them  a definition of themselves.

 The truth is that we are more than our examination results. Whether you got an A or F, this results is just a function of who you are and not the whole of you. You have no excuse not to learn and pass your exams but don’t take it that you are failure because of your inability to pass a paper or even all the papers. Always know that the best in you cannot be put on paper. Just be determined and re-sit the examination again and again making sure you are not repeating the same things you did that brought the failure. There are several examples of people who were “back benchers” in the classroom but have taken the front role in discovery and inventions. Such people did not allow the classroom to define their value. People like Bill Gates have influenced the whole world with his skills and talents in computing and the whole world is going after his invention. If this man had allowed the failures he encountered in the classroom to define his destiny, he would have given up and never be able to contribute to the world's development.

Don’t run away from your fears; confront them. I once listened to an interview granted to one    former Miss Ghana on one  of the radio stations in Ghana who was involved in a plane crush. Today that lady is a pilot. She indicated that from the day of the crush she got so  frightened  anytime she even drove pass the Kotoka International Airport in Ghana not to talk about embarking on  a plane. But do  you know what she did? She confronted her fear and learnt how to fly the object she  dreaded most because of her experience. The truth is that what  frightens you might be your promotional, stage, so find a way to face your fears. Confront it and don’t allow that situation to dictate to you. Refuse to give up , keep trying for there is no great person whoever  failed trying to do the  thing that he did not succeed initially. As long as you are committed to that dream or idea, take steps towards it and you can walk pass the obstacle with the believe that you have what it takes to conquer any obstacle.

Always remember that ordinary people like you and I became   great people because they knew and valued the potentials they had . They decided to use their God given talents to change this world for good. Think of   Bill Gates,  President Obama, Nelson Mandela, Kwame Nkrumah and the likes. These people placed value on the power inside them and today they are our dream mentors. You can also become a mentor to someone  so know yourself and tag it for a price by developing what you have

The Ghanaian susu scheme and key lessons for innovative financing

usu is an informal deposits collection scheme that is common amongst Ghanaians. Literature has it that Susu was introduced to Ghana from Nigeria and was  first practiced in Ghana around  1965 by a Roman Catholic priest in the Northern Region of Ghana.
Susu as an indigenous deposit mobilizing scheme has contributed to instilling the act of thrift amongst many actors in the informal sector. This mode of deposit mobilization has thrived in places where most formal banks dare to go. The individuals involved in the collection of Susu are often referred to as Susu collectors. Although the scheme was formally more identifiable with people living in  the rural areas, today  the Susu scheme is very much popular and  can be found almost everywhere in Ghana even within  the major cities where there are a number of  several traditional banks and other financial institutions.
The Susu collector’s role within the context of financial development in Ghana cannot be overlooked. The Susu concept has existed before the establishment of most of the pro poor financial institutions.  For instance the rural banking concept in Ghana started around 1976,11 years after the first Susu scheme was practiced. Susu collection is as well older than any form of the microfinance institutions we have in present day Ghana. However they have been one of the few pro poor financial schemes that is still going through re-tooling to turn it into a very effective indigenous poverty alleviation tool to help in the fight against poverty.
With the expansion of the money economy, these informal financial institutions (IFIs) have not lost their vigor. Quite to the contrary, they have multiplied, both in numbers and diversity (Barclays 2005). The Susu system seems to have proven to be a dependable and cost effective mechanism of emphasizing state participation and encouragement of the domestic indigenous sector.
The Ghanaian banking sector has seen tremendous growth in terms of the number and type of the financial institutions available to assist towards deepening financial access. By the end of 2011 there were a total of 25 universal banks, 19 Savings and loans companies, 131 rural and community banks and a number of microfinance companies including Credit Unions all across the length and breadth of Ghana. Inspite of this, a recent report by the World Bank indicates that only 30% of Ghanaians have bank accounts. This finding therefore gives the clue that the number of bank branches in Ghana has not translated to increasing outreach, a condition that may be attributed to several reasons including the delivery mechanisms of the traditional banks something that the traditional Susu collectors have as the reason behind their successful  existence over all these years
How susu operates
Susu can be described as one of the most ancient traditional banking systems found in Africa. It has been used over the years as a medium for fund mobilization and ensuring the safety of the deposits of savers within the informal sector. Susu has remained an informal financial instrument use for the daily deposit mobilizations or collections by people known as Susu collectors. The Susu collector operates by visiting clients and potential clients  to collect their savings on daily basis for investment and safe keeping. Most clients in history only used the Susu for building assets through savings and not for the purpose of securing loans. In recent times, however, some susu operators provide loans to their clients in order to ensure client loyalty in the phase of competitions and also to meet the changing needs of the Susu clients.
In order to keep accurate records each customer or client of the Susu collector is given a card for the recording of   the daily savings made by each client. The Susu collector on the other hand also keeps a contra card that has the name and picture of the said client. The collector at all times ensures that both cards contain the same transactions and are used by each party to solve any discrepancy that may arise during the period of the contract.
Most Susu schemes are operated on monthly basis with savings cycle pegged to a month after which a client can withdrawal his or her total savings and take the decision to continue or discontinue with the Susu collector. Clients in most cases agree to take their deposits after the end of a cycle which is mostly one month and also made up of 30 days. In order to make the transaction simple for both parties, client are required to do their daily payment in  equal    amounts.  The operator of the Susu scheme charges a day amount saved out of the total number of days saved as his operating charges. The interesting thing is that the traditional Susu products mostly do not pay any interest on the clients’ savings.
Importance of the Susu Collector
In Ghana, the history of the growth and contribution of the microfinance sector cannot be written without making reference to the role and contribution of Susu. The Susu schemes  are the nucleus of the present day microfinance industry in Ghana.  They provide means by which individuals without formal   financial services can be assured of the safety of their funds. Currently there are 1,462 Susu collectors registered with the Ghana Co-operative Susu Collector Association (GCSCA) and have still indentified over 4,000 Susu collectors who are yet not registered with the Association.
For a lot more people, it is quite difficult to understand what motivates people to hand over their savings to other individuals who do not pay them any interest on their savings but rather take a fee for keeping their monies. This phenomenon is directly the opposite of what happens in the formal financial sector where financial institutions pay interest on depositors’ savings. Many  innovative financial observers  are yet to  understand  why the Susu scheme have rather registered growth to the extent that many of the MFIs today  have adopted  Susu as a deposit  moblising product to reach their clients.  In recent times some insurance companies have also modeled premium payment by their clients within the informal sector around the Susu scheme to reach their clients.   The Barclay’s Bank Ghana and Susu collector’s partnership in 2008 is also an additional recognition for the informal practice that has existed and contributed to deepening the financial frontiers for most low income earners.
What made Susu worked
There should be something that has sustained the scheme even in the era of financial sector growth in addition to the increasing complexity of the informal clients.  Trusting the Susu collector is one of the main ingredients that have sustained the activities of Susu collectors. Susu clients tend to trust the Susu collectors to safely keep their deposits. Although the aspect of trust has been challenged by some recent activities where some collectors sometimes abscond with client’s deposits, it has not entirely affected the number of clients who are using   the services of the Susu providers.
The nature of the economic activities of most of the Susu clients is such that they are the only key person managing their enterprises. In view of that, they mostly do not have the leisure of making time to go to the bank to transact any financial business. Most informal clients have a need for convenient banking and the Susu collectors have the their product tailored to solve the needs of these clients. Client of Susu schemes have the laxity of having to undertake the withdrawal of their savings from their work location by the Susu collector sending their amounts to the clients during the collector’s daily rounds.  The truth is that this kind of service in the formal financial sector is something most traditional banks will only do for their prestige customers.
For the informal clients, the understanding and acceptance they receive from the Susu collector is what keeps them glued to the Susu scheme. The clients remain loyal because they feel accepted by the Susu provider.  The Susu collector in most cases lives in the same communities with their clients and, therefore, tends to understand the value systems of their clients and this include the cultural mannerisms of the clients. The appearance, workout fit and the medium of expression of the Susu collector also makes it comfortable for the clients in dealing with the Susu collector. Literature reviews have proven that the way and manner bank officers dress and even decorate their plush offices somehow can scare most informal clients to cultivating relationship with the traditional banks.
Microfinance clients or informal clients have low or no literacy skills making it difficult to understand or read or fill the account opening or loan forms provided by most traditional banks. The transaction between the Susu collector and his clients are so simple that even without referring to their deposits cards most customers can establish their savings balance with the Susu collector because of the fact that savings are done in equal amount and on daily basis. Additionally, the transaction between them is mostly without much paper works. In most cases the only binding document is the card or savings booklets held by each party to serve as source  of verification in the event of any doubt.
Successful Susu collectors have been seen to demonstrate friendliness towards their clients and even potential clients. The Susu scheme has demonstrated very excellent client relationship and has generated into client loyalty the reason why the Susu schemes have remained stronger even in the era of financial sector boost in Ghana.
Conclusion
With the formalization of microfinance sector in Ghana , the principle that have preserved an indigenous act of “savings’(SUSU) can be modeled  by microfinance institutions seeking to improve outreach ,impact and sustainability of their operations. The Susu scheme has the client at the center of their operations and their operations are highly determined by the needs and demands of the Susu clients. If financial services meant for the low income are to effectively reached them for the purpose of improving their livelihoods, there will be the need for such financial institutions (whether downscaling bank or a microfinance institution) to create mechanisms to suit the lifestyles of the core clients rather than the institutions trying to get their clients to adopt to their systems. This is what the Susu scheme in Ghana have done so well.