Meeting a microfinance group in Sefwi Bekwai in the Western Region of Ghana

The Ghanaian microfinance industry is still in its early stages under the regulatory regime.  About 161 MFIs under the 2nd and 3rd tiers have been granted their provisional licences by the Bank of Ghana.

One clear thing with the regulation is that MFIs will not have the freedom of doing what only looks good for the owners; they will have to operate so that their activities conform to certain standards as set by the regulations.

 Microfinance Institutions (MFIs) are expected to provide solutions to the wide financial gap that exists between the informal and formal sector of most developing economies. MFIs exist to facilitate access to financial and non-financial services for the poor and low-income earners. Providing the needed financial support to poor clients will enable them with the financial resources to assist them to take advantage of economic opportunities.

 The classic example that is widely known is the contribution of the Grameen Bank in providing credit to poor women in Bangladesh, who did not have the needed requirements to access loans from the traditional banks. In Ghana as well, there are interesting positive stories wherein some women clients of MFIs have through the effective usage of micro-loans been able to financially assist their husbands to pursue a university education.

This and many other successful stories documented in microfinance literature have convinced many more countries and donors to support the use of microfinance when it comes to improving livelihoods for the world’s poor.

Microfinance in Ghana has registered some significant achievements which include the formation of microfinance networks; introduction of governmental regulation; the formation of the various Apexes bodies to assist in self-regulation; and growth in terms of the number of MFIs operating in Ghana.

Although the sector has seen these significant achievements, there are other known challenges that should be noted and examined. The critical examination of this sector will help stakeholders design and adopt the necessary solutions to ensure that the microfinance industry is able to become a positive development tool and not just another avenue for investors to multiply their investments.

In this paper, I will attempt to bring to light some developments within the Ghanaian microfinance sector which over time, if not checked, can reduce the impact that microfinance can have.  I wish to say that these issues are purely from observations made as a result of my dealing with MFIs. 

These are developments within the industry that should be given the needed attention by all stakeholders directly or indirectly involved in the business of microfinance. In doing so, appropriates steps or solutions can be developed to safeguard the industry from becoming one of the many developmental tools that never achieved the intended objective.

Microfinance started with a social mission. Donors and governments during the early stages of the microfinance revolution made available grants to MFIs to enable them to reach out to poor clients. These institutions at that time operated without having to think about making a profit.

They could therefore go any length to assist their clients, irrespective of the cost associated with serving these particular clients. With the availability of grants, MFIs were able to concentrate mainly on recording positive improvement in the lives of their clients by taking time to provide them with the needed capacity building programmes, which was an avenue of expenditure and not  income-making.

Today, the objective for most MFIs in Ghana is shifting more toward profit-making. The issue of social impact is becoming secondary to most MFIs. The fact on the ground is that the owners of the MFIs cannot be blamed entirely for this kind of development. There are several connected reasons and occurrences that are influencing the shift from a wholly social entity to a more capitalist one. Some of the known happenings include the total decline in availability of grants as a result of ‘donor fatigue’.

The absence of ‘free’ funding has naturally pushed the microfinance operators from the wholly social venture to become a more commercially oriented.

Most MFIs in Ghana are largely financed or capitalised by entrepreneurs or other private investors that expect high returns on their investments. The high expectation of profits by these investors must be met by the management of MFIs to guarantee their employment. In situations like this, such management cannot, therefore, afford to keep focus on social returns which are not a point of consideration in assessing their performance.

 Another point for consideration is that MFIs in Ghana are not assessed on their social performance but entirely on their financial performance. Regulation, therefore, does not pay any particular attention to the social aspect of microfinance.

MFIs are required to only show that they are financially sound (which is obvious) to keep operating. The absence of social regulatory requirements can also indirectly contribute to high regard for the purely capitalised mentality of MFIs.  The regulators of the microfinance industry can help the microfinance sector to include the element of social mission in its operation.

This can be done if  MFIs are mandated to report on their social contributions as a way to ensure that microfinance contributes to building the social capacity of their clients -- and not only providing them with loans when they don’t have the ability to effectively manage such loans granted to their clients.

 The growing sense of profitability in the microfinance sector in Ghana can lead to negative impacts on the clients they serve, and this can undermine the national objective of poverty reduction. For instance, the high regard for profitability can lead to high cost (interest rate) of micro-loans, which can trigger loan defaults.

It can further give rise to crude recovery methods, which can affect the economic and social progress made by some of the microfinance clients. It may however be argued that high interest rates under the circumstance in which MFIs in Ghana operate are needed to enable them to cover the cost of operations and be sustainable as well.

 In many of my interactions with staff of MFIs, the issue of staff salary not being enough has always come up. Most owners of MFIs in response to these demands are taking steps to improve the pay structure of their officers in order to help attract and maintain quality staff.

The inability of most MFIs to pay a good salary has contributed to the high staff turnovers registered in the microfinance sector. In trying to find a common balance between salary and sustainability, most MFIs are paying salary amounts that are directly passed on to the clients of the MFIs.

  I must admit that the high cost associated with microfinance loans may not necessarily be because of staff salaries; it can also be that costing of loans is not effectively done, and most MFI may be passing their inefficiencies on to their clients.

It is important for MFIs to note that they are not banks, and therefore cannot pay the salary rates that banks are paying their staff. The operations of the traditional banks are large and they have high volumes of transactions that can take care of the amounts they pay as salaries. MFIs are limited in several ways and must therefore consider very pragmatic salary structures, with the background that MFI businesses have high operational costs due to the nature of their operations.

MFIs in Ghana largely depend on depositors’ funds for their operations. In order to help improve the liquidity of the MFIs, most of them contract loans from traditional banks to complement deposits and other investment funds. One of the challenges for Ghanaian industry is the absence of a specialised fund or investment vehicle that can provide competitive funds for the microfinance companies.

Although commercial loans from the traditional banks are helping, the loans for MFIs are priced at the same rate compared with other loan products, without giving consideration to the fact that the MFIs are serving as conduits to on-lend the loans they contract to other clients.

 In order for the MFIs to also be able to pay for the loans they contract from the commercial banks and make some profit, they have to as well increase the cost of their loans.  This is another condition that can negatively affect the overall impact of microfinance. What is lacking in the industry is the presence of microfinance specialised funds that are designed to provide funding to support microfinance activities.

As a matter of fact, there are some microfinance funds available in Ghana. However, most of the MFIs cannot meet the fund requirement because of what I called the “Washington criteria”; thus developing requirements without consideration of a specific market environment. For instance, some microfinance investment funds will only deal with only MFIs that have above 500,000 clients (this may be the extreme).

  In the absence of microfinance funding sources in Ghana, the alternative for most MFIs is to privately take investments from individuals at very high rates to support their operation -- a situation that cannot support growth of the microfinance sector.

The office structure and image of microfinance companies in Ghana is changing. The majority of microfinance companies have offices that are very comparable to offices of some of the traditional banks. The way MFIs offices look today has been largely influenced by the activities and presence of the traditional banks.

Many clients of MFIs consider all MFIs as banks, and therefore also expect MFIs to operate from offices that look like those of traditional banks. In fact, some clients also associate trust in an MFI’s ability to keep their funds by the nature of their office set-up. To these clients, if the office set-up only has few things, that branch of the MFI can easily be closed down and staff can abscond with their savings.

This somehow explains why most MFIs in Ghana are now investing heavily in improving their image through their expensive office set-ups.

 Having a good and impressive office is very important, but it is also important to note that they add cost and can indirectly increase the cost of doing microfinance business. The silent urge by MFIs to also make their premises attractive and comfortable is a source of cost that must be compensated for. In Bangladesh, for example, it is reported that Grameen Bank employs make-shift office structures to provide the services for their clients in rural areas.  Owners of MFIs must seek a blend in the cost of branding and the price of their product if they wish to continue serving the economically poor clients.

 MFIs in Ghana are largely located in the urban areas. They have positioned themselves to serve relatively poor clients and the low-income earners within urban areas. By virtue of their location, most MFI have loan sizes even above GH¢5,000.00. Most of them have customers who are involved in various activities that may require amounts beyond the size of micro-loans. The size of loans that some MFIs make to individual clients can make one wonder whether these MFIs are really serving low-income clients.

The truth is that the majority of these MFIs are not targetting the poor but rather clients with some appreciable level of income.  Most of the clients they are now targetting can have access to loans or they are already into multiple-banking.

 The average loans of MFIs can give a clue as to whether the clients in question are actually low-income or poor. Another interesting development is that most of the microfinance companies in the urban areas also require their clients to produce collateral before the loans are advanced. There are, somehow, contradictions of what microfinance is and what the majority of microfinance companies are undertaking.

Classic microfinance targets clients who may not have the needed collateral to enable them easily qualify for loans with any of the traditional banks. Today, most MFIs are rather competing with the traditional banks for their salaried workers so that they can provide salary loans to this category of clients instead of targetting the productive poor and low-income entrepreneurs.

The MFIs are granting loans in amounts that cannot qualify as microfinance, and the granting of these oversized micro-loans is becoming a normal thing with most microfinance companies (regulation will check this though). The logic that high loan amounts will give you a higher profit rate compared to the micro-loans is taking over the concept of microfinance.  The fact is that giving micro-loans demands a lot of work, and profitability is dependent on volumes.

 I am not tying to say that granting large loans is out of place for MFIs; it is a recipe for disaster if the MFIs in question do not have the human or technical resources to appraise and manage large loans. However, the granting of large loans by MFIs is a contributing factor to the high loan default rate being recorded by some MFIs. Large loan amounts can also have a negative effect on the client’s social performance if the quantum is beyond their borrowing ability.

These and other issues cropping up in the microfinance sector can have a negative or positive effect on the contribution of microfinance to national development. It is important, therefore, for the country to develop a detailed system that will help monitor the activities of all the players within the industry, to ensure that the right things are being done in the name of microfinance.

MICROFINANCE AND THE MATTERS ARISING

recently participated in a microfinance conference organized by the University of Cape coast in Ghana. The theme for the conference was: Microfinance and poverty reduction: taking stock of achievement and Challenges towards 2015.

Making reference to the theme, it is clear that the objective of the conference was to look at the contribution of microfinance towards the improvement of the livelihoods of the poor and the low income earners. It was further aimed at developing key landmarks to make the contribution of microfinance in Ghana more pronounced towards poverty reduction.

One interesting comments that I overheard a participant passed was “has microfinance in Ghana been able to achieve anything that we can talk about?”Literally what he meant was, has the microfinance industry contributed anything towards the social and economic development of the poor? The truth is that, this man is not alone. Although microfinance activities have received international recognition over the past 10 years, there are still some people with some critical questions on their minds with regards to the contribution of microfinance towards poverty reduction. There are people who are strongly of the opinion that microfinance programmes are not the solution to poverty reduction. They hold the notion that, these programmes rather make the target clients more poorer.  To them, microfinance institutions’ are fleecing the poor clients to enrich the owners.  There are even people who have postulated that   microfinance businesses are benefiting the owners more than empowering   the poor. Regarding microfinance regulation, there are people with the view that microfinance regulation can negatively affect innovation within the microfinance sector. This are but some of the few questions on the mind of people regarding microfinance

In this article, I intend to provide some answers to some of the various questions regarding the activities of the microfinance sector in Ghana and also draw readers attention to some of the recent happening within the sector .

Is there anything to take stock of in the Microfinance Industry?

There is no doubt about the in roads that microfinance progammes has made as regards to its contribution to improving financial access to the poor and the low income earners in Ghana. The fact is that, even in the era of the high number of microfinance institutions (MFIs) around, there is still a large number of unbanked and under banked population in Ghana. There are many more micro entrepreneurs and individuals who do not have any financial dealings with even a traditional susu collector. Try this on your own and ask the traders who come to your vehicle to sell to you on your way up to any part of this country. The little observation I made in these areas was revealing and it confirms that there is the need to strengthen the microfinance institutions to make them more accessible to the rural and urban poor.

The unbanked population in Ghana is a reminder to everybody involved in developments circles to support efforts to improve financial access. MFIs like any financial institution afford the poor clients the opportunity to build and acquire assets through either savings or taking up credits. The absence of these institutions, therefore, does not enable the trader selling by the road side, or in the market to have access to loans or savings services to either improve on her business as well as serve as a means to protect their little earnings.

In talking about the contribution of microfinance  to poverty reduction , it is important to note  that access to financial services as well as the capacity of the clients benefiting from the services are the two key points to consider.

One of the first points in accessing the impact of microfinance is the ability of the sector to improve financial and non – financial products to the high number of the under-banked and the non-banked in the informal sector. The fact is that, without the existence of MFIs, most productive poor people would have no sustainable access to financial services. Access to financial service is important towards poverty reduction but it is not the only important thing. That is why most classical microfinance methodologies include the factor of education or capacity building for their clients.  A least all microfinance clients are exposed to some form of training to ensure that they are resourced to deal with some of their social or economic problems.

Poverty reduction must be vigorously pursued by all developmental programmes and microfinance programmes should not only be seen as the only tool for reducing poverty. This is because; poverty reduction is a product of various inter-connected activities with all the various activities having a direct effect on the other. For instance, if microfinance is able to improve the income levels of clients but these clients do have access to affordable health care, it is very likely that all the gains made through access to loans will be eroded after making visits to the hospital. In the same vain, without access to school facilities, microfinance clients cannot send their children to school and this is  not because they cannot pay the accompanying fees but because of lack of social facility. It is important, therefore, for development agents to seriously pay attention to all projects aimed at poverty reduction to fully ensure the benefit of microfinance programs. Microfinance contributes to poverty reduction and further has the ability to sustain the gains made by donors and governments.

Apart from client impact, the sector as a whole, has seen some  significant developments. The microfinance sector has seen the formation and strengthening of the various Apex Bodies to provide self regulation for the sector before the formal regulation regime.  The yearly organization of the financial literacy week which is aimed at providing information on financial management in Ghana is also an important stride made.  The National Insurance Commission in order to promote and strengthen microinsurance in Ghana has launched guidelines to regulate the microinsurance in Ghana.

In spite of the key issues raised regarding the achievement of microfinance in Ghana, there are are more gaps to fill   in consolidating the achievement of microfinance sector. For instance, the data management within the sector must improve. Staff capacity and skills should be developed.  There is also the need to design and roll out diversified microfinance   products that can meet the needs of the poor clients. Additionally, there is the need for an extensive research into the activities of microfinance companies to scientifically measure their contribution to poverty reduction in Ghana.

Can Microfinance regulation slow down innovation ?

Regulation is one of the best things that can ever happen to the Ghanaian microfinance sector. This is because, it has come to streamline the aggression with which people were setting up and expanding microfinance companies without regards to prudential banking requirement .Most owners of microfinance before the regulation had multiplied their branch networks without first considering the level of risk exposure and financial demands expansion come with. This is one of the many reasons that led to the collapse of many of the microfinance companies.

Microfinance regulation has a dual effect on the sector. It directly helps the MFIs to operate more sustainably by ensuring that MFI meet certain statutory obligation which in most cases are directed at ensuring that they remain liquid to continue their operations. The other effect of regulation is that, it provides protection for depositors and other corporate or individual investors. Regulation further helps improve confidence in the microfinance sector. In this sense,it improves business  confidence.  The challenge, however, is that microfinance regulation can have some negative effect on the sector if it is done without the needed caution.

Regulation is important but regulating what you don’t understand is what can stifle innovation and growth. Microfinance is a business of numbers because of the small size of loans and deposits. The business of microfinance thrives on strategies that can  enable MFIs to reach clients without having to necessary increase their cost of operation. This is one of the driving forces in the industry that has birthed   some effective innovative measures. Some of the innovative strategies for increasing outreach include the setting up makeshift structures (kiosk) in market center or lorry parks and the use of mobile technology to improve  savings and other banking transactions. The act of regulating microfinance activities must, therefore, critically look at these innovations and develop working strategies to assist the sector to innovate for the good of the MFIs and the clients.

Restrictive regulation can  stifle innovation and productivity. Microfinance is a unique financial service which should inform the requirement needed by the MFIs to meet regulatory requirements. The traditional supervision and reporting requirements for the formal banks would not yield the same benefits when imposed on MFIs. Thus the need for a special regulatory window that takes into account the peculiarity in microfinance. One key point to note with microfinance regulation is that, it should be country specific and in addition regulation should follow the sector rather than trying to lead the development of the sector.

Is microfinance really helping the poor or the entrepreneurs ?

To a lot more people, the microfinance companies or owners are taking advantage of the situation of the poor to enrich themselves. This is largely inferred from the interest rate most MFIs charges on their loans. Most people wonder why the poor person rather should be made to pay high interest rate when they contract loans. This reservation is not only a thing limited to Ghana but it’s a global issue.

There is no straight answer to the question. It is important to note that MFIs financed their operations through the returns they make on the  loans  they grant. They provide access to loans, build their staff capacity and invest in infrastructure all at cost in order to effectively serve their clients. These costs and other ones must be financed to enable these institutions to be able to expand and sustain their activities towards the poor. The cost of delivery micro loans are expensive therefore the reason why most micro loans are expensive. This, however, does not rule out the fact that some MFIs in Ghana have over priced their services without any scientific basis.

The MFI and their  relationship is a  mutual one where the MFIs provides capacity for the poor to enable them to take advantage of economic  opportunities and the poor also through their activities provide income sources to enable the MFIs to cover cost and record dividends on their investments. The operations of MFIs benefit the poor clients and the poor clients also provide sustainability means for the MFIs. If the MFIs fail to be sustainable, the poor clients may be cut off from such opportunities. From this, it is not entirely true that MFIs stand to benefits more in their dealing with poor clients.

What are the key issues coming up with Microfinance in Ghana?

Microfinance is an evolving field. Microfinance clients in time past where referred to as beneficiaries. Today they are known as customers or clients. The sector which was more of supply driven has become a demand driven business that must be able to make enough returns in order to be sustainable.

In Ghana, the owners of majority of the microfinance companies are entrepreneurs with the motive to judiciously have a good return on their investments. Social impact is, therefore, a by- product and not the main driving force behind the microfinance business.  Most owners think about profit before they think about social impact. This has, therefore, affected most of the traditional role that microfinance has stood for. For example the term micro loan in Ghana is very relative and not standard. Most players within the microfinance although operating as microfinance companies  can write huge amount  loans that will be difficult to believe if  that loan was made to a poor or low income earner. Which poor person can manage a loan amount of GHC 10,000.00 as a first time borrower and for what business activity?

Are the poor being targeted effectively?

Microfinance products and programmes are meant to target the poor and the low income earners. The question is that;who are the poor and are the MFIs in Ghana targeting the right clients? This question arises from the critical study of the profile of the clients of that MFIs are targeting. Ghana has one of the unique profiles of microfinance clients.

The microfinance sector in Ghana does not seem to have a clear characteristic of who their clientele are.  The classical  microfinance clients are known to be people with low literacy levels, they have no assets to use as collateral ,they save and borrow in small amounts, they mostly work throughout the week, their source of income are not guarantee, etc. However the  profile of microfinance clients in Ghana include, salaried workers whose salaries are guaranteed, clients  who can pledge some form of collateral before they can take a loans, clients with high literacy levels, client who have banking history, etc.

The point worth considering is that, majority of the poor in Ghana are found in the rural areas. However majority of the MFIs in Ghana are located in the cities. This is not to say that poverty cannot be found in the urban areas. The logic here is that considering the location of the MFIs (Rural Bank excluded) more productive poor people may still be cut off from financial services because financial services providers are limited to the cities. The microfinance sector must redefine what their target clients and develop the necessary products in other to ensure that they target the right caliber of clients in order to support the poverty reduction agenda.

Conclusion

The microfinance sector is still in its infant stage of development in Ghana. This notwithstanding the fact that it has achieved many important landmarks and has made very pronounced statement regarding it ability to contribute to achieving sustainable poverty reduction. To make the contribution of microfinance more effective, the Ghanaian sector must seek to define who their clients are, what efficient tools can help them achieve efficient outreach,  adopt appropriate interest rate calculating method, build the capacity of the owners and board members  together with the staff to  level up the understanding and objective of microfinance. It is important for all to acknowledge the fact that microfinance is not just another financial services but a business with a mandate to improve the livelihoods of it clients.