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.