Regulation and Capital Requirement for Microfinance in Ghana

Introduction

Microfinance regulation in sub- Saharan Africa gained momentum from 2001 to 2009 with about 31 countries passing new or revising microfinance regulations whiles 24 countries adopted national microfinance strategies. The regulation of the sector in Ghana however became effective in 2011. Regulations potentially open a door to variety of funding opportunities for the MFIs. It serves to protect the users of microfinance institutions and creates confidence for the activities of microfinance companies.

In Ghana the minimum capital requirement for establishing microfinance for tiers 1 to 3 have been reviewed upwards. New rural banks as well as savings and loans companies which falls under tier 1 are now mandated to show evidence of  a minimum amount of GH¢ 300,000.00 and GH¢16 million respectively. Deposits and non deposit taking microfinance institutions would need to have a minimum capital amount of GH¢500,000.00 and GH¢300,000.00 respectively. Already existing microfinance companies as per the directives have up to 2016 to meet the new capital requirement.

The microfinance regulatory regime was officially made effective in July 2011. After a period of almost two years the capital requirement had been increased largely in responds to certain occurrences’ or observations within the microfinance sector. It is important as an industry to know the key things that might have led to the review of the requirement and further understand the possible impact on the activities of the microfinance sector.

Ghana Association of Microfinance Companies (GAMC) which is the Apex bodies indicates that about 30 companies within the first quarter of 2013 have collapsed. The collapse of these companies are outcomes of various process that have not gone well and not necessary a onetime event. This collapses must be investigated to provide clear reasons to help diagnose appropriate solutions to safeguard the entire microfinance sector from systemic risk and any loss of confidence in the sector as a whole.

Increasing size of amount                                  

Classical microfinance defines microloans as a small short-term loan made to impoverished or low income entrepreneurs. The small nature of micro loans over time has  evolved from country to country but it is still define on the principle of “small” .Practical evidence  however suggests that some  microfinance institutions in  Ghana are now disbursing loans above the amount of five thousand Ghana cedis (GHC¢5,000.00) to individuals as microloans.

Prudential credit managements regulate the quantum of loan that a bank can give to one individual customer. This same regulation applies to MFIs and therefore going by this rule MFIs can give loans in amount up 10% or 25% of MFI capital. The percentages are dependent on whether a loan is collateralised or  not respectively. This, therefore, implies that microfinance with average minimum capital amount of GH¢100,000.00 can technically give loans up to an amount of GHC 25,000.00 if that loan is secured and GH¢10,000.00 if unsecured.

Going by the single obligor rule, MFIs can grant such amounts to individual clients however the question is do the MFIs have the logistics and human resource base to make and monitor such loans? Can we classify these loans as micro?

Micro loans business depends on volumes in order to be profitable. In view of the complexity and the difficulty in managing micro loans, MFIs in Ghana in order to generate enough to cover their cost rather opt for large loans sizes which at least guarantee appreciable interest return.

Accompanying the increasing loan sizes is the rise in the  non-performing loans on the books of most MFIs. The truth is that, the more the non-performing loans increase the more the income sources of the MFIs decreases. This is because interest from loans forms about 90% of total income of all MFIs. The more MFIs record losses the weaker the networth of the MFI .A continuous loss position over time can lead to a negative networth eroding all the capital contributions of the shareholders.

 Branching without recourse to capital requirement

During the pre- regulation period most MFIs established branches to improve outreach, customer growth and increase deposit mobilization. Some MFIs even established more than one branch within their first years of operation. The phenomenon of branch establishment has not necessary ceased during the post-regulation era but the rate has reduced. Most of the multiple branched MFIs have their history dating back to the pre-regulation period.

Studying the MFIs, I noticed that some of the owners of the MFIs saw branching as the only way of growing. They thereby focused on extending their operations to other locations without having to inject new capital. In most cases the growth was fueled by clients’ deposits and short term loans either from investors or the banks. The decision to grow long terms goals (branches) with short terms liquidity created liquidity mismatches which have contributed to the collapse of some of the institutions. The inability to adequately manage liquidity (deposits) has contributed to the inability to meet deposit demands which in most cases have compelled owners of such MFIs to go into hiding.     

There are other factors that have negatively affected the operations of MFIs have contributed to the collapse of some of these MFIs. These factors may include weak credit risk management policies, weak internal control procedures, fraud and poor inter branch management policies.

 What informs the setting up of Microfinance Capital Requirement?

 The main objective of financial regulation is to ensure safety and soundness of the financial sector. This therefore informs the reason behind increasing the capital requirement in order to streamline the risk activities of the MFIs. The increase in the capital requirement is expected to cover MFIs that will want to increase outreach by establishing branches since each branch to be established will have to be supported by an additional capital requirement. An increase capital base therefore ensures that depositors’ funds are not entirely to in the branch expansion.

Empirical evidence suggests that the setting up of capital requirement for microfinance activities are considered based on the hard part of regulation which is the safety and soundness as well as the social aspect of microfinance which is associated with poverty reduction. These underlining factors have affected the capital requirement set for all microfinance banks in most economies across Africa.

Microfinance is a special field considering the fact that it aims at providing financial access to the poor and the low income. This is one of the more reasons why their capital requirements are concessionary low. The stakeholders must therefore consider appropriate framework to ensure a right balance between impact and enforcement. The various players in the industry must therefore understand the actual happenings within the microfinance sector to enable Ghana achieve the best results in line with poverty reduction. These are some of the reasons why there have been reviews in almost all the countries reviewed as shown in the table below.

The table below compares the amount needed as capital need for deposit taking MFI across some selected countries. It can be noted that that the stated amounts are relatively within the same region. This is not withstanding the fact that majority of the amounts quoted have be reviewed over in line with the growth of the particular sector. Another key observation noted here is that although the regulatory framework for Ghana was one of the latest in the category; its capital requirement is one of the highest. The reason behind the different amounts can further be studied to give a broader understanding.

Table: Capital requirement for one Unit branch

Country	Number of years of regulations	Requirement for Deposit taking MFI(USD)
Uganda	2003	195,312.50
Kenya	2005	229,885.00
Nigeria	2005 revised in 2011.	124,069.48
Ghana	2011	263,157.00

    Compiled from many source.

Capital requirement and the future of microfinance

The upward review of capital requirement can help in managing risk associated to the increasing trading activities of the MFIs and further help protect the industry as well as the depositors. There are other non-financial activities that are the main treats to the industry which also requires a positive review. For instance capital amounts cannot protect the sector from the incidence of collapse if the key issues which are more intrinsic in the MFIs are not adequately addressed.

Minimum capital is an entry requirement and cannot help in improving operations of the MFIs and safeguard them against liquidity challenges. Key managers of microfinance institutions must build their capacity in  the management of the MFIs  to avoid liquidity mismatch.

Increasing capital requirement cannot necessary reduce the risk appetite of MFIs owners. The challenge with the microfinance sector in Ghana is that majority of them mobilize short (mostly 30 days) and turn these deposits into loans with tenor of 16 weeks or more. There is therefore an issue of mismatch creating the liquidity challenges. There must a national plan whether private or governmental to establish a specialized fund to support the liquidity needs of MFIs who for me are equally contributing to fill an economic need. The microfinance regulation in Nigeria spells out clearly the setting up of a fund to provide funding support to MFIs. 

The absence of a local “in country” on-lending fund is hampering access to loans to help support the operations of these MFIs. Such loans will have special rate and duration to allow the MFIs to work and repay over time compared with the current harsh borrowing requirement majority of them are exposed to. With the establishment of this fund and some managerial capacity most of the collapsed MFIs might not have gone down.

Another creeping challenge with the microfinance sector is that MFIs are experimenting with the granting of large loan sizes. However, these MFIs do not have the structures, logistic and human resource to appraise and manage these large loan sizes. This experiment has resulted in the  difficulty in loan management a situation that has contributed to  increasing delinquency  within the microfinance sector.

In view to help MFIs to desist from experimenting with large loans sizes, there should the need to have a national definition of a “micro loan” within the borders of Ghana. The MFIs must be provided with a benchmark amount beyond which an institution licensed as a microfinance company must not be allowed to. This will ensure that MFIs avoid mission drift and as well manage loans that they are capable of managing. MFIs must match the loans they grant to their logistics and as well as their human resource to enable them to grow healthy loans.

Review of capital requirement are largely done base on the traditional principles of regulation and the social aspect of microfinance. If considerable investment capital is earmarked for the establishment of microfinance as a regulatory requirement, there is the chance that owners of the MFIs will only consider to target clients that can support their activities to meet their investment returns. Impact of the sector will therefore be missed and the role of microfinance may not be fully achieved.  

Conclusion

The Microfinance sector has become a key player within the financial system of Ghana. MFIs have been identified to be instrumental in achieving financial inclusion.  Apart from the core business of providing financial assess MFIs provide a source of employment to a number of people. When a microfinance company collapses, it goes down with people’s investment and renders the poor client poorer. As regulatory takes steps to protect the sector, the MFIs themselves must look within their set up and operate within the prudential requirements. 

 The safety and soundness of the microfinance sector in Ghana can only be achieved when the capacity of the owners and manager of MFIs are improved. Increasing capital requirement will not arrest the issue of entry, mismanagement and collapse of MFIs.

MICROFINANCE AS A TOOL FOR COMMUNITY DEVELOPMENT

Microfinance without social objective is micro banking. Micro banking is practically creating financial access mainly credit to the low income or poor. The inclusion of social objective together with financial objective is what transforms micro banking into microfinance. This, therefore, makes microfinance effective as a tool capable of transforming   the economic and social livelihood of the poor and low income clients.

Ghanaians have come to embrace microfinance institutions as key players within the main financial system. People are aware that microfinance can assist address the varied financial needs of both the poor and some high networth clients. There are over 400 microfinance companies registered with the   Ghana Association of Microfinance Companies (GAMC) as at the end of 2012. The increasing number of MFIs under the four tiers attests to the theory that the activities of microfinance institutions have been accepted as an important component within Ghana’s financial system. The proposed reasons that have herald the acceptance of MFIs in Ghana is largely hinged on two reasons. These reasons have relations to whether one is an investor or a consumer seeking financial services and products.

Many people theoretically or practically have come to accept that microfinance can assist in improving the income levels of the target clients. Apart from this well known fact, microfinance can assist to directly contribute to community development so as to improve the community where the poor people live and work.

This article will attempt to bring to light the activities of a Microfinance Company based in Agona in the Western Region of Ghana that has demonstrated how microfinance methodologies can help to develop the poor and their communities.

Turning waste water sachets into bags  

Innovative microfinance methodologies can be use to restore the cleanliness of our environments whiles at the same time create a source of livelihood for the poor and low income clients. Through innovation, this MFI has develop and implement products to assist clients to sew school bags, shopping bags and carrier bags from using disposed water sachet bags which mostly   litter most places in Ghana.

The MFI offers capacity training for the selected clients or beneficiaries on how to create an economic usage from   disposed water sachet bags. The clients are extensively train on how to sew bags and other materials by using disposed sachet bags. The MFI in addition to the training provide clients with logistics like sewing machines on credit basis and working capital in the form of microcredit to enable them to purchase or pay for the sachets bags that have been collected or mobilized by other people within community. This product, therefore, provide three key benefits which are;  income for the collectors of the disposed sachets, income for the clients sewing the bags and providing solution to waste disposal within the community.

Improved Cook Stoves

The MFI targets women who are fish mongers in a community near Axim. The MFI observed that the conditions under which these women were working was not healthy and environmentally friendly. The MFI took steps to ensure that these clients work and support their livelihoods in a manner that was  not  dangerous to their health as well as to the environment. In view of that the MFI went on to research   better and healthy ways by which the client can work to protect their health and as well adopt environmentally friendly cook stoves to save the environment.

To be able to address the needs of the clients the MFI collaborated with other institutions to design and build improve cook stove using traditional materials like clay. The key point about of this product is that, the MFI trained the women on how to build this improve cook stove so that they can provide such services to other women alongside their main trade. Apart from training the women themselves some members within the community are well trained to take up the duty of building the stoves. The MFI adopts technology transfer as part of its operations. The positive impact of the “microtech” transfer according to the MFI enabled some women to re-construct new stoves when floods destroyed the stoves that were built for them. The client in this case used the skills acquired to rebuild a stove for themselves without having to wait for any financial support. The positive factor of microfinance is that it enables the poor and the low income earners to participate in the process of poverty reduction by themselves instead of it becoming the duty of government and its partners alone. This can only be achieved through capacity building aimed at transferring simple technology to help simplify the lives of these clients.

Providing quality drinking water device

Access to quality drinking water is a challenge in most communities in Ghana. Through a socially responsive microfinance programme clients of the Agona based MFI are provided with a simple portable water treatment device to assist their clients to purify their drinking water. These devices are provided on credit basis. To make microfinance very beneficial to the clients, MFIs should note that they require stratergic partnerships with other organizations that have products and services that can help solve some of the problems the clients encounter. Through workable linkages, clients of MFIs are having access to energy and other essential amenities. A practical example is the provision credit to enable rural clients purchase Solar Home Systems (SHS) through the rural banks in Ghana. The product was made possible through a partnership between the Ministry of Energy and the Apex Bank together with the SHS providers. Positive linkages can help to reduce transactional cost and also improve the scope of products for the poor clients.

Value Chain Actors

MFIs can as well be a major player within the various agricultural value chain processes. For instance the MFI I visited as part of their operations organise the palm kennel oil producers within it catchment area to form associations. The MFI is currently researching the industrial uses of palm kennel oil to further enable them to arrange for sales or marketing contracts for the produce of their clients. The MFIs took the initiative to organise these producers into a cooperative by educating them on the need to come together to seek their own common good. The objective of the MFI is therefore, to provide financing to the oil palm producers, the palm kennel oil process and other actors within the palm kennel oil value chain. The successful implementation of this product will at least take care of some actors within the palm kennel oil value change which will go a long way to help the producers of the oil to acquire guarantee market for their produce.

Important linkages between microfinance and national development

Microfinance companies can be a vehicle by which important products and services can reach poor communities in a sustainable way. It can also be used for the transfer of technology to help simplify the lifestyles of the poor clients. One clear partnership that should be looked into is a partnership between MFIs and the National Health Insurance Scheme (NHIS). This linkage can help reduce the cost of transaction for the National Insurance Authority (NIA) since the MFIs will be the point of premium payments or collection whiles the NA takes care of their main operations of providing the product to their clients. Such partnership as well will mean that the NIA will not have to either spend money to establish offices or hire agents in specific locations but can work through already established rural banks or MFIs. In this partnership the rural banks or MFIs provides a onetime “shopping” point for both insurance and banking services thereby reducing the cost of transaction also for the clients.

Information dissemination to people within a particular community can be perfectly done through the microfinance institutions. My observation is that, clients whether poor or rich have lots of respect for officers who work for financial institutions including microfinance companies. The contribution of these institutions can, therefore, be beyond just the provision of financial services. Most clients of financial services look up to these officers for advise even beyond financial management. The MFIs command a great deal of respect and can partner institutions like the National Commission on Civic Education, Ministry of Health,  Ministry of Agriculture other agencies  for the purposes of educating the poor on important subject relating to national development.

Conclusion

The social aspect of microfinance in Ghana has been a challenge due to the fact that social investment in microfinance does not directly affect the profit of MFIs. Most MFIs in view of the lack of adequate financial muscles, therefore, do not include social objectives as a key component in their operations. The big question they ask is who will pay for the social investment?

 Transforming  livelihood and the communities of the poor clients can largely be achieved through  sustainable means if the various microfinance institutions are adequately assisted through technical, logistics and capital means to enable them pursue the social dimension of microfinance. In the absence of the needed support it is important for MFIs to create a social vehicle within their operations since that can directly or indirectly translate into customer retention and profitability.

Governments in supporting the to grow the microfinance sector  by way of developing clear policy, infrastructure and logistics  must consider assisting the establishment of a sustainable microfinance fund that can be commercially accessed by socially responsive MFIs so as to ensure sustainable development to complement government developmental agenda. To make microfinance responsive to national development there is the need for governments, donors and other stakeholders to still support the social aspect of microfinance because it’s that part of microfinance that can sustain poverty reduction.

Microfinance workers as agents of change

The importance that microfinance brings to development is its ability to contribute to social and economic development in a sustainable manner. As a developmental tool, microfinance not only provides financial access to the poor, it can also transform the social orientation of targeted clients to make them efficient users of the financial assistance they receive.

For instance, a typical comprehensive microfinance programme always includes educative programmes such as financial management, leadership, health etc. to make them better managers of their micro-enterprises as well as better leaders at the household level.

Microfinance is transformational in nature: it works on the principle that poor clients accessing microfinance programmes must at least achieve a level of economic or social transformation, better than at the point of receiving the assistance or service. Some examples of the transformation include improvement in income levels of clients; improvement in micro-enterprise management; improvement in nutritional intake at the household level and the nature of quality decision-making regarding family health, birth, and raising children.

In spite of the very positive contribution of microfinance to poverty reduction, some people believe that microfinance programmes rather make the poor poorer.  They in most cases support their argument by quoting the factor of high interest rates charged by Microfinance Institutions (MFIs).

The cost of a loan can lead to over-indebtedness that can aggravate the financial hardship of clients. Most of the issues raised against the concept of microfinance can be well-addressed if appropriate methodologies are applied by people who have the required skills. One clear point is that the interest rate for the micro clients is not as important as access to loans. It is, therefore, important for key players within any economy to look at creating or enabling easy access to micro loans. In principle, increasing access to micro loans can have the tendency to force down the interest rates being charged on them by the MFIs.

The effectiveness of microfinance is largely dependent on the skills and understanding of the personnel administering the microfinance programme. The uniqueness of microfinance programme is built around the characteristics of the clients that microfinance seeks to target. For MFIs to remain economically and socially transformational, the skills and understanding of the entire workforce must be sharpened around the nature of the target clients.

It is important that microfinance workers have special skills to achieve transformation; however, the skills of front-line officers who come into daily contact with clients should be prioritised. This is not to say that other staff-members working for MFIs are not relevant to achieving the social and economic transformation that microfinance seeks to achieve.

There are various departments or units within a well-structured MFI. These departments or units can be put into what can generally be referred to as the back and front offices. The back office can include the board, management, ICT staff and other technically-biased skills like accountancy.

The front officers in most cases include the cashiers, mobilisation agents and credit officers. The front office area can be defined based on the interactive nature that staff working in this area have with clients.  The skills required by a staff working in the back office can be sourced from the main banking industry or from a specific generic field. The frontline skills are mostly of a secondary type that is built with the characteristics of the poor and the low income clients in mind. 

The nature of microfinance clients is clearly different from the clients of traditional banks, and therefore different skill-sets are needed by these staff in order to get the best out of microfinance programmes. For instance, the average microfinance client is noted to have a low literacy level, which therefore requires innovative approaches to educating them.

In addition to this, the majority also saves and takes loans in small amounts -- requiring special consideration in product development. Their source of income as well cannot be guaranteed, meaning that their income sources keep changing depending on several factors.

To make any microfinance effective, the role of frontline officers within the industry cannot be over-emphasised. The activities and posture of these staff can help clients to create and sustain personal desires to be liberated from poverty or to benefit from the assistance being provided by the MFIs.

It is important to note that the personal commitment exhibited by clients of microfinance is needed to complement efforts undertaken by MFIs toward achieving economic and social impact. The attitudinal changes made by clients through guidance, persuasion and assistance -- mostly given by the frontline officers -- are very much needed to make microfinance work effectively.

In practical cases most clients develop relationships with frontline officers who over time become their “counsellors”. The officers in a way become both business and household advisors for the clients. When this happens, the frontline officers are expected to provide all kinds of business and social advisory services to their clients. This, therefore, means that officers must be equipped with skills and experiences that will enable them to provide the needed support to their clients.

Frontline staffs of MFIs hold the key to making or unmaking microfinance relevant in achieving poverty reduction.
To enable MFIs to be effective in providing the needed service toward contributing to social and economic development, the key frontline staff should exhibit the following qualities which I have found to be critical:

•  Knowledge 
Microfinance is not entirely economics, finance, banking or sociology. The application of microfinance methodologies combines several technical academic backgrounds in order to be effective. There are some aspects of agriculture, sociology, developmental economics, banking, finance, management, etc. For instance, a frontline officer who does not consider the cultural orientation of clients can have challenges which negatively affect the performance of the service or products being offered.

To illustrate this point further, let us assume that a project has the objective of providing loans to women in a community to support them in undertaking economic activities to improve their livelihoods. What will happen if the norms or beliefs of the community do not support women living within the project areas to contract loans? Practically no person will refuse such assistance, so the women who are the target clients will by all means contract the loans; but the likelihood that the loans will end up with the men within the community is high.  This emphasises the point for field officers to be able to understand and appreciate the sociological, cultural and religious inclination of clients regarding services or products being offered by the MFI.

Understanding the nature and demands of poor people is a very important skill needed by the frontline staff. The characteristics must inform the way and manner their training needs are executed to achieve the transformation needed. A microfinance officer or worker without an appreciation of how micro enterprises work cannot help to transform the micro business of the clients they serve.

The micro entrepreneurs largely operate their business with only their traditionally-bred management skills. They do not provide day-to-day recording of their financial transactions. This therefore makes it difficult to assess the financial needs of their businesses. In most cases there is also no clear distinction between their business and their households’ activities. Understanding their approach to business will enable the field officer of frontline person to offer appropriate support to help the low-income entrepreneurs to improve on their enterprises so as to support loan repayment.

•  Commitment

The work as a frontline officer requires sincere commitment toward raising livelihoods of the poor. The work sometimes involves long hours of trekking either to mobilise deposits or to collect loan repayments. This is because the majority of clients live in areas where it would be very expensive to use cars to reach them. In view of this, some field officers are either required to use bicycles, motor-cycles, or walk to meet their clients. All these activities can pose a hindrance to getting field workers for MFIs to work effectively.

Due to the nature of the clients, the work also requires officers to exercise extreme patience in dealing with their clients -- especially when it comes to explaining technical issues such as interest rates and loan conditions. It is commitment and love for the work that can sustain the interest and passion in working with the poor and low-income earners aside from the salary, which in most cases is not very lucrative or attractive.

•    Trust and truthfulness

The work of frontline officers cannot be effective without the element of trust. Poor clients look out for officers they can trust before they can become comfortable in dealing with a particular MFI. This is the case for deposit-taking MFIs. There are practical examples of clients who have categorically stated that they are saving with a named MFI because of  the character and nature of a specific frontline officer. The level of trust can have a direct impact on group management and even on the attitude of clients to loan repayment.

The interesting thing is that some clients will do whatever it takes to pay off their loans in order not to create problems for their trusted officers. This is all dependent on the value of the relationship that exists between the officer and his/her clients.  Trust is built by the posture of respect shown to the clients by the frontline officers. Frontline officers must avoid the know-it-all attitude and should avoid a posture that would suggest to the client that they are superior. Micro clients value trust and respect, and they equate the respect exhibited by the frontline officers with representing the values of the institution.

•    Training

The dynamic nature of microfinance requires staff with a trainable attitude as the microfinance sector keeps changing due to various factors. Some of the factors fueling the change are the changing needs of clients; national and global changes in economic factors; changes in the source of funding for microfinance programmes; microfinance regulations etc. These changes, therefore, require workers within the microfinance sector to be abreast of new and innovative products and services in order to be relevant in achieving both economic and social objectives.

There is so much happening in the area of research, training and workshops which can be a good source of skill and knowledge improvement for frontline officers. Unfortunately most workers within the microfinance sector fail to update their knowledge, and employers do not plan comprehensive training for their employees.  Most people within the microfinance sector therefore have limited understanding of local or global changes in microfinance, which thus narrows their contribution to making microfinance more effective toward poverty reduction.

Conclusion

The microfinance sector has many players and workers. Each contributor or worker has an important role to play in pushing the impact of microfinance to another level.  Some of the key contributors directly linked to the impact of microfinance are frontline officers, who in the case of Ghana include susu collectors and loans officers. The skill-levels and competencies of these officers are very much important since the sector depends on them to champion the cause of using microfinance in transforming the livelihoods of the poor and low-income earners. 

In order to make microfinance transformational toward economic and social empowerment of the poor and low-income clients, employers, government and other stakeholders must place the training of frontline officers within the microfinance sector on high priority -- since they are the product champions and the only means through which MFIs can get to the targeted clients.