IMPORTANCE OF FINANCIAL LITERACY EDUCATION IN GHANA

I recently met a University mate of mine in a very popular restaurant in Accra. As usual the question that comes to mind after meeting a long time school mate is “so what are you doing or where are you”?

I was very impressed when this friend told me that he was managing his own business that is to say he is self employed. He indicated   that right after school like a typical graduate   he  was offered employment  by a firm after a writing   series of application letters. During this period of employment, he felt that although he was employed by the firm as a technical person on the job, his technical submission on issues regarding the business was not respected by the people who employed or hired him. He felt useless in this business and therefore left to establish his own business. 

After he told me of what he has been up to, I also told him I work for a financial institution and this answer sparked up some interesting conversation relating to the relationship between  the self employed  business in Ghana and the banks.  Like any other entrepreneur he started   lamenting about how difficult it was to access loans from the bank to finance their operations or contracts that had been already secured. He concluded that, the banks were not very helpful and not very innovative in their dealings with small and medium businesses in Ghana. He confirmed this by telling me of what his bank is requesting from him before they can grant him a loan to finance a contract that he has currently secured. As usual the  bank is  asking for tangible security (landed property ) or cash equivalent before they can start talking about loan of any kind. I am sure that most owners of small and medium business can identify with the frustrations of this man and are hopeful that one day their frustrations will be over.

 The state of relationship between the bank and SME owners for me is due to the misunderstanding between both parties. What I mean to say is that the banks are yet to fully appreciate the psychology of SMEs and their owners. In the same vain SME owners seem not to understand the psychology of the banks and its officers .Unfortunately it  seems this perceive misunderstanding is increasing on a day to day basis and this is as a result of certain revelation from my discussions and other observations made.

 For instance in my conversation with my business owner mate I advised him to not to limit his search for loans to the main banks or traditional banks but he should talk to other non –bank financial institutions . The main focus on this article is hinged on the responds I receive after asking him to consider accessing loans from some of the non-bank financial institutions around. It was surprising to me when the entrepreneur told me that it was a common knowledge that if you use loans from some of the non-bank financial institutions around, your business will collapse. According to him the information around town is that the loans from these institutions were “spiritually adulterated” and has the power to destroy your business if you use money from that source.

This answer surprised me for many reasons. The main reason why I was surprised was the level of education of this mate and the fact that he had come to believe in statement like this. This statement is an indication that there is strong need for  financial literacy education  for majority of small and medium enterprise owners. This should be  looked at again especially by the  financial sector players  to ensure that the men and women managing the small enterprises are better place  to effectively manage  the loans or debt they contract to help the growth of their businesses and also to ensure prompt and consistent repayment of loans to their bankers.

The fallout from this little discussion points to the fact that there is more work to be done in the area of building the financial literacy capacities of owners of SMEs in Ghana. It is obvious that the problem associated to taking on loan from alternative financial houses mainly is with the interest rate charged on the loans. Most of these alternative financial houses are more proactive and have good appetite for risk associated to financing SMEs than most traditional banks. From a non-scientific point it can be concluded that it is easier to access loans from the “alternative financial institutions” than from the traditional banks. This is supported by the many comments made many entrepreneurs regarding the fact that banks were not meeting their financial needs   and that the loan requirements put in place equally make it difficult for SME owners to provide this requirement in order to access loans.

The thought that some “bank money” can collapse your business is a strong indication that most entrepreneurs are yet to appreciate the importance of a thorough analysis of the loans they take and its implication on their business. For most business men and women the mere desire for a loan consumes them so much that they fail to scrutinize the interest element on the loan to ascertain if their enterprise can comfortably finance the repayment of the loan and its associated interest.

I am tempted to believe that the reason why there is this thinking that a loan from some institutions can collapse a business is mainly due to the cost of the loan and the inability of most   enterprises to generate enough income to cover the principal and interest.  Another reason may be due to poor loan management by some clients who after taking a loan from a bank may not apply it for the intended reason for which it was borrowed. In the event  where some  borrowers are able to pay off their loans, it  may happen that they  may have serviced the loan repayment by partially using a portion of their  initial capital. If that happens it becomes difficult for the entrepreneur to refinance the purchase of stock or materials to the same level that they started with and at this point the perception that some money can collapse your business become real to them.

The bank and SME relationship can be mutually beneficial if an understanding is reached between owners of SMEs and the bank’s. The fact is, owners of SMEs think the bank does not quickly respond to their needs and even if they do they mostly do not grant them all the loans they need. Others believe that the bank ask for too many things that goes to prevent them from qualifying for the loans. The need for landed properties  as collaterals in a country like Ghana where majority of land owners don’t have land title registrations or sometimes the request for cash collaterals for a clients who needs cash makes it  difficult for most SMEs to meet the requirement for loans.  The logic of this kind of arrangement is only understood by the banks and not the clients. Some SME operators also perceived that some bank officials have some negative attitude towards SMEs and therefore shy away unnecessarily from dealing with SMEs.

The banks on the other hand also have some genuine issues regarding the financing of SMEs. This is largely based on the manner in which most SMEs are managed. To the banks the lack of proper business records, lack of collateral to secure the facilities, improper banking culture, low level of literacy among SME operators, poor governance, lack of secession planes, etc all together make the granting of loans to SMEs a high risk business.

Understanding of the various stakeholders involved in improving access to SMEs is very paramount. The blame game cannot be left at the door steps of the banks by the SMEs operators and similarly the banks cannot leave the SMEs to their fate. This is mainly because as stated by developmental experts, SMEs holds a very important part in the growth of all economies. This, therefore, calls for positive collaborations by governments, trade associations, and district assemblies, financial institutions to contribute to ensuring that the problems and challenges identified are adequately addressed for the benefit of the entire economy.

When the capacity of the SME operators are developed, they will be in the position to better negotiate the terms and conditions of the loans they take so that they are able to comfortably use them to expand their business enterprise and in addition pay off their loans and the related interest and still be able to sustain their business activities.

Additionally banks should also build the capacity of its officers to fully understand and adopt some entrepreneur skills to further help them to understand the operations of SMEs to enable them better provide the needed services to this sector.

Due to the high cost associated to providing training services to the SME operators, government and donors can assist by either financing capacity training activities like the annual financial literacy week which started some years ago. Additionally Banks and other institutions can also diversify their corporate social responsibilities (CSR) portfolio and commit some fund to develop and train their SME clients.

I hope after reading this feature it has been clear that there is no truth about the assertion that   money from a financial institution can collapse a business  due to “juju or spiritual” reason but what can collapse the business may be the lack of adequate knowledge on how to negotiate for  loans as well as how to manage your loan and a business.

UNDERSTANDING THE BUSINESS OF MICROFINANCE

Introduction

Microfinance has become a big business in Ghana. People have invested in microfinance for several reasons. The reasons for the interest in investing in microfinance are many. Some investors have found it as means to assist in the reduction of poverty which is considered as a social impact business. Others have relied on the fact that microfinance business have recorded have recorded high loan repayment rates and therefore guarantees high investment returns.

The microfinance businesses in very recent time have registered the incidence of some companies closing down with most of these companies not being able to honour their liabilities. The news of these happenings has somehow dented the image of microfinance in Ghana and has contributed to the recent high withdrawals happening being experienced by many of the microfinance institutions (MFIs), this aside the general economic outlook. The incidences of collapse have also created the impression that some microfinance owners only set up these institutions to dup unsuspecting clients.

The mage created as a result of these happenings should not be swept under the carpet. Industry players must embark on a mission to positively brand microfinance operations in order to revive the confidence people have for microfinance activities. This is because financial dealings hinges on trust and microfinance business cannot be an exception. The difficult part of the image building is that, the entire industry image is largely dependent on the image of the individual MFIs. What other players in the industry do can affect the way the sector is viewed from the outside.

Most consumers of MFIs and other stakeholders form their impressions about a MFI from the activities of another MFIs which is entirely different from so many things. To them Kemp Microfinance Company Limited is equally as corrupt as the MFI which collapsed next door and swindled it customers. The key point I wish to drive at is that efforts to building the image of the microfinance industry cannot be achieved by each MFI minding their own business. The most effective way  is to collectively as an industry  identify the key factors leading to the  shutting down of MFIs  and map out the needed strategy to manage potential MFIs from collapsing.

One way of working to improve on the image of the microfinance industry is to document and project the positive results obtained by some MFIs in transforming the livelihoods of micro clients in the various catchment areas. There are various positive success stories which have not been showcased to the outside world and therefore the negative news have succeeded in making it look like microfinance business only enriches the owners of investors. The various Apex bodies must collaborate with the media in positive news within the sector instead of the news on collapses.

Aside the issues of image there are several questions on the minds of many people regarding the activities of MFIs or microfinance in general. Providing information to the general public helps in enabling them to fully appreciate the role of microfinance as a tool for poverty reduction. This is important because other people still hold the view that microfinance does not really reduce poverty among clients that microfinance serve. Some literally describe microfinance as a killer tool them that makes poor clients poorer. Others are still not convinced about how small amount of money can help transform the lives of a microfinance client. This feature seeks to address some of the non technical questions on microfinance in Ghana that I hope can provide information to other people.

Why is microfinance restricted to low income earners and poor people?

Microfinance was born out the need to provide financial and non financial access to the segment of the population who were classified as unbanked and under banked. These people are mostly poor and found at the bottom of the economic pyramid.

Traditional banks did not consider them to have the capacity to take advantage of economic opportunities to enable them to repay the loans they contract. In instances where they were economically active, the nature of their economic activities were judge as not profitable enough to support their livelihoods and also support any profitable banking. These group of people were regarded so because they could only save and borrow in small amounts.  In addition, their source of economic income could not guarantee consistent income. In cases where there was consistent cashflow  the amounts were not enough to cover the cost incurred by the traditional banks in providing services to the poor clients.   Additionally the low income and poor clients did not have the capacity to provide the needed collateral to secure loans from these banks. These and other things therefore led to financial exclusion. Microfinance is helping most developing economies to improve financial access in other to achieve what has come to be known as financial inclusion.

Microfinance institutions are the vehicles through which microfinance products are channeled to reach the poor and low income earners. This institutions have innovated to develop financial and the non financial services to improve the overall wellbeing of the poor client in a sustainable manner.

Recent evolution in the sector points to the fact that the profiles of MFIs clients now include clients who necessary may not be classified as poor or low income earners. These clients are mostly clients who have some   financial needs but have challenges with accessing the funds from a traditional bank. Some of these clients are even indebted to some of the traditional banks and because of the associated debit such high net worth client turn to the MFIs for additional loans.  A way to confirm the changing profile of microfinance clients is to measure the average loan size of loans held by MFIs.

In very strict terms microfinance is suppose to provide services to poor and the low income earners. Recent development regarding the issue of sustainability of MFIs, mission drift and emerging economic challenges is pushing   microfinance business in Ghana to expand their outreach to include other classes of clients apart from the low income or poor clients.

What are the various functions and the differences between registered and non registered MFIs?

Under the Bank of Regulation for microfinance, all MFIs must be registered by

the Bank of Ghana(BOG).
By the enactment of the microfinance regulation, therefore, all non registered MFIs are illegal entities.

There is no clear distinction in the activities of registered and non registered MFIs. They all do the same things just that one is legal and the other is illegal or now going through the process to be legal.

Regulation will provide the frame work to ensure that legally registered MFIs operate to ensure sustainability, impact and outreach. Additionally clients of microfinance or potential clients must be educated on what to look out for in other to ensure that they deal with only legally registered microfinance institutions. There must  be a disincentive for non registered MFIs.

The other aspect of microfinance regulation is that all though is regulation is the legal mandate of the  Central Bank, the various Apex bodies provide a social form of oversight control to augment the work of BOG . This arrangement when effectively done can improve the quality of regulation and further help to reduce the overall cost involved in regulating microfinance.

Who qualifies to access credits from microfinance institutions, is it for only local groups or self-employed individual or both?

MFIs serve clients they consider as productive poor. This has become a more recent occurrence in order to secure the sustainability of the MFIs. The microfinance movement started with the course to reduce poverty and therefore previous financial support were in the form of grants to beneficiary clients. With the incidence of donor fatigue, grants and donation for the microfinance activities started decreasing. Private capital now dominates the microfinance market. MFI are now cautious of their sustainability and liabilities to investors and therefore must employed effective loan screening methodology that will help improve and increase loan repayment.

Access to credits from any MFI can be made available to individuals and groups. The individual or group methodologies are tools employed by MFIs in granting loans.

The group methodology involves granting loans to clients who have formed groups. This method helps to self select the clients since clients will only accept other members they are comfortable with. Group lending help to reduce the cost of undertaking loan analysis and supervision since group meeting days provides a cheaper opportunity to meet all the borrowers or potential borrowers. It also provides a social form of collateral where members within the groups’ co-guarantees for each other.

The individual lending methodology is used for appraising loans for clients who are not in groups. Loan decisions under this methodology are taken based on the individual clients and in most cases such methodologies call for tangible collateral. The supervision and monitoring of such loans are quite expensive since borrowers are monitored individually. In the case of the group methodology, monitoring can be done with the help and assistance of group leaders and therefore, it provides two layers of supervision.

Depending on the nature of the MFIs and what lending methodology is being used, clients can be considered under the individual or group schemes. MFIs may also determine as part of their operations to grant loans to only clients who have saved over time as individuals or groups. In Ghana, however, most MFIs require clients to save for a period before they can request for loans.

Non-deposit taken MFIs and even some deposit taken ones provide loans to client who may have any relationship history with the MFI. In the case of Credit Union loans are strictly for   members. MFIs in Ghana therefore can provide loans to clients under deferent status. Such clients can therefore be individual clients, “walk in clients” and or group clients.

Conclusion

Understanding microfinance as a developing tool will help ensure that microfinance is better understood and appreciated as a developmental tool.

 Microfinance is not the same as micro credit because micro credit is only an aspect of microfinance. Understanding the dynamics in microfinance products and services are important basics needed to achieve a better impact from microfinance activities.

One thing that can hinder the growth and performance of the sector is the image that people have about the products and services of MFIs. Building the microfinance sector should include building the image of the sector through appropriate information shearing and collective pro-activeness by all players to guide against institutional failures.

We must admit that microfinance in Ghana has a lot of scaling up to do and must be ready to learn and apply the right tools for effective microfinance .The microfinance today  must be relevant towards national development just as seen in other countries.  This can only be achieved through appropriate product innovation and effective microfinance methodology.