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.