BANKS MUST KNOW THE WHY

There is no doubt that 2014 as a year has been a difficult financial year for Banks Ghana. This is evident by the reduction in deposits recorded by banks against the projected budget. In view of the general reduction in deposits most banks over the past months have rolled out aggressive deposit mobilising strategy to help improve their deposit levels. One key strategy that I have noticed is the use of raffles. These promos by some leading banks promise rewards for clients who   save up to a certain amount and for a specified number of months. The rewards include adding zeros to the saved amount, mobile phone credits, etc. Observing this trend gives me a clue that most banks or financial sector players do not really understand the very nature of the clients they serve.

Having promos or increasing the role of advertisement to improve the deposits is not what I find wrong but it’s important for banks to understand the various reasons resulting in the overall reduction in deposits. Their findings or understanding of the situation can inform the efficient strategy that can help sustain deposits drive.

My understanding of the conditions leading to the decline in deposits can largely be ascribed to the responses of the average client to national economic issues. The two main reasons are as follows:

1) The cost of living has gone up without a corresponding rise in income levels. People spend more to obtain the same quantity of goods or services. Businesses have to spend more to produce the same quantity of goods due to general price hikes.  Most people therefore are forced economically to spend more leaving little or no amount for savings. This therefore means that people are not necessarily saving their excess monies outside the main financial system. They practically have to ration their income to meet their day to day needs and therefore are treating savings as a secondary issue.

2) Most clients now prefer to spend or save in tangible assets to protect the value of their savings. Some clients are also contracting high purchase schemes products to also avoid future price increases. These schemes provide people with the opportunity to use an item and pay later instead of saving-up to finance the purchase of the same item. The decision by clients to opt for these strategies is because the interest rate being paid by the banks on deposits cannot compensate for the loss in value of their savings. In addition the interest rate being paid cannot match up with the rising cost of goods and services. So the common sense approach is that if there  is anything to buy in the near  future buy it now whether on credit or with cash because the same product will cost more in the next few months.

In summary banks must understand that clients are economically rational beings. These clients can react to economic happenings and therefore banks must ensure to develop their strategy around the main issues affecting their clients. Banks must therefore not assume that clients are keeping their excess income on them and that the promos will drastically lead to improving their deposit levels.

MICROFINANCE AND POVERTY REDUCTION IN GHANA

Introduction

Increasing financial access to the poor and the low income earners through sustainable financial services is one of the important strategies that can effectively contribute to achieving the Millennium Development Goals which is a statement of well-being for underprivileged population in developing countries.

It is estimated that Microfinance Institutions (MFIs) in Africa have over 44 million deposit accounts and 20 million loans customers. Overall, there are 23, 000 MFIs doted across Sub Saharan Africa (Mixmarket 2011).  This is just to establish the reason why current development programmes cannot afford to exclude   MFIs in developing and implementing effective poverty reduction programmes.

MFI are "missioned" to create social and economic impact as they create or increase financial participation for poor or low income clients who are mostly outside the formal financial sector. In summary, all MFIs strive to achieve threefold objectives which are; improving social impact, increasing outreach and becoming financially sustainable.

Ghana has witnessed a sharp growth in the establishment of microfinance institutions over the last decade. The MFI sector has recorded   increases in both borrowing and savings clients. Overall, the sector can be described as a vibrant one which is striving to improve financial services across the breath and length of the country.

Inspite of the vibrancy characterized by the increasing number of MFIs, deposits and loans there are many more questions that must be answered to ensure that microfinance in Ghana is able to contribute immensely to social and economic development of the targeted clients. The microfinance sector in Ghana must, therefore, establish the following:

• ·         Who really are the clients of the MFIs?
• ·          Can the regional location of MFIs assist in reaching  the poor?
• ·         Are the MFIs capable of contributing to reducing the poverty levels of their clients?
• ·         What issues are challenging the sustainability of the Microfinance operations in Ghana?

 This article is not to provide answers but will rather project some key observations or happenings within the microfinance sector so as to establish some awareness and further initiate discussions among players and stakeholders within the microfinance sector.

Considering the overall objective of microfinance and the intent to help contribute to national development by creating positive impact through the delivery of financial and non-financial services, there is the need for all stakeholders to review the happenings within the microfinance sector in Ghana. An appropriate review will enable stakeholders develop appropriate strategies or policies that can help the sector to become relevant beyond just becoming sustainable. The point is that MFIs can become very sustainable and yet not be able impact the livelihoods of its clients. MFIs are important actors in the financial sector and it is important for industry analysts to understand how the sector is evolving.

Location of MFIs in Ghana

Poverty levels across the 10 regions of Ghana are not the same. Aside the poverty levels, the population of poor people are also not the same across the regions. Some regions of Ghana have more population of poor people then others. The levels of poverty (incidence of poverty) are high for some regions compared with others.  For example the poverty incidence ranking by regions (2006) indicated that Greater Accra Region ranked 1^st with upper West Region ranking 10^th.

MFIs are classically established to target poor people. If that assertion is right then it stands to reason that more MFIs should be located in regions or areas that are characterized by high population of poor people. This can best be illustrated by using the global picture that shows that there are more MFIs in Africa compared with MFIs in Europe. This is so because there are more poor people in Africa than in Europe.

In the case of Ghana, however, the numbers of MFIs in regions with high poor population are less than the numbers of MFIs that are operating in regions with less poor population.  The situation is that, regions that are characterized by high economic activities have more MFIs operating in such markets.  This is evidenced by the number of MFIs operating currently in Greater Accra region compared with all the other regions irrespective of the population of poor people that can be found in a particular region.

The situation where more MFIs are located in highly economic areas can be attributed to many factors including entry barriers (capital requirement) that has been set for establishing MFIs in Ghana. This requirement are established in a way to reduce the number of new MFIs and further manager any other associated risk. Owners of MFIs prefer to locate their MFIs in highly economic active markets so as to ensure higher return on their investments.   

It is important for stakeholders in the microfinance industry to determine whether MFIs in Ghana are serving the right market in order to be able to contribute to helping to reduce poverty levels in their operational areas. By the location pattern of the MFIs it can be that MFIs may not be directly operating in the markets where they are needed most. If that is the case than the role of MFIs in contributing to  improving financial access to the poor and the low income earners who by their nature are more located in the rural areas or less developed areas of the country many not be realized.

Client Targeting by MFIs

Traditionally microfinance programmes target people who largely classified as poor. These categories of people are defined based on their cost of consumption or living. Poor people are defined by the World Bank as people who live on less than USD 2 per a day. Typical microfinance clients are low-income persons who do not have access to formal financial institutions. They are typically self-employed and often micro entrepreneurs. In rural areas, they are usually smallholder farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively unstable source of income. The net worth of these clients, therefore, in most cases cannot support them to borrow in large amounts

 Analyzing the type of clientele of most MFIs in Ghana, it seems to suggest that most MFIs are targeting clients that have different characteristics from the classical poor definition (USD 2.0 per day). Most of these clients have secured employment and work in the formal sector with consistent or reliable cash flows. Their salaries are guaranteed and majority of the new microfinance clients can provide the needed collateral requested by the MFIs.

Comparing the profile of the microfinance clients that majority of the MFIs are targeting, we can find a contradiction between the “acceptable microfinance clients” and what currently is happening in the Ghanaian microfinance industry. The profiles of the microfinance clients in Ghana include clients in formal employment majority of whom may be able to access loans from traditional banks.

These observations, therefore, leads to the next question; are MFIs in Ghana really targeting the poor who are outside the banking systems?  The importance of right targeting is only to ensure that MFIs are on course in contributing to reducing  poverty .MFIs are to participate directly at the bottom of the economic pyramid because that is where the poor people can be found.

In microfinance targeting it’s important to note that outreach in microfinance is not only about the number of people the MFI is reaching with its product and service but it is defined by other factors including the depth of  outreach which basically answers the question how poor are the clients being  targeted. 

Regulation of MFIs.

Regulation has many advantages to microfinance development. However, the manner in which microfinance institutions are regulated can affect the social objective of microfinance. In the case of Ghana, the regulation of MFIs does not encourage MFI to keep focus on achieving their social objectives.  The current microfinance regulation requirements in Ghana is more tailored towards the financial sustainability of the microfinance industry. The approach, therefore, tends to only address one aspect of the 3 fold objectives of microfinance.

The social objective of  MFIs are the strong elements that informs whether  microfinance can achieve the necessary impact on their clients and without necessary having to think only in commercial terms. It is important to note that credits or loans in itself does not directly lead to better nutrition or improvement in financial literacy. However, it is the training received by microfinance client that is mostly provided by the MFIs which builds the capacity of the clients and better enable them to make important choices including how to better manage the credit they receive. The non-financial assistance in the form of training also further enables the clients to appreciate the reason for quality nutrition for their households. Regulation, therefore, must encourage the inclusion of other non-financial details in the monthly reports by MFIs to their Apex bodies. There must also be a way to ensure that reports being made to various Apexes including the Central Bank does not compete with the core activities of the MFIs. This is with the backdrop that MFIs activities are already expensive and, therefore, designating one key staff only for the purposes of completing returns can add up to the already expensive cost and further squeeze social objective out of the overall equation.

Conclusion
Microfinance programmes have a purpose to contribute to poverty reduction and MFIs are the vehicle which drives sustainable microfinance programmes. There is the need to constantly review the entire microfinance sector in Ghana to ensure its effectiveness. This can only be achieved through a proper balancing of outreach, social impact and sustainability.  The microfinance industry may miss the objective of contributing to poverty reduction if the key issues regarding location of MFIs, clients targeting and regulation are not critically reviewed. MFIs in Ghana must operat directly in places where the poor can be located. Their products and services must be designed to target the financially excluded. It is only through this that the objective of ensuring that MFIs become relevant towards poverty reduction and economic development at the micro level can be achieved.  

4 key points why microfinance in Ghana may miss the poverty reduction objective

The regions noted for high number of poor people have the least number of microfinance Institutions. More than 90% of the MFIs are located in the urban centers competing the universal banks over the same customers.

The characteristic of the clients being targeted by MFIs are  mostly people above the poverty line with majority of them having the ability to spend USD 2.0 per day.

Regulation of MFI in Ghana does not encourage MFI to keep focus on improving the social aspect of microfinance. There is no much diffrence between the Universal and microfinance regulation. The social aspect that MFIs can address are the strong elements that informs whether a microfinance can achieve the necessary impact. Credit does not directly  lead to better nutrition or improvement in financial literacy. The training received by microfinance client is what informs them to be able to make the most important choices including how to better manage the credit they receive.

MFI staff today are more traditional banking oriented than developmentally oriented. They serve clients of MFIs just the same way they will serve universal bank clients.

MICRO ENTREPRUERS MUST GROW

I will disagree with anyone who will say that the Ghanaian is lazy. The average person in Ghana is not lazy considering the hard work people undertake to earn their survival. The various micro enterprises started and managed by many people is a demonstration that majority of the people in the informal sector are working hard to reduce their own “level of poverty”. Unfortunately many of these people inspite of their hard work have not been able to either grow their enterprises as expected. Some have managed the same size of business over the years.

The question is; what is keeping the hardworking man on the street hawking and hawking without graduating into a different business? What is keeping the koko(porridge), waakye (rice mixed with beans), roasted plantain seller, etc from transforming their small joint into a micro then to small and then becoming a medium enterprise? Analysing these issues overtime it is clear to me that hard work and access to credits are not the only ingredients needed for enterprise development or wealth creation.

The capacity of the micro entrepreneur including the hawker comes to play. Many of our entrepreneurs work with their raw skills. There is little or no adoption of tools and systems that can enable them to innovate well. Innovation can be capital intensive but simple ways of finding out how something can be done better may not need much money.
Why should the koko seller still fetch koko from the bowl of koko with a cup? Can’t there be a better and healthy way to do this?

Why should the plantain seller subject herself to serious health hazard to provide for her household without a better way of doing her business?
Why should the farmer still struggle just to keep a 1 acre farm? Many of such questions can be asked but how do we help solve these challenges.

• Business innovators must not only focus on developing strategies for the bigger businesses. There is need for more “thinkers” who can create creative systems that can help micro- enterprises to function better and more effectively. 
• Financial institutions must not only sell credits and saving products  they must be enterprise transformers.
• Government must not just be involved in supplying credit to the poor they must help finance tools and structures that can enable small businesses to work effectively and efficiently.