The microfinance industry in Ghana
during year 2013 witnessed some interesting developments. The year saw most
microfinance institutions (MFIS) trying to position by building systems as
required by the regulator. During the
same year, about 30 MFIs also went down raising fears amongst many
stakeholders. This generated mixed perception about the business of microfinance
in Ghana and many more questioned were asked whether microfinance was really a
developmental tool. These questions were supported by the news of collapsing
companies and the high interest rates charged by the MFIs.
During the year, the sector witnessed
an increase in the capital requirement for establishing MFIs. The capital
requirement of GHC100,000.00 for deposit taken institutions was increased to GHC500,000.00 whiles that of
non-deposit taken MFIs increased from
GHC60,000.00 to GHC250,000.00. The overall
objective of the increment was to increase the risk base of these MFIs and also
raise the entry bar for establishing new MFIs.
Microfinance has been used to provide
poor clients with the needed opportunity to take advantage of economic and social opportunities in various
developing countries like Bolivia, Bangladesh and Uganda. It has
served as a transformational tool contributing to the financial and
non-financial capacities of the poor and the low income earners.
A look at the developing stages of
miocrofinance markets reveals that the Ghanaian microfinance sector can best be
said to be in second stage of microfinance development. This stage is characterized
by the establishment of more MFIs and increasing clientele base but with only
few product options. The dominant
products distributed by the MFIs are mainly microcredit and saving
products.
The third stage of microfinance
development is when there are diverse products with accompanying increasing outreach.
This stage is when clients can have the option of choosing among other products
to meet their financial needs. This stage should provides products for insurance, housing, agric loans,
warehouse finance, and other non financial services to the microfinance client
without any difficulty .
The Ghanaian microfinance sector by far is yet to expand in terms of
increasing outreach in to provide financial access to close to 50% of the
people outside the formal financial sector. The growth accompanying effective microfinance
implementation can only be achieved through providing better understanding of
microfinance as a developmental tool.
This article will share 6 key
resolutions that microfinance institutions can make in the year 2014 in order
to improve on their operations.
Increase Efficiency
Microfinance has high operational
cost. Granting small loans and taking small deposits have high transactional
cost. Microfinance is, therefore, a business of volumes. Increasing the number of
transaction can help cover cost in order to be profitable. Another cost related
element is non financial services which includes building the capacity of the
clients. These are mostly done for microfinance clients but they do not
directly yield any cash return to the MFIs.
Although Microfinance is very
expensive business to undertake, it however, does not mean that nothing can be
done to control the high cost associated with its operations. High operational
cost is one reason that has been used to explain the high cost of microfinance
loans. This can be as a result of inefficient operational systems adopted. For
instance, cost can be increased or reduced when staff of MFIs are assigned to a
number of loan clients (Client per credit officer) that are below or above the
capacity of the officer.
The level of skills or the skills
sets of loan officers or deposit Officer can increase or decrease the cost of transactions
to clients. For instance, loan officer’s ability to handle clients request on
time can reduce the cost associated with a particular transaction. Some loan
officers are not schooled on what to ask for when they interact with loan
clients. Sometimes a single loan request becomes too expensive when the clients
or officer would have to visit each other for additional information which can
be avoided if there is a clear checklist available.
Additionally, using effective and
reliable information technology systems can also help reduce the cost of
transaction by reducing the time needed to execute all transactions.
For MFIs to remain sustainable, MFIs
would have to develop efficient operational systems which must include
improving the skills and knowledge of the credit officers to enable them to
adequately manage the workloads that have been assigned to them. Managers of
MFIs must also ensure that the clients to credit officers are within the
acceptable limits to ensure efficiency and positive returns on their loan
investments.
Liquidity Management
Liquidity management has been one of
the most important challenges that have confronted many MFIs in Ghana. This is one major thing that has
contributed to the collapse of some of these companies. The reason of fraud
associated to MFIs collapses may not be as dominant as the reasons linked to
the inability of MFIs to prudentially manage their liquidity.
Liquidity management guarantees a comfortable
position for the MFIs to have available cash to manage it day to day
activities. For the MFIs, these activities may include, loan disbursements, cash
withdrawals, honouring the payment of investments to investors, etc.
To be sustainable, MFIs like most
financial institutions are required to manage their cashflow efficiently. This will
require making decision regarding what amount of cash that should be put into
investments and which kind of investments (short, loan term or call deposit) is
appropriate at a particular time to invest in. How much should be made ready for
daily, weekly withdrawals? How much cash will be mobilized as savings, etc? These questions are very important in order
for the MFIs to make the most out of the deposits that they mobilize.
The mistake some MFI managers
commit is how they the depositors’ funds. Some are used for
activities that may have longer maturity terms than that of the deposits. Some
managers have used such funds to invest in office set ups and even purchased
official vehicles thereby locking their cash in long term fixed assets.
To find ways around this, MFIs should
consider borrowing from other financial institutions to finance some of their
capital investments but should desist or reduce their desire for using deposits
to undertake branch expansions, office facelifts, purchasing vehicles, etc.
To stay in business in 2014 and beyond, MFIs will
need to match the characteristics of their deposits to the investments they undertake.
MFIs must also watch what they pay as interest to their investors and also negotiate
terms on the investments so that at least they are pegged longer than their
short term loans.
Capacity Building
The core of MFI business depends on
the knowledge and skills of the credit officers or the officers that are constantly
in contact with the clients. The frontline staff of MFIs are the key development actors in
microfinance. They are required to understand their role as microfinance
officers beyond the duty of granting loans and making recoveries. They must be
educated to appreciate the dynamics behind how small loans can be used to
improve the livelihoods of their clients. The truth is that many more officers
within the microfinance industry cannot even comprehend the logic behind how
small amounts of loans can assist in poverty reduction. They are microfinance
workers in title but not in knowledge.
MFIs must try to increase the efficiencies
of their workforce so as to increase impact and ensure sustainability. These
can be achieved by exposing microfinance
staff to various aspects of microfinance
either through classroom training, workshop participation, industry exchange
programmes and hands-on or on-the- spot training of staff. Training must be
part of the main activities of MFIs and these must include training the board
and management to appreciate the very nature and dynamics of transformational
microfinance.
Get Board Active
The governing boards of microfinance
institutions are important part for building vibrant microfinance institutions.
Like any other board, they are required to formulate policies and supervise the
implementation of the policies. The regulatory
requirement mandates the formation of a board as part of the process of
regulation.
The observation with most board of
MFIs are that majority of them are not very active. On paper the boards exist
but in reality majority of the boards do not have active proceedings to guide
the whole governance process of the MFIs.
Some of the reasons necessitating the inactiveness of the board is the
way and manner most of the board are formed. Most MFI owners choose board
members they feel comfortable with but who may lack the needed skills and
knowledge to help with managing the MFI.
In cases where some of the boards are
active, the owners of the MFIs are sometimes more powerful than the board such
that the board’s recommendations are subjected to the decision of the owner
CEO.
An active and vibrant board is not
about the names on your board. It is about the quality of people who can make
time to meet, discuss and understand the business of microfinance and the associated
challenges as well as the opportunities that can be take advantage of.
In 2014, MFIs must find ways of
making their boards active not only in terms of meetings but to improve their
role to provide policy guidance to help avoid the various pitfalls that most
MFIs may find themselves.
Increase Outreach versus Sustainability
The aim of every MFI is to be able to
reach out to many more people with their services and products. This has
inspired MFIs to branch out to places that may be far away from their head
offices. The MFIs either physically establish structures in these places or
provide mobile services (susu) or banking on foots. Any of the branching method
adopted to provide services to client have their own cost implications. The
cost of managing branching if it is not compensated with the needed income can
affect the overall financial and operational sustainability of the MFIs.
When MFIs think of outreach, it is
important to think of the cost and the returns. This will ensure that the systems
including the human resource are not overly stretched. Some MFI have encountered
operational problems with the onsite of increasing outreach. Outreach or
branching can lead to inter-branch or agency mismatches which have been used
mostly to undertake fraudulent deals by some staff due to weak internal
systems.
In some other cases, the cost
involved in financing the outreached is far beyond the income from such
decision and this give rise to liquidity challenges. For instance, some MFIs send officers to areas that are
quite far from their operational center in order to provide services to clients
in such communities. The number of clients and volumes of transaction in such
communities may not be economically viable. The long term effect of such decision
is that the MFI may commit resources from other quarters to maintain such
activities which may affect the overall financial performance of the MFI. This
is not to say MFIs should not increase outreach. What is recommended is that MFIs
would have to increase efficiency with every decision to increase outreach in
order to stay in business.
Client Entrepreneurial
Development
The current trend shows that most
MFIs in Ghana are not very focused on providing the needed capacity in the form
of non-financial services to the clients. The MFIs are quick in providing loans
to clients without first ensuring that the clients have the needed capacity to
effectively manage their enterprises. The provision of the non-financial
services can also assist the client in putting the loans to effective use. One
of the striking differences between microfinance and other financial is the
attention giving to clients which focuses on making them capable of managing
their enterprises and household duties.
To improve the impact of the
microfinance sector in contributing to economic and social growth of their
clients, MFIs must take a keen interest in micro enterprise development in
order to provide the necessary support to their clients so as to help grow the
enterprises of their clients.
Conclusion
The microfinance sector has the
objective of meeting the financial demand of the poor and the low income
earners. In the era of commercial microfinance, it is important for MFIs to
increase their operational performance in order to be financially viable so as to
continue in business. Improving the skills set of microfinance workers, proper management
systems and quality governance are key contributors of efficiency. It is
important for stakeholders to keep asking the one important question that is “what
significant difference is microfinance making towards poverty reduction in
Ghana”? There is the need for all stakeholders especially the MFIs to innovate and
work towards making microfinance a developmental tool.
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