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.

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.