GHANAIAN MFIs AND TECHNOLOGY ADOPTION

The West Africa Microfinance industry is way behind innovate technology. Technology in the Ghanaian microfinance is limited to the use of the MFIs. Client have limited means to interact to their MFIs through the use of technology app.

The telecoms are trying hard to improve the use of the mobile money. The challenge here is that clients would still have to liquidate their e-cash to “real” cash before usage. This is not like the case in Kenya, Uganda and others where you can still transact with your “e cash”.  In this case there is much motivation to be on that platform.

Another challenge with mobile money platform in Ghana is the reliability of the mobile payment systems. I have for the past months not being able to use my e-cash to pay simple bills. I have complained to the service provider and till date that issue have not been solved.

In Ghana for example cash reload or transfer can largely be done from one network to the other and not across the networks. This is much of an inconvenience to clients because one would have to locate an agent for a specific provider before you can load or download your cash. The search for an agent can take you forever.

The way to improve innovation within the microfinance sector in Ghana is through partnerships and linkages. From my observations MFIs in Ghana are typical of Ghanaian businesses where everyone think they can succeed by operating as standalone entities. The challenges and opportunities in the microfinance business is so huge that no one MFI can harness the opportunity alone or will be able to conquer the challenges alone. There is the need to break up this “island business attitude” and seek for positive innovation and partnerships to help transform the entire microfinance industry. This is the only way to further improve on the relevance of microfinance services to clients as well as towards national development.

MANAGING MICROFINANCE INSTITUTIONS IN DIFFICULT ECONOMIC TIMES

Difficult  economic conditions prevailing in a country can  pose a challenge to enterprise development, sustainability and growth processes. Many enterprises including microfinance institutions will have to face the realities and develop the needed approach in order to sustain their operations.

The effect of  economic challenges on micro and small enterprises (MSEs)  will include but not limited to increasing  need for additional working  capital to manage the same size of  businesses, reduction in production or sales volumes, high  production cost and cashflow challenges.

Microfinance institutions (MFIs) as financiers of microenterprises will face various challenges just like the enterprises they finance.  This is largely because what happens to their clients in most cases is mirrored in their operations. For instance the inability of the clients to increase or maintain volumes and values of their sales can directly affect the repayment of their loans. Low volumes of sales can also affect the volume of deposits that can be mobilized.

The challenge for MFIs and other financialinstitutions in difficult economic times will be evident in decline in deposits mobilization,low loan recovery rates,high operational or transaction cost as well as high cost associated with borrowings and difficulty in raising the needed loans to support operations.

The decrease in deposits and low recovery rates are due to the fact that clients or micro and small entrepreneurs in view of their need for additional capital will quickly plough back available money in order to ensure that their enterprises can operate and generate the returns needed to meet other demands which may include repayment of loans, savings and household consumption. By this, therefore, income received from sales is directly used to restock their enterprises for fear of price changes. In some cases where clients are able to save, they do that in reduced amounts and such amounts do not stay long with the MFIs.

Microfinance operations are naturally expensive. This is due to the very nature of the microfinance business which involves making small loans and taking small deposits. The cost of transacting one loan or taking a deposit is very expensive. Owners and operators of microfinance institutions must not be oblivious of the challenging economic situation. MFIs  must prepare and implement the needed operational or managerial strategy to ensure that their businesses are able to continue to provide the needed support to MSEs and still be financially and operationally sustainable.

WHAT SHOULD MFIs EXPECT

Expensive Operations:

 The cost of operating MFIs is likely to increase due to general increase in prices of goods and services. The cost to income ratio is an important measure of profitability for MFIs. With the current economic conditions MFIs will register high “additional” operating cost. The challenge here is that the interest income which is the main source of income for MFIs will not proportionally grow in line with the operational cost. The failure to control the operational cost can, therefore, lead to a high cost to income ratio and further affect the operational fortunes of  MFIs. MFIs will need to implement controls that will lead to cost reduction. They must pay closer attention to growing and maintaining quality loans in order to improve their interest income.

High cost of capital:

MFIs in Ghana incur a high cost in raising funds to support their operations. With rise in inflation and other factors, MFIs in Ghana will further be required to pay more for the loans they contract. The high cost of the loans is due to unstable economic situation which is perceived by investors whether local or foreign as a high risk. The high cost of capital is, therefore, to compensate for the risk associated with the entire macro-economic situation and also to protect the value of their investments placed with the MFIs.

Short terms loans for MFIs:

Aside the high cost of capital, MFIs will witness that most investors will be willing to offer short term investments instead of providing long term investments.Shorter term credits will prevail because most investors are skeptical of the future developments of the economy that can further affect the value of their funds. The dangers with shorter term credits for MFIs is that it may affect the cashflow position of the MFIs. The challenge with short term loans made to MFIs is that MFIs are unable to fully invest these funds in order to record the needed returns to compensate for the cost incurred in raising such funds. MFIs can address this by ensuring to invest such funds in activities that have similar repayment patterns compared with the borrowed facility.

Reduction in deposit mobilization:

MFIs will experience reduction in deposits mobilization. Deposits are one of the key sources of funding for MFIs. MFIs spend to mobilize in order to place the funds mobilized in loans and other investments. Under difficult economic situations, the enterprises of client are financially stretched and the income from these enterprises will dwindle. This is expected to negatively affect the savings habits of these clients. This, therefore, means that clients will not have enough income to spend and save. Clients will prioritize their consumption smoothing needs instead of savings or loan repayments. The other obvious thing is that because the general cost of items have gone up, microclients will have to use more of their little income to buy what they need. All these development have the tendency that will affect the loan repayment potentials of the clients in questions.

Conclusion

Acknowledging the current economic challenges as an owner of a MFI is one step to ensure that MFIs can be able to stay financially sound to support operations and be able to reach out to targeted clients.   The good thing with MFIs and difficult economic conditions is that, there is much evidence to support the fact that MFIs have the potential of surviving harsh economic conditions if prudent steps are implemented. This is made evident by the growth registered by the microfinance industry during the world economic crisis. 

Sustainability of the MFIs is an important step to ensure that MFIs will be available to support the economic empowerment of their clients through the provision of financial and non-financial services.

MFIs must ensure to prioritize the management of their liquidity. This will include having to constantly or frequently review the liquidity positions. This can be performed on weekly basis or at least on monthly basis. Instead of depending on only one person to make decision on the liquidity status of the MFIs, it is advisable to use small committees instead of one man reviews.

MFIs must reduce or suspend capital investments and rather fund more liquid assets. This is because MFIs would have challenges with raising funds and, therefore, must be able to internally make funds available for investments in areas that will yield better returns to support increase in operational cost. MFIs can hold on to branch expansion and rather seek to improve the efficiency of their operations.

MFIs must ensure to do proper and detailed loan analysis for all their loan requests. Credit officers or managers  should not only assess the “ability to pay”loans only based on the financial position of the clients  but must include assessing  the entrepreneurial competencies  of the clients to better make informed decisions to manage and grow their business enterprise. In addition, MFIs must ensure to diversify their loan portfolio by ensuring to finance clients involved in different economic activities instead of financing clients involved in just one economic activity.

This is the time MFIs must place priority on efficiency instead of expansion. MFIs should improve their liquidity management to meet the frequent cash withdrawal and also aim at lean operations. MFIs must survive to support the micro and small entrepreneurs and this can be only achieved if owners and managers of MFIs make inform decisions regarding the day to day operations of their enterprises.

Microfinance is for the empowerment of the poor and the low income earners. They are not to serve the already served population.

WILL MY MICROFINANCE COMPANY COLLAPSE?

I encountered an “owner manager” of a microfinance company who had signed onto a one on one microfinance operational support and advice session. During the course of our discussions we spoke on the challenging facing the Ghanaian microfinance sector. I mentioned in our discussions that over 50 microfinance had collapsed as at end 2013. This particular subject led the owner manager to ask a question that I found quite revealing.

The “owner manager” made a confession and stated that “anytime I hear the news of microfinance companies collapsing I feel very uneasy and very much afraid. I always ask myself; will my microfinance company collapse”?  

In my dealing with microfinance companies I have not thought about personalizing the challenges within the sector although I have looked at the issues from the operational point of view. I am sure the fears of the owner manager was largely the point that the failure of the company would mean that he would have several liabilities to deal with. This is because the capital invested in that business was not entirely his own and that he was answerable to the depositors and other investors.

The “manager owner” was expecting an answer for his question. Something that I have not really thought off. Well I told him “the answer to your question is that your company will collapse if you do what caused the failure of those companies”.  This article will look at some of the things that might have contributed to the collapse of some of the MFIs. I am sure these pointers can provide answers to other owners of MFIs who are battling with the fear of whether their microfinance companies will collapse.

This article is not a scientist explanation of the causes of collapse of some microfinance companies but from an operational point of view to explain why your microfinance company will collapse if you do what will cause it to collapse.

 FACTORS THAT LEAD TO MICROFINANCE COLLAPSES

To start with it is important to note that business collapse can be fueled by two main factors: external or internal factors.   

External Factors

The external factors are largely the economic, political environment within which the business is operating. The external factors are economically related to the happening within a defined nation and sometimes even at the world level. A typical example is the effect of the world economic crisis which happened in 2008. This crisis affected business across certain parts of the world including Africa. The external factors may also include, high inflation rate, foreign exchange rates, regulatory policies, political decisions, economic opportunities or markets, etc. For instance, the absence of adequate economic opportunities in a particular country or region cannot guarantee the efficient loan repayments. Lack of economics opportunities will prevent loan clients within such catchment areas from finding the needed opportunity to invest the loans they secure so as to repay the loans they contract from the MFIs or banks. High occurrence of such events can therefore lead to high poor loan performance and therefore can affect the overall sustainability of the MFI.

With reference to the collapses of MFIs in Ghana, the role of external factors like the risk arising from regulatory or compliance, market and foreign exchange contributing to the collapsing MFIs cannot be compared with factors arising from the competencies of the owners, board and staff of the collapsed microfinance institutions or what can best be referred to as internal factors.

Internal Factors

Internal factors that can negatively affect the operations of the MFIs are the day to day decisions and actions of the staff and management of the MFIs. These activities have a measure of risk which when not managed adequately can affect the entire operations of the MFIs.

Risk is very central to the management of MFIs just like any other financial institution. Financial institutions including MFIs are responsible for the distribution of financial resources within any economy. They mobilize financial resources from the “haves” in the society as deposits and make them available to the “have nots” as loans or credits. These activities involve the management of risk.  The MFIs are to ensure that the money they mobilize from the “haves” can come back to them with some added value in the terms of interest. On the side of the “have nots” they are to ensure that loans or credit extended to these people can be repaid. These two events are all risk centered activities which should be managed to ensure that neither the depositor nor the borrower become a negative risk to the activities of the MFIs.the

Microfinance institutions are more prone to risk. This is because they deal with the part of the population that have been known to be highly risky. These clients are risky because they have low level of education, are involved in enterprises that are risky, live in areas that are known to have poor sanitation and therefore high incidence of diseases, have no or little access to health care facilities, do not have reliable income, etc.

Another pointer of risk is the fact that microfinance is a business of small volumes. This therefore means that there are several small element of risk associated with the various small transactions. Each small transaction comes with cost. This is one reason that explains the high operational cost associated with microfinance. MFIs are, therefore, presented with the challenge to manage both inherent risk and cost in each of the small  transactions so as to stay in business.

The situation with most MFIs in Ghana is that although it is known that microfinance has high operational cost, most MFIs rather pursue activities that increases cost instead of keeping cost under control. For instance some MFI have adopted physical branch establishment in order to expand outreach and increase their share of the market. This system has led to a situation where such capital investments now competes with available funds for on-lending purposes. It is important to note that the loans and advances are the main source of income for microfinance. Growing bad loan or not having the needed funds to grow quality loans therefore means that a microfinance company may not be generating enough income to support its operations.

Most MFI in Ghana are keen about how their companies image. This has led to investment in image enhancement through office set up, branded office buildings, cars, etc. The problem here is not the image investment but the source of financing the image enhancement. Some MFIs have funded this using depositors funds. The owners expect that the branded image will lead to client confidence and further translate into increase business activities from their clients or investors. The inability to match the terms of these investments to the terms of clients deposits have led to liquidity mismatches.  The effects of poor liquidity management adopted by some MFI companies is one main thing that have threaten the existence of the microfinance companies. 

Managing MFIs for success

As indicated earlier microfinance is already an expensive business. Therefore for microfinance to achieve the objective of being sustainable through increasing outreach and achieving impact there are two ways to go about it. One way is to increase the volumes of transactions so as to be able to finance the cost of the MFIs. The second scenario is that as much as possible MFIs must try to cut down on any activity that have cost implication through being efficient. For instance MFIs must look at their staff needs very well before they undertake to hire more staff. Getting job executed within the MFIs is not necessary about having many staff. It is about improving the capacities of the staff to enable them to handle task effectively.

 The situation with the Ghanaian microfinance is that most owners actually take on staff who rather become a source of cost. To some owners, hiring or keeping a number of staff is more to satisfy “business ego” rather than for economic or business sense.  MFIs that intends to stay for long need to insist on ensuring that they have the acceptable staff to client load that can guarantee efficiency. The simple way to manage this is to ensure that the frontline staff or credit staff have the number of loans or deposit clients whose business with the MFI can pay for the cost of hiring that particular staff.

The other source of cost that have threaten the operations of the microfinance companies is the cost at which majority of them mobilize or take on investments. The other side to the cost is the terms or tenor for the borrowings (investments) or deposits. The cost of the investment made by investors to the MFIs ranges from 5 % to 10% per month. The high cost of investment has been necessitated by the lack of adequate source of competitive funds.  MFIs are, therefore, forced to take on these high cost investments which in most cases cannot be passed on as loans to generate the needed income to repay the investors on due dates.

The other challenge with regards to the cost of investments is the issue of the tenor. It can be observed that the sources of funds for the MFIs are mostly short term. The short term nature of the funds cannot allow them to adequately invest the funds for long term purposes. The interesting thing is that some MFIs can take on investment with only one month tenor and give loans for three months. Under this circumstances most MFIs are not able to effectively utilized the funds they contract and this rather become a cost to the MFIs that is if they are able to make payment when such investments are due.

The chances of a microfinance company failing is a factor of what is being done from within by the management and staff of  the microfinance and not what is happening outside it. These include how the financial resources are being managed, the attitude and lifestyles of the owners, their personal life styles and their business management skills. The microfinance companies that have become very successful are not only owned and managed by entrepreneurs. They are managed by people who have improved their understanding and skills in microfinance. This is what owners of microfinance companies in Ghana must aim at.

To prevent more microfinance companies from collapsing, there must be sustained investment in the board, management and staff of these companies. Owners, managers and other stakeholder must put much emphasis on how to improve knowledge and skills with regards to microfinance management. MFIs must analyze their outreach objectives, capital investment   and staff recruitment and ensure that all these actions do not become a drain on the resources of the company.  MFIs must focus on the microfinance business and avoid creating other investments or business entities using short term funds from the MFIs.  So to conclude a microfinance company will collapse if you fail to know that your success as a microfinance is not how much you spend but how much you generate from what you spend.