Investopedia, an investment dictionary website, defines microfinance as “A type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance”. This is one of the best definitions I have come across for microfinance.
The concept of microfinance has been with us for centuries, from the days of our forefathers who gave and received loans from each other for various reasons but mainly to invest in their farming businesses. These loans were paid back at an agreed upon time, and interest paid with portions of the crop harvested. Over the years a much more organized system evolved –the susu scheme which has since grown into the microfinance phenomenon we are experiencing today.
Microfinance has similar history across the world; from its highly informal and unregulated roots to its modern formal and semi-regulated form. Modern history however credits Bangladeshi economist Muhammad Yunus with modern microfinance hence his world acclaimed title as “father of microfinance”. Yunus in 1976 established the Grameen Bank which is credited with lifting millions of people out of poverty. Mr. Yunus and his bank jointly won the Nobel Peace Prize in 2006 for lifting millions of people out of poverty through their visionary leadership.
When practiced well, microfinance can achieve the following social good as can be gleaned from the definition above:
• Provide a source of livelihood for many unemployed people
• Provide capital for low-income people to engage in sustainable business
• Eliminate unintended consequences of poverty e.g. Social unrest, crime, psychological problems (depression, etc)
• Provide financial services to areas deemed unprofitable by mainstream financial services firms and banks
The potential good that can be done through the ethical administration of micro-loans cannot be overemphasized. The question however remains that who is the ideal 'person' to invest in microfinance -- Non-profit institutions, Private Investors or Governments? Are Microfinance Institutions (MFIs) really helping the poor or they are exploiting them? What is the motivation for the recent mushrooming of MFIs everywhere particularly in Ghana? What informs the interest rates that these MFIs charge?
A lot has been said about microfinance being a major vehicle to drive the poor out of their poverty. Many institutions and persons have come up with various programs and projects in an attempt to eradicate poverty but only succeed in enriching the proponents and the managers of those project and programs while plunging the poor deeper into poverty. Truth is that:
• Poverty eradication is a myth and can never be achieved
• It has always been very expensive to be poor and this will not change
To my first statement, the idea of being poor or wealthy is relative; the goal post keeps shifting all the time. The World Bank previously had the International Poverty Line at $1 a day, later revised to $1.25 a day. These revisions will continue. One can only be considered wealthy relative to those with the least wealth in their society and vice versa as regards the poor person. So, unless we intend to create a Utopian Society (communist of course) it is obvious the idea of poverty eradication will never be achieved.
My second statement stems from the fact that the poor pay more for goods and services than the rich do; from sachet water to micro-loans. Whereas the poor pay GH₵ 0.10 per sachet, other people pay GH₵ 1.50 for 30 sachets (the poor paying double the price) also whereas the business people complain of high interest rates of 25% per annum, the poor on the other hand are charged 120% per annum (10% per month). It is definitely very expensive to be poor. It is obvious that it is not only MFIs that are taking the poor to the cleaners but rather every other person does that.
It is not all bad news about the effects of microfinance on the poor and poverty reduction; there are hundreds of positive transformational stories about microfinance around the world. As Damain von Stauffenberg, the Director of MicroRate, a microfinance rating agency rightly put in “Microcredit really is effective in allowing poor people to improve their lives, but it cannot cure all the causes of poverty; and yes, credit is a two-edged sword: in the hands of unscrupulous or incompetent lenders it will make poor people even poorer. Microfinance therefore faces the double challenge of keeping expectations as well as abuses in check.”
Back to my first question, 'who should invest in microfinance?” in other words, should microfinance be commercialized? The answer is Yes and No.
Yes, if regulators are in the position to tightly regulate the industry and avoid the institutionalization of 'loan sharks' whose primary aim is to exploit the poor and make as much profit as they can get away with.
No, because the idea of microfinance is one of social business. The idea of commercialization will inevitably lead to exploitation of the poor. This is how 'the father of microfinance' Muhammad Yunus put it "Microcredit should be an area for social business where you want to help poor people get out of poverty by doing business...You get your money back, but you don't make profit out of it." According to Mr. Yunus, any MFI that charges more that 10% above the cost of funds is definitely crossing the 'red line'.
The argument made by most MFIs to justify their rather high interest rates is that the cost of doing business is much higher for MFIs than it is for larger banks. This assertion though true, should not justify the rather abnormal interest rates charged by some MFIs. For instance the salary and stationery cost incurred to lend out GH₵ 200,000 in 400 loans of GH₵ 500 each is much higher than the cost incurred by a bank in giving out a single loan of GH₵ 200,000 to a business. Another justification sometimes given for the high interest rates is the need for the MFIs to make profit in order to reinvest to help the poor. Ridiculous! Preposterous!
It is therefore clear that ideally, Governments, Non-profit organizations and Social Business should be the ones engaged in microfinance and not profit oriented private commercial entities. In Ghana, until the second half of 2011 there was hardly any guideline for the regulation of MFIs. The absence of regulation, coupled with the success story of Unique Trust (UT) Financial services has drawn many persons and institution into the microfinance industry and naturally the number of abuses and exploitations has since been on the increase.
Given the potential abuses that abound in commercial microfinance, the establishment of the Microfinance and Small Loans Center (MASLOC) by the Government of Ghana was welcomed news to both Ghana's development partners and the population at large. The need for government to have its own microfinance institution is even more crucial now than it has ever been. Left to commercial MFIs, the poor and unemployed will plunge deeper into poverty since the levels of interests charged are simply abusive and exploitative. If businesses in the formal sectors are unable to operate profitably with 25% annual interest rate loans, how do we expect an informal business person, who is not well trained and unable to source products at wholesale prices, operate profitably with 120% interest rate? Of all the operators in the microfinance space in Ghana, MASLOC has the lowest APR of 24% per annum (2% per month). Even the so called Financial NGOs (FNGOs) charge annual interest rates between 36% and 60% (3-5% monthly interest).
MASLOC can achieve its aim of reducing poverty, creating jobs and wealth only if it is managed ethically and responsibly. It is unacceptable for MASLOC to have 81.8 million in default as reported by the GNA and carried by various news media on January 26, 2010. In a May 2010 article carried by Joy Business, the CEO of MASLOC Ms Bertha Ansah Djan was reported to have said that the default rate on MASLOC loans was more than 90 percent. Whatever the reasons, excuses or explanations given for this high level of default rate is unacceptable and must be condemned. One thing is evident; there is a problem with the management of the center. MASLOC has been turned upside down, instead of having over 90 percent recovery rate, it had over 90 percent default rate. MASLOC will NEVER achieve its aim with this kind of unsustainable record. This great project should not be allowed to die prematurely.
The need for MASLOC to be reorganized is better appreciated when compared with the Grameen Bank (GB). According GB's latest report on its website, since its establishment until November, 2011, GB has disbursed a total of $11.465 billion of which $10.217 billion has been repaid representing 89.1 percent fully recovered. GB reports 96.82 percent recovery rate over its 35 year history. This data alone is enough demonstration of the sense of urgency government needs to attach to reformation/reorganization of MASLOC
The MASLOC program cannot be sustained in its current form. This is not the time to politicize the problems of MASLOC. It is worth noting that this social intervention program was started by the Ghana Government under the NPP regime and it is being continued under the current NDC regime. All well meaning Ghanaians and the media should not put any political twists on this issue. The issues of who started it and under whose regime were the bulk of the bad loans disbursed is irrelevant. What is important is whether we all agree that there are problems with MASLOC in its current form, and if we agree there are problems, then let us discuss the way forward.
The way forward:
First, MASLOC should be a semi-autonomous entity which must be shielded from the direct interference of politicians. The Executive Director (ED) must have the authority and ability to raise money from the capital markets for onward lending to its members. The center must wean itself off government support if it is to be sustainable. When given the free hand to operate, an ED should be able to creatively raise funds targeting specific industries, communities or groups of people. According to a December 2010 report by ADA Microfinance Expertise, the 'funding problem' being experienced by MFIs is not that of scarcity of funds but rather the opposite. This according to the report does not suggest that MFIs are swimming in cash but rather those MFIs that fund themselves internationally (which is a small percentage of MFIs) have too much cash chasing them. MASLOC fits into this group of MFIs that are able to fund themselves internationally. I believe all competent EDs will take advantage of the international capital markets when given the free hand to operate.
Second, the human resource managing the center must be properly and adequately trained to do a highly professional job at managing MASLOC loan portfolios. Loan officers need to be able to manage their individual portfolios the size of which shall be determined based on competence.
Third, mangers should be incentivized to give off their very best and achieve rewards. Employee remuneration should be performance based where good performance is positively rewarded and subpar performance negatively rewarded. When the organization develops an unambiguous Key Performance Indicators (KPIs) by which performance is measured, staff will be motivated to give off their very best and achieve results.
Fourth, clear guidelines for granting of microcredit must be well laid out and violators severely punished. Practices such as employees granting themselves loans to the tune of GH₵ 70,000 will not be repeated when this is done. Criminal behaviors by employees prosecuted and people jailed. Causing financial loss to the state should not be a charge reserved for politicians alone but rather all Ghanaians and criminals must prosecuted under same crime.
Lastly, competent risk management professionals must be recruited to help in the management of the center. Risk management and internal control systems should be put in place to ensure that all 'criminals' who might be working for MASLOC are flushed out. For instance, all key employees and their spouses must declare their assets prior to working for MASLOC.
MASLOC must not be allowed to die! If it is allowed to die, the MFIs will be emboldened to continue to exploit the poor and unemployed. Eventually when the poor gets fed up the larger population will be made to bear the brunt of their anger. Remember Tunisia and the genesis of the so called Arab Spring.
By Kwesi Acquah
Business & Financial Analyst
Member, Volta Advocacy Forum
Contact: [email protected]
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