Microfinance In Ghana: “Mission Impossible Or Mission Drift”

When Professor Muhammad Yunus set out in 1976 to transform the lives of women in Jobra, Bangladesh who dealt in bamboo, I doubt in my opinion he knew the massive transformation he had set in motion. He is often credited as the father of modern day microfinance with his pioneering Grameen Bank (1983).

It is however prudent to note that various forms of small, informal credit unions and lending groups have existed in history prior to the formation of Grameen Bank.

Literature on microfinance points to mixed effects it has had on the lives of people who have benefited from a variety of microfinance products. For example, Stewarts et al. 2010 in their paper, The Impact of Microfinance in Sub-Saharan Africa: A Systematic Review of the Evidence, systematically reviewed the evidence of the impacts of micro-credit and micro-savings on poor people in sub-Saharan Africa (SSA).

The authors considered impacts on income, savings, expenditure, and the accumulation of assets, as well as non-financial outcomes including health, nutrition, food security, education, child labor, women’s empowerment, housing, job creation, and social cohesion. The available evidence shows that microfinance does harm, as well as good, to the livelihoods of the poor.

But is that indeed the case in our motherland Ghana? Have you seen any comprehensive report chronicling the effects of microfinance on the users of their products and services in the Ghanaian context? Apart from the obvious collapse and chaos of some institutions in the sub-sector, has the regulator come out to detail the effects of this pro-poor intervention on the lives of individuals or even the potential impact the Ghanaian microfinance sub-sector may have on lives and livelihoods of the poor? Or perhaps such a report exists and has not yet been made public or I have not been able to get my hands on it? There exists a plethora of studies done by students, scholars etc. on a myriad of issues in the sub-sector. But would it be too much to ask if we got the views on the one in charge of the sector?

There have been a number of reports by the Bank of Ghana on the state of affairs in the microfinance sub-sector. The most recent report was contained in a broader report on the financial sector which was released by the regulator in March, 2018. Find the excerpt on the microfinance sub-sector below;

“6. The problems in the financial sector were also reflected in the Microfinance or MFI subsector comprising MFCs, MLCs and FNGOs, and RCBs and the extent of distress in this subsector was characterized by severely impaired capital; inability to meet regulatory capital adequacy requirement; generally low asset quality; and liquidity crises.

These have culminated in threats to depositors’ funds thus eroding public confidence and undermining efforts to promote financial inclusion. Of the total number of 566 licensed MFIs in 2018, 211 are active but distressed or folded up.

Also, out of the total number of 141 RCBs, 37 are active but distressed or folded up. In total, it is estimated that 272 out of the 707 institutions in the sub-sector, representing 38.5% are at risk. This indicates that approximately GHȼ740.5 million is owed to an estimated 705,396 depositors of the distressed or folded up MFIs and RCBs. In terms of significance, the deposits under distress form 8.81% and 52.49% of industry total deposits of RCBs and MFIs respectively.”

Before we delve into a brief minutiae of microfinance in Ghana (anecdotally speaking) it is prudent to explore the fundamental underpinnings of microfinance and what exactly the mission of microfinance is and ask ourselves has the microfinance mission gone adrift? Or has it sailed into treachery waters as it struggles to find its way back to calm waters? Or has this mission indeed failed to achieve its desired purpose?

Theoretically and empirically speaking microfinance is the provision of financial products and services to low-income individuals, earners and generally individuals who fall outside the scope of the mainstream financial services.

There you have it! Clearly defined! The mission of microfinance as envisaged by the father of modern day microfinance is the provision of financial services to the poor with the aim of ostensibly transforming their lives. These services range from savings, credit, insurance and money transfers.

Microfinance (speaking from a Ghanaian’s perspective) was not meant to blow up into an unsustainable business venture robbing the common man of his savings and plunging the average household into misery as they see their savings and investments disappear into thin air! NO! This was not the mission of microfinance, but alas, anecdotally speaking, this seems to be the case of the microfinance sub-sector in the Ghanaian financial services landscape.

Now, within the Ghanaian context, what will we call microfinance? The Bank of Ghana, the regulator of the bank and non-bank sector has categorized the microfinance subsector. Following Bank of Ghana’s NOTICE TO BANKS, NON-BANK FINANCIAL INSTITUTIONS AND THE GENERAL PUBLIC, NOTICE NO. BG/GOV/SEC/2011/04

Find below the said categorization;
1. Tier 1 activities shall comprise those undertaken by Rural and Community

Banks, Finance Houses and Savings and Loans Companies – These institutions are regulated under the Banking and Specialized Deposit-Taking Institutions Act, 2016 (Act 930)

2. Tier 2 activities – Those activities undertaken by;

i. Susu companies and other financial service providers, including Financial Non-Governmental Organizations (FNGOs) that are deposit taking and profit making.

ii. Credit Unions. However, credit unions are not regulated under this Notice. A Legislative Instrument under the Non-Bank Financial Institutions (NBFI) Act, 2008 has been passed to regulate their activities.

3. Tier 3 Activities – Those activities undertaken by

i. Money lenders
ii. Non-deposit taking Financial Non-Governmental Organizations

(FNGOs).
Money lenders and Financial NGOs are encouraged to belong to an umbrella Association. FNGOs desiring to take deposits shall convert from companies limited by guarantee to companies limited by shares.

4. Tier 4 activities – Those activities undertaken by

i. Susu collectors whether or not previously registered with the

Ghana Cooperative Susu Collectors Association (GCSCA);

ii. Individual money lenders.
Individuals and entities engaged in the above activities are encouraged to form associations for the purpose of furthering their objectives and or dealing with regulators and other stakeholders.

It is important we take full cognizance of this categorization to make informed decisions when examining the sub-sector.

I would want to believe the BoG had good intentions when it set out the framework for the sub-sector and believed in my opinion that it was helping plug a deficit in our financial system and at the same time expand and improve the livelihoods of our brothers and sisters in the low income or ‘poor’ bracket. But however due to a myriad of challenges we are well-accustomed with ranging from weak governance structures, offering abnormally high interest rates in an attempt to attract and retain customers which also the translates into usurious lending practices, regulatory weaknesses and most importantly the lack of understanding of what the business is, (MISSION DRIFT) this fantastic vision is fast losing relevance as the preponderance of debacles in the sector rages on.

What would it take to get the sub-sector to fulfil its mission as envisaged by the good Professor Yunus and of course by the regulator itself, the Bank of Ghana? Should it behove the regulator alone to ensure that indeed microfinance institutions stick to their niche market? Or it is incumbent on practioners to do so? I understand the need to diversify their sources of funding as they target individuals in the upper parts of the income ladder to broaden their deposit base.

The funding here is critical because the market they are intended to serve may not be able to provide the necessary amount of deposits to enable smooth lending but this should not lead to an over concentration on the others to the detriment of the main target. A fine balance must be struck!

There’s no denying that there are indeed some ‘industry-worthy’ microfinance practitioners out there and all things being equal have made some decent impact on the lives of their customers, anecdotally speaking. But this takes me back to my call for an empirical study by the regulator to measure this.

The conversation can go on and on but I believe the key message is clear. Has microfinance within the Ghanaian context achieved its goal? Should more be done to ensure this is achieved or perhaps more be done? Has this piece stoked some debate and train of thoughts in your mind? Questions! Questions! Answers are what we need! But from who we may ask? That I would leave to you, my astute reader.

Before I take leave of you, let me ask you if the elements below resonate with the broader microfinance institutions in Ghana?

The Consultative group to assist the poor (CGAP), one of the world’s leading bodies on issues related to financial inclusion and by extension microfinance, have what is called the key principles of microfinance which the group addresses how sustainable microfinance can be a powerful tool against fighting poverty. The KEY WORD here is SUSTAINABLE. If the provision of these services are not in SUSTAINABLE AND RESPONISLBE manner, then we should not be in the provision of said services. Pay particular attention to numbers 3, 5, 8, 11. Find the key principles from CGAP here below;

• Poor people need a variety of financial services.
• Microfinance is a powerful tool to fight poverty.
• Microfinance means building financial systems that serve the poor.
• Microfinance can pay for itself.
• Microfinance is about building permanent local financial institutions.
• Microcredit is not always the answer.
• Interest rate ceilings hurt poor people.
• The job of government is to enable financial services, not to provide them.
• Donor funds should complement private capital, not compete.
• The key bottleneck is shortage of strong institutions and managers.
• Microfinance works best when it measures—and discloses—its performance.

Ponder on these and read more here .
The writer of this opinion piece is Philip Gandaa Nanfuri. He is an Analyst and Researcher with Joy Business. His email is [email protected] The views expressed in this piece are his personal opinions and do not reflect, in any way, shape or form those of The Multimedia Group, where he works.