Business News of 2014-06-03

‘BoG reserve requirements for MFIs too harsh’

A seasoned banker and Chief Executive Officer of Waxson Financial Services Limited, Mr Korsi Dzokoto, has called for an immediate downward review of the Bank of Ghana (BoG) reserve requirements for microfinance institutions (MFIs) from the existing 30 per cent to a flat rate of 11 per cent, as is the case with the universal banks.

That, he said, would help reduce the cost of lending to the MFIs, as well as free extra funds from the institutions for onward lending to financially distressed micro, small and medium scale enterprises (MSMEs).

BoG's reserve requirement currently mandates the MFIs to keep 10 per cent of their total deposits in primary reserve and 20 per cent in secondary reserve; bringing the total percentage of a microfinance company's deposits in reserves to 30 per cent.

The 20 per cent in the secondary reserve is often invested in government treasury bills.

This means that although an MFI may be able to mobilise GG¢1 million in deposits, that institution would only be allowed to lend a maximum of GH¢700,000 to the general public as 30 per cent of the sum would be locked up in reserves.

This, Mr Dzokoto, said was disingenuous to the growth of the MFIs and their clientele base, the MSMEs, in particular.

"The cost of borrowing is already very high and as a microfinance, you go into the market to look for deposits and people would want to give you funds well above what the banks are giving out in terms of interest rates. In addition to that, you have the BoG asking you to keep 30 per cent of your deposits in reserves.

What it means is that you are only having 70 per cent (of the total deposits) available but the cost of the 30 per cent that you are keeping as reserves is added to the 30 per cent that you are left with to lend. That, definitely doesn't add up," the CEO of Waxson Financial Services told the GRAPHIC BUSINESS recently.

Given that MFIs are meant to augment the services of the traditional banks by meeting the credit needs of MSMEs that would hitherto not be able to access funds from the banks, Mr Dzokoto said it would be prudent for the economy if the central bank revised its reserve requirements on them.

BoG disagrees

But the Deputy Head of the Banking Supervision Department of the BoG, Dr Settor Amidiku, has however explained in a separate interview that the decision to compel MFIs to keep 30 per cent of their deposits in reserves was in line with the risky nature of their operations. "You know the MFIs do not have proper structures in place, most of them fold up easily and so you would want to be sure that they have a lot of buffer to fall on in cases like that," he told the paper on.

Although Dr Amidiku admitted the concerns of Mr Dzokoto, which he said was an industry situation, he added that revising the reserve requirements for MFIs to 11 per cent was not something the bank would consider soon.

"Reserve requirements are done for a purpose. In this case, the purpose is to create a buffer that matches the risk levels of the sector. So if you revise it down, will the risks also go down”, he explained.

Fund MFIs

Torching on the cost of loans from MFIs to businesses, Mr Dzokoto, who has some 15 years working experience in the financial services sector, said the central bank needed to intermittently support the institutions with funds for onward lending to the business community. This, he said, would help bring down the cost of MFI funds to the already credit-stressed MSMEs.

"Probably, cheap funds can be raised and given to the association (the umbrella body of the MFIs) for distribution so that we can now on-lend to businesses at a much cheaper rate," he said.

On how the central bank should raise such funds, the CEO of Waxson Financial Services said the bank could use its status as a lender of last resort to support the institutions.

"The banks also go to the BoG and borrow. If they can do that for the banks, why not the MFIs," he asked.

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