BoG begins overhaul of microfinance, rural banks

Even as public attention remains focused on the fate of Ghana’s universal banking industry, with only a month left to the dead line for recapitalization to a minimum of GHc400 million, the Bank of Ghana is now commencing with its plans to overhaul the country’s micro-finance and rural banking industries.

Last Thursday, Parliament ratified an agreement for the World Bank to furnish government with a US$ 30 million credit facility, approved by the Bank on September 30, to implement a Financial Sector Development Programme (FSDP) which will run through to 2022, the core of which is aimed at improving regulation of the MFI and rural banking sectors and making them more accessible to the banking public at the grass roots level. The new funding will enable the BoG, in collaboration with the Ministry of Finance to implement and enforce an array of corporate governance, risk management, enhanced capitalization and financial reporting measures which the central bank has drawn up, but which so far has not been implemented because of logistical challenges.

The FSDP itself has four components. One is to improve financial sector regulatory oversight to enhance market transparency and discipline of specialized deposit taking institutions (SDIs). The second is to increase the geographical reach of MFIs and Rural &Community Banks (RCBs); modernize their management information systems so as to improve their business operations and regulatory compliance and reporting; to link Village Savings &Loans Associations (VSLAs) to the formal financial sector; upgrade the e-banking platforms of the Association of Rural Banks Apex Bank; and develop and roll out a shared network of bank agents to expand the branch networks of RCBs The third is to Improve their financial capacity and the protection of consumers to enhance both financial stability and inclusion. The fourth component is to enhance the capacity for the implementation and monitoring of financial sector policies to support the rest of the programme

Under the programme the BoG will seek to overcome challenges to its implementation of several initiatives.

The most pressing is recapitalization. As at October, with less than three months to the end of 2018 deadline for RCBs to meet the new GHc1 million new minimum capital requirement, only 94 of them had complied, leaving the other 47 facing an uncertain fate. But even this is a major improvement on the erstwhile situation – the deadline was extended by one year from the original end of 2017 date because as at that time only 51 out of the existing 142 RCBs had succeeded in complying.

The situation in the micro finance industry is even worse. As at their June 30, 2018 deadline for recapitalizing to a new minimum of GHc2 million ( for deposit taking MFIs), from an erstwhile level of GHc500,000 barely 30 out of the 319 still on the BoG’s register had complied leaving 289 in the lurch. Although the BoG had repeatedly warned that it would not extend the deadline, despite pleas from the Ghana Association of Micro-finance Companies, it has not taken action against those that have not complied, obviously because that would amount to virtually closing down the sector altogether.

Then there is the challenge of financial distress which has put a huge quantum of deposits in potential jeopardy. According to the BoG there were 211 MFIs that were either distressed or had collapsed completely out of the 566 that it had licensed prior to its decision to suspend new licensing, taken in 2016. The central bank also frets that 705,396 deposits, worth GHc740.5 million, held by MFIs and RCBs, are in jeopardy, this amounting to 52.4% of total deposits held by MFIs. MFIs and RCBs hold about 8.81% of total deposits in Ghana.

As part of its efforts to clean up the sector, government has begun refunding the retail deposits of customers of duly licensed MFIs that have gone under. Industry analysts estimate that the bill could possibly rise to over GH1 billion but government is determined to revive confidence in MFIs by the banking public.

Going forward, under the new FSDP, the BoG will now try to implement a plethora of corporate governance directives issued in April this year to MFIs and RCBs alongside the universal banks, which aim at ensuring better risk and financial management.