BoG revokes licences of 347 microfinance companies; 137 remain

The Bank of Ghana has revoked the operating licences of some 347 microfinance companies, which, it says, are insolvent or had folded up.

In a statement issued on Friday, 31 May 2019, the central bank said it has, “with effect from today, revoked the licences of 192 insolvent microfinance companies”.

“In addition”, the statement added, the “licences of another 155 insolvent microfinance companies that have ceased operations have been revoked”.

“These actions were taken pursuant to section 123 (1) of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), which requires the Bank of Ghana to revoke the licence of a bank or Specialised Deposit-taking Institution (SDI) where the Bank of Ghana determines that the institution is insolvent or is likely to become insolvent within the next 60 days.

“Consequently, the Bank of Ghana has appointed Mr. Eric Nipah as Receiver for the specified institutions in line with section 123 (2) of Act 930.

“The revocation of the licences of these institutions is to get rid of insolvent and dormant institutions that have no reasonable prospects of rehabilitation and have denied depositors access to their deposits, thereby constituting a threat to the stability of the financial system”, the statement said.

By the revocation of these licences, “the Bank of Ghana seeks to protect the stability of the financial system and to protect affected depositors”.

The central bank said: “To salvage depositors’ funds, the government of Ghana has made funds available to enable the Receiver pay depositors, after their claims are validated”, adding that: “In line with the hierarchy of creditor claims set out under Act 930, other creditors of the failed institutions will be settled by the Receiver upon validation of their claims and to the extent that the Receiver is able to realise value from the remaining assets of these institutions”.

Background as presented by the BoG

The emergence and rapid growth of microfinance operations in the late 2000s, led to the introduction by the Bank of Ghana of a licensing regime for the industry in 2011 after the promulgation of the Non-Bank Financial Institutions Act, 2008 (Act 774).

Existing microfinance operators that had hitherto operated without a licence from the Bank of Ghana, were grandfathered into the new licensing regime introduced in 2011. Subsequently, these institutions were re-licensed under the now-repealed Banking Act of 2004 (Act 673).

A number of additional licences were issued on an annual basis until the end of 2015. By the end of 2015, about 484 microfinance companies had been licensed by the Bank of Ghana.

The majority of licensed microfinance companies began to show signs of distress from 2014 onwards, as a result of severe undercapitalisation, high cost of operations largely from high and unsustainable interest rates offered to depositors, poor lending and investment practices leading to inordinate losses, diversion of customer deposits into private, unprofitable and speculative ventures, general noncompliance with prudential norms, poor corporate governance, weak internal controls, and fraud, among others.

Over the years, the Bank of Ghana notified these institutions of deficiencies and vulnerabilities which had been identified through off-site reviews and onsite examinations. Unfortunately, efforts by the Bank of Ghana to get the affected institutions and their shareholders and directors to rectify these deficiencies yielded no results.

Consequently, the financial position of these institutions continued to deteriorate, leading to their insolvency with majority of them ceasing operations and closing their offices with depositors’ funds locked up. Even those that have not closed their offices are unable to pay their depositors.

This has placed a substantial amount of depositors’ funds at risk.

Given the risks that these institutions continue to pose to the entire financial system, and the need to protect depositors, the Bank of Ghana is sanitizing this sector through the orderly resolution of the failed institutions in accordance with sections 123 to 137 of Act 930.

The Way Forward

Following the revocation of the licences of these institutions, a total number of 137 microfinance companies will continue to operate.

Going forward, the Bank of Ghana has put in place measures to ensure that the existing institutions remain safe and sound by complying with relevant prudential norms.

Among other things, the Bank of Ghana is:

• Undertaking a comprehensive review of licensing and supervisory policies and directives;

• Reviewing the minimum capital requirements for microfinance companies and encouraging possible consolidation through voluntary mergers and acquisitions;

• Introducing proportional corporate governance, fit and proper, and risk management directives;

• Embarking on strict supervision of licensed institutions and enforcement of relevant regulatory requirements;

• Increase the resources available for effective supervision of licensed microfinance companies.

The Bank of Ghana assures the public of its continued commitment to protecting depositors’ funds and promoting the stability of the financial system. Kindly direct any questions to the Other Financial Institutions Supervision Department of Bank of Ghana.