MFIs’ peril exacerbated by coronavirus disruption of global supply chains

Declining trade volumes and values due to COVID-19 disruption in supply chains globally has had a serious effect on the wholesale, retail and distribution business in Ghana; thereby causing a ripple-effect on Specialised Deposit-Taking Institutions (SDIs).

In March 2020, the Bank of Ghana (BoG) announced a number of monetary policy interventions including a cut in the policy rate by 150 basis points to 14.5 percent; and loan repayments past due of Microfinance Institutions for up to 30 days shall be considered as ‘current’, as is the case for all other SDIs.

Despite these cushioning measures, SDIs are struggling to stay on their feet; and the contraction in business threatens the survival of Savings & Loans companies (S&Ls) and microfinance companies, particularly coming after the financial industry clean-up by the Bank of Ghana.

Managing Director-Golden Pride Savings and Loans, Johnson Boadi Asamoah, speaking at a webinar recently organised by Krif Media noted that the institutions are at risk because of their dependence on short-term funding, interbank liabilities, and high concentration in sectors particularly affected by the COVID-19 shock.

“MFIs’ portfolios are under stress as a result of lending to households with volatile income and no assets, and some may be unable to maintain liquidity and solvency.”

The decline in income and revenue means borrowers cannot meet their obligations, and as a result, the stability of the S&L sub-sector in the country is threatened by the likelihood of a sharp increase in non-performing loans.

What double jeopardy, particularly for the microfinance and savings and loan companies who are just about recuperating from the financial sector clean-up and are struggling to stay afloat and be competitive.

To this end, some are clamouring for engagement with the regulator so as to dialogue with the associations of S&Ls, finance houses and microfinance companies to adopt policy interventions that highlight their financial restructuring to help them survive these challenging times.

An asset quality review carried out by the BoG in 2015 and 2016 revealed severe challenges with solvency, liquidity and asset quality in Ghana’s banking industry, with some banks showing significant under-provisioning and capital shortfalls.

A similar clean-up process was also applied to the microfinance and non-banking financial institutions sector, which resulted in hundreds of licence withdrawals.

The regulator justified its decision on the grounds that the institutions had no reasonable prospect of recovery, and that their continued existence “posed severe risks to the stability of the financial system and to the interests of their depositors.”