Savings & Loans firms battle identity crisis

Savings and loans companies in the country have appealed to the Bank of Ghana to consider creating a new identity for the industry, as the image of their business has been severely battered as a consequence of the troubles in the microfinance sector.

According to operators in the savings and loans sector, confidence in their business is waning among consumers since savings and loans companies are considered to be the same as microfinance institutions by many people, especially those in the informal sector where the companies largely operate.

This, operators in the savings and loans sector argue, has made it necessary - following the recent challenges in the microfinance sector - for the central bank to consider amending its regulations and allow them to take up a name that implies savings and loans companies are in the business of banking since their mandate allows them to perform a lot of banking transactions, except forex clearing and providing guarantees and safe custody of valuables.

Already, the Ghana Association of Savings and Loans Companies has made a strong proposal to the central bank for the identity of companies in the sector to be changed into something that will encourage banking consumers to have confidence in firms operating in the second tier of the financial system, in the face of the institutional crisis in the microfinance sector.

The CEO of Beige Capital, Michael Nyinaku in adding his voice to the call for the name-change, explained in an interview with the B&FT that since savings and loans companies and microfinance institutions are all considered by the central bank as non-bank financial institutions, the ills in the microfinance sector rub-off strongly to savings and loans firms, which is affecting their business…especially in mobilising deposits.

“Savings and loans companies are currently suffering from what we call identity-crisis because they have been lumped together with other microfinance institutions, since customers see all of them as such. What this means is that when microfinance institutions have a challenge, some customers think savings and loans companies are faced with a similar challenge, which is not true.

“However, because savings and loans companies are just seen as an extension of microfinance institutions, especially in these times when there’s some challenges with several microfinance institutions in the country, savings and loans companies are suffering a backlash and we think that if there are institutions like rural banks whose size and capacity are much smaller than a lot of savings and loans companies but carry the name bank, then it is fair to relook at the names given to savings and loans companies; because in business marketing and promotion, the mention of ‘bank’ alone creates a whole lot of difference.

“And because of the challenges that savings and loans companies are facing as a result of the name and identity issue, we are not able to convince a lot of our clients that they are better-off dealing with savings and loans companies other than a microfinance company.

"It is a big challenge, that is why we are asking the central bank to take another look at the name again; and we are proposing the idea that an ‘SME bank’ would best fit the kind of service savings and loans companies are performing,” he said.

Mr. Nyinaku, who heads the largest savings and loans company in the country with assets of about 20 percent of the total in the sector, explained that allowing savings and loans companies to take the name of ‘SME bank’ will fully describe a financial institution that is proving services to the economy’s informal sector.

The call for an identity change for savings and loans companies has gathered steam following the increasing demise of microfinance companies, which has left many customers in pain after losing several millions of cedis to rogue institutions.

Since 2013 more than 50 microfinance institutions have collapsed due to poor managerial skills, while some have been used as a conduit for the perpetration of fraud through Ponzi schemes that lure depositors with absurdly lucrative investment interest rates.

Currently, the central bank’s regulations distinguish microfinance companies from savings and loans firms in so many ways -- in that the amount of stated capital needed to run a microfinance company and how much deposits a microfinance firm can mobilise from a deposit is far less than that of savings and loans companies.

Additionally, the size of transaction a microfinance institution can undertake as well as the number of branches a microfinance company can open within a geographical area all sets them apart from savings and loans companies.

But savings and loans operators believe this is not enough and that they should be allowed to carry the name ‘bank’ to help them to overcome the challenges brought about by the collapse of many microfinance firms.

However, per the law establishing Non-Bank Financial Institutions and the Banking Act, savings and loans companies are not banks and are therefore not permitted to use the word ‘bank’ as part of their registered names.

As such, allowing savings and loans companies to carry ‘bank’ in their name will thus require parliament to amend the banking Act, which might take years to materialise.