Ghana's microfinance - My take on the happenings so far

By Roderick Okoampah Ayeh

The Microfinance industry in Ghana has gone through some notable phases; influx of microfinance companies, regulation, collapse, scam, etc. These happenings seem to have impacted the industry in diverse ways.

The scams and how there were handled, regulatory strengthening, regulator role and the role of microfinance apex bodies within the microfinance space seem to have affected the growth and development of the microfinance sector in both positive and negative ways.

To understand the microfinance sector, people must look beyond what they see. The happenings are just a product of several activities that were not handled the way they must be handled. For instance, the inability of a microfinance company to pay its clients may not necessarily because of fraudulent actions but by intention beyond fraud.

From my work and interactions with some microfinance company owners it is obvious that what was described as scams by many people in the microfinance sector were not scams in itself. These scams as they came to be known were not really planned as in the case of setting up a company with the intention to swindle clients.

The facts from the interactions indicate that most of the owners of these MFIs undertook the establishment of the company with the aim of taking advantage of the growing feedback that was being recorded in the microfinance industry. What lead to the scams were mostly as a result of lack of respect for laid down of basic operational requirements.

What people see as scam are just failure or lack of systems in the management of some microfinance companies. The management of these entities were poorly done and they were just like a bomb waiting to explode. MFIs owners mistakenly saw the deposits as their own and not as liabilities. Some of them invested these deposits into long term activities even though these deposits were short term in nature. These actions and inactions resulted in liquidity challenges that became the microfinance scams as we may call it.

These scams are results of failed operations in a more simplified term. Examining the reasons behind the failed Microfinance Companies, one key observation was that, there was a clear disregard for proper liquidity management techniques by most of the affected MFIs. Additionally, they are showed signs over expansion (over trading) with unsupported growth in the number of staff as well as increasing operational cost.

They recorded increases in their operational costs which resulted in these MFIs using clients deposits to finance recurrent cost therefore creating a huge gap largely in the deposit mobilized versus deposit invested (investment and loans).

Following the scams some observers and clients of MFIs were quick to blame the Bank of Ghana(BOG) and the Ghana Association of Microfinance Companies. some people opined that the BOG shirked its supervisory and regulatory role, thus resulting in the scam.

Ghana has various apex bodies and the Central Bank within the regulatory space. In real terms, the Apex Bodies are not regulatory bodies. They are associations with their own binding rules and objectives. The Central Bank is the sole regulator. The causes of the recent challenges can be attributed to the regulatory structures that we have.

The size of the microfinance sector (in terms of the number of MFIs) cannot allow for effective regulations considering the fact that the size of the microfinance in terms of numbers are larger than what the Central Bank can effectively monitor and regulate.

Additionally, the capacities also available for regulating Microfinance has remained same as the skills used for regulating the traditional banks. Cleary microfinance regulation is technically different from regulating traditional banks. In addition, the various Apex Bodes can stay as associations but there must be one Apex Body for microfinance which must be created and be equipped legally and technically to provide regulatory functions in a more streamlined manner.

The BOG as part of measures to strengthen its supervisory and regulatory role on the sector, raised the minimum capital required for the operations of Microfinance sector. This measure was expected to help sanitise the Microfinance industry in the country? From the perspective of microfinance management minimum capital can be raised to improve the level of risk MFIs can absorb in their dealings. However, increasing minimum capital requirement cannot automatically help sanitise the Microfinance sector.

The increase in the capital will raise the entry barrier. This means that, the number of newly registered MFIs will be reduced. The other point is that, existing MFIs that will be able to raise the capital are already operating so they don’t have the problems that would-be MFIs will have.

How then will the increased minimum capital sanitise the operations of existing MFIs beyond the fact that existing MFIs that cannot meet the minimum capital would have to merge with other MFIs. Sanitization of the MFIs can be done by improving the governance and management processes of MFIs and not just increasing the minimum capital. The Central Bank must, therefore, look further than using capital requirement in senitising the microfinance sector.

The Media is a strong developmental tool and must be used effectively to promote the development of microfinance in Ghana. The media must educate the public and not only report fraud. There are quite a number of innovative microfinance companies who are using their operations to transform the livelihoods of their clients. The media must know exactly what they are reporting when it comes to the issue of alleged fraudulent MFIs and MFIs that have operational challenges. The truth is that, only few people may have the intentions to defraud through establishing MFIs. As indicated a lot of the fraud related issues where due to mismanagement which could be avoided by using effective microfinance methodologies.

The government and law enforcement agencies have handled microfinance company offenders (the Microfinance operators) who were unable to pay clients’ deposits by applying the law. The decision for government to bailout clients who had fallen victims to failed microfinance companies was not the best solution needed to solve the issues. A different approach should have been used in handling the operational side of the problem.

The operational side could have been to consider which of the affected companies could have been bailed out with a new set of hands and liquidity to keep them in operations while the repayment of the deposits and investments were rationed or payment renegotiated. The outright proposal to pay out the clients has not solved the whole challenge as we speak and the issue keeps coming up.

Microfinance management looks easy on the surface but it has complex details. Understanding the reasons behind what happens is a surer way to diagnose the exact solution to solve the challenges that shows up in microfinance management.

Roderick Okoampah Ayeh

Microfinance Consultant

roayeh@gmail.com