Ghanaian authorities enforce higher standards in the microfinance segment

To promote a sector capable of supporting rural development, the government introduced a flexible regulatory framework for microfinance institutions (MFIs) in 2011. Since then, over 500 MFIs have registered in the race for customers, though many have gone bust or been exposed as pyramid schemes. Recently the central bank has renewed efforts to make MFIs more reliable, taking decisive action to clean up the segment in 2017.

Revoke & Suspend

In June 2017 the Bank of Ghana (BoG) revoked the licences of 70 MFIs and suspended the issuance of new ones. The decision came after two years of worsening results for MFIs, largely due to the up-surge in non-performing loans (NPLs). This culminated in the collapse of DKM Microfinance in 2016, which sparked protests in the Upper East Region. The resulting push for reform has met with widespread support. “The government’s intention to have a micro-finance sector run by Ghanaians for Ghanaians was well intentioned, but the sector has grown beyond the BoG’s minimum capital requirement threshold and raising local equity capital is not easy,” Sheila Azuntaba, CEO of Innovative Microfinance, told OBG. “There is a need to open us up to attracting some levels of foreign equity and not only foreign debt.”

Oversight

At the annual meeting of the Ghana Association of Microfinance Companies in June 2017, Joseph Amoah-Awuah, head of the BoG’s financial institutions supervision department, said the BoG had recruited 54 experts to oversee the market and was designing a new sector blueprint with the World Bank. “We have also deepened our off-site surveillance and have introduced an electronic surveillance system, a platform meant to improve judgement in reportage and analysis, as well as eradicate errors associated with the traditional email attachment system previously in use,” he said.

In February 2017 the government passed a Deposit Protection Act to compensate customers of failing financial institutions. In also adopted a “naming and shaming” policy towards risky microfinance firms, advising the public not to do business with five named MFIs. The registrar general also agreed to reimburse 70,000 victims who had been scammed by DKM Micro-finance. “The BoG’s new approach to MFIs, focusing on accountability and transparency, is very much needed,” Azuntaba told OBG. “However, given the wide spectrum of MFI organisations the BoG should go even further, establishing different tiers of MFIs that allow customers to identify the most reliable organisations.”

Consolidation

As in the wider banking sector, the microfinance segment could soon see consolidation, as authorities nudge firms to reorganise their loan books and recapitalise. “There has to be consolidation or there will be more collapses in MFIs,” Joe Jackson, director of business development at one non-bank lender, Dalex Finance and Leasing Company, told OBG. “There are around 10 medium players in the microfinance market with the capacity to buy up smaller firms. However, it can be a challenge given the bad status of most firms’ loan books. Companies considering acquiring or merging are looking for institutions that are organised and have strong relationships with their client base.”

In July 2015 the BoG mandated that MFIs double their minimum capital requirement to GHS2m ($479,000) by end-2017. Whether this would happen is unclear: in October 2017 the Ghana Microfinance Institutions Network announced that 80% of MFIs would be unable to meet the new requirements by the deadline. Given the segment’s challenges and the dubious reputation of some registered institutions, it can be easy to overlook the fundamental importance of MFIs to Ghana’s small and medium-sized enterprises. “With commercial banks preferring to lend to the government rather than the private sector, the true lenders are non-bank institutions,” Jackson told OBG. “We do not have the luxury of cheap money from the government, so we lend to the country’s small businesses. As mobile money continues to grow and our credit-risk analysis improves, MFIs will remain a key source of finance for the private sector.”