The fulcrum of funding: Despite their small size, microfinance institutions are causing a big stir

The microfinance segment in Ghana looks set to face tougher regulation and higher minimum capital requirements in light of the regulator’s decision to strengthen risk management and capital buffers across the sector. Microfinance institutions, which have exploded in number over the past 12 months since new licensing regulations were laid out, have come under particular scrutiny following the announcement that a number of small-scale lenders were forced to shutter their doors. However, the moves by the Bank of Ghana (BoG) to increase capital requirements for microfinance institutions is part of a larger push by the central bank to ensure a more robust financial sector as a whole. In August 2013 Millison Narh, the first deputy-governor of the BoG, told the Ghana Association of Bankers that the minimum paid-up capital for new major banks would increase from GHS60m ($30.8m) to GHS120m ($61.7m), and that new savings and loans would face higher minimum paid-up capital of GHS15m ($7.7m), up from GHS7m ($3.6m). These increases come eight months after the deadline for existing universal banks and savings and loans institutions to raise their minimum paid-up capital from GHS7m ($3.6m) and GHS1m ($514,000), respectively. In the same speech, Narh said that the minimum capital requirement for rural banks would be doubled from GHS150,000 ($77,000) to GHS300,000 ($154,000). Narh also said the BoG was monitoring the growing share of deposit-taking non-bank financial institutions (NBFIs). Growth of this sector had seen universal banks’ share of total assets fall from 89% in 2010 to 85% in 2013, he said.

SECOND-TIER SEGMENT: The announcement comes on the heels of a declaration that microfinance lenders would see their minimum capital requirements re-considered. Microfinance institutions are governed under the NBFI Act of 2008, and they are generally classified as either tier-two or tier-three organisations (tier-one institutions generally consist of rural and community banks and savings-and-loans firms, and tier four refers to individual susu lenders).

In June 2013, the BoG’s head of banking supervision, Franklyn Belnye, indicated that a review of requirements for this segment would be completed in August 2013. The minimum capital requirement of GHS100,000 ($51,410) for tier-two microfinance firms was introduced in 2012 and represented a compromise with the industry as the BoG had originally wanted the minimum threshold to be set at GHS500,000 ($257,000). Tier-three companies, including non-deposit-taking moneylenders, are required to have a minimum paid-up capital of just GHS60,000 ($31,000).

The revised requirements are seen as much needed, given the dramatic proliferation of microfinance institutions in the country. As of June 2013, the BoG had licensed 228 microfinance institutions, compared to 90 in December 2012, and Belnye told participants at the seventh Ghana Microfinance Forum in Accra in June 2013 that the bank had fielded more than 700 licence applications.

GROWING PAINS: The large volume of institutions and the exponential growth rate in the number of actors has created challenges for institutional reliability and trust, with press reports indicating that a large number of new institutions operate without a licence. Customers face a bewildering choice and local media have reported many cases of microfinance companies closing at short notice, leaving savers out of pocket. At the time of the Ghana Microfinance Forum in Accra, local newspapers reported that 30 unnamed microfinance firms had shut down in first-quarter 2013. In recent months failed microfinance companies have repeatedly featured in local media reports, although in some cases the firms have not been officially registered with the BoG. Newspapers covered the trial of a managing director of a microlender in the Volta region who faced multiple charges of fraud after the failure of his firm. In June, ROGAI Microfinance closed in Takoradi, allegedly owing clients thousand of cedis. Neither company was listed on the BoG’s register of licensed microfinance institutions. At the same time, fears over the safety of deposits in microfinance institutions have prompted customers to withdraw funds from reputable firms. “We have seen huge withdrawals from member companies and this cannot continue,” Collins Amponsah Mensah, the national chairman of the Ghana Association of Microfinance Companies (GAMC), told local press at the end of June 2013.

Amponsah Mensah said the GAMC would like to sign a memorandum of understanding with the BoG, giving it the ability to act as a mini-central bank for microfinance, in much the same way as the ARB Apex Bank does for rural and community banks. He believes this kind of supervision will do more to protect consumers and rebuild confidence.

NEW OVERSIGHT: The increased scrutiny and capital requirements from the BoG are evidence that regulators are tightening enforcement in the sector. The BoG has warned it will take a tough stance on non-compliant microfinance firms, and in December 2012 it ordered the closure of seven firms, directing them to refund all their customers. In August 2013 the BoG signalled that it had already undertaken steps to bolster this legislation to “remove any potential vulnerabilities in the banking landscape”.

In addition, the BoG has commissioned a study by Global Business Solutions of Germany to assess the introduction of a deposit insurance scheme for microfinance firms. As a result, Ghana’s Ministry of Finance and the BoG have approved terms of reference for legal consultants to draft a Deposit Insurance Law, which could become operational by December 2014, offering more protection to all depositors.

In spite of the hiccups in the microfinance sector, there is no doubt that it has a key role to play in Ghana, which not only has a sizeable demand, given the prevalence of small businesses and the challenges they face in accessing commercial loans, which regularly exceed 20% interest rates, but which also has a tradition of small-scale lending through susu loans. Speaking in August 2013, the minister of finance and economic planning, Seth Terkper, said he would like microfinance firms to be able to tap into the Export Development and Agriculture Investment Fund (EDAIF) to give small and medium-sized enterprises (SMEs) access to capital. “A lot of microfinance institutions have sprung up lately and I would like to look at how we can support them with EDAIF funds,” Terkper said. In 2012 the EDAIF fund distributed GHS370m ($190.2m) to 90 institutions and organisations. Approximately GHS22m ($11.3m) was in the form of credit. The BoG has also recognised the role that microfinance firms can play in financing SMEs, which are often under-served by universal banks wary of risk. “The increasing number of microfinance institutions suggests a broadening of financial service provision at the micro level,” said Narh.