The Managing Director of HFC Bank, Asare Akuffo, has noted that the activities of a number of microfinance finance companies have shown that policymakers made a “mistake” by deciding to issue them licences to operate; a decision he believes has proved costly for the financial services sector.
Mr. Akuffo, whose company has a subsidiary that is focused on providing financial services to businesses in the micro sector of the economy, said the regulator could have been more prudent in its decision by restricting microfinance authorisation to traditional financial institutions such as the banks, savings and loans companies, and rural banks.
Speaking at the third edition of B&FT's Ghana Economic Forum held in Accra last week, Mr. Akuffo said: “Let me say that in Ghana now, microfinance has become a by-word -- especially in the rural areas, because many people have lost their money.
“I think we made a mistake. In Ghana, we have built our own financial system with the universal banks, savings and loans, and rural banks; so microfinance companies should have been seen as a product of those existing institutions that we had developed, and not been built or licensed as new institutions.
“This is because I believe that those existing institutions are better regulated, so they could have served the people who have lost money (microfinance customers) better. That is it.”
The central bank has in recent times authorised hundreds of institutions to operate microfinance business in an attempt to bring financial services to about 70 per cent of the country's estimated 14 million adult population who still remain outside the formal financial services sector.
Additionally, microfinance institutions are expected to offer credit facilities to small and micro enterprises that do not have collateral to secure loans from the banks.
As of January this year, more than 340 microfinance companies had already been licenced by the central bank, while close to 600 applications for licences are pending.
However, regulating the high number of microfinance companies has been a tough challenge for the central bank, which recently created the Other Financial Institutions Supervisory Department to deal specifically with, this rapidly- expanding financial sub-sector.
Apart from concerns over their “outrageous” lending rates, microfinance companies have also been perceived as a conduit for the perpetration of fraud through Ponzi schemes that lure depositors with absurdly lucrative investment interest rates.
Mr. Akuffo said even though microfinance companies have helped to provide credit to micro businesses - enterprises often overlooked by banks - without collateral, their activities have created a number of problems for the financial services industry; including dampening public confidence in a sector that banks have struggled to expand their reach to.
Some bankers have admitted in recent times that the operations of microfinance companies and some ..non-bank financial institutions which promise colossal interest on deposits are threatening' universal banks that have to compete with them for deposits.
Mr. Akuffo said, the approach whereby banks set up microfinance subsidiaries is better for confidence in the system, and will minimise risk.
Last year the central bank revised its. operating rules and guidelines for microfinance institutions, categorising the sector into Tier-2 for deposit- taking and Tier-3 for non- deposit-taking institutions.
According to the revised rules, new entrants applying to operate as non-deposit-taking firms will require a minimum paid-up capital of GH¢t300,000, while deposit-taking institutions require a minimum Capital ofGH¢500,000.
The BoG gave existing microfinance companies up to 30th June, 2016 to meet the new requirements. Institutions with up to five branches require an additional paid-up capital of GH¢100,000 for each branch, while those with more than five branches require an additional GH¢200,000 for each branch.
“On the matter of collateral, I want to emphasise that the money in the banks belongs to depositors. So when we lend the money, we expect to be able to collect so that we can pay back depositors' money when demanded. So collateral helps us to manage the credit risks better and that is why we insist on that. Microfinance can do without collateral but we can't do without it - looking at the risks that we face,” Mr. Akuffo said.
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