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Microfinance: The quest for reform

Microfinance: The quest for reform
Source: Ghana | Myjoyonline.com | Philip Nanfuri
Date: 17-04-2019 Time: 09:04:14:am
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Philip Nanfuri is an Analyst and Researcher with Joy Business.

In 1976, a man lent an initial sum of $27 to 42 women, some of whom dealt in bamboo furniture. This was in Jobra, Bangladesh. The women made profits, paid back the loan with interest and on time.

This was the beginning of Prof Yunus' path down a road to empower the viable and profitable poor.

He was convinced that such loans to the poor, worked and thus formed an institution that dealt with the lending to the poor, which later became the Grameen Bank. Grameen means village or rural in the Bengali language of Bangladesh.

Microfinance since its birth has transformed the livelihoods of the poor, and low-income earners.

The story on our shores is not so different. Available evidence suggests that the first Credit Union in Africa was established in Northern Ghana in 1955 by Canadian Catholic Missionaries and since then, it has grown in leaps and bounds.

Fast forward to 2019. The name and concept of Microfinance is synonymous with greed, misfortune, absconders, misery and a plethora of other adjectives that are not apt in describing the nature and notion and act in reverse to such an innovative concept of microfinance.

Why? What are the possible causes? There are some arguments that microfinance has veered of its core mandate into other ventures, profit-making, without a fair balance between financial intermediation and social intermediation.

Roderick Ayeh, a microfinance consultant and Akorfa Ahiafor, Managing Director of Jireh Microfinance Limited, explain that the indeed microfinance has drifted off its core mission or mandate to a rooting in commercialization as a new wave of profit-making hits the sector.


Akorfa pins it down to education. We (Practitioners, Depositors, Investors) had no idea and did not understand the practice and this is why this is the case in Ghana.

But apart from this, why have there been failures? Poor management, weak governance structures, offer of unsustainable interest rates to customers as competition pushed them rake in expensive deposits, high expenditure on image enhancement through extravagant office set-up, branded office buildings, cars and a plethora of other reasons.

Findings on the current state of the sector is largely based on anecdotal evidence. There is no comprehensive study on the sector by the regulator like is done with the Banking sector report released after the Monetary Policy committee meetings. A number of scholarly articles have been put together on microfinance but perhaps a more in-depth work from the regulator should speak, no?

Here is an excerpt of a report by the Bank of Ghana titled State of the Financial Sector in Ghana released on March 20th, 2018 during the height of the banking sector turmoil chronicled happenings in the microfinance sector. Find below an excerpt:

“The problems in the financial sector were also reflected in the Microfinance or MFI subsector comprising MFCs, MLCs and FNGOs, and RCBs and the extent of distress in this subsector was characterized by severely impaired capital; inability to meet regulatory capital adequacy requirement; generally low asset quality; and liquidity crises. These have culminated in threats to depositors’ funds thus eroding public confidence and undermining efforts to promote financial inclusion. Of the total number of 566 licensed MFIs in 2018, 211 are active but distressed or folded up. Also, out of the total number of 141 RCBs, 37 are active but distressed or folded up. In total, it is estimated that 272 out of the 707 institutions in the sub-sector, representing 38.5% are at risk. This indicates that approximately GHȼ740.5 million is owed to an estimated 705,396 depositors of the distressed or folded up MFIs and RCBs. In terms of significance, the deposits under distress form 8.81% and 52.49% of industry total deposits of RCBs and MFIs respectively.”

Apart from the above I have not sighted another report on the sector in recent times, I stand to be corrected.

Below are two infographics on the state of the sector in terms of number of institutions and the broader specialized deposit-taking institutions.

IMG417

Fig 1. Microfinance Institutions in Ghana as at August, 2018.

IMG417

Fig 2. Specialized Deposit-Taking Institutions (SDIs) as at April, 2018

The Bank of Ghana and the Ministry of Finance will soon start the reforms of the broader SDIs, Microfinance. An amount of GHC 3 billion and GHC 953 million,  according to the Minister of Finance speaking at the Town Hall Meeting, will be the estimated cost of the clean-up in the SDIs and Microfinance institutions. Thus approximately GHC 4 billion.

But an important question lies at the heart of this. What should the nature of the reform be and what can be put in place to make sure the sector is robust in a manner that we do not return to the era of mishap and confusion.

Engaging some microfinance consultants, a number of key and pragmatic solutions and measures come up:

-- A tiered capital system where – depending on your operations – you either have ore capital for urban and less for regional  operations

-- A fund where microfinance institutions can access cheap credit as the cost of their funds are expensive in our current market though interest rates have been trending downwards largely.

-- A consolidation of the associations in Ghana so there is one apex body giving out directions. Currently there are a multiplicity of them and experts believes it defeats singularity of purpose.

I believe that beyond sound policies and guidelines and modes of operations, regulators, practioners and the general public should all be on the same page, same book and same library for microfinance to have the needed impact and outreach.

What stands out for you as the clean-up draws nigh? Ponder! Share feedback. Let’s get interactive.

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The writer of this opinion piece is Philip Gandaa Nanfuri. He is an Analyst and Researcher with Joy Business. His email is philipnanfuri@yahoo.com The views expressed in this piece are his personal opinions and do not reflect, in any way, shape or form those of The Multimedia Group, where he works.

 


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