Banking and Finance

Abstract

Money and credit have many functions in an economy, but from the point of view of economic development, their role in financing agriculture, industry, commerce and other activities is vital. Working as intermediaries, the banking and finance institutions play a major role in raising savings and investment and this role is, obviously, of great importance in developing countries, where both these functions need to be strengthened for faster economic growth.

Appendix to Chapter 11: Microfinance in Ghana

As microfinance is a part of the banking industry, it has, obviously, been included in the coverage of the financial activities of the sector. However, the industry appears to deserve some special attention. First, in many parts of the developing world, it has grown mainly as an NGO sector as is exemplified by its phenomenal growth, for example in Bangladesh (see e.g. Clunies-Ross and Huq 2014, Chap. 13). Secondly, as loans are advanced on faith, it does not follow the normal banking practice of lending on collateral, so in some ways it has emerged as a unique case of bank lending on a vast scale. Thirdly, as the term implies, the loan is relatively of small amount and the clients generally are form the poorer sections of the society and there is often an income distributional aspect, specifically attacking poverty.

Given that the main body of Chap. 11 has dealt with most microfinance institutions, in order to avoid repetitions here we will be highly selective. Moreover, we would also like to acknowledge that this note has benefited greatly especially from the following publications (BoG 2007a; GoG 2017), from which we have borrowed extensively.

1.1 Profiles of Microfinance in Ghana

As elsewhere, microfinance in some form or other has existed in Ghana for a long time. Indeed, it is believed that in the whole of Africa the first credit union was established in 1955 in northern Ghana by the Canadian Catholic missionaries. Ghana is also credited to have the Susu, an important microfinance scheme, soon after it was started in Nigeria in the early part of the twentieth century (Asiama 2007).

The microfinance sector has gone through four distinct phases in Ghana, as shown below (GoG 2017, p. 3).

• Phase One: The provision of subsidised credit by various Ghanaian Governments starting in the 1950s when it was assumed that the lack of money was the ultimate hindrance to the elimination of poverty.

• Phase Two: Involved the provision of microcredit mainly through NGOs to the poor in the 1960s and 1970s. During this period sustainability and financial self-sufficiency were still not considered important.

• Phase Three: In the 1990s the formalisation of Microfinance Institutions (MFIs) began.

• Phase Four: Since the mid-1990s the commercialisation of MFIs has gained importance with the mainstreaming of microfinance and its institutions into the financial sector.

The policies have led to the emergence of four broad categories of microfinance providers (GoG 2017, p. 4), as shown below.

• a. formal suppliers such as savings and loans companies, rural and community banks, as well as some development and commercial banks;

• b. semi-formal suppliers such as credit unions, financial non-governmental organisations (FNGOs) and cooperatives;

• c. Informal suppliers such as Susu collectors and clubs, rotating and accumulating savings and credit associations (ROSCAs and ASCAs), traders, moneylenders and other individuals; and

• d. public sector programmes which have helped to develop various financial and non-financial services for their clients.

Box A.11.1 helps us to get an idea of the structure and the stakeholders in the Ghanaian microfinance sector.

The microfinance institutions now comprise a number of providers including the Rural and Community Banks, and Savings and Loans companies which are discussed in the body of Chap. 11. There has also developed a number of Apex bodies including the Association of Rural Banks (ARB), Association of Financial NGOs (ASSFIN), Ghana Cooperative Credit Union Association (CUA) and Ghana Cooperative Susu Collectors Association (GCSCA).

Of the supporting institutions which have emerged, the Microfinance and Small Loans Centre (MASLOC) is a government-supported institution which disburses micro and small loans to the identified poor, besides providing business advisory services and training and capacity building for small- and medium-scale enterprises (SMEs). MASLOC is also engaged in wholesale lending to various groups including Microfinance Institutions (MFIs) and Rural Banks, thus enabling them to provide small and micro loans to the productive poor. Another supporting institution is the Ghana Microfinance Institutions Network (GHAMFIN) which helps to coordinate and support the activities of microfinance institutions. A key objective of GHAMFIN is to promote the development of an efficient microfinance industry in the country.

Box A.11.1 Structure and Key Stakeholders of Microfinance in Ghana

The key microfinance stakeholders comprise:

• 1. Microfinance Institutions, including:

  • The Rural and Community Banks,

  • Savings and Loans Companies

  • Financial NGOs

  • Primary Societies of CUA

  • Susu Collectors Association of GCSCA

  • Development and commercial banks with microfinance programmes and linkages

  • Micro-insurance and micro-leasing services.

• 2. Microfinance Apex Bodies, namely;

  • Association of Rural Banks (ARB)

  • ARB Apex Bank

  • Association of Financial NGOs (ASSFIN)

  • Ghana Cooperative Credit Unions Association (CUA)

  • Ghana Cooperative Susu Collectors Association (GCSCA)

• 3. End Users

  • Economically active poor who are clients of microfinance products and services.

• 4. Technical Service Providers

  • Business Development Service Providers to MFIs and their clients.

• 5. Supporting Institutions

  • Microfinance and Small Loans Center (MASLOC);

  • The Ghana Microfinance Institutions Network (GHAMFIN);

  • Development partners and International non-governmental organisations

  • Universities, training and research institutions.

• 6. Government Institutions

  • Ministry of Finance and Economic Planning

  • Ministries, Departments, Agencies (MDAs) and Metropolitan, Municipal and District Assemblies (MMDAs)

  Source: BoG (2007a, p. 4).

Table A.11.1 helps to give us an idea of the extent of involvement of the various types of microfinance providers in Ghana. Thanks to GHAMFIN (a major supporting institution of the sector as already mentioned), which collected a lot of information as contained in the table, we are now in a position to get such an extensive picture! As may be seen, as of December 2012, the sector had over 6.5 million total clients. Furthermore, there is a strong domination of the savings-led rather than credit-led institutions, and the biggest share of the market (almost two-thirds) was held by the Rural & Community Banks, followed by Savings & Loans companies, while the role of the Financial Non-Government Organisations (FNGOs) as a provider of microfinance loans has been rather small.

Table A.11.1 The microfinance industry in Ghana (as of December 2012)

1.2 The Regulatory Framework

In terms of the regulatory framework, Rural and Community Banks are regulated under the Banking Act 2004 (Act 673), while the Savings and Loans Companies are currently regulated under the Non-Bank Financial Institutions (NBFI) Law 1993 (PNDCL 328). On the other hand, the regulatory framework for credit unions is now being prepared, and this would recognise their dual nature as cooperatives and financial institutions. The rest of the players such as FNGOs, ROSCAS and ASCAs do not appear to have legal and regulatory frameworks.

Programmes currently addressing the sub-sector in Ghana include the Financial Sector Improvement Project, Financial Sector Strategic Plan (FINSSP), the Rural Financial Services Project (RFSP), the United Nations Development Programme (UNDP) Microfinance Project, the Social Investment Fund (SIF), the Community Based Rural Development Programme (CBRDP), Rural Enterprise Project (REP) and Agricultural Services Investment Project (ASIP).

The Bank of Ghana introduced a four-tiered classification guideline for MFIs and offered them respective registration requirements, as shown below. BoG (n.d.-d) Annual Reports; GoG 2017; GHAMFIN (2014, p. 7).

• Tier 1: Tier 1 represents what was previously termed formal microfinance institutions which are incorporated under the Companies code 1963 and licensed by the BoG under the Banking Act of 2004 as amended in 2008. (The minimum capital of RCBs was raised from GH₵ 150,000 to GH₵ 300,000 in 2013, and that for the Savings and Loans Companies from GH₵ 7 million to GH₵ 15 million in 2013. RCBs operate as banks licensed by Bank of Ghana under the Banking Act, except that they cannot undertake any foreign business and their minimum capital requirement is significantly lower.)

• Tier 2: Type 2 refers to MFIs which were typically considered as semi-formal legally registered but not licensed by the BoG. The minimum capital of Microfinance Companies (MFCs) was raised from GH₵ 100,000 to GH₵ 500,000 in 2013; and the Credit Unions (CUs) to be regulated separately under a new legislation instrument.

• Tier 3: Tier 3 is similar to that of tier 2, and it represents the MFIs which were previously considered as semi-formal in the domain of legally registered, but not licensed by Bank of Ghana. Non-Deposit-taking MFIs: Incorporated Money Lenders, and Financial NGOs (FNGOs), that is for those MFIs not mobilising deposits, their minimum capital was raised from GH₵ 60,000 to GH₵ 300,000 in 2013.

• Tier 4: Tier 4 comprises Susu collectors and money lenders. This category is considered as ‘informal’ but now technically ‘semi-formal’ entities in that they have to be registered, but are not licensed or directly supervised.

For the registered Susu Collectors and Money Lenders, the minimum capital has not been prescribed, nor are they supervised directly by Bank of Ghana, but are expected to join and report to their respective apex associations, which in turn are expected to report to the Bank of Ghana.

Table A.11.2 is helpful in presenting the main regulatory characteristics of the various providers and the membership in each category in the Ghanaian microfinance sector.

Table A.11.2 Microfinance status of regulation by tiers (as of March, 2014)

1.3 Prospects and Challenges

The sector has made some rapid progress in a rather short period of time and the Bank of Ghana, among others, apparently has greatly succeeded in steering the development. In particular, the rapid development of the Savings and Loans companies is really spectacular (as already explained in the main chapter). Indeed, the story of the rapid growth of microfinance in Ghana based on a commercial basis helps to demonstrate that it is possible to advance such micro and small loans on a large scale, by companies working to maximise their profits. Hence the success of the rapid microfinance expansion in Ghana can provide some valuable lessons for many others especially those developing countries which are failing to make any progress in this regard!

Also, to those advocates such as Morduch (1998), and Roodman (2012) who are critical of the heavy involvement of the NGOs pushing the microfinance agenda, the rapid expansion of this sector in Ghana should provide an example in favour of their argument especially that a sector like this can operate on a commercial basis.

However, the rapid growth of the microfinance sector in Ghana almost entirely run on commercial undertakings is also showing some disturbing developments. The following three are particularly pertinent.

A major area of concern is that very high interest rates are being charged, thus adversely impacting on private enterprise growth at the small and medium scale. Following the liberalisation of interest rates, the financial institutions are free to set such rates based, obviously, on demand and supply. Indeed, there exists interest rates which are even above 70 per cent, as may be seen from Table A.11.3. Understandably, such high interest rates on loans as charged by many of the microfinance providers are attracting serious criticisms. It appears that monopoly profit maximisation is in operation, as is expected in an imperfect market. According to a study carried out by Boateng and Boateng (2014), MFIs charge between 40 per cent to 100 per cent interest on loans while they pay only 3 per cent to 6 per cent on savings (quoted in Boateng et al. 2015, p. 156). Understandably, in the neoliberal market strategy as pursued by Ghana, the Government is not keen on imposing any ceiling on the maximum interest rate to be charged. There is, indeed, a case for regulation here.

Table A.11.3 Average loan amounts and interest charged by the various types of microfinance providers in Ghana, 2010–2014

Secondly, with the exception of the Rural and Community Banks, most of the microfinance providers appear to be by-passing the agricultural sector. As found by the Ghana Living Standards Survey (6th Round) GSS (2014b, p. 158), even in the case of the Rural and Community Banks (as well as in Savings and Loan Companies, Cooperative Credit Unions and Susu Schemes) more than 50 per cent of the Account holders are all in urban localities. Indeed, for them the most preferred clients are those from the trading community. Understandably, the microfinance providers (operating to maximise profit) often do not see the farmers as their preferred clients. In a situation like this, left to the free play of market forces, there is hardly any prospect of fast growth of Ghana’s agriculture. Hence the urgency on the part of the government to pursue a pro-active agenda, given the policy of encouraging agricultural development through, for example, clear directives of prioritising agricultural growth, as is the case in Western Europe and North America, helping the farmers with designated subsidy programmes.¹ The Common Agricultural Policy of European Union is a very good example in this regard.

Thirdly, it does not appear that with the expansion of the microfinance in Ghana, the laudable objective of making finance available to the poorer sections of the community (who are by-passed by the banking system) is being achieved, as is apparent from one of the major findings from a microfinance impact study recently conducted by the Directorate of Research and Consultancy of the University of Cape Coast (UCC). Only Rural and Community Banks are found to have clients from the poorer sections, but just a small proportion (10 per cent of the lowest wealth quintile), while “S&Ls, MLAG and Susu companies did not record any in the poorest quintile. Indeed, in terms of clients in the wealthiest quintile, S&Ls had almost four out of every five clients and MFCs had one out of every two clients” (University of Cape Coast 2016, p. 2).