Ghana was an early adopter of the microfinance concept. According to the regulator, the Bank of Ghana (BoG), the first credit union was established in northern Ghana as early as 1955, introduced to the country by Canadian missionaries. A more local financing tradition, susu (where informal agents charge a small fee to hold money and provide limited credit), is thought to have spread from Nigeria to Ghana in the early 20th century.
From there, the microfinance industry advanced in a number of stages. The Agricultural Development Bank was established in 1965, tasked with directing small loans to the fisheries and agriculture sector. In the 1970s and 1980s Ghana’s network of rural and community banks (RCBs) began to emerge to serve a similar client base, while commercial banks were directed by regulations to set aside 20% of their credit portfolio for lending to agriculture and small industry. Then, in 1991, a legislative change allowed for the establishment of non-bank financial institutions, which includes savings and loan (S&L) companies, and credit unions.
The result of this long evolution is a complex ecosystem of credit providers that sometimes complements, and often competes with Ghana’s commercial banks. The plethora of credit-advancing institutions that exist outside the commercial banking sphere are defined in numerous ways. The BoG differentiates between those that accept deposits and those that are not permitted to, as well as those that it defines in legal terms to be banking institutions and those that are non-bank entities. From a microfinance perspective, however, there are three major categories of companies operating in the Ghanaian market. The first tier is largely made up of formal suppliers such as S&L companies and the 144 RCBs distributed across Ghana as of 2018. Some development and commercial banks also operate at this level. The second tier of microfinance operators is made up of semi-formal suppliers, such as credit unions, cooperatives and financial non-governmental organisations (FNGOs). The third tier is made up of informal suppliers, such as susu collectors and clubs, micro-credit organisations and non-deposit-taking FNGOs. Capital requirements and regulatory responsibilities vary across the tiers, with tier-1 companies facing the most stringent regime, and subject to the same banking act as commercial banks.
Like the commercial banking segment, the financial soundness of the country’s microfinance institutions has recently come under scrutiny. According to the central bank, the capital adequacy ratio of RCBs at the outset of 2019 was 10.5% of risk-weighted assets. The segment also showed a double-digit non-performing loan ratio, although the level of 12.6% at the beginning of the year was a marginal improvement on the 13% a year earlier. For the pure microfinance segment, the financial soundness indicators were less favourable. The capital adequacy ratio of the deposit-taking microfinance institutions stood at approximately 8%, while the non-performing loan ratio sat at some 19.2%, down from 19.7% in 2017.
Following its examination of banks’ balance sheets, which resulted in the revocation of licences and forced mergers, the BoG put the nation’s microfinance segment through similar tests. The BoG’s assessment of the S&L and finance house subsectors uncovered a number of significant systemic risks, including low levels of capital, inadequate risk management, and – in some cases – the misuse of depositors’ funds to finance personal or related-party projects or businesses. The central bank’s response was swift. At the end of May 2019 the regulator withdrew the licences of some 192 insolvent microfinance companies and revoked the licences of a further 155 insolvent microfinance companies that had already ceased operations. By August 2019 the central bank had also withdrawn the licences of 23 S&L and finance house companies, deploying the powers granted to it by the Specialised Deposit-Taking Institutions Act 2016. The regulator justified its decision on the grounds that the institutions had no reasonable prospect of recovery, and that their continued existence posed “severe risks to the stability of the financial system and to the interests of their depositors”. The statement also revealed that the government had made funds available to the appointed receiver, who can validate and settle claims from customers. The closure of the S&L companies has affected more than 70,000 customers.
RCBs and microfinance institutions have been facing gradually increasing minimum capital requirements since 2015, when the BoG first announced a timetable of reform. Institutions were given until December 2017 to comply with the first hike of the requirement to GHS1m ($194,000), and until June 2018 to meet the next minimum capital requirement of GHS2m ($387,000). In August 2019 the central bank urged rural banks and microfinance agencies to meet their revised minimum capital requirement, or face the prospect of sanctions.
Reputation is particularly important for RCBs and microfinance institutions due to the importance of deposits in their funding operations. Deposits are liabilities on RCBs’ balance sheets, accounting for nearly 90% of total assets, according to BoG data. For microfinance companies, the figure is close to 60%. Obtaining deposits from their customer base – primarily low- to middle-income Ghanaians who are not as comfortable with the formal financial sector as high-net-worth individuals and corporates – will become increasingly challenging if concerns regarding financial integrity continue.
Depositor protection emerged as a primary concern of the BoG during its recent reform effort, and this is likely to remain the case in any of its future actions. The regulator was keen to avoid consumer panic by pointing out that depositors’ claims were to be validated and paid to the depositors of the institutions that had their licences revoked. The regulator also stressed that the clean-up exercise of the sector was directed only at insolvent and illiquid financial institutions that were unable to meet depositor withdrawals, whereas solvent institutions that were capable of meeting depositors’ withdrawals were not subject to the emergency measures.
However, one segment of the microfinance universe appears to have emerged from the recent turmoil relatively unscathed, and is well positioned to build on its already substantial customer base. According to the BoG, the weaknesses discovered in the other tiers of the microfinance sector have not contaminated the RCB segment, and the regulator has consequently identified only a handful of rural banks that are having difficulties meeting the new regulatory requirements.
The survival of RCBs is systemically important for the domestic economy. Together, RCBs serve more than 7m customers across the country, and the government has come to rely on the institutions for the payment of salaries, pensions and allowances to the working and retired populations that live in rural areas. In particular, RCBs play an important role in financing the nation’s agriculture sector, providing microfinance products to smallholder farmers, and extending loans to processors and producers, as well as the transport segment that ships agricultural products.
Under the guidance of the ARB Apex Bank – the country’s bank for RCBs – Ghana’s rural banks are setting their sights on technologically driven growth. For instance, in 2019 the ARB Apex Bank was working on a warehouse receipt product aimed at increasing loans to maize, soya bean and cashew farmers on the back of the Ghana Commodity Exchange platform. The bank has also collaborated with IT Consortium in the use of their product TransFlow Payment Gateway, a payment platform ecosystem that simplifies and improves the efficiency of payments between customers, merchants and channel providers, enabling RCBs to work with both educational and entertainment institutions, as well as other service providers, in areas such as fee and subscription collection.
A potentially more significant step is scheduled for 2020. With support from the World Bank and the government’s Ghana Financial Sector Development Project, the ARB Apex Bank is to oversee the rollout of an RCB agency banking platform that will allow storekeepers and other remote points to extend banking and financial services to underserved populations. The continuing evolution of the RCB segment demonstrates that, while the microfinance industry is faced with significant challenges, there are a number of high-potential areas poised for growth.
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