Following moves by Ghana’s regulator to improve capital requirements across the financial industry, with hikes in recent years for universal banks and non-bank financial institutions, the microfinance sector is now slated for an increase, prompted in part by a spate of recent lender failures that led some savers to withdraw their holdings.
The decision was announced in June by the Bank of Ghana (BoG), the central bank. It was in response to the failures of five microfinance companies in the six preceding weeks, according to media reports. Head of Banking Supervision Franklyn Belnye said in late June that a review of capital requirements would be conducted before August, and a new regulation would be announced. It was unclear the extent to which consumers have been hurt by the closures, although reports of depositors having difficulty withdrawing their funds have been registered with the central bank.
The minimum capital requirement for microfinance companies – GHS100,000 ($51,410) – was introduced in 2012 and represents a compromise between the central bank and the industry. The BoG wanted the minimum threshold set at at least GHS500,000 ($257,050) and had at times called for a floor of GHS1m ($514,100). The industry argued that high minimums would shut out smaller providers that tend to focus on rural areas, and could therefore harm financial inclusion outside the cities.
Lenders in Ghana range from universal banks to smaller-scale savings-and-loan operations, single-location rural banks, microfinance outfits, and, on the smallest end, informal operations called “susu”. Universal banks’ minimum capital requirement is GHS60m ($30.8m), and savings-and-loan institutions must have at least GHS7m ($3.6m).
Rural banks have lower capital requirements and are limited to doing business and opening agencies within one region. In 2000 the Association of Rural Banks (ARB) formed a “mini-central bank”, known as the ARB Apex Bank, to carry out functions such as cheque clearing and cash movement, although it remains under the regulatory supervision of the BoG.
A similar institution has been proposed for the microfinance segment, therefore perhaps reducing the burden on the central bank, which lacks the capacity to monitor closely the large number of players. As of June 2013, the BoG had licensed 228 microfinance institutions, but only about 50 were reporting financial results on a regular basis, according to media reports.
Moreover, these figures are likely to grow. In June, Belnye told participants at the seventh Ghana Microfinance Forum in Accra that the central bank has fielded more than 700 licence applications, and new players are keen to expand at a faster rate than regulations allow.
Two industry associations – the Ghana Association of Microfinance Companies (GAMC) and the Ghana Microfinance Institutions Network (GAMFIN) – have weighed in with possible solutions.
GAMC’s executive secretary, Richard Amaning, told local media that an increase in the minimum capital requirement could help, but he supported the establishment of tiered regulations, based on the size of the institution. As some microfinance outfits are single-branch operations and others maintain multi-branch networks, there should be different thresholds for regulation and capital, he said, suggesting a minimum capital requirement of GHS1m ($514,100) capital for larger operations.
GAMC has offered to take on some of the supervisory burden, the group’s chairman Collins Amponsah Mensah, said. That would perhaps be similar to the role the ARB Apex Bank plays for rural lenders. Mensah told local media in June that GAMC is advising its members to be careful about rapid expansion, lest they end up losing the confidence of their clients. “We have seen huge withdrawals in member companies. The more you branch, the riskier it becomes and you also lose hold of control over your operations,” he said.
Higher minimum capital requirements would go some way towards alleviating customer concerns and boosting overall system stability, factors that the central bank is likely to take into consideration as it debates whether to issue new regulations.