Ghana: Microfinance- A new business in Ghana
From Joy Online
The microfinance fever is catching on very fast in Ghana. There are Microfinance Institutions (MFIs) on major streets in Accra. It is now common to see offices that have inscriptions which presuppose that these enterprises are into the provision of microfinance services. These firms mainly provide loans or and mobile banking which is commonly know as susu.
The increasing number of MFIs whether a registered susu agent or an on-lending MFI is an encouraging phenomenon for the Ghanaian microfinance industry. At least the increasing number of these MFIs will provide the end users (low income earners and the poor) alternative services and products to choose from when it comes to their financial needs. The increasing number of MFIs will also break the cycle of monopoly and contribute to a more competitive industry that will provide products and services that will meet the financial and non-financial needs of the poor and the low income earners. The growth in terms of numbers (setting up on new MFIs) is expected to improve the accessibility of financial services to the large non-banked population in Ghana and, thereby, lead to an improvement in the services and products being offered to the informal sector or market.
The increase in the number of MFIs in Ghana can be attributed to the successes that have been recorded by some MFIs in Kenya, Ethiopia and Uganda as well as the world wide acknowledgement and recognition that has been given to microfinance by international donors and governments. In addition the proven fact that the low income earners and the productive poor can improve their livelihood through the provision of credit is influencing many more entrepreneurs’ to invest in microfinance. For others, it is purely for commercial purposes and for others; it is a mixture of the two. This is to say that incentives and rewards play a vital role in attracting financial and non financial service providers to consider serving the poor and the low income earners.
SUSU demystifying banking in Ghana
A study conducted by CGAP indicated that half of the people who are not banked and not extremely poor in Zambia do not open an account because the nearest bank branch is too far. Other studies have also supported the fact that physical distance is often cited in household surveys as a reason for not opening a bank account. The situation is not so different from what is happening in Ghana. The susu saving scheme (“mobile banking”) have provided a bridge by taking banking to the doorsteps of its clients. It is evident that susu operations in Ghana has contributed to the mobilization of excess monies from the informal sector into the main banking stream. Through the susu operations, it has been demonstrated that most Ghanaians can improve on their savings culture if access to “deposit centers” were not a problem. This is supported by the number of people who consistently save with trusted susu operators within their localities. The success of this system has influenced some traditional banks to adopt the susu banking scheme’s to improve on their deposit mobilizations activities. Another interesting development in the susu industry is that , the profile of most of their clients which in time past were mainly made of traders, farmers, hair dressers, mechanics (fitters) etc, is gradually changing to include some clients in the formal sectors of the economy . These developments tend to suggest the wider acceptance of the susu system among many Ghanaians irrespective of the presence of some charlatans in the business. The acceptance of the susu schemes has motivated several individuals and entities to set up their own susu firms. The achievement of the susu schemes tend to supports the fact that given a convenient means (accessibility) most Ghanaians can cultivate the habit of savings. This conclusion can be deduced from the increasing number of people who are signing onto susu products that even do not offer any interest rates on the amount saved.
The informal market and their need for financial services
Clients in the informal sector have developed confidence for MFIs aiming to provide financial service to the people in the informal sector of the economy either by making loans or deposits products available. This is a demonstration of the potential desire of the under-banked and non-banked population to have access to funds and other financial services to improve their livelihood by investing in economic opportunities. This desire for financial services has even resulted in instances where self styled MFIs abscond with the savings of the clients. It is interesting to note that although trust in a financial system is a precondition for individuals to give their money to banks or MFIs, the demand for financial services is increasing even in situation where some MFIs have absconded with clients’ savings. The trust demonstrated by clients even for clients who have had their savings lost through the activities of fake MFIs is still soaring high and quite a number of these clients still maintain some relationship with an MFI. This scenario is different for some countries. For example in the Russian Federation, Ukraine, and other Eastern European countries, it took years before people returned to banks after losing their life’s savings to high inflation and bank collapses in the 1990s (CGAP 2009). However, the larger part of the informal market in Ghana do not take a long time for them to renew their trust for new MFIs after a negative experience with another MFI.
The peculiar characteristics of the informal market and their increasing desire for financial services and products are an indication that there is a huge market for microfinance in Ghana. But to serve this market on a sustainable basis, and grow entrepreneurs behind MFIs should endeavor to know that microfinance goes beyond the granting of loans and the collection of daily savings. These MFIs must start thinking about sustainability. They must begin to identify the main challenges that will hinder their operations and, thereby, affect their sustainability.
Like any other business, doing microfinance business successfully requires paying attention to certain key issues which may be peculiar to the industry. These important factors may include:
• Understanding the profile of the low income earner
• Gender sensitivity
• Staff hiring
• Building volumes (number of clients, number of borrowers)
• Keeping loan repayment rates high
• Retaining customers (active savers and active borrowers)
• Minimizing scope for fraud in branches
Understanding the profile of the low income earner
Microfinance is a not just a social program. It is a business that should be learned if it is to function sustainably. A lot of the people behind most of the pro- poor “banks” or MFIs do not think doing microfinance business requires any specialized skill and that the conservative banking techniques will work when dealing in microfinance. MFIs providing financial services to the poor should consider the complex nature involved in offering services to the poor in order to ensure a better return on their investments and to achieve some level of impact for their contribution to eradicating poverty. Doing microfinance can be costly because of the small size of loans and deposits. This, therefore, calls for appropriate methodologies and strategies that can minimize the operational cost as well as strategies to increase staff productivity or efficiency in order to be sustainable.
It is important that MFIs acquire adequate knowledge of the market they are serving. This will assist them in designing efficient strategy to serve their client better. For instance the market of the micro clients are principally characterized by low literacy levels, low financial literacy levels, short term economic activities (buying and selling, crop farming, etc),high social capital (trust) and low or absence of adequate collateral amongst others. The usual type of collateral required by traditional banks does not exit. In the absence of the traditional collateral, there is the need to device new risk management strategies to keep clients committed to paying off all the loans granted them. This background contributed to the group loan methodologies which have been used by several MFIs across the world. However, the chosen credit methodology should be adopted to fit the operational area of the MFI.
Purely microfinance concepts have over the years targeted women and this formed the heart of the microfinance system. Statistical evidences indicate that the majority of the customers of MFIs are women. Some MFIs, like Crecer in Bolivia and Kashf in Pakistan, lend exclusively to women. Several research works indicate that women have better repayment behaviour compared to their male counterparts. These findings arose through a process of experimentation in the late 1970s at what became the Grameen Bank, as the institution discovered that women were easier to work with than men in rural Bangladesh.
From this background MFIs doing business in Ghana cannot reinvent the wheels and will have to acknowledge that women clients can be a booster for the growth of their enterprises. MFIs should, therefore, make an effort to understand how poor women earn, save and invest money in order to guide them to design products and services that can meet the needs of the women client.
Minimizing scope for fraud
For MFIs that operates small branches which are physically linked by weak transportation and communications infrastructure or susu operators that have several field staff, monitoring branch activities or filed officers activities to prevent internal fraud is a major challenge. This challenge has resulted in several fraud cases where field officers under record the actual deposits or repayments of their clients. MFIs with such challenges should not gloss over them. At least supervisors and managers of such MFIs should undertake random visits with their field officers to interact with some of its clients and to verify their deposits in the case of susu clients and the repayment of loans. These challenges can also be reduced if the MFI practice good booking practice which has been identified as one of the major weakness in most MFIs.
Most MFIs have been conscious of reducing their staff cost to ensure that they become profitable. This has resulted in MFIs having to deal with high staff turnovers as a result of low paid salaries. Staff packages in place at most MFIs have resulted in the industries inability to attract highly qualified staff and ,therefore , most of the MFIs have settled for staff with average qualifications. It is, however, important for MFIs to ensure that any calibers of staff employed are provided with adequate training. This will not only help them serve their special clients better but they will become efficient individual lenders as they improve on their turn around time.
One key thing to keep in mind when recruiting MFI staff is that they we will be required to make independent judgment especially on the part of loan officers. These workers would assess the quality of the information given by the client, which cannot be taken at face value even when supported by financial statements which in most cases are absent. Good individual loan officers will also be required to develop indirect techniques for getting at the truth, such as asking borrowers about both the value and volume of their sales in order to see whether the implied price is realistic. They should be able to deduce a lot of information about a retailer’s business by scanning the merchandise on the shelves: Are the shelves empty or full, the products new or old? All these require a habit of critical thinking which can be found in staff with appreciable level of educational qualification. The MF industry should therefore, develop an attractive incentive package systems to enable it to attract well qualified staff to support its sustainability strategy.
The presence of MFIs in Ghana would not be felt; that is their contribution to raising the income levels of the low income and the productive poor through the provision of loans and other services will not be felt if the basic requirements needed to grow the microfinance business are not employed.
As more and more MFI springs up in Ghana, regulatory bodies concern should act to support the activities of these firms and also to protect the clients dealing with these institutions so that in the wake of the “microfinance revolution” authorities and the poor will not be caught on aware.
By Roderick Okoampah Ayeh
Microfinance Technical Officer
ARB Apex Bank Limited