Micro- finance institutions -A saviour for private businesses?

It has been five years since the founder of Juperp Enterprise, Mrs Christiana Ofosu-Ntiamoah, started her business of binding exercise books for sale to students in the Greater Accra Region.

Although the enterprise has largely survived on loans, its founder and Chief Executive Officer told the Daily Graphic that she was yet to step into any bank in the country to ask for financial support to either keep the business running or expand its fortunes.

She said financial aid to the enterprise, in the form of loans, had rather often come from non-traditional financial institutions (NBFIs) such as the dozens of rural and community banks (RCBs), money lenders, susu collectors,  and savings and loans companies (SLCs) dotted across the length and breadth of the country.

‘I always take my loans from the micro-finance institutions (MFIs). Their requirements are okay and unlike the banks, they do not ask for landed property as collateral before they give a loan,’ she explained in an interview.

Notwithstanding Mrs Ofosu-Ntiamoah’s non-dependence on the banks for funds, her book binding business at Sukura in the Greater Accra Region has grown from the typical one-person operated enterprise to one that currently gives full-time employment to five people. That has been a result of the regular inflow of funds from her financial supporters the MFIs to keep the business running.

But she is not alone. Hundreds of other small and medium-scale enterprises (SMEs) spread across the country, especially those in the hinterlands, have equally not known the four squares of a banking hall despite surviving solely on loans.

Such businesses, as is the case with Mrs Ofosu-Ntiamoah’s enterprise, depend largely on funds given them by MFIs.

These institutions have sprung up in multitudes over the past decade and are now yearning for and ready to meet the funding needs of the country’s financially impoverished informal sector.

The micro-finance boom
The story behind the growth of MFIs in the country is tied to the communal lifestyle of the typical Ghanaian.

In the olden days when formal banking was not in existence, most individuals, mostly friends and relatives, saved their meagre earnings as a group and lent them to each other. But as time went on, this kind of savings, then termed ‘susu,’ developed into diverse formal ways of gathering money in bids from the populace and lending them back to those who had saved them for commercial purposes.

That gave birth to today’s money-lending businesses, susu-collection companies, savings and loans companies, credit unions and financial non-governmental organisations (FNGOs), among others.

These institutions, which have now blossomed into bigger financial providers as a result of consistent rise in demand for their services, are now doing brisk business throughout the country.

But for them, lack of funds would have killed the millions of micro, small and medium-scale enterprises (MSMEs), including Mrs Ofosu-Ntiamoah’s Juperp Enterprise, that are contributing in diverse ways to economic development.

Regulating MFIs
Following the rising growth in the numbers and sizes of these institutions, the Bank of Ghana (BoG) which regulates the financial sector, came up with a regulatory guideline that categorises MFIs and confines each category to specific activities.

The said regulation also classified the institutions into four tiers.

Tier one
Under this are rural and community banks (RCBs) and savings and loans companies (SLCs). Their minimum paid-up capital, which was GH¢7 million, is now being revised to GH¢15 million in line with rising demand for their services by businesses in the country.

This is also the result of the increasing growth in the national economy, the BoG said.

Although institutions under this tier are almost similar to the commercial banks, their paid-up capital limits them from engaging in big-ticket transactions.

They are also not allowed to raise letters of credits as well as engage in commercial transactions outside the shores of the country.

The BoG said in August this year that licensed operators under this tier had more than doubled to 228 by June this year, from 90 in December last year.

Tier two
This consists of deposit-taking institutions which are required by law to raise and keep at least GH¢100,000 as paid-up capital.

Their minimum capital is, however, now being revised to GH¢500,000 to be in line with recent economic growth in the country.

Players under this category are allowed to take deposits from the general public.

Tier three
Tier three institutions comprise money-lending companies and financial non-governmental organisations (FNGOs). They are mandated to raise and keep a minimum of GH¢50,000 as paid-up capital.

Tier Four
This covers money-lending enterprises and susu-collecting companies. These institutions do not have any minimum paid-up capital and are allowed to take deposits but on fixed basis.

Contributions of MFIs
In the first quarter of this year, a credit survey by the Monetary Policy Committee (MPC) of the BoG showed that businesses were receiving less credit from banks and other financial institutions than they needed.

The survey indicated that credit to the private sector slowed to 28.7 per cent in the first three months of this year from the 44.6 per cent recorded last year.

It also found that annual growth of real private sector credit was 17.6 per cent in March this year, down from the 32.9 per cent recorded as of March last year.

These findings, however worrying they were to the development of the country’s private sector, are not entirely new to the business community-one that survives only on finance.

The Association Of Ghana Industries (AGI), which is the umbrella body of manufacturing and related businesses in the country, has always mentioned access to and cost of credit as the twin tedious challenges confronting its members in the country.

The association’s Business Barometer Survey (BBS) has consistently found that these challenges continue to limit the expansion drives of businesses in the country, leading to a general slowdown in the contribution of industry to the country’s annualised gross domestic product (GDP).

This brings to light the relevance of NBFIs in the country.

As the First Deputy Governor of the BoG, Mr Millison Narh, said in mid-August this year, the increasing demand for licenses by these MFIs at the bank showed that demand for their services was consistently on the rise. Thus, the existence of MFIs is critical to the fruition of MSMEs.

‘Had it not been because of MFIs, most businesses would not have survived,’ the board chairman of Ghana Association of Micro-Finance Companies (GAMC) said in an interview.

These MFIs also help in taming inflation.
According to Mr Amposah-Mensah, a cumulative sum of 940.17 million worth of deposits was mobilised by 180 MFIs as of December last year.

This equals the minimum capital of about 15 banks and could have triggered a constant rise in prices of goods and services, measured by inflation, if it had been left in the hands of the general public.

MFIs also serve as a good source of employment, both direct and indirect, to dozens of youth.

As of December 2012, GAMC’s Board Chairman said, 180 of its members employed over 8,200 people nation-wide.

‘This is just 180 companies out of the more than 600 members that we have. Beyond this, our activities also generate indirect jobs,’ he added.

MFIs competing with banks?
The consistent growth in size and numbers of MFIs clearly exposes the inability of commercial banks to satisfy the financial needs of the business community and the average Ghanaian in particular.

This is seen in the amount of deposits these institutions, mostly staffed by untrained bankers, are able to mobilise from the general public and the way those funds are used to support the operations of businesses throughout the country.

This is further supported by recent revelations by the First Deputy Governor of BoG that the strong growth in MFIs has ‘reduced banks’ share in total assets from 89 per cent in 2010 to 85 per cent in 2012. Clearly, this should be a wakeup call to all banks,’ Mr Narh said in a recent interaction with bankers in Accra.

But instead of seeing MFIs as competing with banks for funds and businesses, the Board Chairman of GAMC said they should be seen as complementing each other.

‘We are all providing a service to the people. The market is such that one category of financial institutions can’t handle it all,’ he said.

‘The fact that some businesses are even looking for funds shows that there is need for more and it should not be seen as competition,’ Mr Amposah-Mensah added.

The challenges
Despite BoG’s tireless efforts at regulating the activities of MFIs in the country, dozens of them still exist outside the legal framework provided by the bank.

Although data on the number in existence and size of their operation is limited, available statistics at the Ghana Association of Micro-Finance Companies (GAMC) indicate that there could be as many as 1,000 of them in the system.

The GAMC, which is the umbrella body of companies providing micro-finance services in the country, said in December last year that it had over 600 members in its system.

There could be many others in operation, said Mr Collins Amposah-Mensah, the Board Chairman of GAMC.

‘We are aware of some individuals and companies that do not belong to the association operating as MFIs but that is an issue the regulator (the Bank of Ghana) will have to deal with,’ he said in an interview.

This gives cause for concern, especially given that the existence of these institutions and their operations have implications on monetary policy issues, inflation and the economic well-being of the general public, especially their clients.

No wonder the BoG has now resorted to the shutting down of those that operate without the necessary licences.

But there is a challenge. Although this could prove a good antidote to the illegal existence of these institutions, it has implications on the gullible public who might have been deceived into doing business with them. That is because once the affected institution is shut down; it becomes difficult for it to refund deposits to clients. Thus, while it is commendable that BoG acts within its remit to flush out recalcitrant people and institutions that have the tendency to bring the entire financial sector into disrepute, it is even more commendable if it does that tactfully such that it does not deny innocent people their hard-earned savings.

It is obvious that the importance of NBFIs to the economic development of the country has been overwhelming.That notwithstanding, lack of effective regulations by the BoG has led to pockets of indiscipline by some institutions in this category. It is therefore imperative for the Central Bank to work closely with the relevant umbrella bodies of the various MFIs to help  sanitise the sector.

In the meantime, however, the Board Chairman of GAMC said the general public should be vigilant when dealing with MFIs.

‘In most cases, people don’t know the location of the company yet they do business with it and that is not the best,’ he said.

And for those who borrow from MFIs but refuse to repay, Mr Amposah-Mensah said ‘try to repay so that we can continue to be in business and be able to give loans to other businesses and people’.

Daily Graphic

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