Microfinance is deep-rooted in the history of Ghana. The tradition of keeping money for emergencies or taking small loans from individuals and groups to self-start a business or for family ventures; from little susu to savings groups amongst traders, farmers, or members of a community, microfinance was practiced. Its practice has been said to have become necessary because the nature of commercial banking i.e. the building structure and ambiance, the language used by their staff, the products and services rendered did not favour the low-income and the traders who felt uncomfortable and out of place with their small deposits. This according to some microfinance practitioners necessitated the start of microfinance in the country.
Through the regimes and times have come policies which have led to the emergence of broad categories of microfinance providers such as:
- The formal: this includes the savings and Loans, rural and community banks as well as some development and commercial banks
- The Semi-formal: this includes the credit unions, the FNGOs and the cooperatives
- The Informal: this includes the Susu collectors, the ROSCAs and ASCAs, money lenders and the microfinance companies.
What is microfinance and what is its goal?
Microfinance is a type of banking service that is provided to the unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Its goal is to give low income people an opportunity to become self-sufficient by providing them a means of saving, borrowing and insuring their money as well as alleviate poverty. The world bank estimates that there are more than five hundred (500) million people worldwide who have directly or indirectly benefited from microfinance related –operations.
But what are microfinance products and services really?
Microfinance products include micro savings, micro loans otherwise known as microcredit and micro insurance. While microfinance seeks to alleviate poverty, business must still run, and therefore interest must be charges on loans. However, microfinance loans are generally lower than that of the commercial banks.
Are we really practicing Microfinance in Ghana?
A highly debatable question. We seem to be more interested in making profits and therefore charging high loans in Ghana. The only notable differences between the commercial banks and the microfinance are these:
- That the commercial banks are not limited in their services and can undertake foreign remittances and give high valued loans.
- That the commercial banks have a higher capital requirement as compared to the highest microfinance providers capital requirement.
We find that in Ghana, the commercial banks charge interest as high as 30% per annum on loans and pay as little as 4% on savings. They also set high targets to be achieved by their staff and target mostly the high income earners and the corporate institutions as their clientele. Very few however, have created departments to provide ‘Microfinance Services’ to the low income segment after realising the capital potential to be derived as well as fulfilling their social goals.
Now the microfinance do same, but in a different way. Microfinance institutions charge clients high interest as well (which defeats the microcredit objective) yet charge interest per month instead of per annum, charging clients as much as 5-9% a month on loans and seldom using the reducing balance approach because the flat rate is more profitable. In this vein, the microfinance providers make more profit on loans given to clients, given that they end up gaining interest as high as 60% (5 % x 12 months) per annum on loans that span twelve (12) months. Clients are also often mesmerised because they fail to understand that the banks charge per annum on loans whereas the microfinance charge monthly and so often hear the 5% and quickly sign on.
Then again, the microfinance providers can also make a valid point in saying they borrow from the commercial banks or their financial service providers at high rates and so have no option than to raise their rates as well when lending.
Microfinance providers in Ghana have gradually moved from targeting the low income people to targeting the same target groups of the commercial banks, often ignoring small deposits and small loans. We have gradually switched from practicing microfinance to practicing mainstream banking. From targets set, through interest charged on loans to interest paid on savings. No wonder the low-income cannot tell the difference between the commercial banks and the microfinance institutions or providers and call all of them ‘Banks’. It’s a chain actually;
- First the MFI gives its staff high targets in terms of value to achieve knowing very well such targets can’t be met with the low-income people;
- The staff or mobilizers to achieve their targets and get full payment shift their focus to the high income earners, the companies;
- Again to achieve their targets, the staff also entice traders and other potential clients with the promise of loans and grant them high valued loans they know will cripple them and leave them over-indebted.
It would be extremely difficult to say that microfinance is being practiced in Ghana from the practices in the sector.
By Angela Esi Daisie