Financial inclusion and microfinance institutions: The role of increased inclusive financial systems in promoting macroeconomic benefits and significant improvement in personal benefits to households, stability, and growth to enterprises is important. The Bank of Ghana has indicated it is working to increase financial inclusion from 58% at end of 2017 to 75% by the close of 2023. One cannot underestimate the role of microfinance institutions (MFIs) in achieving this target.
Ghana’s microfinance sector is one that is unique and difficult for many to understand. It is a mix of profit sharing and not-for-profit sharing providers, with some working at combining both commercial and social missions. The Bank of Ghana has outlined a four-tier approach to segmenting the various provider categories. The tiers have different capital requirements and permissible activities.
Tier 4 which is at the base of the regulated institutions has susu collectors and individual money lenders. This is actually to ensure that the role of individual providers and the Ghanaian entrepreneurial ingenuity is not sacrificed on the altar of regulation. The tier 4 providers make “profit” for themselves. Tier 3 has corporate micro lenders and non-deposit taking financial NGOs (FNGOs). FNGOs are those known to mainly have social mission and are non-profit sharing (please note that “non-profit sharing” does not mean “non-profit making”). The microlenders on the other hand are profit oriented and when they make the profit, it is distributed among the owners. Tier 2 has microfinance companies (MFCs), Deposit-taking FNGOs and Credit Unions. Credit Unions are member-owned cooperatives and share profit or losses as the case may be among their members. Microfinance companies have shareholders who are profit oriented. The deposit-taking FNGOs are largely social mission oriented. The providers in Tier 2, especially MFCs can have the dual mission of social and commercial orientation if they choose to, but it is important to note that most of them did not set out to be social mission oriented. These companies have deployed private capital that has to be rewarded and may therefore not be keen on social mission. However, those MFCs that realize a microfinance business can combine social and commercial mission and remain profitable are the eventual winners. Afterall, social mission is largely about the client and it is clients who determine the success or otherwise of a business.
The Tier 1 providers comprise mainly rural banks and savings and loans companies. Their inclusion in Tier 1 recognises that prior to the formal regulation of the others, they were under regulation. It is interesting to note that the rural and community banks did not consider themselves as MFIs and most of them had gone ahead to set up independent departments and units that they called microfinance unit or department within the bank. The savings and loans companies are fighting hard through all their actions and pronouncements that they are not ‘microfinance’. This fight is about self- preservation from a branding perspectives. The fact however, remains that these tier 1 providers also adopt methodologies and practices similar to those of the providers in tiers 2, 3 and 4. It is important to note that some commercial banks also provide microfinance products and services through direct and indirect channels.
State of microfinance institutions in Ghana: Ghana’s microfinance sector receives different assessments from various stakeholders. It is clear that it is a sector that can do more than it is currently doing. It has received negative reportage even before the days of DKM crisis of 2016. The negative image has assumed even greater proportion with the advent of the DKM crises as if DKM is the face of Ghana’s microfinance sector.
A reliable assessment of the industry comes from the industry regulator, the Bank of Ghana. In a presentation[1] on the state of Ghana’s financial sector, on a day one of Ghana’s banks (uniBank) was put under Official Administration, the Governor of the Bank of Ghana indicated that the problems in the financial sector (referring to the banks) were also reflected in the Microfinance or MFI subsector comprising MFCs, MLCs, FNGOs, and RCBs. The Governor indicated specifically that “the extent of distress in this subsector was characterized by severely impaired capital; inability to meet regulatory capital adequacy requirement; generally low asset quality; and liquidity crises”. In his words, these developments have “culminated in threats to depositors’ funds thus eroding public confidence and undermining efforts to promote financial inclusion”. It is obvious that the situation as painted by the Governor of the Bank of Ghana has affected the ‘survival’ of most of the microfinance institutions.
But how did the microfinance industry get to the level that their survival and ability to play a key role in the nation’s quest for high financial inclusion has become a major concern? Several interrelated factors brought us here, key ones include low or no capital from owners at start of business or for expansion; lack of distinction between board and management roles; board and management failure; use of depositors’ fund for what capital should be used for; inadequate understanding of microfinance business and its management; deliberate fraud and slow response from the regulator in dealing with those found culpable.
Capitalisation: One of the tools for addressing the current situation is that of increased capitalisation. Indeed, most of the MFIs (MFCs, FNGOs, and MCLs) are required to comply with increased minimum capital requirements by 30th June 2018. At the time of writing, 30th June had arrived. The industry expects to hear a formal statement from the Bank of Ghana on minimum capital directives. Whether it is offering an extension, abandoning the capitalisation agenda or instituting measures to take over the MFIs. It is obvious that the BoG means well in its minimum capital directives and it is also obvious that the MFIs recognise the need to operate with adequate capital. The challenge is, how much capital is adequate and is the timing given to the affected MFIs adequate given that the industry itself is not currently attractive to potential investors. Do we anticipate takeovers or consolidations in the microfinance sector as we saw with some banks? This is not likely and will not be an ideal option. It is not easy to takeover MFIs or put them under official administration as was done for the banks (UT, Capital Bank, and uniBank). The sheer number of MFIs that may be affected makes takeover or official administration scary, but the real concern remains the effect on depositors. The depositors of MFIs especially customers of microfinance companies remain one of the bargaining chips that may influence the next steps of the Bank of Ghana. If for nothing, customers of DKM are still petitioning for their deposits and no one would want to create more of this through a deliberate action. As we await the decision of the Bank of Ghana on the minimum capital directives for MFIs, the providers (MFIs) have to recognise the need to address the capital requirements. No MFI can operate without adequate capital especially if it intends to make the needed impact of achieving scale, profitability, and sustainability. The changes on the microfinance landscape including digitisation, decline in donor fund for FNGOs, the absence of wholesale funds from which MFIs can borrow for competitive on-lending and the increased number of financial services providers point to only one conclusion – MFIs that do not increase their capital will not go far. Infact, MFIs cannot build their businesses on depositors’ funds.
Options for Increased Capitalisation: There are not many routes for MFIs to increase capitalisation and we are not about to see significant changes in the minimum capital base for most of the MFIs anytime soon. The main reason for this situation is that, a majority of the MFIs have not positioned themselves as befitting brides to be taken over or invested in by interested grooms. The options for addressing capitalisation include increased investment from owners; admission of new shareholders; mergers and acquisitions; downward movement along the tiers.
Increased Investment From Existing Owners/Promoters: The first path is increased investment from existing shareholders or promoters of the affected MFIs. It is doubtful how many of existing shareholders will be keen and even if they are keen, do have the resources to invest. Most have already invested their all, and asking them for additional investment will not yield any results.
Admission Of New Shareholders: This sounds logical especially if existing owners cannot increase investment. Given that foreign nationals cannot invest, this has to be Ghanaians. Existing owners need to demonstrate they have a viable business that will generate future earnings, adequate enough to be of interest to new shareholders. MFIs need real data and strong as well as realistic market and financial projections to attract investors. Most MFIs have not demonstrated that their businesses deserve capital from new investors. This demonstration is necessary whether we consider individual investors or through the stock exchange. All MFIs that need new shareholders should go back and build a credible story that resonates with investors. Additionally, existing MFI owners should be willing to become minority shareholders because, for many, their holdings will drop below controlling levels. I doubt if golden share scenario will work here.
Mergers And Acquisitions: This strategy has been touted by many as one of the main tools for meeting the capitalisation challenge. This has so far not yielded the needed results. In most cases, you will need mergers of about seven institutions if you have to meet the minimum capital of GHS2.0million (using an average of unimpaired capital of GHS300,000 per MFI). Most MFIs hold impaired capital due to accumulated losses (reference governor’s speech). It is not easy having a merger of seven previously independent providers. You have to deal with all the issues relating to conflict of core values, loss of using MFI resources for personal benefits, management, and board restructuring, and inability to fund related businesses among others. Still, on mergers, there are not enough unique offerings from the respective MFIs that will promote mergers. This does not mean mergers cannot work, it is only meant to highlight the real issues that have to be considered. Willingness to sacrifice control will win the day for many that are interested in merging. An acquisition, on the other hand, may look more promising. Some existing MFI owners are tired of the challenges posed by the business and will gladly sell off. This provides individuals and funds interested in going into microfinance business the opportunity to buy off the MFIs by making offers to existing shareholders through cash or share considerations or both. But this is a slow process that requires more time to see results especially because those acquiring the MFIs should also be willing to take over all known and unknown liabilities. We should push for more of this in the coming months.
Downward Movement Along Tiers and Collaborations: One feasible option is to move downwards along the tiers. Tier 2 providers may want to move downwards to a lower tier where minimum capital requirements may be more manageable and rebuild from there (eg Tier 2 to Tier 3). Others have to negotiate with commercial banks to become commission agencies and mobilization centres. There may be issues of changes in legal structure and treatment of existing liabilities to be addressed, but it is a viable option and should be pursued.
Is capitalisation the panacea to the issues faced by MFIs?: No, capitalisation alone will not do the trick for MFIs if we expect them to play their critical role in financial inclusion. The market for MFIs remain huge, but not all MFIs are well placed to serve the market. Whether MFIs operate as microfinance companies (MFCs), financial non-governmental organisations (FNGOs) or micro-lending companies (MLCs), there are a number of considerations that must be given the needed attention. Even though these are not the only factors, it is my submission that, attention to these issues will reposition most of the providers to reach scale, operate profitably and attain sustainability.
Define your business model: Choosing a business model is about strategy. There is need for MFIs to understand the nature of their business and develop suitable business models that will clarify the entrepreneurial opportunities they wish to take on; outline the specific markets and alternative market segments so as to choose the preferred market they want to serve; understand the needs and capacities of the chosen markets so as to develop appropriate products that meet the changing needs of these chosen markets; adopt appropriate promotional and distribution strategies that reach the chosen segments. It is surprising that most MFIs have not outlined who they want to serve, let alone convince themselves that, there is a significant market with growth potential prior to committing capital at commencement or expansion. Simply put, a majority of our MFIs lack strategy and others do not pay adequate attention to strategy. This lack of business model and strategy is not limited to Ghana, as was made abundantly clear in the results of financial inclusion banana skins 2016[2].
Indeed, the absence of a well-defined business model is one of the reasons why it is difficult to attract discerning capital into most MFIs in the country. Tied to the need for robust business models by MFIs is THE ROLE OF TECHNOLOGY in financial services delivery. The role of fintech providers on the financial inclusion landscape and effect of the emergence of mobile money on the operations of MFIs are well known to the providers. For the typical MFI, the emerging technology has great prospects for microfinance business but it will also be the source of rapid death of many MFIs. The important focus of MFIs should be their business models – only those MFIs that have appropriate business models to take advantage of the emerging technologies will benefit from the opportunities offered by technology. This does not suggest that without adopting the technological innovations all MFIs will be out of business. The key determinant is the market an MFI serves. Some MFIs have adopted technological innovations that their clients are not comfortable with, a clear reflection of inadequate understanding of clients.
Put a performing board in place: The fish rots from the head and if you are in any doubt just ask anyone who cooks fish. The Governor of the Bank of Ghana had this to say in his address on the state of the financial sector in Ghana in March 2018, “……It was also clear from BOG’s banking supervisory reports that some banks and deposit-taking institutions lacked good corporate governance structures and more worryingly, was the co-mingling of board and management responsibilities which significantly undermined credit and risk management policies”. This is not only about banks but MFIs as well. The role of a performing board in the MFI cannot be overemphasised. Even though we admit that the MFI board is not the only actor in the governance structure, its role is very significant. The performing board will ensure markets are selected carefully, appropriate policies and procedures are established and followed as well as exercise oversight. To carry out these and more, MFI boards must be capable and committed to the work of a board. It is not enough to constitute a board that either does not understand the work it is expected to do or is not allowed to do the work it is supposed to do or is not committed to doing its work. From my experience, there is a sad situation with some board members who believe that they do not need any orientation in microfinance to serve on MFI boards. This pretense is a very disturbing development that MFIs and their boards have to address if the board is to play its envisaged role effectively. Let us be blunt on this: how can you serve on the board of a business that you do not understand?
MFIs should have competent management and staff: Management and staff quality is a key determinant for building sustainable MFIs. Indeed, both are cited as key risk sources in the Financial Inclusion Banana Skins 2016. A management team and staff that understand the business of microfinance in this country is a major gap that needs immediate attention. One does not need to be the Executive Director or Managing Director or CEO of an MFI, whether FNGO, MFC or MLC only because you are the founder or financier. This is difficult to accept but it is a fact that many do not want to accept. For example, your previous role as Head of Credit in a commercial bank has not necessarily prepared you to be the CEO of an MFI. The industry has seen many failed MFIs that were set up by bankers and other experienced business people. It is always easy to blame it on the state of the economy. But we need to get it right, there is need to admit that management and staff training in the rudiments of “how to make microfinance work” as well as the willingness on the part of management to implement what is learned is critical if MFIs want to be sustainable.
Build a culture of business integrity: Integrity is synonymous with business. Ask any long-distance business runner that is still on the road and one of the success factors they will mention is integrity. Integrity in the MFI shapes the behaviour of management and staff. A culture of integrity will significantly reduce fraud in the business especially those committed by management and staff, increase client retention as MFIs remain true to their customers and contribute to compliance with regulatory provisions among others. There are many instances where under the misdirected guise of doing “smart business”, some MFIs have brought shame to themselves and the entire industry. A culture of integrity starts with the board and filters through management and staff actions. It is realised through upholding core values and practices that reinforce integrity. Additionally, strong sanction and reward regimes are needed to entrench a culture of integrity.
Operate as a regulated business: MFIs need to recognise that they are under regulation and should conduct the business as such. A regulated business cannot be carried out in a “business as usual” manner. MFIs need to among others meet specific capital requirements, governance requirements, reporting requirements, management capacity requirements, risk management requirements and engage in only approved permissible activities[3]. Adherence to regulatory provisions is not only in the interest of the general public but the MFI itself. There are concerns from MFIs that some of the requirements from the Bank of Ghana are overburdening for some of them and this has led to non-compliance. Some have even argued that MFIs should not be held by the same standards banks are held to if we are to see MFIs play their role in promoting financial inclusion. I do not share the opinion that MFIs are held to the same standards banks are held to because the facts on the ground do not support this view. I will however, agree that some of the requirements are really difficult to meet. For example, the expected minimum capital requirement of GHS2.0 million for MFCs and minimum of 5 board members for those required to have a board are difficult for some to meet. The regulatory concerns will be discussed in another article. For now, MFIs need to understand the regulatory provisions if they want to remain in business.
Implementation of robust management information systems: Microfinance business is a serious business that thrives on well-informed management decisions carried out on the basis of timely, complete, accurate and relevant information. Two problems are worth noting in this area, in the first instance, some MFIs do not have the system to capture, process, analyse and generate the needed reports to drive management decision making. Secondly, some MFIs simply do not know how to use the information generated from the MIS to make well-informed management decisions. Performance indicators that are provided by well-structured and fed MIS provide early warning signals that facilitate effective decision making. For example, an MFI’s loan portfolio report with its supporting indicators provides valuable insight on what actions management should take to cure or minimise the effect of potential future failures.
Concluding thoughts
The best is yet to come for Ghana’s MFIs. In the meantime, many more providers will be out of business as they will fail to meet the basic market conditions, some will grow even stronger and others will develop new partnerships and collaborations. With these, we shall all realise the benefits of inclusive financial systems especially for those individuals, households, and enterprises that are yet to be covered to achieve the country’s financial inclusion targets. Until then let us keep discussing what has worked for other countries and what works best for our context regarding appropriate policy framework, effective regulatory systems, and sustainable MFIs.
[1] State of the Financial Sector in Ghana, Address by Governor of the Bank of Ghana, March 2018. [2] Centre for the Study of Financial Innovation [3] Please see Business Rules and Sanctions for MFIs (Tiers 2,3&4) issued by Bank of Ghana