Last week some microfinance industry practitioners were pushing for government support to recapitalize their MFIs to provide them with the much needed fuel to reposition their microfinance businesses. The writer’s thoughts on the expectations, merits, and demerits of the expectation and some considerations are presented.
There is a growing expectation among microfinance institutions that government has to provide them with financial support to recapitalize their businesses. The support, in their view, will reposition them to provide the useful services they already provide to the excluded and low-income segment of the population. What are the merits and demerits of these expectations and should the government provide support or not?
Merits and demerits of the expectation
What are the merits? It is okay for citizens of any country to expect the government to provide them with the required support that makes the business environment conducive to their operations. Indeed, the government owes it as a responsibility to create a conducive business environment so the call can be described as a justifiable call.
Financial inclusion remains a priority of government and given that microfinance institutions are active players in this arena, it is a justified demand for support. The government has provided and continues to provide a lot of technical assistance support to the microfinance sector to help position them on the path of profitability and sustainability. What has not come to the microfinance industry is direct funding which they can assess for purposes of on-lending.
MFIs borrow from other lenders such as commercial banks and other high net-worth individuals for on-lending. These funds come at high interest rates that compel the MFIs to on-lend at high interest rates to their clients. MFIs themselves recognise that the interest they charge is high but they do not have any other option if their institutions have to make decent profit and remain sustainable. The net effect is high interest rates on loans lead to loan installment default on the part of clients which in turn affects the capacity of MFIs to repay their individual investors including depositors and lenders. Some providers in their bid to rise from the challenge continue borrowing at even higher rates and lending at higher rates and the cycle has no end till the MFI gives up the ghost. It is obvious that in the absence of owners’ capital contribution to the business, most MFIs will collapse and with them, the deposits of most of their clients. It is also clear as broad daylight that current owners of MFIs are unable to raise additional capital on their own.
The major downside of the call for government support is the expectation that government’s funding support for MFIs, most of which are private profit making and sharing businesses is a right and government is under obligation to provide this support. One might as well argue that all private businesses in health, education, tourism etc. should be supported with direct funding to reposition and stabilize their businesses. The other downside of the call is the posture of MFI owners and directors, blaming the Ghanaian economic environment for the state of MFIs. The argument that MFI clients are unable to pay their loans because of the poor economic environment caused by government actions and inactions, for which reason government has a responsibility to bail out MFIs cannot win the call for government financial support.
Funding Support and Conditions to be met by MFIs in need of funding
Do MFIs need funding support from the government? Yes, they do because they serve as critical agents for achieving government and the world’s agenda for financial inclusion. But this support should not be considered and provided on a wholesale basis. The government should be encouraged to provide support for MFIs (Microfinance Companies, Financial NGOs, and Micro Credit Lenders) that meet some preconditions that serve government agenda as well as facilitate MFI profitability, growth and sustainability. Some of the pre-conditions to be considered are presented:
- Demonstrate that they serve the vulnerable and excluded as well as micro and small businesses. Some MFIs are known to serve salaried workers and businesses that already have access to credit from banks. The demonstration of serving deprived, excluded and low income must be backed with evidence of what has been achieved over the years and what they intend to do to further reach the deprived and excluded;
- Demonstrate good governance practices that will include among others the nomination of a board chairperson who is not a shareholder in the MFI or any other MFI;
- Demonstrate it has strong MIS in place that provides periodic information to facilitate sound management decisions or be willing to install this with the needed technical support;
- Demonstrate the willingness to implement an effective risk management structure for the MFI;
- Demonstrate the willingness to participate in periodic training and implement gaps identified from training;
- Demonstrate the willingness to merge with other MFIs to increase outreach and improve operational performance;
- Demonstrate the willingness to implement good responsible inclusive finance practices – compliance with client protection principles management especially responsible client treatment, develop products that meet the needs of clients and responsible pricing;
- Demonstrate minimum performance indicators such as in areas of loan portfolio quality and cost/income ratio at the time of seeking the support and through the life of the support;
- Commit to carrying out financial education (not product education) of clients as a key part of product and service delivery methodology;
- Demonstrate compliance with BoG’s reporting requirements and performance standards at the time of joining and throughout.
Source of funding
We need as a country to explore various sources of funding for the qualifying MFIs. But the government has to take the lead. Sources may include:
- The government with the needed determination can find the funding as it always does when it is needed;
- The government could consider the provision of incentives to universal banks with strong capital base to provide on-lending fund to MFIs at rates that are tied to the prime rate + margin;
- District Assemblies could consider setting up a fund for MFIs in their districts to access for on-lending after meeting the pre-conditions to fund as a strategy for local economic development.
Screening and Monitoring
There must be an independent body to screen the applications from MFIs and as much as possible this should be independent of practitioners. The various microfinance associations and industry network could be represented on the screening board. Continuous monitoring of the beneficiary MFIs should be a key strategy. Fees and expenses for monitors could be included in the interest to be paid by MFIs on the on-lending fund.