Implications of Microfinance for Efficient Finance Systems in Ghana.
BY ATTA GEORGE PEPRAH
Most Microfinance (MFIs) in Ghana are deposit-taking institutions. However, deposit-taking is not without risk. MFIs must be able to lend profitably enough to pay for and protect the deposits they mobilize. They must also be able to cope with temporary downturns when these arise. Failure to do so can quickly harm financial stability and deprive small depositors of their deposits. For this reason, Ghana has subjected their banking sectors including the MFIs to prudential regulation.
There are several players in the microfinance sub-sector. Rural and Community Banks (RCBs) constitute the largest players in the rural formal banking sector. RCBs are unit banks owned by community members and stand out as the largest financial players in terms of geographical coverage
According to ARB Apex Bank (2013) as at 2013 there were 143 RCBs with 546 branches across the country with more than 1.2 million depositors and over 150,000 borrowers. Nevertheless, RCBs are generally rather small, especially in terms of the number of outstanding loans.
In Ghana Bank of Ghana (BOG) has the mandate to protect the interest of all depositors and ensure sanity in the overall financial system according to the BoG Act, 2002 Act 612 (BoG, 2002.
Before 2006 Ministry of Finance with support from United Nation Development Programme started drafting Ghana Microfinance Policy (GHAMP) to provide guidelines on microfinance system in Ghana. The GHAMP then became one major strategy being pursued by government to achieve its microfinance development agenda. The GHAMP in itself is not a regulatory document but it provided the microfinance unit at the Ministry of Finance the road map of microfinance activities in Ghana and to inform government and development partners about policies that will make microfinance work in Ghana
The main reason was in response to the public outcry and the frequent folding-up of MFIs (Bank of Ghana, 2011). The main objective of the regulation was to protect depositors and ensure sound financial system within the microfinance sector
The operational guidelines require that MFIs constitute a strong board of directors with diverse rich background to ensure effective strategic planning for the companies. In Ghana, most MFIs were operating as one man companies. The transition from one man companies to board companies has already been witnessed among MFIs that have been issued provisional licenses. Institutions are to feed the Bank of Ghana with updated records of the members that serve on their boards. This is a big challenge for MFIs that started as sole proprietors. Board-management-employee management is likely to be difficult for these institutions.
The prudential requirements set 30% of deposits and paid-up capital to be kept as reserves in an escrow account and government of Ghana of treasury shares seems to be moderately high. What this means is that excess reserve meant for operations will be 70%. The question is: will the remaining 70% be sufficient for MFI operation? What are the implications for outreach? It is possible that in the very near future BoG will increase the capital requirements of institutions. If this comes into effect those institutions that could not meet the requirements will have to close down. It is therefore essential to optimise regulation by weighing its costs against its benefits. From a policy point of view optimum regulation needs to ensure sanity in the microfinance sector by protecting the consumer and allocating scarce financial capital among the poor households
Even though the MFI sector soundness is a necessary ingredient for efficient financial system, there is the need for carefully designed regulation and supervision of these institutions-too stringent regulations might hamper the development of the sector and too lax regulation will also increase the riskiness of the sector. Designing effective regulation and supervisory rules for MFIs will require commitment from the institutions themselves, apex bodies, the government and the general public as well
BY ATTA GEORGE PEPRAH
Most Microfinance (MFIs) in Ghana are deposit-taking institutions. However, deposit-taking is not without risk. MFIs must be able to lend profitably enough to pay for and protect the deposits they mobilize. They must also be able to cope with temporary downturns when these arise. Failure to do so can quickly harm financial stability and deprive small depositors of their deposits. For this reason, Ghana has subjected their banking sectors including the MFIs to prudential regulation.
There are several players in the microfinance sub-sector. Rural and Community Banks (RCBs) constitute the largest players in the rural formal banking sector. RCBs are unit banks owned by community members and stand out as the largest financial players in terms of geographical coverage
According to ARB Apex Bank (2013) as at 2013 there were 143 RCBs with 546 branches across the country with more than 1.2 million depositors and over 150,000 borrowers. Nevertheless, RCBs are generally rather small, especially in terms of the number of outstanding loans.
In Ghana Bank of Ghana (BOG) has the mandate to protect the interest of all depositors and ensure sanity in the overall financial system according to the BoG Act, 2002 Act 612 (BoG, 2002.
Before 2006 Ministry of Finance with support from United Nation Development Programme started drafting Ghana Microfinance Policy (GHAMP) to provide guidelines on microfinance system in Ghana. The GHAMP then became one major strategy being pursued by government to achieve its microfinance development agenda. The GHAMP in itself is not a regulatory document but it provided the microfinance unit at the Ministry of Finance the road map of microfinance activities in Ghana and to inform government and development partners about policies that will make microfinance work in Ghana
The main reason was in response to the public outcry and the frequent folding-up of MFIs (Bank of Ghana, 2011). The main objective of the regulation was to protect depositors and ensure sound financial system within the microfinance sector
The operational guidelines require that MFIs constitute a strong board of directors with diverse rich background to ensure effective strategic planning for the companies. In Ghana, most MFIs were operating as one man companies. The transition from one man companies to board companies has already been witnessed among MFIs that have been issued provisional licenses. Institutions are to feed the Bank of Ghana with updated records of the members that serve on their boards. This is a big challenge for MFIs that started as sole proprietors. Board-management-employee management is likely to be difficult for these institutions.
The prudential requirements set 30% of deposits and paid-up capital to be kept as reserves in an escrow account and government of Ghana of treasury shares seems to be moderately high. What this means is that excess reserve meant for operations will be 70%. The question is: will the remaining 70% be sufficient for MFI operation? What are the implications for outreach? It is possible that in the very near future BoG will increase the capital requirements of institutions. If this comes into effect those institutions that could not meet the requirements will have to close down. It is therefore essential to optimise regulation by weighing its costs against its benefits. From a policy point of view optimum regulation needs to ensure sanity in the microfinance sector by protecting the consumer and allocating scarce financial capital among the poor households
Even though the MFI sector soundness is a necessary ingredient for efficient financial system, there is the need for carefully designed regulation and supervision of these institutions-too stringent regulations might hamper the development of the sector and too lax regulation will also increase the riskiness of the sector. Designing effective regulation and supervisory rules for MFIs will require commitment from the institutions themselves, apex bodies, the government and the general public as well
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