Convid 19

GAPNEWS

COVID-19 and future of Microfinance        

              Institutions in Ghana.

George Atta Peprah

The coronavirus disease (COVID-19) has taken the world by storm, spreading like a wildfire. Major cities around the world are in a lockdown as a result of which businesses have closed down. This indicates a great danger for borrowers and lenders as incidences of Non-Performing Loans are on the increase. It has therefore become necessary to interrogate and forecast what the behavior of lenders and borrowers would and should be in dealing with disputes and litigation that would attend the end of COVID-19. The COVID-19 pandemic threatens lives and livelihoods, and with that, has created immediate challenges for microfinance institutions, that serve affected rural communities. 

The concept of microfinance is not new in Ghana. There has always been the tradition of people saving or taking small loans from individuals and groups within the context of self-help to start businesses or farming ventures.  For example, available evidence suggests that the first credit union in Africa was established in Northern Ghana in 1955 by Canadian Catholic missionaries. However, Susu, which is one of the microfinance schemes in Ghana, is thought to have originated from Nigeria and spread to Ghana in the early twentieth century.  Over the years, the microfinance sector has thrived and evolved into its current state thanks to various financial sector policies and programmes undertaken by different governments since independence. 

Among these are:  Provision of subsidized credits in the 1950s, Establishment of the Agricultural Development Bank in 1965 specifically to address the financial needs of the fisheries and agricultural sector, Establishment of Rural and Community Banks (RCBs), and the introduction of regulations such as commercial banks being required to set aside 20% of total portfolio, to promote lending to agriculture and small scale industries in the 1970s and early 1980s,Shifting from a restrictive financial sector regime to a liberalized regime in 1986, and Promulgation of PNDC Law 328 in 1991 to allow the establishment of different categories of non-bank financial institutions, including savings and loans companies, and credit unions.

The policies have led to the emergence of three broad categories of microfinance institutions. These are: Formal suppliers such as savings and loans companies, rural and community banks, as well as some development and commercial banks, Semi-formal suppliers such as credit unions, financial non-governmental organizations (FNGOs), and cooperatives, and Informal suppliers such as susu collectors and clubs, rotating and accumulating savings and credit associations (ROSCAs and ASCAs), traders, moneylenders and other individuals.

In terms of the regulatory framework, rural and community banks are regulated under the Banking Act 2004 (Act 673), while the Savings and Loans Companies are currently regulated under the Non-Bank Financial Institutions (NBFI) Law 1993 (PNDCL 328)[2].

 Microfinance institutions offer loans and saving accounts to low-income customers who lack easy access to traditional commercial banks. Yet as household incomes have collapsed with the imposition of lockdowns, borrowers’ ability to repay loans has collapsed too.   If the microfinance sector is going to survive the pandemic, we need to treat COVID-19 as the fundamental threat to the industry that it likely is. We need every part of the sector to start mobilizing around easing the terms of debts that borrowers cannot service when economies seize up, keeping MFIs solvent and preparing to recapitalize them so they are in a position to lend again and play their vital role in recovery once the crisis recedes.

The economics of microfinance require high repayment rates. A slip in repayment rates from 95 to just 85 percent would render many MFIs insolvent in less than a year, and we see significant risk that repayment rates may fall by more than this, as borrowers struggle to make ends meet in the face of a precipitous income shock. Microfinance crises of the past have an important lesson to teach, when repayment rates drop, they do so rapidly. Beyond this, high touch business models may face additional challenges as social distancing measures are implemented. For microfinance institutions (MFIs) in Ghana, the combined effects of the pandemic and its economic impact will lead to high levels of non-performing loans (NPLs), as clients struggle to make their scheduled payments.    The challenges are further exacerbated by the volumes involved since the threat of the coronavirus has had widespread impact on many businesses and individuals. It is very likely that a lender moving to recover a debt will be significantly unsuccessful due to the simple fact that debtors may not be liquid enough at this time to service the borrowings due to the unexpected changes in circumstances brought about by coronavirus.    

 

On the 12th of March, 2020, a day after the World Health Organisation (WHO) declared COVID 19 a pandemic, the President of Ghana gave the first of what will become a regular feature in the COVID 19 response agenda to the entire nation.  He presented the readiness of the Country and added that the Government of Ghana (GoG) had plans of spending One Hundred Million Dollars ($100 Million) on interventions such as expansion of infrastructure, procurement of materials and equipment, and public education among others. 

In recognition of this Ghana Government, in collaboration with the National Board for Small Scale Industries (NBSSI), Business & Trade Associations and selected Commercial and Rural Banks, will roll out a soft loan scheme up to a total of six hundred million cedis (GH¢600 million), which will have a one-year moratorium and two-year repayment period for micro, small and medium scale businesses. The loan scheme is expected to have a one-year moratorium and two-year repayment period.   

 

The Bank of Ghana has also provided a 1.5% decrease in the Policy Rate and 2% in reserve requirement with a Three Billion-Cedi (GH¢3 billion) facility, to support industry especially in the pharmaceutical, hospitality, service and manufacturing sectors. There is also a 2% reduction in interest rate among others.

Effectively, banks would consider issuing extensions for repayments and other restructuring arrangements to these borrowers. For construction and other real estate transactions, cash flow for financing projects and for servicing any development loans will be severely constrained. Shortage of labor may also pose a problem as employees avoid work to avert contracting the virus.    

 

The COVID-19 pandemic is different from the crises that have come before. It disrupts both the client and the capital sides of microfinance simultaneously. MFIs are suffering from both a lack of repayments and a lack of access to capital and liquidity from funders, and thus we are seeing a crisis for the industry as a whole. Microfinance business model may need to be significantly rethought and additional innovation may be needed.