Ghana: How Susu Evolved Into Microfinance

There has been an explosion of microfinance companies in Ghana as an increasing number of the unbanked seek better ways to save their earnings. Stephen Gyasi Jnr explains how the traditional susu system has evolved into its modern counterpart.

Microfinance companies seem to be springing up in every nook and cranny in Ghana providing easy-access financial services to the country’s largely unbanked population. Today, they have become the most ubiquitous firms in the country, especially in regional capitals. The proliferation of microfinance firms is such that it is even threatening to outdo the number of charismatic churches that spring up by the day across the country.

These outfits seem to be performing the valuable function of keeping the Ghanaian economy afloat while also driving the country’s development agenda from the perspective of finance. The Banking Act 2004 calls for job creation, the enhancement of local skills and knowledge and the strengthening of the financial sector through expansion of investment and retail banking instruments.

In the past, susu, (the system whereby money was kept in sealed, small wooden boxes to be retrieved later) used to be the traditional way of saving. It evolved to the practice whereby money was collected from house to house by an individual who kept it and returned to its owners after 30 days with no interest changing hands.

That trend was further modified to the point where men would collect money and deposit it in banks, to be returned to the customer when he needed it. However, interest that accrued on the deposits was for the collector alone.

These various forms of savings have led to the modern microfinance sector of the financial industry. While it is helping to bank the unbanked, some players within the mainstream financial sector still see the development as an advanced susu scheme.

The mode of operation of these institutions is not much different from the house-to-house susu collection system, differing only perhaps in its name and the computerisation of operations. Today, the house-to-house money-collection system, very much an intrinsic part of the microfinance industry, has taken the form of mobile banking.

The microfinance system targets low-income earners who are not prepared to be frustrated by the red tape of the mainstream financial sector. Its agents, conspicuously branded, move from markets to residential areas to attract prospective customers to sign on for small loans, savings, insurance or funds-transfer services.

Their marketing teams use persuasive talk to woo their targets. It works like magic because of the unbridled access customers have to savings, a practice which the traditional banks would not countenance for its ‘financial indiscipline’.

British-trained chartered accountant, Elvis K Gyasi, managing director of Accra-based microcredit company, Financial Republic, a new addition to the sprawling microfinance sector in Ghana, says: “Our decision to venture into this sector was to offer the informal sector the opportunity to enjoy similar, if not the same, services to those the traditional banks give to their customers while giving them unlimited access to their funds.”

Established a year ago with a client base of 500, Financial Republic now serves more than 3,000 active customers, with almost the same number having benefited from the company’s range of products and services: “We are in this business to augment government’s efforts at bridging the gap between the banking population and the unbanked, as well as poverty alleviation as enshrined in the Millennium Development Goals, to provide financial services to the informal sector – that is, to empower our clients by encouraging a savings culture and providing micro-loans in a cost-effective and sustainable manner.”

Major patrons of the microfinance sector are women – mainly petty traders, farmers, street vendors and service providers – who find it an abiding companion, although some have, in the past, been swindled of millions owing to poor monitoring by the central bank.

The sector’s strongest selling point is its ability to hand out loans within the shortest time possible. While some microfinance companies are able to give loans in less than 24 hours, others take days to deliver but still get their share of clients from the largely non-banking customers.

Rapid expansion

The rapid expansion of the sector is attributable to the implementation of the Ghana Growth and Poverty Reduction Strategy (GPRS II), which seeks to ensure “sustainable, equitable growth, accelerated poverty reduction and the protection of the vulnerable and excluded within a decentralised, democratic environment”.

The object of the GPRS II is “to eliminate widespread poverty and growing income inequality, especially among the productive poor who constitute the majority of the working population”. Despite the challenges that the nation’s informal finance sector faces, it has the potential to propel its economic growth and ultimately, the development agenda.

But the future of the microfinance industry may be threatened if all players decide to metamorphose into full banking operations, as has been the case in the past. The fast-growing UT Bank was, until three years ago, one of the leading microcredit companies in the country, doling out loans in 48 hours to customers: after 10 years of operation, it decided to become a fully fledged financial institution.

Gyasi has similar intentions: “In the next five years, we intend to metamorphose into a fully fledged financial institution so that we can offer our clients all the opportunities and services such institutions can provide.” But he adds, “before we do that, we are now primarily concerned with expanding our presence from four branches to 10 in Accra and then moving into the other regions.”

The Bank of Ghana recently issued new operating rules and guidelines to regulate microfinance institutions in the country, in pursuance of the provisions of the Non-bank Financial Institutions Act 2008. Categories of regulated activities under the Act have increased from a single tier to four tiers, to include susu companies, susu collectors, moneylenders and financial NGOs.

Under the second tier, susu companies taking deposits and making profits shall hold an initial minimum paid-up capital of not less than GH¢100,000 ($59,000) for one unit office; and the opening of branch(es) shall be subject to higher capital requirements.

“We started our operations with GH¢80,000 ($47,000) so it will not be difficult for us to meet the new requirements of the central bank,” Gyasi says, adding, “between September last year and July this year, we had disbursed loans totalling GH¢400,000 ($236,000) to various customers such as market women, traders, commercial vehicle owners and workers, among others.”

Insurance funds

Credit unions fall under the second tier, but the Bank of Ghana is yet to pass a legislative instrument to regulate activities in the sector.

The third tier of moneylenders and non-deposit-taking financial NGOs shall maintain a minimum paid-up capital of Gh¢60,000, ($35,000) and a gearing ratio not exceeding eight times their capital.

Activities under the fourth tier include the operations of individual susu collectors, susu enterprises, individual moneylenders and money-lending enterprises. Operators under this tier will belong to an umbrella body like the Ghana Cooperative Susu Collectors’ Association (GCSCA) and there shall be no minimum capital requirement for an individual susu collector or moneylender. However, each registered member of an umbrella association shall contribute to an insurance fund to be set up by the association.

Regulations for first tier rural and community banks, savings and loans companies, and other financial intermediaries already regulated under the Banking Act remains unchanged. The new licensing requirements are expected to take effect within six months.

Companies operating the susu business are already confident of better prospects in the microfinance industry with the new Central Bank regulation.