Microfinance Comes Of Age

Ensuring that previously unbanked Africans have access to credit is perhaps the most important development in financial services on the continent in recent years. Following in the footsteps of Bangladesh’s Grameen Bank, hundreds of microfinance organisations have been set up in most parts of Africa. Neil Ford reports on how these institutions are expanding banking services across the continent.

The relatively small loans and huge numbers of people involved in microfinance have created a sector that has largely run parallel to the traditional banking industry. Yet the sector is now maturing. Some microfinance institutions are converting into licensed banks and the thorny issue of regulation is finally being raised, not least in Ghana, where the Central Bank of Ghana (CBG) has taken the lead.

One obvious area where microfinance can help is in agriculture. Most Africans rely on growing crops for all or part of their income and so any increase in efficiency or yields can have a positive impact, particularly as most African farmers are women.

Smallholders in India, Bangladesh and Brazil have all benefited from rising incomes over the past 20 years, without giving up their land to bigger land owners. In the case of South Asia, at least, microfinance has been a key part of the equation and several African governments are seeking to replicate its success.

As part of its rapid development plan, the government of Rwanda has set a target of at least 80% of its population gaining access to microfinance services by 2017, in order to enable rural workers to make the most of the resources at their disposal.

Some microfinance companies are looking further afield. Ghana’s Noble Dream Financial Services has 18 branches in its domestic market and has now opened offices in South Africa and Germany, with 10 more due to open in other parts of Europe. The firm’s marketing and research manager, Kwame Basoa, said: “Most of our ventures outside Ghana are in the form of money transfers for businesses and other things. We want to give the Ghanaian entrepreneur the courage that a Ghanaian can start something and take it to the other level rather than always looking for European investors.”

Other microfinance companies have evolved into fully fledged banks. Equity Bank of Kenya, for instance, which is ranked as the 52nd biggest bank in Africa and 5th in Eastern Africa in our survey, gained its commercial banking licence in 2004. The bank still pledges “to offer inclusive, customer focused financial services that socially and economically empower our clients and other stakeholders” and boasts half of all deposit accounts in the country by number. Its total share of the market is much less than this, demonstrating that it attracts lower income customers.

The National Microfinance Bank (NMB) in neighbouring Tanzania also features in our listings, taking 14th position in East Africa and 83rd across the entire continent. It has 1.6m customers, 140 branches and 450 ATMs across Tanzania as a result of steady growth over the past decade. NMB posted a 75% increase in pre-tax profits for the three months to the end of June at TSh27.53bn ($17.27m).

The chief executive of Tanzania Securities, Moremi Marwa, said: “NMB has demonstrated a good performance – this will attract investors and increase trading activities at its counter. Projections are that many will go for [NMB] shares as most are dividend conscious. Profits portrayed a good dividend in the first half.”

IT to the rescue

Rapid growth creates challenges for microfinance organisations as much as for companies in any other sector and IT companies are beginning to become involved in the sector. Collating all transactions on a single platform can help a microfinance bank to keep track of both its customers and its money.

Swiss firm Softgen, which has an office in Nairobi, has adapted its Temenous T24 cloud platform specifically for the market. Softgen’s Africa region chief executive, Tunde Oladele, says: “Microfinance institutions are faced with increased cases of fraud due to their non-robust IT systems and infrastructure. This can be militated against with the use of the Temenos T24 cloud-based software which is available more cost effectively on a subscription basis with the charges being made depending on the number of accounts and clients.”

He added: “We are in talks with various microfinance institutions with a view to migrating their operations and systems.” Many such institutions cannot afford tailor made IT systems.

An attractive rate?

While microfinance institutions perform a valuable role in providing loans to people who would not otherwise have access to finance, the interest rates involved can still be prohibitively high.

A recent study into microfinance by University of Nairobi researchers found that most microfinance loans in Kenya charged an interest rate of 1.8-2.5% per month. If a small loan is taken out for business purposes that can be repaid within two or three months, this seems reasonable. However, most customers repay over a far longer time scale and so pay interest at an annualised rate of  between 21.6% and 30%. This is slightly higher than the 20-25% rate charged by mainstream Kenyan banks for larger loans to established personal and business customers.

When annual inflation approached 20% last November, such interest rates were acceptable; now that prices are rising by just 6% a year, it is to be hoped that microfinance and traditional banks alike reduce their rates of interest.

The Central Bank of Kenya only regulates microfinance institutions that take deposits, which currently number six institutions. Perhaps up to 10 times as many, which do not take deposits, are not regulated. The researchers found that fewer than 20% of microfinance customers repaid their loans from increased income, while a further 22% were forced to sell assets to make the repayments. Other surveys have not yielded such negative results but there is no doubt that – as with all lending – repayment can be a problem.

Concerns over regulation have also been expressed in several other countries. The Central Bank of Ghana (CBG) has introduced new regulatory guidelines following statements by the Ghana Association of Microfinance Companies (GAMC) that new lenders could be set up without proper preparations.

The national president of GAMC, Collins Amponsah-Mensah, said: “As it is now, as they [the Bank of Ghana] try to process those who are already in operations, others are coming in and so the number gradually becomes overwhelming and that makes it very difficult for the regulator to work on.”

He added: “When you look at the regulation, equity is restricted to only Ghanaians and these are companies that were started solely by Ghanaians from their own resources. You go to some countries and they have micro-finance wholesale banks where MFIs can go and borrow from; in Ghana, we don’t have it.”

According to figures from GAMC, there are more than 500 microfinance companies operating in the country and all should be regulated under the Non-bank Financial Institutions Act 2008. However, the CBG also published its Operating Rules and Guidelines for Microfinance Institutions last year and the new document is being studied by other governments in Africa with a view to introducing similar regulation in other jurisdictions.

Bank of Ghana operating rule and guidelines for microfinance  institutions

Categorisation of Activities

Tier 1 Activities shall comprise those undertaken by rural and community banks, finance houses, and savings and loans Companies.

Tier 2 activities: are those activities undertaken by credit unions, Susu companies and other financial service providers, including financial non-governmental organisations (FNGOs) that are deposit taking and profit making.  

Tier 3 activities: undertaken by money lenders and non-deposit taking FNGOs. Money lenders and Financial NGOs are encouraged to belong to an umbrella association.

Tier 4 activities: Those activities undertaken by Susu collectors whether or not previously registered with the Ghana Cooperative Susu Collectors Association (GCSCA); and individual money lenders.

Tier 2 Activities

1.    Business form: All Tier 2 activities, except credit unions, shall be undertaken by companies limited by shares. Companies undertaking Tier 2 activities shall include the word ‘microfinance’ in their names.

2.    Capital: Institutions in this category shall hold an initial minimum paid up capital of not less than GH¢100,000.00 for one unit office. The opening of branch shall be subject to higher capital requirements. Tier 2 institutions shall, in addition to the minimum capital requirement determined by the Bank of Ghana also maintain a minimum capital adequacy ratio of 10%.

3.    Branch expansion: Institutions shall be eligible to establish branches subject to prior approval of the Bank of Ghana and compliance with the higher capital requirement as determined by the Bank of Ghana.

4.    Permissible activities: Tier 2 institutions shall undertake the following:

i.    Accept deposits from the public; no single deposit shall exceed 5% of the company’s paid up capital.

ii.    Make loans to their customers as follows:

a.    a ceiling of 5% of the company’s net worth for unsecured exposures;

b.    a ceiling of 20% of the company’s net worth for secured exposures; and

c.    a ceiling of 1% of the company’s net worth per member of the group for group loans

iii.    Institutions may only undertake any other services with prior written consent from the Bank of Ghana.

5.    Non Permissible Activities: Tier 2 institutions shall not undertake the following:

a.    issue checking accounts;

b.    engage in foreign exchange business; and

c.    engage in any trading activities or hold any stocks of goods for sale to their clients.

6. Prudential Oversight:

i.    Institutions shall submit periodic prudential reports to the Bank of Ghana.

ii.    Institutions may be subject to on-site supervision.

iii.    An operating licence shall be subject to annual renewal upon satisfactory performance and payment of the appropriate licence renewal fee.

Tier 3 Activities

1.    Business form: All Tier 3 activities shall be undertaken by companies limited by shares (money lenders) or companies limited by guarantee (FNGOs).

2.    Capital: Institutions shall maintain a minimum paid-up capital of GH¢60,000.

3.    Branch expansion: Tier 3 institutions shall be eligible to establish branches subject to the prior approval of the Bank of Ghana.

4.    Permissible activities: Institutions shall undertake the following:

i.    The granting of micro-loans to their customers provided an unsecured loan shall not exceed 10% of the paid up capital of the entity.

ii.    The raising of funds, excluding deposits, from high net worth individuals, wholesale sources and donors.

iii.    Any other services subject to written authorisation by the Bank of Ghana.

5.    Prudential Oversight

i.    Institutions shall submit periodic prudential reports to the Bank of Ghana.

ii.    Institutions may be subject to on-site supervision.

iii.    An operating licence shall be subject to annual renewal upon satisfactory performance and payment of an annual licence renewal fee.

Tier 4 Activities

1.    Business form: Tier 4 activities may be undertaken by individuals or enterprises with a registered business name. All Tier 4 operators shall belong to an umbrella association such as the GCSCA. Individual money lenders are advised to form an Association as a platform for educating and informing each other as well as a forum for interacting with regulators and other stakeholders.

2.    Capital: There shall be no minimum capital requirement for an individual Susu collector or money lender. However, each registered member of an umbrella association shall contribute to an insurance fund to be set up by the association.

3.    Permissible Activities: Institutions shall engage in Susu collection or money lending only. Susu collection involves the periodic collection of deposits from the general public and the refund of such accumulated deposits at the designated times for a fee. Money lending shall involve the granting of credit for such tenors as agreed between the lender and the borrower.

4.    Branch expansion: Tier 4 operators shall carry out their activities within a defined geographical area such as a town, city, a market or a suburb and shall not operate branches, except with the prior written approval of the Bank of Ghana.

5.    Prudential Reporting: Umbrella Associations of Tier 4 institutions shall collect and collate statistics on the operations of their members and furnish this to the Bank of Ghana.