Ghana: Microfinance calls the shots

Traditional banks serve only an estimated 5% of the population of Ghana – the rest depend on microfinance institutions and the informal susu system. But, as Eric Kwame Amesimeku reports, formal banks are adapting the methods of the informal systems while the microfinance institutions have ambitions of upgrading into the formal sector.

In the streets of Accra, Ghana’s capital – and indeed many other regional capitals – it is impossible to go more than a few metres without being accosted by a sign advertising a micro-finance company. Or, just as often, coming across an office promising micro-finance services. Micro-finance has been one of the big successes of the country’s liberalisation policies, reflecting a wider boom in financial services in the lower-middle-income country.

Micro-finance is not actually new to the country. It is believed that Africa’s first ever credit union was established in the Northern Region of Ghana by Catholic Missionaries from Canada. It is not difficult to believe that community-based initiatives may have predated this first formal attempt.

In a typically collaborative culture such as Ghana’s where labour and produce are often loaned and shared, it is quite feasible that financial transactions of the nature that characterise modern microfinance would have been effected.

An iteration of communal lending, susu, is, however, known to have originated from Nigeria and spread to Ghana in the early part of the 20th century.

The current wave of activity in the sub-sector however owes more to legal manoeuvring than to traditional financial instincts.

In 1991, the Provisional National Defence Council, the military government of the time, followed through on its Bretton Woods-guided economic liberalisation and passed a law that allowed private individuals and companies to set up different categories of non-banking financial institutions, including savings and loans companies and credit unions.

Under the evolving reforms since then, three broad categories of microfinance companies have shaped up. At the higher end of the strata are savings and loans companies and rural banks. These serve some of the better established small and medium-scale enterprises. Record keeping is better at this level and many have a national presence. Under the Bank of Ghana’s regulations, companies at this stage must have a minimum balance of GHs 500,000 ($179,000) and must monetise each new branch to the tune of GHs 100,000 ($36,000).

Lower down the scale are credit unions, financial non-governmental organisations and cooperatives. They typically concentrate on particular geographical areas and have a less formal structure. They collect contributions from their clients on a daily or weekly basis and offer set amounts on the achievements of certain milestones. Loans are typically short term and non-collateralised.

Below them are the susu collectors – who have survived nearly a century of evolution – and rotating and accumulating savings and credit associations. Others providers at this level are traders and moneylenders. While susu collectors have to be registered and are under the supervision of the central bank, some of the individual money lenders operate on the blind side of the law and are as exposed to risk as are the borrowers, who occasionally fall prey to unscrupulous characters in the business. 

Microfinance lessons
At all its levels, microfinance is undoubtedly popular in Ghana and it is easy to see why. In a country that has a predominantly informal economy, microfinance institutions provide a service that is vital to the lives of many individuals and critical to the survival of many companies.

Even though the banking sector itself has seen tremendous expansion, it is believed that the 23 universally licensed banks serve only about 5% of the population. In the face of such dim statistics, it is no surprise that the Bank of Ghana has issued 77 full licences to microfinance institutions with some 400 others in possession of provisional licenses as at year end, 2012. At the time, there were 500 more applications pending.

These providers have been doing some of the lifting necessary in the large informal pool of the Ghanaian economy, providing capital for businesses, securing jobs and building the capacity of many entrepreneurs. In 2006, for example, the microfinance industry together delivered over of GHs160.47m ($57m) in loans to its clients. This was an astounding increase over the half decade; in 2001, they were able to give out GHs 39.64m ($14m).

While the effect of the boom in microfinance will undoubtedly be mostly felt by its clients, the rest of the financial services industry has taken note.

Ghana’s typically stuffy banking sector has, in addition to the jolt from more aggressive Nigerian entrants, had to deal with its potential clients now having more flexible options. In response, at least two of the traditional banks have initiated microfinance strategies.

Ecobank has a microfinance arm – EB-ACCION and Barclays launched a susu banking scheme in 2005. EB-ACCION operates pretty much like a microfinance concern while the Barclays strategy was to target the susu collectors and lure them to keep their monies with the bank, assuring them of greater security and assistance in extending credit to their customers.

For nearly every bank, however, the attention from consumers has brought into sharp focus not only the need for financial services at the lower – and less formal – end of the economy, but also the capacity in that space to access and service financial instruments.

The effect of this is that many of the banks have taken on practices that owe their origin to microfinance institutions. In seeking to bring banking closer to the customer, many banks, including Fidelity Bank for example, routinely send out agents to take deposits from customers whereas previously they would only take deposits from customers who came into the bank and waited in line to do so.

Interestingly, while banks borrow from microfinance institutions, many of those institutions themselves covet universal banking status. For many of the larger ones, the aim, often expressly stated in their business plans, is to become actual banks.

UT Bank, previously a titan in the non-banking space, is a celebrated example. Having revolutionised the non-banking sector with its popular “loan in 48 hours”, the company bought BPI Bank and found itself in possession of a universal banking licence.

Since then, it has continued to put pressure on its new colleague banks to provide faster services to customers. As more microfinance companies acquire universal licences, banking in Ghana will take on a more personal air, as the traditional banks struggle to cope with more flexible competitors with very different backgrounds.

The microfinance industry obviously has challenges to deal with. Lack of effective record keeping is only one of its obvious difficulties. There are broader issues of institutional practices that militate against it and often raise huge questions of credibility.

There can be no doubt, however, that for many in the informal sector, they remain the only hope for financial support, while by their very presence, making it easier for even those who are not their customers, to gain quicker access to financial products and services.

As the industry continues to evolve, it will increasingly drive big changes and may, in the end, be the catalyst for change in banks fighting to justify their survival.