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ENHANCING THE
EFFECTIVENESS OF
MICROFINANCING
IN
GHANA
A
DEVELOPMENT
PRACTITIONER’S
PERSPECTIVE
JUNE 2002
ACKNOWLEDGEMENT
Presented by:
Nana Opare Djan
Executive Director
Kraban Support Foundation
Accra,Ghana.
Paper presented at the 30th International Conference
on Social Welfare organised by the Netherlands Institute
for Care and Welfare
at “De Doelen” Conference Centre, Rotterdam,Netherlands,
on Thursday 27 June 2002.
SUMMARIES OF
PRESENTATION
• GOAL OF THE PRESENTATION
• MICRO FINANCE DEFINED
• THE PROBLEM AND EXISTING GAP
• OBJECTIVES OF THE PRESENTATION
• MODELS AND PRODUCTS
• CHARACTERISTICS OF GHANAIAN MFOs
• THE SIZE OF THE INDUSTRY IN GHANA
continue
• PERCENTAGE SIZE OF THE
INDUSTRY
• TARGET CLIENTELE
• THE CASE OF
AGRICULTURAL CREDIT
AND FINANCING IN GHANA
• RISKS OF MICRO-FINANCE
INITIATIVES IN GHANA
continue
• PLAUSIBLE PANACEA
TO IDENTIFIED
PROBLEMS
• CONCLUSION
INCLUDING SUGGESTED
POLICY GUIDE
GOAL FOR
PRESENTING
GHANA’S CASE
THIS PRRESENTATION
IS AN ATTEMPT AT EXPLORING
VARIOUS WAYS
OF IMPROVING THE SUSTAINABILITY
OF MICROFINANCE SERVICES IN GHANA
MICRO FINANCE DEFINED
• A financial intermediation mechanism that seeks to
enhance savings mobilization and access to credit and other
related technical support services for informal sector
operators
THE PROBLEM
AND
EXISTING GAP
Access to Micro finance Services in Ghana is very low. In 1999, for instance, the Rural Finance Department of the Central Bank of Ghana indicated that access by low income clients to financial services provided by key microfinance institutions reached only 7% out of the targeted clientele of 3,600,000.
continue
According to Ghana’s
population census of 2000
and Ghana Poverty
Reduction Strategy Paper,
approximately, 40% of the
population in Ghana is
considered to be below the
poverty line i.e they live
below the National Per
Capita Income of $390.
continue
From the
geographical perspective, five
out of the ten
Provinces/Regions had more
than 40% of their population
living in poverty.
Significantly, the
larger proportion are
engaged in informal sector
income generating activities
and women form 70% of
these operatives.
continue
• The low income levels
resulting from the factors
indicated earlier has had the
ramifications of low savings
mobilisation drive due to
higher propensity to
consume the limited
disposable incomes by such
informal sector operators the
majority being women as
stated earlier.
continue
• Formal financial institutions are unable to mop up excess incomes for on-lending with the view of generating further capital
• They typically mention:
- Risks of default
- High cost of delivery
- Socio-economic factors
- Cultural Barriers
- Limited logistics and infrastructure are
among the main reasons that prevent their entry into the microfinance industry.
OBJECTIVES OF
THE
PRESENTATION
• To suggest means of making
financial services (especially
savings and credit) available
to low income persons with
a view of providing them
with the opportunities to
organize themselves
financially.
continue
• To suggest means of
developing and promoting
sustainable methodologies
for providing micro-
financial services to low
income and disadvantaged
groups in deprived
communities in Ghana .
continue
• To suggest ways of
strengthening the capacity of
indigenous grassroots and
related community-based
institutions including Susu
Associations, Cooperatives and
fledgling NGOs that are
involved in the provision of
microfinance services to low-
income micro-entrepreneurs.
continue
• To suggest ways of
increasing client outreach
(development and
retention), MFI efficiency,
productivity, profitability
and sustainability of
lending/savings
programmes in Ghana
continue
• To suggest ways of
improving local and global
knowledge of the impact
microfinance have on clients
and suggest means of
building the capacity of
organisations wishing to
provide direct microfinance
services as part of Ghana’s
Poverty Reduction Strategy.
MODELS/PRODUCTS
• INVENTORY CREDIT SCHEMES
( Some Rural Banks, Technoserve International)
• CREDIT WITH EDUCATION (Freedom from Hunger, Ghana and Selected Rural Banks)
• ROTATIONAL SAVINGS AND CREDIT
(Citi Savings and Loans Co., Action aid, Enowid Foundation)
• CREDIT AND SPIRITUAL TRANSFORMATION
SCHEMES (Sinapi Aba Trust, World Vision Ghana)
continue • SUSU ON-LENDING
(Rural banks,Gupt Kath Mali, Amasachina, Math an-Tudu)
• VILLAGE/MOBILE BANKING STRATEGY (Catholic Relief Services,SNV, Rural Banks)
MICRO INSURANCE SCHEMES
(GHAMFIN)
TEACH STRATEGY (Kraban Support Foundation)
GOVERNMENTAL SCHEMES
(PAMSCAD, /IFAD-Lacosrep,SDRP, SCIMP/ ,SIF and ESRP)
CHARACTERISTICS OF
MFIs
• Group-lending based activities
• Commerce/agro-based activities
• Clientele-predominantly women microenterpreneurs
• Regular meetings of clients and programme officers(training and education offered)
• Ease of replicability and adaptability
• Inculcation of the savings habit
• Linkage programmes
• Flexibility of methodology/strategy
• Collateral based on joint and several liability.
continue
• Collective approach to monitoring programme services- (Usually Tripartite)
- Group-members
- Programme Officers
- Community members
• Groups formed based on Trust, Solidarity and Voluntary Association not forced
• Fixed and regular deposits mobilisation
• Flexible Interest Rate Policy
• Repeat and increased Loans guaranteed
• Business development services offered
continue
• Targeting the very poor
• Simple procedures for reviewing and approving loans
• Quick disbursement of small, short-term loans (three months to one year)
• Accurate management and information systems that are actively used to make decisions, motivate performance, and provide accountability of management performance and the use of funds.
THE SIZE OF THE
INDUSTRY IN
GHANA
• FORMAL Commercial Banks,Rural
Banks,Savings & Loans
Companies
• SEMI-FORMAL Credit-oriented
NGOs,Cooperative Credit Unions
• INFORMAL Susu groups/clubs
* Susu are traditional and unregulated forms of
voluntary/informal
associations in Ghana for mobilising savings
PERCENTAGE SIZE
OF THE INDUSTRY
IN GHANA
• FORMAL MFIs
= 37%
• SEMI-FORMAL MFIs
= 52%
• INFORMAL MFIs
= 11%
* Source : GHAMFIN Quarterly Bulletin, June 2000
TARGET
CLIENTELE
• INFORMAL SECTOR OPERATORS
• UNEMPLOYED YOUTH WHO HAVE COMPLETED
TRAINING
• WOMEN IN SMALL & MICRO
ENTERPRISES
• LOW INCOME SALARIED WORKERS
continue
• SUBSISTENCE AND
SMALLHOLDER
PRODUCERS IN
AGRICULTURE
• VULNERABLE GROUPS,
ESPECIALLY THE
DISABLED
* WOMEN FORM 65% OF
THE TARGET CLIENTELE
IN GHANA
AGRICULTURAL
CREDIT FINANCING
IN GHANA DEFINITION
THE KIND OF FINANCE REQUIRED TO SUPPORT
AGRICULTURAL PRODUCTION AND
VALUED ADDED ACTIVITIES. ITS
DEMAND IS DERIVED FROM AGRICULTURAL
PRODUCERS WHOSE DEMAND FOR INPUTS
ARE TIED TO FINANCE.
POLICY
OBJECTIVES OF
GHANA’S
AGRICULTURAL
DEVELOPMENT
BASED ON THE
GHANA POVERTY
REDUCTION
STRATEGY
continue
• TO ENSURE FOOD
SECURITY AND
NUTRITION FOR ALL
GHANAIANS
• TO ADEQUATELY
SUPPLY RAW
MATERIALS TO FEED
AGRO-BASED
INDUSTRIES
continue
• TO CONTRIBUTE
SUBSTANTIALLY TO
B.O.P. THROUGH
INCREASED FOREIGN
EXCHANGE EARNINGS
AND PRODUCTION OF
IMPORT SUBSTITUTES
continue
• TO ENSURE THAT
AGRICULTURAL
PRODUCERS RECEIVE
FAIR INCOMES TO
CONTRIBUTE TO
POVERTY REDUCTION
AGRICULTURAL
POLICY
GUIDELINES
1980s
• THE POLICY OF
AGRICULTURAL
FINANCE WAS
REGULATED AND
ENSURED CREDIT
CEILINGS
continue
All Banks were required to
channel 20% of their
Loanable Funds to
agriculture
Interest rates were decreed
and administered at below
market rates
continue
RESULTS • The outcome of these was
that between 1980 and 1990
only 15% of all Loanable
Funds could be advanced to
the agricultural sector due
to the ineffectiveness of
these policies.
continue
1990s
• THE FINANCIAL
SECTOR
ADJUSTMENT
PROGRAMME
WAS
IMPLEMENTED.
continue
Credit ceilings were
abolished and interest
rates de-regulated.
Banks operated as they
saw fit to ensure
allocative efficiency.
continue
RESULTS • By 1994 there was a drop from
the 15% to 8.5% of Bank Loanable funds to Agriculture.
*However attempts to address this resulted in progressive increases in Bank Loans to the agricultural sector between 1994 to 1997.
1997 -
¢128 billion : Agric. Credit
¢108 billion : Manu./Cons.
¢ 538 billion : Commerce Sectors
CURRENT
REQUIREMENTS
2000s BASED ON ESTIMATES IN THE
GPRS, AGRICULTURE
REQUIRES 934.3 BILLION
CEDIS TO GROW AT 6% PER
ANNUM. ONLY 313 BILLION
CEDIS OF THIS AMOUNT WAS
AVAILABLE, CREATING THE
DEMAND GAP OF 616 BILLION
CEDIS OR 66%
continue
Secondly, the present
allocation of GDP to
agriculture is 2%, which is
far below the 20%,
recommended by the World
Food Summit in 1996.
continue RESULTS
• An Emergency Social Relief
Programme had been launched
since July 2001 as part of
National effort to reduce
poverty in Ghana.
Total disbursements as at May 31
2002
¢ 9.3 billion
=
3,379(Clients/Fish processors)
500(Poultry Farmers)
continue
• ¢1.96 billion was disbursed to
2,610 women small-scale fish
processors representing 21% of
the total disbursements in 2001.
• ¢ 2.5 billion was disbursed to
493 Poultry Farmers in 2001.
• ¢ 4.3 billion has been
earmarked for 4,300 Women in
Food Marketing 2002.
continue • ¢ 1.7 billion distributed to
Conflict and Disaster prone areas in the 2 Regions of
Northern Ghana.
• 269 Outboard Motors purchased and supplied to
fishermen
The programme is expected to cost
¢ 700 billion over a 3 year period
* Source : Daily Graphic,Friday, June 7 2002 : 28.
Minutes of Staff Monthly Meetings, Flagstaff House,Ghana,
Friday, March 1 2002.
RISKS OF
MICROFINANCE
INITIATIVES IN
GHANA
EXOGENOUS FACTORS
1. Macroeconomic Variables
-High rates of inflation resulting in problems for
long-term investment.
- Interest rate risk. Non-competitive
- Frequency at which the national currency depreciates relatively to the major external
currencies.Value for money seems unachievable.
continue
2. Limited Loanable Funds
- Government sources funds from (IFAD,IDA,African Development Bank,etc) for various Agricultural
credit schemes in Ghana. However,this is not enough given
the present gap between the demand and supply of funds.
* Refer to the 2000 Current Requirements.
continue
3. Production/Marketing risks
- The main problem with loan
recovery depends on the system
of loan administration. In times
of unfavourable market
conditions or natural disasters,the
burden of loan repayment rests
solely with the financial service
providers. No remedies had been
identified for this situation.
continue
- Low technology resulting in low
yield per unit cost of production
- Poor client education coupled
with an attitude that portrays
government money to be free
- Over-reliance on rain-fed
agriculture resulting in the huge
production risk of and repayment
problems for programme
formulators and implementers
continue
ENDOGENOUS
1. Low level of Savings and the considerably high cost of
savings mobilization, which is invariably passed on to the
consumer.
2. Attitude of Bankers to micro-finance programmes,
especially agricultural credit.
3. High transaction cost in advancing credit .
4.Corruption
5.Poor Supervision
PLAUSIBLE PANACEA TO IDENTIFIED
PROBLEMS
Umbrella Network of MFOs must be strengthened to provide resources and information sharing for members.
Close collaboration and regular dialogue must be forged between regulators and government as an essential element for capacity building of MFOs.
Training at all levels
( i.e. beneficiaries,communities,programmers/ management) is crucial to the micro finance service delivery process.
continue
Training could take the following
forms:
understudying experienced
persons in the industry,
attachments and exposure to
other MFOs through field and
office visits,
workshops,seminars and
conferences,
community sensitization
programmes.
continue
systematic and regular
beneficiary conscientisation
programmes.Recipient need
to see credit as a necessary
factor to facilitate their
businesses and must be paid
back for other members of the
society to benefit.
continue
developing a well defined loan
administration system to ensure
efficient and loan recovery. The
capacity to administer funds
effectively should depend on the
readiness of clients to define
effective demand for credit, i.e.,
the ability to repay loans based on
the level of production and
productivity,marketability of
products and client’s intrinsic
habits of repaying loans.
continue
developing a well defined loan
administration system to ensure
efficient and loan recovery. The
capacity to administer funds
effectively should depend on the
readiness of clients to define
effective demand for credit, i.e.,
the ability to repay loans based on
the level of production and
productivity,marketability of
products and client’s intrinsic
habits of repaying loans.
continue
developing a well defined loan
administration system to ensure
efficient and loan recovery. The
capacity to administer funds
effectively should depend on the
readiness of clients to define
effective demand for credit, i.e.,
the ability to repay loans based on
the level of production and
productivity,marketability of
products and client’s intrinsic
habits of repaying loans.
continue
developing a well defined loan
administration system to ensure
efficient and loan recovery. The
capacity to administer funds
effectively should depend on the
readiness of clients to define
effective demand for credit, i.e.,
the ability to repay loans based on
the level of production and
productivity,marketability of
products and client’s intrinsic
habits of repaying loans.
continue
Time of credit delivery must
be streamlined.Proper timing
is necessary for all micro-
credit programmes, especially
production credit, to succeed.
The bureaucracy in the
administration of these credits
schemes make them useless
and non-functional by the
time the clients receive the
credit.
continue
Improving conditions of granting loans and adopting competitive interest rate. Formal financial
institutions demand landed properties from clients as
collateral to secure production credit which clients find very
difficult to meet.
Other less severe forms of collateral such as :
Group guarantee based on solidarity and the Trust Banks
systems, Micro-insurance schemes and the promotion of a
Bad Debt Reserve Account through Voluntary Offertory
schemes should be developed.
continue
Also, the main problem with production credits in Ghana is high interest rates. This stands
presently between 45-65% which is too high for poor
microenterpreneurs who need capital to break even in their
small entrepreneurial ventures.
A competitive but flexible interest rate regime should be
developed
continue
Improve service delivery to client by financial service
providers.
Most commercial banks with the exception of few rural banks are located in urban areas. Clients travel long
distances to look for small loans which often times becomes a mirage.This
discourages clients not to even save the little they hold.
continue
Semi-formal and informal
MFOs who provide
community financial services
must be strengthened to
provide door-to-door services
to their target clientele,thus
filling the gap where formal
financial institutions had
failed.
SUGGESTED
POLICY GUIDE
Leadership and Good Governance Policy.
The success of any microfinance business lies in its leadership and governance policies of the body
that would ensure proper conduct, control and professional management of MFOs.
Strategic Planning Policy.
Planning is so crucial to the industry and it is imperative that Ghanaian MFOs must encompass budgeting and periodic reviews of anticipated revenues and expenses
necessary for growth of such MFOs.
continue
Credit Risks Management
Policy.
MFOs must devise credit
policies, procedures and
analytical capabilities.
This would help ensure that the
origination,approval,monitori
ng and delinquent loans are
managed properly.
continue
Control Systems and Information Technology Policy.
To ensure that micro-finance institutions operate in a
sound and safer manner, it is imperative that
MFI personnel perform their duties in
accordance with laid down policies, procedures and
even the law. An Information Technology policy
should ensure that this is done efficiently.
continue
Capacity Building and Human Resource Management Policy.
The greatest asset of any institution is its human resource and in a
competitive sector such as this, well qualified and highly
motivated personnel are a must. Ghanaian MFOs must have good
personnel policies and procedures to ensure that vital
staff development and continued staff loyalty are ensured. This would foster an effective and
successful microfinance culture that ensures the inculcation of
requisite attitudinal and behaviourial changes in
consonance with microfinance institutional sector vision
continue
Product Research and Development policy.
Many MFIs in Ghana seems to do a good job of offering loan
products that clients do not like. In some cases, individual loans
supersede group loans as the lending methodology of choice. This shift has resulted from the
high demand of borrowers who do not like guaranteeing the loans of others. Hence, many MFOs are
having difficulty in offering competitive products because
they followed a model that was more concerned with outreach than with efficiency. Research
into Loan products must therefore be developed and tailored to suit
the needs of clienteles.
CONCLUSION AND
PROPOSED LINKAGE
POLICY
Some of the informal savings and
credit systems in Ghana, as
indicated earlier, are Susu groups,
Credit Unions, NGOs,Community
Commodity Savings,Money Lenders
among others. These operate
through group formation and group
dynamics, compulsory savings, use
of group collateral. They tend to
have more limited bureaucracy,
flexible and variable terms than the
formal financial institutions.
continue
The weaknesses of these agencies
show up when they source funds,
manage risk, and in their strategy
for repayment. They are normally
faced with problems of
inadequate capital, lack of
logistics, weaknesses in human
resource,lack of logistics,
weaknesses in human resource,
lack of safety of money collected,
and micro-finance information.
continue
The Government of Ghana
need to come to the aid of
these informal savings and
credit groups by providing
training, logistics, information
and also to link them up with
the formal financial
institutions.
THANK
YOU
FOR
YOUR
AUDIENCE