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

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• PERCENTAGE SIZE OF THE INDUSTRY

• TARGET CLIENTELE

• THE CASE OF AGRICULTURAL CREDIT

AND FINANCING IN GHANA

• RISKS OF MICRO-FINANCE INITIATIVES IN GHANA

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• PLAUSIBLE PANACEA TO IDENTIFIED

PROBLEMS

• CONCLUSION INCLUDING SUGGESTED

POLICY GUIDE

GOAL FOR PRESENTING

GHANA’S CASE

THIS PRRESENTATION IS AN ATTEMPT AT

EXPLORINGVARIOUS 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.

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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.

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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.

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• 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.

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• 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.

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• 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 .

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• 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.

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• To suggest ways of increasing client outreach (development and retention), MFI efficiency, productivity, profitability and sustainability of lending/savings programmes in Ghana

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• 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

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• 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

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• 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

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• TO ENSURE FOOD SECURITY AND

NUTRITION FOR ALL GHANAIANS

• TO ADEQUATELY SUPPLY RAW

MATERIALS TO FEED AGRO-BASED INDUSTRIES

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• TO CONTRIBUTE SUBSTANTIALLY TO

B.O.P. THROUGH INCREASED FOREIGN EXCHANGE EARNINGS AND PRODUCTION OF IMPORT SUBSTITUTES

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• 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

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All Banks were required to channel 20% of their Loanable Funds to agriculture

Interest rates were decreed and administered at below market rates

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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.

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1990s

• THE FINANCIAL SECTOR

ADJUSTMENT PROGRAMME

WAS IMPLEMENTED.

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Credit ceilings were abolished and interest rates de-regulated.

Banks operated as they saw fit to ensure allocative efficiency.

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• 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%

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Secondly, the present allocation of GDP to

agriculture is 2%, which is far below the 20%,

recommended by the World Food Summit in 1996.

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• 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.

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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.

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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.

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- 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

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ENDOGENOUS1. 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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Credit Risks Management Policy.

MFOs must devise credit policies, procedures and analytical capabilities.

This would help ensure that the origination,approval,monitoring and delinquent loans are

managed properly.

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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.

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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.

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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