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.

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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.

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• 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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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%

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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)

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• ¢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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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.

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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.

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.

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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.

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

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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,monitori

ng 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.

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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

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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.

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