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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
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.
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.
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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.
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 .
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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.
continueRESULTS
• 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.
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.
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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.
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,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.
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.
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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