Micro Financing History

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Rural and Micro Finance Regulation in Ghana:Implications for Development and Performance of the IndustryAfrica Region Working Paper Series No. 49June 2003

Abstract

egislation and regulations governing rural and microfinance institutions (RMFIs) in Ghana have evolved with

the market, both opening up possibilities for new types ofinstitutions and tightening up to restrain excessive entry andweak performance in the face of inadequate supervisioncapacity. The result though not entirely by conscious design is several tiers of different types of RMFIs with a strongsavings orientation and a much greater role of licensedinstitutions relative to NGOs than is found in many countries.Small unit Rural and Community Banks (RCBs) areaccommodated in the Banking Act; savings and loancompanies in the Non-Bank Financial Institutions (NBFIs)Law; and credit unions under a new law being prepared torecognize their dual nature as cooperatives and financialinstitutions. The informal sector is dominated by a variety of

savings-based methodologies, both individual and group.

Supervision of a large number of RMFIs is costly relative totheir potential impact on the financial system (about 7% ofassets), and the Bank of Ghana has adopted a number ofstrategies to cope with its limited supervision capacity: raisingreserve requirement for RCBs to as high as 62%; drasticallyraising the minimum capital requirement for NBFIs; andpermitting self-regulation of credit unions by their apex body.It is currently establishing an Apex Bank to serve the RCBs,link them more effectively to the commercial banking system,and take the lead in building their capacity and, eventually, inundertaking front-line supervision. Although the US$2 millionminimum capital requirement makes the S&Ls less accessiblefor NGO transformation, it has led to introduction of foreign

capital.

While the RCBs have had limited outreach, some haveeffectively partnered with NGOs to introduce microfinancemethodologies such as village banking, and they are now beingstrengthened as the backbone for expansion of rural financialservices. Linkages also occur between informal savings-basedsusu institutions and both RCBs and S&Ls. The Bank ofGhana has taken a relatively laissez-faire position vis--vis theinformal sector.

Liberalization of financial policies in the late 1980s hasenabled RMFIs to develop with relatively little interference,

and without a clearly articulated national strategy.Nevertheless, continued high inflation and interest rates(particularly on Treasury Bills) has limited the incentive forcommercial financial institutions to reach out to smaller,poorer clients (though enabling weak RCBs to improve theircapital adequacy with highly restricted lending).Furthermore, directed, subsidized loans under currentgovernment poverty programs threaten to undermine loanperformance and weaken the long-run potential fordeveloping sound, self-sustaining RMFIs on a significant

scale.

While Ghanas approach has yielded a wide range of RMFIsand products with the potential for substantial outreach to thepoor and sustainability based on savings mobilization, it has

also permitted easy entry of institutions with weakmanagement and internal controls. Ghanas experiencedemonstrates the difficulty of striking the right balancebetween encouraging entry and innovation on the one handand establishing adequate supervision capacity on the other.In several segments RCBs, credit unions, S&Ls Ghanahas gone through a cycle of easy entry, weak performance,tightening up regulations, and some restructuring (throughclosing insolvent units, takeovers, or infusion of newinvestment). The Bank of Ghana has exercised considerableregulatory forbearance in allowing weak units time to complywith stricter regulations (or, in the case of the credit unions,to establish a self-regulating system while awaiting passageof a new law). On the whole, this approach appears to havesucceeded in giving Ghana a very diverse, reasonably robust

system of RMFIs, with relatively little cost in terms ofoutright failed institutions (and lost deposits) and moderatedrain on supervisory resources. Nevertheless, the system hasfailed to achieve impressive outreach, especially to the ruralpoor, and remains burdened by a number of weak units thatthe regulatory authorities are not well equipped to turn

around.

AuthorsAffiliation and Sponsorship

William F. Steel

Senior Adviser, Private Sector Unit, Africa Region, World BankEmail: [email protected]

DavidO. AndahManaging Consultant, Consultant Management Enterprise (Ghana)Email: [email protected]

The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with potential for improving

economic performance and social conditions in Sub-Saharan Africa. The Series publishes papers at preliminary stages to stimulate timelydiscussion within the Region and among client countries, donors, and the policy research community. The editorial board for the Seriesconsists of representatives from professional families appointed by the Regions Sector Directors. For additional information, please contact

Paula White, managing editor of the series, (81131), Email:[email protected] or visit the Web site:

http://www.worldbank.org/afr/wps/index.htm .

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they do not necess arilyrepresent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed tothem.

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Rural and Micro FinanceRegulation in Ghana:

Implications for Development andPerformance of the Industry

By

William F. Steel & David O. Andah

June 2003


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Foreword

his country study is one of three beingpublished as part of research on theimplications of legal and regulatorystructures for the development of

microfinance institutions in African countries.This research is a collaborative effort betweenthe World Banks Financial Sector Operationsand Policy Department and the Financial and

Private Sector Units of the Africa Region, withfunding from the Financial Sector Board andAfrica Regional Programs. The publishedcountry studies on Benin, Ghana, and Tanzania,together with work on Ethiopia, South Africa,Uganda, and Zambia in Africa, as well asexperiences drawn from other regions, will formthe basis for a comparative review intended toprovide practical lessons and guidance topolicymakers and donor agencies on how thestructure of legal and regulatory systems mayaffect (and in turn be influenced by) the

evolution of microfinance institutions indifferent country contexts.

Increasing the access of the poor to sustainablefinancial services is an important part of theWorld Bank Africa Regions strategy forsupporting the Millenium Development Goalsfor poverty reduction. Convenient andaffordable instruments for savings, credit,insurance, and payment transfers are essentialboth to cope with the economic fluctuations andrisks that make the poor especially vulnerableand to take advantage of opportunities to acquire

productive assets and skills that can generateincreased income. Microfinance is theapplication of innovative methodologies thatmake such financial services available to

relatively poor households and microenterprisesin small transactions suited to their conditions.Innovative microfinance institutions have hadsubstantial success in making financial servicesaccessible to the poor in many parts of theworld, and microfinance is increasinglyprovided through licensed, commercial financialinstitutions capable of mobilizing the funds

necessary to significantly increase the scale ofoutreach.

The microfinance sector has evolved anddeveloped according to different patterns andgrowth paths in various countries and regions.The literature on microfinance identifies thelegal and regulatory framework as one factorthat influences the emergence of different kindsof institutional providers of microfinance and,especially, their development into self-sustaining, commercial microfinance institutionscapable of reaching growing numbers of poor

clients, especially in rural areas. These countrystudies provide an assessment of how the legaland regulatory framework influences themicrofinance sector and the benefits and risks ofdifferent approaches, providing importantlessons for other countries that may be goingthrough a similar process of establishing ormodifying the legal and regulatory frameworkfor microfinance.

Gerard ByamSector ManagerFinancial Sector, Africa Region

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The authors are grateful for comments on earlier drafts from Peer Reviewers Joselito Gallardoand Rich Rosenberg, as well as from Kwaku Addeah, Stefan Staschen, Andreas Thiele, AntonyThompson, and workshop participants. The authors also appreciate information and inputs

provided by Ken Appenteng Mensah, Edmund Armah, Eyob Tesfaye, Amha Wolday, theAssociation of Rural Banks, Bank of Ghana, Ghana Co-operative Credit Union Association, and

the Ghana Microfinance Institutions Network.


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Abbreviations and Acronyms

ADB Agricultural Development BankAfDB African Development Bank

ARB Association of Rural Banks

ARBAB ARB Apex BankBOG Bank of Ghana

CAMEL Capital adequacy, Assets quality, Management, Earnings and LiquidityCBO Community-based organization

CUA Ghana Co-operative Credit Unions AssociationCUs Credit UnionsDANIDA Danish International Development Agency

DFID Department for International Development (UK)

ENOWID Enhancing Opportunities for Women in DevelopmentFFH Freedom From Hunger

GHAMFIN Ghana Microfinance Institutions NetworkGCSCA Ghana Co-operative Susu Collectors AssociationGTZ German Agency for Technical Cooperation

IDA International Development AssociationIFAD International Fund for Agricultural DevelopmentMFIs microfinance institutions

MOF Ministry of FinanceMSEs micro and small enterprises

NBFIs non-bank financial institutionsNBSSI National Board for Small-Scale IndustriesNGOs non-governmental organizations

NRCD National Revolutionary Council Decree

PNDCL Provisional National Defense Council LawRBs Rural BanksRCBs Rural and Community Banks

RFSP Rural Financial Services Project (AfDB, GTZ, IFAD, World Bank)RMF rural micro finance

RMFI rural and micro finance institutionsS&L Savings and Loans CompanySAT Sinapi Aba Trust

SMEs Small and Medium-scale Enterprises

T-bills Treasury BillsUK United KingdomUNDP United Nations Development ProgramUSAID United States Agency for International Development

WWBG Womens World Banking Ghana


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Table of Contents

Foreword ......................................................................................................................................... iiAbbreviations and Acronyms..........................................................................................................iv

I. Background ............................................................................................................................. 1

A. Introduction....................................................................................................................... 1B. Macroeconomic and Policy Context ................................................................................. 2

II. Structure and Performance of Rural and Micro Finance Industry.......................................... 3A. Agricultural Development Bank ....................................................................................... 5

B. Rural and Community Banks ............................................................................................ 5C. Non-Bank Financial Institutions ....................................................................................... 9D. Credit Unions .................................................................................................................. 11

E. Non-Governmental and Community-Based Organizations ............................................. 13F. Donor Programs............................................................................................................... 15

G. Informal Finance ............................................................................................................. 15H. Government Credit Programs ......................................................................................... 18

III. Licensing and Regulatory Framework for Rural and Micro Finance ................................. 19

A. Structure and Origins of the Licensing Framework........................................................ 19B. Evolution of Regulatory Norms ...................................................................................... 20

C. Supervision and Monitoring Mechanisms....................................................................... 26D. Performance of the Supervision System......................................................................... 29

IV. Business and Contract Enforcement Environment .............................................................. 31

A. Registration of RMFIs .................................................................................................... 31B. Regulation of Small Business Activity ........................................................................... 31

C. Financial Contracts.......................................................................................................... 32V. Assessment of Impact of Regulation on the Evolution of Microfinance............................. 33

A. Advantages and Drawbacks of Ghanas Approach......................................................... 34

B. Conclusions ..................................................................................................................... 38C. Recommendations for Ghana .......................................................................................... 38

Annex 1: Microfinance Legislation in Uganda and Ethiopia ....................................................... 40Annex 2: Evolution of Legal Framework for RMFIs ................................................................... 43Annex 3: Summary of Laws and Regulations for RMFIs and Businesses ................................... 46

Schedule 1. Legal and Regulatory Requirements for Different Types of MFIs - Ghana................. 46Schedule 2. Classification of Regulations According to Objective Ghana ................................ 47

Schedule 3. Legal Systems and Judicial Processes .................................................................... 47Annex 4: Reports to Be Submitted by S&Ls, RCBs, and Banks.................................................. 48References..................................................................................................................................... 49

BOXES

Box 1: Performance Monitoring Data and GHAMFIN .................................................................. 5Box 2: Types of Group and Individual Savings and Credit Programs ........................................... 8

Box 3: Inventory Credit Scheme................................................................................................... 14Box 4: Types ofSusu (Savings Collection) in Ghana................................................................... 16


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TABLES

Table 2.1: Classification of Rural Banks ........................................................................................ 6Table 2.2: Average Size of Ghanas Rural Banks and Credit Unions Relative to African MFIs... 7

Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993 ............................. 9

Table 2.4: Growth in Credit Unions and Membership, 1968-2001 .............................................. 12Table 2.5: Performance of Sinapi Aba Trust ................................................................................ 13

Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$ .............................. 21Table 3.2: New Reserve Requirements for Rural and Community Banks ................................... 23

Table 3.3: S&L Provisioning Rates .............................................................................................. 25Table 3.4: RCBs Provisioning Rates ........................................................................................... 25Table 3.5: Credit Exposure Limit as Percentage of Net Worth.................................................... 26

Table 3.6: Selected Balance Sheet Items (2001) ( million) ...................................................... 29Table 5.1: Assets of Depository Financial Institutions, 2001 ( million)..................................... 36


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Review of Rural and Micro Finance Regulation in Ghana:Implications for Development and Performance of the Industry

William F. Steel and David O. Andah

I. Background

A. Introduction

The purpose of this paper is to assess how the policy, legal and regulatory framework hasaffected and been influenced by the development of rural and micro finance institutions1

(RMFIs) in Ghana, especially in terms of the range of institutions and products available, theirfinancial performance and outreach (particularly to the rural and lower-income population). Thisreview of Ghanas experience is intended to help guide other countries that are in the process of

adopting legislation and regulations for RMFIs. The study also examines how the operation ofRMFIs and their clients may be affected by the impact of business and commercial laws and

institutions on contract enforcement and the operation of businesses.

The potential of microfinance to reach large numbers of the poor is now well understood

(Robinson 2001). Diversity of RMFIs and products is facilitated by a flexible regulatoryenvironment in which they can develop innovative methodologies for reaching different market

niches not served by commercial banks. Nevertheless, at some point in the sectors evolution,in the growth of a successful RMFI, in the willingness of investors to enter these niches

regulations are appropriate both to facilitate commercialization and sustainability of the rural andmicro finance (RMF) industry (especially through mobilization of savings from the public) andto ensure the stability of the financial system (as well as to protect deposits). Difficult decisions

must be made in each country context as to the timing and complexity of regulations in order topromote orderly development without unduly stifling innovation. This review of Ghanasexperience, together with comparisons to other country case studies, is intended to draw lessons

on how the timing and design of regulations has developed and affected the diversity, outreachand sustainability of RMFIs.

Ghana is particularly interesting because it has evolved a tiered system of different lawsand regulations for different types of institutions, largely in response to local conditions, needs

and institutional developments. The resulting system resembles the tiered approach

1 Microfinance refers to small financial transactions with low-income households and microenterprises (bothurban and rural) , using non-standard methodologies such as character-based lending, group guarantees, and short-term repeat loans. Rural finance includes other instruments and institutions specifically intended to finance rural

activities, both farm and off-farm. The common elements are that the clients being served typically lack thecharacteristics (e.g., titled property as collateral) required by commercial banks or are located beyond the reach ofcommercial bank branches and that innovative methods and specialized products or institutions are needed to reach

these markets.


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recommended by the World Banks 1999 study of microfinance regulation from the viewpoint ofa regulator trying to assess what characteristics (such as size and taking deposits from the public)

of RMFIs should trigger a regulatory response in the sense that the likely benefits wouldoutweigh the costs of supervising relatively small financial intermediaries (Van Greuning et al.

1999). This approach is being adopted in Uganda, which already has one specialized

microfinance institution under the existing non-bank financial institution category and a licensedcommercial bank offering mainly rural and micro finance services. Ugandas new (2002) Micro

Deposit-taking Institutions Law provides for central bank licensing of specialized microfinanceinstitutions that wish to mobilize savings and use them for lending, while leaving credit-only

NGO MFIs and small member-based organizations to operate outside direct regulation (Annex1a). This approach stands in contrast to the approaches of countries such as Ethiopia, whichallows only one category of licensed RMFI (Annex 1b).2 While Ghanas approach has fostered a

wide range of RMFIs, formal and informal (rural banks, savings and loan companies, creditunions, non-governmental organizations [NGOs], savings and credit associations of various

types, and informal savings collectors and moneylenders), it has not been so successful in termsof achieving strong financial performance, significant scale, and true commercialization ofmicrofinance. Although it is premature to judge what approach is most likely to be successful by

these standards, it is an appropriate time to assess the extent to which Ghanas flexible,evolutionary, tiered approach is leading the development of RMFIs in the right direction.

After briefly reviewing Ghanas macroeconomic and policy context in the remainder ofthis chapter, Chapter II sets out the structure, products and performance of RMFIs in Ghana, as a

context for examining the evolution of the legal, regulatory and supervisory framework forRMFIs in Chapter III. Chapter IV briefly reviews relevant aspect of the business and contract

enforcement environment, while Chapter V concludes with an assessment of how the legal andregulatory environment has affected the development of rural and micro finance in Ghana.

B. Macroeconomic and Policy Context3

Ghana has a population of about 18 million, which has been growing at about 3% peryear. Recent statistics (1999-2000) indicate that 63% of the population live in rural areas and37% in urban areas. Gross domestic product (GDP) for 2001 at current prices stands at US$5.36

billion, with an annual growth rate of 4.2%; per capita GNP of US$390 remains lower than theaverage per capita income level of US$520 for Sub-Saharan Africa. Inflation and high interest

rates have been a persistent problem; the end-of-period inflation rate rose from 13.8% in 1999 to40.5% in 2000 before falling to 21.3% in 2001, with 91-day Treasury Bill (T-bill) rates reaching42% in 2001 before declining to 22% in 2002. Ghanas financial structure is fairly shallow: the

degree of monetization of the economy stands at 20.7%, as measured by the M2/GDP ratio. With

international reserves at only 1.5 months of imports as of 2001, Ghanas economy is markedlyvulnerable to external shocks.

Ghana has focused on poverty reduction as the core of its development strategy. Thisapproach was galvanized in 1995 with launching of the first version of Ghana Vision 2020

2 Savings and credit cooperatives are also permitted, but under the Department of Cooperatives rather than the centralbank.3 This section draws extensively from Gallardo (2002), with updating of the figures.


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initiation of institutional arrangements to promote and analyze poverty reduction. TheGovernment prepared a Development Strategy for Poverty Reduction in 2000 and has since

prepared the Ghana Poverty Reduction Strategy 2002-2004: An Agenda for Growth andProsperity. Poverty in Ghana has decreased from 51% of the population in 1991-92 to about

43% of the population living below the poverty line in 1998, although the average consumption

level of the poor in Ghana is about 30% below this level.

4

The reductions in poverty levels havetended to be concentrated in the Accra and the rural forest areas. Poverty remains substantially

higher in rural areas (52%) than in urban areas (23%), and more than one-half of the populationliving in the rural savannah zones continue to be extremely poor. Poverty is highest among the

self-employed households cultivating agricultural crops, and has decreased only slightlycompared to the self-employed households engaged in export-crop agriculture and the wageemployees in the public and private sectors.

The overall policy framework for microfinance is informed by the poverty reductionstrategy, which seeks to balance growth and macroeconomic stability with human development

and empowerment in such a way as to positively reduce the countrys poverty levels in themedium term. The strategy identifies the main sources of poverty, and aims to assess all sectoral

strategies and programs in terms of the extent to which they contribute to reducing poverty. Theoverall strategy emphasizes the reduction of inflation and the need to sharply reduce the fiscaldeficit, as a key step to reduce the extent of the public sectors crowding out of the private sector

in the financial markets, and to help lower interest rates.

A microfinance strategy paper was prepared through a consultative process in 2000, butwas never taken up by Cabinet before a change of government. The poverty focus has led the

new regime to expand directed, subsidized credit programs that are not consistent with bestpractices in microfinance and tend to undermine development of the industry.

II. Structure and Performance of Rural and Micro Finance Industry

This chapter analyzes the different types of RMFIs in Ghana and their financial products,from the more formal and licensed to the less formal and unregulated. The financial system in

Ghana falls into three main categories: formal, semi-formal, and informal:

Formal financial institutions are those that are incorporated under the Companies Code1963 (Act 179), which gives them legal identities as limited liability companies, and

subsequently licensed by the Bank of Ghana (BOG) under either the Banking Law 1989(PNDCL 225) or the Financial Institutions (Non-Banking) Law 1993 (PNDCL 328) toprovide financial services under Bank of Ghana regulation. Most of the banks target

urban middle income and high net worth clients. Rural and Community Banks (RCBs)

operate as commercial banks under the Banking Law, except that they cannot undertakeforeign exchange operations, their clientele is drawn from their local catchment area, andtheir minimum capital requirement is significantly lower. Some collaborate with NGOsusing microfinance methodologies. Among the nine specified categories of non-bank

4 The upper poverty line in 1998 was set at C900,000, or about US$389 at the time.


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financial institutions (NBFIs),5 the Savings and Loans Companies (S&Ls), which arerestricted to a limited range of services, are most active in micro and small-scale financial

intermediation using microfinance methodologies. One leasing company has opened amicro-leasing window.

Non Governmental Organizations (NGOs) and the Credit Unions (CUs) are considered tobe the semi formal system, in that they are formally registered, but are not licensed bythe Bank of Ghana. NGOs are incorporated as companies limited by guarantee (not forprofit) under the Companies Code. Their poverty focus leads them to relatively deep

penetration to poor clients using microfinance methodologies, though mostly on a limitedscale. They are not licensed to take deposits from the public and hence have to use

external (usually donor) funds for micro credit. Credit Unions are registered by theDepartment of Cooperatives as cooperative thrift societies that can accept deposits fromand give loans to their members only. Although credit unions are included in the NBFI

Law, BOG has allowed the apex body Ghana Cooperative Credit Union Association tocontinue to regulate the societies pending the introduction of a new Credit Union Law.

The informal financial system covers a range of activities known as susu, includingindividual savings collectors, rotating savings and credit associations, and savings and

credit clubs run by an operator. It also includes moneylenders, trade creditors, self-help groups, and personal loans from friends and relatives. Moneylenders are supposed

to be licensed by the police under Moneylenders Ordinance 1957.

The commercial banking system, which is dominated by a few major banks (among the

17 total), reaches only about 5% of households, most of which are excluded by high minimumdeposit requirements. With 60% of the money supply outside the commercial banking system,

the rural banks, savings and loans companies, and the semi-formal and informal financial

systems play a particularly important role in Ghanas private sector development and povertyreduction strategies. The assets of RCBs are nearly 4% of those of the commercial banking

systems, with S&Ls and CUs adding another 2%. The term rural and micro financeinstitutions (RMFIs) is used to refer collectively to the full range of these institutions though

recognizing that they use different methodologies to reach different (albeit overlapping) clienteleamong farmers, rural households, the poor, and microenterprises, and hence that differentregulatory and supervisory instruments may be appropriate. Although systematic data are not

available across these different categories (see Box 1), the institutions in each segment arediscussed below based on the best information available.

5 Including Credit Unions, which are in the law but have not yet been brought under the jurisdiction of BOG in

practice, pending passage of new legislation.


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Box 1: Performance Monitoring Data and GHAMFIN

Information on the rural and micro finance industry is very dispersed, when it is available. Dataon RCBs and S&Ls are available from three departments of BOG (Banking Supervision, NBFI andResearch Departments), only some of which is published in its quarterly and annual reports. CUA has

information on Credit Unions, but only a small fraction is published in the Annual Reports of theDepartment of Cooperatives. The information published is scanty and does not address the main issues ofRMF development. No consistent data are available on the non-licensed semi-formal and informalRMFIs.

An attempt to remedy this situation is being undertaken by the Ghana Microfinance InstitutionsNetwork (GHAMFIN), which was established in the late 1990s by a group of RMFIs as a network ofmicrofinance institutions. Its membership cuts across the formal, semi formal and informal institutionsand includes consultants, researchers and service providers to RMFIs. Although not all RMFIs aremembers, it does include the major associations that represent key groups of RMFIs (ARB, CUA, andsusu collectors). GHAMFINs objectives include serving as the knowledge center for the industry andmonitoring and benchmarking performance.

GHAMFIN has developed a monitoring system based on the methodology of the Micro BankingBulletin, which has been piloted with a small sample of rural banks. It is also undertaking a geographicmapping of different types of RMFIs. When well developed, the benchmarks and performance standardswill be reference points that can be used by the unregulated RMFIs (especially NGOs) for self-regulationand by donors, BOG and MOF to monitor the growth and performance of the sector. GHAMFIN also hasa simpler survey instrument that would give a basic profile of responding institutions. In 2002-03GHAMFIN and other apex bodies (supported by GTZ and the Rural Financial Services Project) collectedbasic data on the size, location and performance of different categories of RMFIs to provide a baseline asa basis for more systematic monitoring in the future.

A. Agricultural Development Bank

While the ADB has played an important role in making finance available for agriculture,it suffered from poor economic conditions in the 1970s and early 1980s, poor repayment, andother problems, resulting in negative net worth by the end of the 1980s and restructuring in 1990.

Furthermore, the share of smallholder credit in ADBs total lending declined to 15 per cent in1992, while the share of lending to agriculture fell to 30 per cent, and short-term loansaccounted for some 80% of lending (Nissanke and Aryeetey, p.63). The share of smallholders

has since risen to 24% in1999 and the share of agriculture loans to 51%. After restructuring ofADB to permit universal banking, its financial profitability has improved, but it has remained

subsidy-dependent (Kowubaa 2000, pp.31-32).

B. Rural and Community Banks

The Rural and Community Banks are unit banks owned by members of the rural

community through purchase of shares and are licensed to provide financial intermediation in therural areas. Rural Banks (RBs) were first initiated in 1976 to expand savings mobilization and


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credit services in rural areas not served by commercial and development banks. 6 The numberexpanded rapidly in the early 1980s in response to the demand for rural banking services created

by the governments introduction of special checks instead of cash payment to cocoa farmers.The small number of rural outlets of commercial banks were woefully inadequate to meet the

demand to cash these checks, let alone provide other banking services, creating undue hardships

on farmers who often had to travel long distances or spend days at the banks to cash their checks.More RBs and agencies were, therefore, hurriedly opened to help service areas without banking

facilities.

The strong promotion of RBs to service the governments policy of paying cocoa farmersby check had adverse consequences for their financial performance. 7 Through a combination ofrapid inflation, currency depreciation, economic decline, mismanagement of funds and natural

disasters (especially in 1983), combined with weak supervision, only 23 of the 123 RCBsqualified as satisfactory in 1992 when the classification started (Table 2.1).

The obvious need for re-capitalization and capacity-building was addressed during 1990-94 under the World Banks Rural Finance Project, with half of them achieving satisfactory

status by 1996 (Table 2.1). The combination of very high (62%) primary and secondary reserverequirements imposed by BOG in 1996 and high T-bill rates helped to reduce the risk assets and

increase net worth, further improving their financial performance. The number of RCBs reacheda peak of 133 in 1998, but fell to 111 in 1999 with the closure of 23 distressed banks and thecommissioning of one new bank. These closures sent a strong signal to the remaining rural

banks to maintain or improve their operations in order to achieve satisfactory status. Between1999 and 2001 there was 64% increase in the number of satisfactory banks.

Table 2.1: Classification of Rural Banks

Category 1981 1986 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

No. ofSatisfactorya

- - 23 43 57 53 61 59 52 53 64 87

Mediocre - - 82 61 51 54 50 55 58 56 47 27

Distressedb/ - - 18 19 19 18 17 17 23 2c/ 2c/ -

Total 29 106 123 123 127 125 128 131 133 111 114 d/ 115 e/

Source: Addo 1998, pp.27-29. BOG Annual Reports, Banking Supervision Departmenta/

Based on compliance with a 6% capital adequacy ratio (a relatively low standard for RMFIs). The classification

system was changed in 2002 to focus instead on loan portfolio performance (as a determinant of reserverequirements).b/

Based on solvency. c/Allowed only to handle workers salary payments.d/

Includes 2 licensed at the end of the year.e/

Includes 1 licensed at the end of the year.

6 The concept was extended to an urban Community Bank in 1987; see Annex 1. There is no limit on the number ofshares that an individual can own. RCBs is used to refer to the entire category (since 1987); RBs is used to refersolely to Rural Banks.7The rural banks have been moderately successful at savings mobilization in the rural areas. In 1993 their share oftotal deposits mobilized and credit extended to the agriculture sector by both banks and credit unions stood at 27 percent and 18 per cent respectively.but the capital base is weak and paid-up capital, income surplus and reserves

constitute only 7.5 per cent of total resources (Nissanke and Aryeetey 1998, p. 63).


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During the 1990s, some of the RCBs adopted a more commercial approach and

introduced innovative programs often in collaboration with NGOs that offered provenmicrofinance methodologies, such as Freedom From Hungers Credit with Education program.

A few RCBs have succeeded in expanding to over 20,000 clients and reaching high levels ofoperational and financial sustainability. 8 The total number of recorded depositors in all RCBs is1.2 million, with about 150,000 borrowers (some of them groups of 5 to 35 members, so actual

outreach is somewhat greater). On average, however, RCBs are relatively small compared evento African MFIs, especially in terms of lending though relatively profitable, thanks in large part

to past high reserve requirements and interest rates (Table 2.2)

Table 2.2: Average Size of Ghanas Rural Banks and Credit Unions Relative to African MFIs

Indicator (average) African MFIs* Rural Banks Credit UnionsNumber of clients 7374 8488 405Loan balance $119 $30 $153

Total loan portfolio $690,027 $251,924 $65,180

Total assets $1,612,029 $841,102 $110,961Capital/assets 60.3% 2.6% 3.5%Return on assets -16.1% 4.4% N/A

Source: Sample survey data from Kowubaa 2000, p.60. S&Ls were not sampled.*From the Micro -Banking Bulletin.

The Association of Rural Banks (ARB) was founded in 1981 as an NGO with voluntarymembership, starting with 29 members and reaching 115 at end of 2001. The association was

formed out of the need to promote and strengthen the rural banking concept. This is carriedout through advocacy and training. Under the Rural Finance Project, financed with a WorldBank/IDA credit in 1991, and with DANIDA assistance, ARB trained 2341 directors and 2559

staff members of the RCBs (Osei-Bonsu, 1998). The training has been in the general areas ofGovernance and Leadership, Management and Operations.

ARB has no statutory authority and influences its members through persuasion andtraining seminars. The association initiated the proposal for the ARB Apex Bank, licensed in

2001 to perform apex financial services for RCBs and, eventually, to take over some supervisoryand training functions. The Association will remain an NGO, concentrating on advocacy goals in

promoting the rural banking system and maintaining the rural banking network of Directors andManagers.

Products and Practices

Originally, RBs made standard commercial loans to individuals or groups, often relatedto agriculture. While term lending may have been justified by the agricultural planting cycle or

8 For example, Nsoatreman Rural Bank was reported in 1998 to have 25,587 depositors (average balance of US$38)and 17,584 borrowers (average loan size US$190), 130% operational self-sufficiency and portfolio in arrears under4%.


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investment in a productive asset, it tended to result in portfolio performance problems, asborrowers had difficulty making balloon payments and RBs had weak capacity to follow up and

enforce repayment. During the 1990s, however, a number of the more progressive RCBs drew onemerging microfinance techniques to introduce new programs for saving and credit, often in

association with NGOs that could provide the expertise in implementing the approach. Loans of

this type are generally short-term (4-6 months) with weekly repayment, averaging around $50-75but ranging up to several hundred dollars, with compulsory up-front savings of 20% that is

retained as security against the loan, complementing group or individual guarantees as the otherprincipal form of security (see Box 2 for four interrelated methodologies).

Box 2: Types of Group and Individual Savings and Credit Programs

Group savings with credit: A group of members (whether pre-existing or formed for this purpose) open ajoint bank savings account and mobilize initial savings deposits to qualify for a loan. Group savings maybe used as security against loans, and also are used to invest in T-bills for the group. Groups usually aremade up of 3-4 sub-solidarity groups.

Group and individual savings with credit: Group members contribute to both a joint group account and

their individual accounts. The group may be a village bank of 25-40 members; or as small as 5members. While both individual and group savings accounts are used as collateral, the individual accountincludes the members additional personal savings. Loan repayments are made by individuals buthandled through the group account. Examples include Nsoatreman, Bosomtwe, and Lower Pra RBs.

Individual savings with group credit: Individuals lodge their savings through the group, which receives aloan for distribution to members after a qualifying period and collection of the required level of savings,and they continue to save into their individual accounts as they repay the loan. The group handles thecollection of savings and repayments, acts as the interface with the loan officer, and bears groupresponsibility for recovery (though the loans are made to individual members). Example: Freedom fromHungers Credit with Education program, operated through Brakwa, Lower Pra, Nsoatreman and NandomRBs, Bulsa Community Bank, and Womens World Banking Ghana (Quainoo 1997, p. 47).

Individual savings with credit: direct lending to individuals, either those who had established a crediblehistory as a member of a group but who need larger or separate loans, or in cases where a group approachis not suitable. Examples: Lower Pra RB; Nsoatreman RBs District Assembly Poverty AlleviationProgram.

Source: Chord 2000.

Some RCBs also have tried to develop linkages with susu collectors (GHAMFIN 2001)

or have served community-based organizations (CBOs) associated with donor programs. RCBsmay also use NGOs to perform ancillary services; for example, Nsoatreman Rural Bank pays a2% commission to an NGO that helps identify, mobilize and educate rural groups on accessing

credit through an IFAD program, as well as to assist in loan monitoring and recovery (OwusuAnsah 1999, p. 13). These growing linkages between RCBs and NGOs, CBOs and susu

collectors provide an important foundation for greater outreach to rural poor clients, with theRCBs providing a decentralized network of licensed financial institutions in rural areas and theothers providing the grassroots orientation that permits reaching relatively poor, remote clients

with small transactions. The Rural Financial Services Program includes measures specifically topromote such linkages, building on such approaches in previous IFAD programs.


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To facilitate savings collection, some RBs (such as Akwapem and Lower Pra) haveintroduced Mobile Banking, whereby officers visit rural markets on certain days to collect

savings and provide loans (whether to groups or individuals with guarantors). They consider thisto be a profitable formal adaptation of the susu system.

C. Non-Bank Financial Institutions

Table 2.3 shows the rapid growth in the number of NBFIs following passage of the newlaw in 1993.9 Except for finance houses, growth has stalled since 1998, in part because new

applicants have been unable to keep up with increases in the minimum capital requirement.

Table 2.3: Growth of Licensed NBFIs by Type since Passage of Law in 1993

Type of NBFI 1994 1995 1998 2001Savings & Loan* 2 5 7 8Leasing & Hire Purchase 0. 5 6 6

Finance Houses 0. 7 12 16

Discount Companies 1 2 3 3Building Societies 1 2 2 2Venture Capital 0 1 1 2

Mortgage Finance 0 1 1 1

Total (except CUs) 4 23 32 38

Source: Bank of Ghana. No acceptance house has been licensed.

*An additional S&L was licensed and began operation in 2002.

Savings & Loan Companies

Initial licensing of the new S&L category was difficult and long-delayed, as the BOGgrappled with how to implement the new law. The required minimum capital (100 million or

US$150,000) initially posed a hurdle, but its real value was eroded by rapid inflation, and thenumber of S&Ls grew from three in 1995 to seven by 1998. By 2002 the eight S&Ls had over

160,000 depositors and 10,000 borrowers. Increases in the minimum capital requirement in 1998and 2000 restored the dollar value through a ten-fold increase in the nominal value, which stalledthe rate of new entry (discussed further in section III.B). As of June 1999, all of the five

outstanding applications for S&L licenses lacked adequate capital to comply with the increasedminimum which was raised further in 2001 to about US$2 million.

Nevertheless, the S&L category has proven to be a flexible means of regularizing threetypes of MFIs through:

transformation of NGOs into licensed financial intermediaries; formalization of actual or potential informal moneylending operations;

establishment of small private banking operations serving a market niche.

9 Credit Unions are discussed separately below because they already existed under a separate regime and have not

yet been brought under BOG.


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The first license as an S&L went to Womens World Banking Ghana (WWBG) in 1994,representing the first transformation of an NGO into a licensed financial institution. 10 Its success,

however, was limited by different views of its mission and commercial orientation between itsBoard and management and by its failure to establish a high-performing, growing loan portfolio,

and it is likely to have difficulty complying with the minimum capital and prudential

requirements established in 2001. Sinapi Aba Trust is expected to become the second NGOtransformation (discussed below). EMPRETEC, an NGO providing training for micro and small-

scale businesses, is also trying to meet the paid-up capital requirement for an S&L.

Some of the S&Ls that have become licensed fall into a category that might be termedpotential moneylenders who wish to enter the formal financial system to be able to mobilizesavings as an additional source of funds. The principal promoters or shareholders of such S&Ls

are entrepreneurs with little experience in financial services but who have surplus funds and highmotivation. Among the S&Ls, First Allied has become one of Ghanas largest RMFIs, reaching

51,049 depositors with 25.5 billion (US$3.4 million) and 2,820 borrowers with a total loanportfolio of 10.3 billion (US$1.4 million) in 2001, although it serves only the local marketaround Kumasi, the second largest city in Ghana.

The S&L category has also made possible the entry of private investment to serve a

particular market niche on a smaller scale than would be required for a commercial bank. Thefirst in this category was Citi S&L, established in 1994 on commercial banking principles butbased in local markets with traders and susu collectors as the main depositors.11 While Citi was

an innovator in its linkages with susu collectors and especially susu clubs, its financialperformance has been constrained by earlier problems with its loan portfolio. It represents both

an interesting success in applying commercial principles to microfinance and innovating incommercial-informal financial linkages; and a challenge to the supervisory authorities inapplying the regulatory guidelines to ensure discipline as well as innovation.

The advantage of having a regulatory niche suitable for specialized MFIs is also apparent

in the establishment of Sikaman S&L Company Ltd., promoted by Internationale Projekt Consultof Germany, which is designed to apply international best practices in microfinance to reachprofitable operation in less than two years. Sikaman began operations in 2002 with a staff of 24

as the only S&L whose shareholders are entirely corporate bodies (all but one foreign).12 Theincreased paid-up capital requirement diluted the local ownership from 30% to 2.5% when one

local partner institution dropped out and the other could not raise the additional funds.

10 Initially, only the Mutual Assistance Susu scheme was licensed, as a subsidiary of the NGO, but subsequentlyWWBG itself adopted S&L status.11 Although not originally conceived as a microfinance institution as such, Citis commercial approach to serving

essentially the same market soon brought it within the ambit of the international microfinance industry. Thisenabled it to access not only new approaches and technical assistance, but also funds. Some of these funds,unfortunately, entailed foreign exchange risk, which resulted in conversion of debt to equity when depreciation of

the Cedi made repayment impossible to a foreign NGO. With a takeover by new private investors in 2001 to meetthe new minimum capital requirements, it is shifting a larger proportion of its loan portfolio toward small andmedium-scale enterprises.12 After raising sufficient capital pledges to reach the required minimum in 2000, the promoters had to return to theirforeign shareholders (Internationale Micro Investitionen of Germany, International Finance Corporation of USA,FMO of The Netherlands and Stichting DOEN of The Netherlands) to meet the revised minimum capital

requirement of US$2 million in 2001.


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The S&Ls generally use the loan products described above under RCBs. For example,

First Allied S&L uses a group and individual savings with credit scheme with existing, registered

occupation-based groups such as butchers, kente weavers, carpenters, and other associations(Chord 2000). S&Ls have also been leaders in innovating. Citi S&L uses Susu Clubs or any

other economic association for their group loan product, with joint group guarantee and savingsbank balance up to 50% of loan amount. It has pioneered linkages with susu collectors as well as

clubs, including through other forms of individual loan products. Citi also has a micro-leasingproduct available to clients with at least two successful loan terms (Anin 2000).

Leasing Companies

Although leasing companies have substantial potential to assist SMEs by solving the

collateral problem that makes it difficult for them to obtain loans, this market has so far goneuntapped in Ghana. One leasing company initially targeted this market niche in the late 1990sand attempted to set up a Micro-lease subsidiary. However, successive increases in the

minimum capital requirement disrupted the planned establishment of this subsidiary as anindependently licensed NBFI, and led the leasing company eventually (in 2001) to establish a

micro-lease department (mainly for SMEs) as a business line within the existing company, ratherthan spinning it off.

D. Credit Unions

Credit Unions are thrift societies offering savings and loan facilities exclusively tomembers. The first credit union in Africa was established at Jirapa in the Northern Region (nowUpper West) in 1955 by Canadian Catholic missionaries. By 1968, when they were brought

under legislation and the Credit Union Association (CUA) was formed as an apex body, therewere 254 CUs (64 of them rural) with some 60,000 members (Quainoo 1997). The number of

CUs continued to grow to nearly 500 by the mid-1970s, but their financial performance was notparticularly strong. High inflation in the late 1970s eroded their capital, and by the early 1990s,the number of CUs had fallen by half. Other causes of the decline included droughts in the

1980s, which severely slowed down economic activities, and the Governments laborredeployment exercise, which led to many workers being laid off (Ghana CUA 2002). Many of

the remaining CUA members were inactive, especially in community-based ones (Table 2.4).

At the end of 2002 CUA had 253 affiliates with 123,204 members (about a quarter of

them Study Groups in the process of becoming full credit unions). Credit unions average about

400-500 members, and their average loan size of US$153 is well above that for African MFIs, aswell as for RCBs13 (Table 2.2).

The weak financial performance of CUs has been due in large part to their organization

as cooperative societies with a welfare focus, and in particular to their policy of low interest rates

13 This is probably because 59% of the CUs are workplace-based, with 71% of the membership serving a more

middle-class salaried clientele than the community based ones.


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Table 2.4: Growth in Credit Unions and Membership, 1968-2001

Year Number Membership1968 254 60,000

1972 204 27,4051976 457 48,705

1980 310 49,1031984 233 55,1701988 330 65,052

1992 223 44,0681996 228 51,423

2000 225 70,0462001 232 96,052

2002 253 123,204

Source: Ghana Credit Union Association (CUA).

on loans.14 While this benefited those members who received loans (usually after long delay,and less than requested), the corresponding low returns on savings (or equity shares) discouragedmobilization of resources. Furthermore, many CUs invested share capital in-group assets such as

tents and furniture that members could rent for social events again at favorable rates thatmeant low return on the investment.

CUA is a private association of cooperative societies, independent of the government.While CUA has attempted to establish a financial reporting system for its members, in fact the

quality of the data is poor and little used for management purposes by the member societies,whose capacity is quite limited and whose managers, as well as Board and members, tend to

have little understanding of the business of financial intermediation. According to CUAs ownclassification, over 70% of all Ghanaian credit unions were in an unsatisfactory situation as ofApril 1996, and 42% of them were placed in the worst category (Camara 1996). By the end of

2001, these ratings had improved to 60% and 15%, respectively, and the share given the toprating for financial soundness had improved significantly to 29% (CUA 2002).

Products and Practices:

Individual members make predetermined periodic deposits15 into their accounts and mayborrow up to two times their savings balance. Most CUs require borrowers to provide security,

in addition to being in good standing with their deposits. Ideally, this can be in the form of aguarantee from another member of the credit union who has adequate uncommitted savingsbalance. Some CUs use the susu method in the collection of deposits and loan repayments. CUA

is an innovator in providing both credit insurance (which pays off the outstanding loan balance in

case of the death of a borrower) and a contractual savings program (which matches savings, upto a limit, if held at death or to maturity) (Gallardo et al. 2002).

14 In 1995 the rate on loans was raised to 3% per month and interest on savings of 5% per quarter was introduced in

place of the previous system of charging 1% per month on loans and only paying dividends to shareholders out ofyear-end profits (if any).15 CUA regulations state a minimum of 20,000 (US$2.70) for a workplace society and 10,000 (US$1.40) for a

community-based society.


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E. Non-Governmental and Community-Based Organizations

NGOs have facilitated the development of good microfinance practices in Ghana by

introducing internationally tested methodologies, often in partnership with RMFIs (reviewed in

depth in Chord 2000). The methodologies introduced by these NGOs often are based on groupsolidarity methods, and have benefited from linkages with CBOs that have already come

together on the basis of some kind of location, occupations, friendship, family ties, gender, orother grounds to serve a purpose at the community level (Chord 2000, para. 3.2). This can save

the long and expensive process of promoting and training prospective groups although someCBOs also have procedures and modalities of doing things that may not suit the micro financescheme.16 NGOs and CBOs are particularly important in making financial services available in

the northern part of the country, where both commercial and rural banks are scarce althoughthey tend to be somewhat localized and dependent on donor funds, in part because the relative

poverty of the area and their association with welfare-oriented programs and NGOs.

Unlike Uganda, Ghana lacks NGOs whose primary mission is microfinance (Womens

World Banking Ghana began as an NGO, but became an S&L). Although some 50 NGOs haveactive microcredit programs, they are generally multipurpose or welfare-oriented agencies (only

four exceed 3,000 clients and total outreach is only about 60,000 clients; GHAMFIN 2003). Theprincipal exception is Sinapi Aba Trust (SAT), which was established in 1994 and presently has16 branches all over the country, offering both group-based and individual loans. As shown in

Table 2.5, SAT has reached financial and operational sustainability and sufficient scale to qualifyand succeed as a licensed S&L. The ability to take and intermediate savings would free it from

its current reliance on RCBs and other intermediaries to handle clients funds and on donor fundsto finance its lending. 17 The SAT S&L would be set up as a micro finance provider separatefrom SAT NGO, which will provide technical services. While it was ready to meet the previous

minimum capitalization of C1 billion, its transformation has been stalled by the necessity to raise15 times that amount, as well as by the costs of preparing to comply with BOGs rigorous

reporting requirements.

Table 2.5: Performance of Sinapi Aba Trust

1996 2001 2002 Jan.-Mar.Value of Loans 0.7 billion 28.5 billion 11.5 billion

Number of Clients 1,741 24,396 23,260% Women 70% 90% 90%

Operational Sustainability 95% 139% 199%Financial Sustainability 48% 103% 140%

Default Rate 6.3% 2.6% 3.7%

Portfolio at Risk 6.9% 4.0% 6.1%Source: Sinapi Aba Trust.

16 For example, one RB reported that the loan repayment of the 31st December Movement (an NGO with politicalundertones) was only 75% compared to over 80% as the lowest among the other groups (Chord 2000, para. 3.2.3.i).17 It is affiliated with Opportunity International, and receives funding from the Agence Franaise de Dveloppement,

DFID, Hilden Charitable Fund (UK), Microstart (UNDP), and USAID.


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The models used by NGOs correspond to those described in Box 2, and indeed are oftenintroduced by the NGOs in collaboration with RCBs or other RMFI partners. Village banking

is a group and individual savings with credit methodology promoted by some NGOs, notably

Catholic Relief Services and the SNV/Netherlands Development Programme. It is an adaptationof the Grameen Bank model as further adapted by K-REP (Kenya), in which both share capital

and savings deposits are mobilized from members (with a one-third match from the donoragency, in the case of the SNV program). Loans are made to groups of ten members, but

benefiting only half of them at a time and reaching the second half only after repayment of theinitial loans. Loans are limited to the combined savings of the individual applicant and guarantorplus the one-third supplement, with an interest rate of 40% per annum (Chord 2000, para.

2.10.2). The village banks are in the process of registering with CUA as Study Groups.

Freedom From Hungers (FFH) Credit with Education program uses individual savingswith group credit to target women and provide accompanying education on health, nutrition,family planning, financial planning and budgeting, and microenterprise development. Group

members make mandatory savings contributions for at least three months before qualifying for aloan. Increasing repeat loans are made on four-month cycles with an interest rate of 3-4% per

month. FFH trains the loan officers for partner RMFIs (mainly RCBs) and the groups handle thebookkeeping of members savings and repayments, so the program can be quite profitable although the reserve requirement has constrained growth using RCBs own mobilized savings.

An inventory credit scheme developed by one NGO on the warehouse receipts model has

led several commercial banks to adopt this form of lending (Box 3). With respect to linkagesbetween CBOs and RMFIs, conditions for success emerging from an evaluation of differentschemes include (Chord 2000, para. 3.2.7):

Empowerment of the groups through training and logistic support that enables themto fully co-operate with the MFIs and sustain the project;

Frequent reporting that keeps each other abreast with developments in the scheme; Transparency and participatory nature of the interactions;

Well-established procedures for record keeping and accountability.

Box 3: Inventory Credit Scheme

Technoserve has developed an inventory credit scheme that enables farmers groups to obtainhigher value for their crops by providing post-harvest credit through linkage with a RMFI, using storedcrops as security for credit, through cooperative group management by farmers producing maize, oil palmand cashews. Instead of selling all of their crop at harvest when prices are lowest in order to meet

cash needs, small-scale farmers in the scheme store their crop in a cooperatively-managed warehouse andreceive a loan of about 75-80% of the value of the stored crop, which serves as collateral. This loanpermits them to clear their accumulated debts and satisfy immediate cash requirements. Subsequently,when prices have risen in the off-season (by as much as double, in the case of maize), the farmers eithersell the stored crop or redeem it for home consumption. Even after deducting a storage fee and a marginfor the cooperative, farmers typically realize significant profits by waiting for the higher prices to sell (oravoiding having to buy at off-season prices for home consumption).

Source: Africa Region 1997; Quainoo 1997.


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F. Donor Programs

Most donor-supported programs use the microfinance methodologies described aboveunder Rural and Community Banks, and often work through existing NGOs and other

organizations. Examples include the SCIMP Solidarity Group System (group savings with

credit) and ENOWID (group and individual savings with credit) (Chord 2000).

G. Informal Finance

Moneylenders

By the mid-1960s, moneylending had become more of a part-time activity by traders and

others with liquid funds than a full-time profession (Offei 1965, cited in Aryeetey 1994, p.16).Loans from moneylenders typically average 3 months and rarely are made for more than 6

months (though some borrowers may take longer). The typical interest rate in the early 1990swas 25-30% for a 3-month loan; this represented a decrease from the 1983 rate of 100% on loansunder 6 months, reflecting some market sensitivity to lower inflation and increased liquidity in

the post-reform period (Aryeetey 1994, pp. 30-32).

Moneylenders invariably require security, preferably in the form of physical assets suchas buildings, farmland and undeveloped land. Unlike commercial banks, moneylenders incurlittle transaction costs in enforcing pledges of such collateral made before family members or

traditional authorities, as the moneylender can simply make use of the property until the debt isrepaid. Loans to employees, including civil servants, are often secured by an arrangement with

the paymaster. Verbal guarantees from family heads, friends and relatives may also be acceptedas security.

The importance, and certainly the registration, of individual moneylenders may havebeen reduced by the emergence of rural banks, Credit Unions, susu associations and clubs, and

especially S&Ls, which has enabled moneylending-type operations to become licensed.Official statistics indicate that in 1972, there were 33 licensed money lenders in Accra Region.By 1988 the number has dwindled to 4 (Anin 2000). These days most individual moneylenders

do not hold licenses or operate full time, and the Ordinance has ceased to be of any importance,although it remains in the statute books.

Susu Collectors, Associations, Clubs, Companies and Products

The susu system (see Box 4) 18 primarily offers savings products to help clients

accumulate their own savings over periods ranging from one month (susu collectors) to twoyears (susu clubs), although credit is also a common feature. All members of a susu ROSCAgroup except the last receive their lump sum earlier than if they saved on their own, and susuclub operators try to attract more clients by advancing members target savings amount well

18 Although the word susu has meaning in Twi, a Ghanaian language, the system is thought to have originated

from Nigeria, where it is known as esusu or osusu.


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before the end of the cycle.19 Even susu collectors give occasional advances to their bestcustomers before the end of the month, and in some cases may make loans of up to three months

though their ability to do so is constrained by the fact that they generally lack capital apartfrom the savings they mobilize. In an effort to capitalize on susu collectors intimate knowledge

of their clients, several RCBs and S&Ls participated in a pilot program to provide funds to susu

collectors for them to on-lend to their clients (GHAMFIN 2001), and some have continued withtheir own funds.

Box 4: Types ofSusu (Savings Collection) in Ghana

Ghana has at least five different types of institutions known as, or offering products termed susu

Susu collectors : individuals who collect daily amounts set by each of their clients (e.g., traders inthe market) and return the accumulated amount at the end of the month, minus one days amount asa commission;

Susu associations or mutualist groups are of two types: (i) a rotating savings and credit association(ROSCA), whose members regularly (e.g., weekly or monthly) contribute a fixed amount that isallocated to each member in turn (according to lottery, bidding, or other system that the group

establishes); (ii) accumulating, whose members make regular contributions and whose funds may belent to members or paid out under certain circumstances (e.g., death of a family member);20

Susu clubs are a combination of the above systems operated by a single individual, in whichmembers commit to saving toward a sum that each decides over a 50- or 100-week cycle, paying a10% commission on each payment and an additional fee when they are advanced the targetedamount earlier in the cycle; they have existed at least since the mid-1970s, quite likely earlier;

Susu companies existed only in the late 1980s as registered businesses whose employees collecteddaily savings using regular susu collector methodology, but promised loans (typically twice theamount saved) after a minimum period of at least six months.

Some licensed financial institutions (commercial banks, insurance companies, RCBs, S&Ls, andcredit unions) have offered a systematic savings plan termed susu, sometimes hiring employees

to go out and gather the savings in the manner of a susu collector. The State Insurance Corporationfirst introduced such a Money Back product in the 1980s, including a life insurance benefit forclients as an additional incentive to mobilize savings, but the scheme was discontinued in 1999 .

The susu collectors are the most visible and extensive form. Even though they mobilizesavings, the central bank has refrained from attempting to regulate them, leaving them to try toimprove the reputation and quality of the industry through self-regulation (discussed below).21

19 Citi S&L was able to gain susu club operators as clients not only by providing a safe place for weekly sumsmobilized, but also by providing loans that would enable the operators to offer more advances than they would havebeen able to make out of their own accumulated resources. Operators were willing to borrow at 53% per annum

even though they were earning only a 5% fee on early advances plus 10% commission on savings, because beingable to make advances to a substantial number of clients improved their reputation and at tractiveness to new clients(who pay an up-front membership fee). Another source of profits to operators is that clients who drop out before

completing 100 payments do not get their accumulated amounts refunded ostensibly as a means of enforcingsavings discipline.20 The accumulating type is usually larger; a 1993 survey found that they average 37, as against 12 for a typical

monthly rotating susu group.21 Besides the impossibility of actually supervising hundreds of the mobile agents, the amounts of individual savingsat risk are fairly small (since they are accumulated only a month at a time; and since susu collectors typically put

their collections in commercial bank accounts).


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There are eight regional susu collectors cooperative societies, which are grouped into thenational Ghana Co-operative Susu Collectors Association (GCSCA). Registered members

account for nearly a quarter of the estimated over 4,000 collectors nationwide, collecting anaverage of US$15 a month from approximately 200,000 clients (GCSCA 2003).

The one type of susu institution that has come under formal regulation (apart from susu-type products offered by licensed financial institutions) was the susu companies, whose

guarantee of loans of double the amounts saved, combined with mismanagement of funds, madethem unsustainable. Passage of the NBFI law essentially terminated this practice as a semi-

formal financial activity carried out by registered businesses, and required that they raisesufficient minimum capital and become registered as an S&L (which Womens World BankingGhana did for its susu scheme).

Some commercial banks have introduced savings products modeled after and advertised

as susu. Likewise, both Nsoatreman Rural Bank and First Allied S&L have a susu scheme inwhich clients can borrow a multiple of their savings after three months, while a portion of thesavings (20-25%) is kept as security in a savings account (Chord 2000). Ahantaman Rural Bank

has a similar scheme, but works with clients in groups, and offers larger depositors the additionalincentive of participation in a raffle. In these cases, daily collection is carried out by salaried or

commissioned agents, whereas Citi S&L works primarily through susu club operators, withservices that include receiving their weekly collections, providing checks for clients who areselected to receive their target sums in advance, and making loans to the operator. These

methodologies have been particularly effective in reaching lower-income brackets and women,who constitute 65% to 80% of the clients of these susu schemes. Thus, the combination of

specialized categories of licensed financial institutions and traditional methodologies hassucceeded both in mobilizing savings from lower-income households and giving them access tofinancial services that are part of the formal, supervised system. 22

In addition, some NGOs have utilized susu collectors to achieve their objectives, notably

Action Aid in the Northern and Upper East Regions to reach communities with little or no accessto formal financial institutions. In this scheme, community committees select susu collectionagents from the local community to work with credit assistants, both to mobilize savings from

the remote communities and to collect loan repayments (Quainoo 1997, p. 45).

Traders

A major component of rural finance in Ghana has always been the traders who operatebetween producers in rural areas and urban markets, and often provide credit in the form of

inputs on suppliers credit or an advance against future purchase of the crop. Traders do not

usually require collateral, but rather the agreement of the farmer to sell them the crop over anagreed period; the implicit interest rate can be as much as 50% of the principal for the farmingseason (Offei 1965, cited in Aryeetey 1994 p.16). Fish traders similarly use advances to lock intheir suppliers at relatively low prices. While these middlemen are often regarded as exploitative

in view of their monopsony power, for a large number of farmers and fishermen, access to

22 Introduction of the susu scheme by Nsoatreman helped accelerate the annual growth of its savings portfolio from

25% in 1998 to 71% in 1999 (Chord 2000).


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financing depends heavily on the liquidity available from these traders and hence, in turn, onthe ability of traders to access funds.

Other Informal Mechanisms

Apart from traders and moneylenders, loans from relatives, friends and neighborsconstitute the other main source of credit available to farmers (Aryeetey 1994, p.16). Inaddition, the traditional nnoboa system of mutual assistance through labor exchange sometimes

includes financial arrangements (and indeed, may constitute an origin of the susu rotatingsavings and credit system).

H. Government Credit Programs

The Government has launched a number of special credit schemes since 1989, usually at

subsidized rates, reaching very few people, and with extremely poor recovery rates. A partialexception has been Enhancing Opportunities for Women in Development (ENOWID), which in

the early 1990s made over 3,500 relatively small loans (over 6 years) with a cumulative recovery

rate of 96% using funds from the Programme of Action to Mitigate the Social Costs ofAdjustment (PAMSCAD) (Quainoo 1997).23 PAMSCAD, launched in 1989, reached an average

83% cumulative recovery by the end 1996 (after substantial efforts to improve recovery), butonly some 1,200 clients. None of the other four programs being administered by the National

Board for Small-Scale Industries (NBSSI) (which charges 20% interest) has reached a 70%recovery rate or as many as 200 clients.24 As a result, these revolving funds are depleting innominal as well as real terms, even without counting the substantial costs to Government of

operating them, with a negligible outreach averaging fewer than 60 loans a year (apart fromENOWID).

The Government has also entered into microcredit through poverty alleviation programs

and the District Assembly Common Funds. While in some instances this has served to makewholesale funds available to local RMFIs for on-lending, more commonly it has been perceivedand used as politically motivated loans, with negative consequences for repayment. The

government in 2001 came out with an Emergency Social Relief Project meant to provide US$57million in business loans to the economically active poor at 20% interest rate over 2002-04.Disbursements are made through RCBs, S&Ls and NGOs, who evaluate the beneficiaries. The

main threat to sustainable rural and micro finance from these government programs comes fromthe negative effects on efforts of RMFIs to mobilize savings and to collect from borrowers,

whose willingness to repay typically is low when loans are known come from government ordonor funds at subsidized rates. A particular hazard for RMFIs that handle such funds is thatpoor repayment may spill over to their own portfolio.

23 The reported recovery rate is not necessarily sustainable, depending on how it is measured and the term of theloans. The program metamorphosed into an NGO (ENOWID Foundation) and expanded its clientele to 3,399

women in 1999, but with an arrears rate of 35%. Subsequent efforts brought reported arrears down to 2% in 2001with 2,623 clients and operational sustainability of 64%.24 The Developing Cottage Enterprise Project (1989), NBSSI Revolving Fund Scheme (1992), NBSSI/DED Credit

Scheme (1993), and NBSSI/NFED-Dev. Assistance (1994) (Quainoo 1997).


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These laws and their origins are discussed in detail in Annex 2 and summarized in Annex

3, Schedule 1. The remainder of this Chapter discusses the application of regulations within thisframework.

B. Evolution of Regulatory NormsThis section discusses the evolution of regulations applicable to institutions that are

licensed as financial intermediaries. Prudential regulations refer to the standards and guidelinesthe financial institutions must meet in order to obtain or retain a license from the central bank,

which assumes responsibility for assuring the soundness of licensed institutions (summarized inAnnex 3, Schedule 2). Regulations governing registration as a business (which applies to NGOsand other semi-formal organizations that are not licensed by BOG) are covered in Chapter IV.

Until 2001 the regulations governing NBFIs did not differentiate between different

institutions according to the nature of their activities. During 2001 BOG came out with a new setof Business Rules for application of the NBFI law, distinguishing between deposit-taking and

non-deposit-taking institutions. These Rules clarify procedures for compliance with capitaladequacy and solvency requirements (10% capital adequacy ratio for deposit-taking NBFIs and10:1 gearing ratio for non-deposit-taking NBFIs); define individual and group-based loans for

microfinance and small business, with single-borrower limits for individual loans; and establishcriteria for classifying microfinance loans into current and delinquent, provisioning standards fordelinquent loans, and liquidity reserve requirements.

Adoption of these Business Rules reflects growing understanding by BOG of ways in

which MFIs and other NBFIs differ from commercial banks and of the value of focusingregulation on the nature of the activities being undertaken. The Rules have clarified theprudential expectations of the BOG. Better understanding of the requirements by the NBFIs has

led to more accurate reporting, and some have brought in well-qualified people for theirmanagement and boards. BOG has since enforced penalties for breaches of regulatory

requirements. NBFIs are required to give action plans and definite time frame for theimplementation of recommendations.

These new Business Rules group NBFIs into four categories of licensed institutions fordifferential treatment (excluding credit unions, for which a separate legal, regulatory and

supervisory framework is being prepared):

A. Deposit taking institutions (other than discount houses);B. Non-deposit taking institutions in credit business;

C. Discount houses;D. Venture capital fund companies.

Deposit-taking institutions are more tightly regulated, through higher levels of minimuminitial capital, capital adequacy standard and mandatory holding of liquid reserve assets. Since

the Rules apply only to licensed institutions, they appear to leave the door open for non-financial NGOs to engage in credit activities using their own funds. However, they do block

mobilization of savings by other registered companies (such as the ill-fated susu companies of


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the 1980s, and, more recently, businesses operating pyramid schemes, which BOG has activelyshut down):25

Notwithstanding the general permission provided in Section 11(1) of the Law,a licensed company, other than a Savings Institution, desiring to solicit and

take public deposits, shall seek and obtain specific deposit taking authorisation

from the Bank of Ghana additional to the business license.

Minimum Capital Requirement

Under the old Banking Act (1970), a bank was to maintain a minimum paid-up capital of

0.75 million (US$0.65 million) for Ghanaian banks and 2 million (US$1.76 million) forforeign banks. After a period of rapid inflation and currency depreciation, the 1989 Banking Lawraised the nominal minimum paid-up capital, but not enough to restore the dollar values until a

further major increase in 2000 (Table 3.1). Another major increase followed in 2001, bringingthe minimum capital requirements to 25 billion (US$3.3 million) for Ghanaian banks, 50

billion (US$6.7 million) for foreign banks, and 70 billion (US$9.3 million) for development

banks as of 2002.

Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$

Type 1993 1998 2000 2001 2002 1993 1998 2000 2001 2002Cedis (billion) US dollars (million)

Comml banks:Ghanaian*Foreign

0.20.5

0.20.5

5.08.0

2550

2550

0.310.77

0.090.22

0.941.5

3.527.04

3.336.66

Devt banks 1.0 1.0 10.0 70 70 1.54 0.43 1.9 9.85 9.33Rural banks 0.01 0.03 0.1 0.5 0.5 0.015 0.013 0.018 0.07 0.067

NBFIs:Deposit-takingNon-deposit

0.10.1

0.50.5

1.00.5

1510

1510

0.150.15

0.220.22

0.190.09

2.11.4

2.01.3

Source: 2000 from Gallardo BTO report; 2001 from Addeah 2001 (updated). Average annual exchange rates (/$):1989 270; 1993 649; 1998 2314; 2000 5322; 2001 7104; 2002 7500 (first quarter).

*60% of shares owned by Ghanaians.

While definite amounts were prescribed for the above-mentioned categories of banks, theBOG was left to determine the paid-up capital for the Rural Banks. Initially BOG based the

minimum capital requirement of 50,00026 on the start-up needs for fixed assets, stationery, rentfor accommodation, etc., while BOG provided the working capital requirement for the initial six

months as Preference Share Capital. In 1994 BOG decided that the shareholders of the ruralbanks should bear the full cost of the banks capitalization, and it stopped providing initial

25 As informal individual agents without corporate identity and business license, susu collectors and operators of

susu clubs, as well as susu groups (ROSCAs) would appear to remain outside the law, and BOG officials haverepeatedly indicated no interest in attempting to supervise them, but rather the need to observe their activities forpossible infringement of the laws.26 Nearly US$20,000 at the overvalued exchange rate in the late 1970s, but considerably less at parallel market rates.


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working capital. The minimum paid-up capital was then fixed at 20 million (US$22,000). By1998 BOG was becoming more concerned with the threat posed by poor portfolio and non-

compliance with capital adequacy ratios in a number of rural banks and S&Ls, and raised theminimum capital requirement. It has since been adjusted twice, though not as drastically for

RCBs as for other categories, standing at 500 million (US$67,000) as of 2002 (Table 3.1).

RCBs have attempted to raise additional capital to comply with minimum capital and

capital adequacy requirements through appeals to both existing and potential new shareholdersand by requiring customers (especially salaried workers) to purchase shares. Nevertheless, only

30 RCBs have been able to keep pace with the increase from 30 million to 100 million in1999, let alone the further increase to 500 million in 2001. Difficulties in mobilizing funds arisebecause of non-payment of dividends since inception, shareholders perception that they are

entitled to be given loans as shareholders, lack of confidence in the RCB, and local politics thatmay engender hostility against RCB leadership.

The Financial Institutions (Non-Banking) Law of 1993 prescribed a uniform minimumpaid-up capital of 100 million (US$154,000) for all categories of NBFIs. As noted above, this

has since been reviewed administratively by the Bank of Ghana to differentiate the capitalrequirement of deposit-taking institutions from that of non-deposit taking institutions. As shown

in Table 3.1, the increases in required minimum capital in 1998 and 2000 served mainly torestore the value to the 1993 level in dollar terms. Nevertheless, this represented a tenfoldincrease in cedi terms, which only 3 of 8 S&Ls were able to achieve. Reasons for difficulties in

compliance include: low initial paid-up capital; lack of additional funds among presentshareholders; unwillingness of present shareholders to cede some of their shares and dilute

ownership by increasing the number of shareholders; and poor operational performance andprofitability.

In 2001, concerns about the health of the majority of the S&Ls and severe under-capitalization of the NBFIs, and perhaps about the rising number of applications relative to

limited supervision capacity, led BOG to substantially raise the minimum capital requirementsfor NBFIs to 15 billion (over US$2 million) for deposit-taking institutions and 10 billion(US$1.4 million) for non-deposit-taking institutions. This increase was far more than necessary

to adjust for the substantial depreciation of the Cedi in 2000-01, and the increase wasproportionately greater for NBFIs than for commercial banks, suggesting that the intent may

have been in large part to ease the burden of supervision by limiting the rate of entry and perhapsencouraging some consolidation. 27 So far, the regulatory authorities have refrained from closingdown existing S&Ls that cannot meet new requirements.

Liquidity Reserve Requirements

All banks and deposit-taking commercial institutions are required to maintain aproportion of deposits in the form of liquidity reserves, consisting of primary reserves in cashand balances with other banks and secondary reserves in Government and BOG bills, bonds and

27 As of 2001, applications pending for licensing included five S&Ls, eight finance houses, and some other NBFIs.The new requirements were being applied initially only to new applicants; existing NBFIs were given some time to

comply, and some S&Ls were taking on or seeking new partners or equity funds.


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