The imminent bubble of Ghana’s booming microfinance industry

Microfinance companies, under the Bank of Ghana’s new regulated licensing regime, offer both lending and deposit products to their clients.

In the past year, about 100 firms have received full operational license. Over 400 others have provisional license to serve the needs of the unbanked population, with some 3,000 others in also yet to come under regulation.

Players in the sector are upbeat about prospects to create jobs and provide financial intermediation in poverty alleviation. But all is not well in the fast-growing industry.

Petty trader, Umar Moro Abubakari opened a savings account in the ‘Daakye’ (future) product of Graford Microfinance Limited in Kumasi, in his bid to save to pursue higher learning.

Trusting in the firm’s provisional license, he managed to save Gh₵810 over an eight month period. But he’s losing all his money.  

 

“I went to my bank to withdraw my money but I didn’t get my money; they’ve closed the bank and I don’t know why”, Umar Moro complained. “I’m worried because I want to go to IPMC, so I was thinking that I’ll use that money to pay for my bills”.

Like Umar Moro, frustrated clients of microfinance firms in distress have been frequenting police stations, media houses and other places to seek help in accessing their savings.

Incidents of firms closing down and bolting with depositors savings have been reported in most parts of the country, including the Ashanti, Brong Ahafo, Western and Volta regions.

“We are in crisis but does not mean that we’ve collapsed and this is not new in the banking system”, admitted a manager of one of the firms, in response to the fate of his clients in getting their money.

Checks indicate some of the big microfinance firms are struggling to stay in business.

“We started with some companies that are no more with us; some have gone through assessment by the regulator, some have even received their provisional licenses but you see them collapsing”, observed Collins Amponsah Mensah, National Chairman of the Ghana Association of Microfinance Companies (GAMC).

Greed, irresponsible and reckless operations as well as poor management of depositors’ funds have been identified as the bane of the microfinance industry.

Sources say some of the seemingly booming firms use multi-branching as a deceptive ploy to attract clients and investors with a credible imaging. In some instance, the firms have managed to open more than 10 branches in less than one year.

When faced challenges in managing their growing branches, the companies go into liquidity distress. One firm in the Ashanti region is reported to be indebted to the tune of over Gh₵10 billion.

In these instances, the monitoring role of the Central Bank has been questioned. “Why should the Bank of Ghana allow the unbridled opening of additional branches?” queried one industry operator, who expects the regulator to be bold in ensuring firms with additional branches recapitalize.

There is also the trend of microfinance operators venturing vehicle hire purchase schemes, with the attendant problems of their inability to sustain the vehicle distribution to customers who have deposited huge sums of money.

Kwame Sarpong Osei-Bonsu of the Banking Supervision Department of the Bank of Ghana acknowledged the Bank has had several complaints, which he says are under investigation.

Unfortunately, depositors with these financial institutions have no safety nets when such businesses collapse.

“There have been talks of bringing in Deposit Insurance Scheme as we have in other countries like US and UK and even Nigeria; once you’re a regulated entity, then you go into that scheme and that guarantees a person that if something goes wrong they’ll get their money back”, noted banking consultant, Nana Otuo Acheampong.

The GAMC is already thinking in that direction, in addition to establishing a Deposit Security Fund to serve as secondary reserve for members.

Whilst financial consumers are protected with the deposit insurance, the Fund, as a liquidity buffer, will aid in the management of deposit liabilities of industry players, explained Mr. Amponsah-Mensah.

“We’re going to mandate our members to deposit an amount each day out of their mobilization into that account; it will be invested, then anytime that there is pressure on them, they can fall on that deposit to free themselves from the pressure”, he said.

Presently, the credible microfinance firms are experiencing high withdrawal rate as clients take precautionary measures to protect their savings.

This is a worry to the GAMC. Mr. Amponsah-Mensah is therefore prevailing on the Bank of Ghana to empower the Association to play a key role in regulation, if the industry is to avoid a bubble.

“If the regulator is unable to enforce the rules and regulation that goes with the regulation itself, our hands will just be tied behind us. So that is why we’re working together with the regulator to ensure that whatever we say should be done under the regulation, operators are complying”, stated the GAMC Chair. “If we take away non-compliance, we should expect the system to collapse one of these days”.

Story by Kofi Adu Domfeh