Visibility is not viability – Bank of Ghana tells microfinance firms

The Bank of Ghana has acknowledged the need to have an apex body to deepen supervision of microfinance operations, but says it is early days yet to establish such a body.

Over 280 firms have been registered to take deposits and advance loans since the new regulation of the non-bank financial institutions came into effect in 2011.

However, the microfinance sector has been dogged with liquidity and operational challenges, with some firms going into distress, especially in the Ashanti region.

According to the Head of Banking Supervision at the Bank of Ghana, Franklin Belnye, the problems keep recurring because some of the operators do not have the right models and also over-branching.

He shared the experience of microfinance firms that used mobilized deposits to build schools and toilet facilities.

“That is not microfinance,” said Mr. Belnye. “Microfinance is mobilizing small savings and making small credit and helping people with little little loans to manage their lives. Some of the microfinance companies are behaving like banks but that’s wrong because your capital is small, your deposits are small scale and they are payable on demand and so if you give big loans you’ll run into problems.”

He also observed that it is a wrong model from microfinance companies to have presence everywhere because “visibility is not viability” when the firms would have to use depositors’ funds to put up those branch networks.

“Through regular interaction with them and educating them, we hope that we’ll be able to deal with most of these problems,” Governor of the Central Bank, Dr. Kofi Wampah told Luv Fm in Kumasi, stating that lack of experience as the major bane of the industry.

He is hopeful the new microfinance department under the Bank of Ghana should lead in sanitizing the industry.

The Ghana Association of Microfinance Companies (GAMC) has been engaging the Central Bank to cede some of its powers to the Association to instill discipline in the industry.

Mr. Belnye tells Luv Biz the arrangement, as it pertains in the rural banking industry, could be extended to microfinance in the future.

“Apex bank in not a regulation institution; their role is more administrative and support for rural banks. We may need to do that for microfinance but now it’s too early; we need to ensure we’ve put in place a number of well functioning microfinance institutions to be able to stand on their own and if they then want to have an umbrella body to hold them together that can be than,” he stated.

Clients of microfinance companies have had to lose savings when firms are shut or go into liquidity challenges.

Dr. Wampah says a reserve account for financial institutions will ensure depositors are protected.

Story by Kofi Adu Domfeh