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

Small unit Rural and Community Banks RCBs are accommodated in the Banking Act; savings and loan companies in the Non-Bank Financial Institutions NBFIs Law; and credit unions under a n

Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry

Africa Region Working Paper Series No 49

June 2003

Abstract

egislation and regulations governing rural and micro

finance institutions (RMFIs) in Ghana have evolved with

the market, both opening up possibilities for new types of

institutions and tightening up to restrain excessive entry and

weak performance in the face of inadequate supervision

capacity The result – though not entirely by conscious design

– is several tiers of different types of RMFIs with a strong

savings orientation and a much greater role of licensed

institutions relative to NGOs than is found in many countries

Small unit Rural and Community Banks (RCBs) are

accommodated in the Banking Act; savings and loan

companies in the Non-Bank Financial Institutions (NBFIs)

Law; and credit unions under a new law being prepared to

recognize their dual nature as cooperatives and financial

institutions 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 to

their potential impact on the financial system (about 7% of

assets), and the Bank of Ghana has adopted a number of

strategies to cope with its limited supervision capacity: raising

reserve requirement for RCBs to as high as 62%; drastically

raising the minimum capital requirement for NBFIs; and

permitting 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, in

undertaking front-line supervision Although the US$2 million

minimum capital requirement makes the S&Ls less accessible

for NGO transformation, it has led to introduction of foreign

capital

While the RCBs have had limited outreach, some have

effectively partnered with NGOs to introduce microfinance

methodologies such as village banking, and they are now being

strengthened as the backbone for expansion of rural financial

services Linkages also occur between informal savings-based

“susu” institutions and both RCBs and S&Ls The Bank of

Ghana has taken a relatively laissez-faire position vis-à-vis the

informal sector

Liberalization of financial policies in the late 1980s has enabled 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 for commercial financial institutions to reach out to smaller, poorer clients (though enabling weak RCBs to improve their capital adequacy with highly restricted lending) Furthermore, directed, subsidized loans under current government poverty programs threaten to undermine loan performance and weaken the long-run potential for developing sound, self-sustaining RMFIs on a significant scale

While Ghana’s approach has yielded a wide range of RMFIs and products with the potential for substantial outreach to the poor and sustainability based on savings mobilization, it has also permitted easy entry of institutions with weak management and internal controls Ghana’s experience demonstrates the difficulty of striking the right balance between encouraging entry and innovation on the one hand and establishing adequate supervision capacity on the other

In several segments – RCBs, credit unions, S&Ls – Ghana has gone through a cycle of easy entry, weak performance, tightening up regulations, and some restructuring (through closing insolvent units, takeovers, or infusion of new investment) The Bank of Ghana has exercised considerable regulatory forbearance in allowing weak units time to comply with stricter regulations (or, in the case of the credit unions,

to establish a self-regulating system while awaiting passage

of a new law) On the whole, this approach appears to have succeeded in giving Ghana a very diverse, reasonably robust system of RMFIs, with relatively little cost in terms of outright failed institutions (and lost deposits) and moderate drain on supervisory resources Nevertheless, the system has failed to achieve impressive outreach, especially to the rural poor, and remains burdened by a number of weak units that the regulatory authorities are not well equipped to turn around

Authors’Affiliation and Sponsorship

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

L

Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry

By

William F Steel & David O Andah

June 2003

Foreword

his country study is one of three being

published as part of research on the

implications of legal and regulatory

structures for the development of

microfinance institutions in African countries

This research is a collaborative effort between

the World Bank’s Financial Sector Operations

and Policy Department and the Financial and

Private Sector Units of the Africa Region, with

funding from the Financial Sector Board and

Africa Regional Programs The published

country studies on Benin, Ghana, and Tanzania,

together with work on Ethiopia, South Africa,

Uganda, and Zambia in Africa, as well as

experiences drawn from other regions, will form

the basis for a comparative review in tended to

provide practical lessons and guidance to

policymakers and donor agencies on how the

structure of legal and regulatory systems may

affect (and in turn be influenced by) the

evolution of microfinance institutions in

different country contexts

Increasing the access of the poor to sustainable

financial services is an important part of the

World Bank Africa Region’s strategy for

supporting the Millenium Development Goals

for poverty reduction Convenient and

affordable instruments for savings, credit,

insurance, and payment transfers are essential

both to cope with the economic fluctuations and

risks that make the poor especially vulnerable

and to take advantage of opportunities to acquire

productive assets and skills that can generate

increased income Microfinance is the

application of innovative methodologies that

make such financial services available to

relatively poor households and microenterprises

in small transactions suited to their conditions Innovative microfinance institutions have had substantial success in making financial services accessible to the poor in many parts of the world, and microfinance is increasingly provided through licensed, commercial financial institutions capable of mobilizing the funds necessary to significantly increase the scale of outreach

The microfinance sector has evolved and developed according to different patterns and growth paths in various countries and regions The literature on microfinance identifies the legal and regulatory framework as one factor that influences the emergence of different kinds

of institutional providers of microfinance and, especially, their development into self- sustaining, commercial microfinance institutions capable of reaching growing numbers of poor clients, especially in rural areas These country studies provide an assessment of how the legal and regulatory framework influences the microfinance sector and the benefits and risks of different approaches, providing important lessons for other countries that may be going through a similar process of establishing or modifying the legal and regulatory framework for microfinance

Gerard Byam Sector Manager Financial Sector, Africa Region

T

The authors are grateful for comments on earlier drafts from Peer Reviewers Joselito Gallardo and Rich Rosenberg, as well as from Kwaku Addeah, Stefan Staschen, Andreas Thiele, Antony Thompson, and workshop participants The authors also appreciate information and inputs provided by Ken Appenteng Mensah, Ed mund Armah, Eyob Tesfaye, Amha Wolday, the Association of Rural Banks, Bank of Ghana, Ghana Co-operative Credit Union Association, and the Ghana Microfinance Institutions Network

Abbreviations and Acronyms

CAMEL Capital adequacy, Assets quality, Management, Earnings and Liquidity

CUA Ghana Co-operative Credit Unions Association

DANIDA Danish International Development Agency

DFID Department for International Development (UK)

ENOWID Enhancing Opportunities for Women in Development

GHAMFIN Ghana Microfinance Institutions Network

GCSCA Ghana Co-operative Susu Collectors Association

GTZ German Agency for Technical Cooperation

IDA International Development Association

IFAD International Fund for Agricultural Development

MFIs microfinance institutions

MSEs micro and small enterprises

NBFIs non-bank financial institutions

NBSSI National Board for Small-Scale Industries

NGOs non-governmental organizations

NRCD National Revolutionary Council Decree

PNDCL Provisional National Defense Council Law

RFSP Rural Financial Services Project (AfDB, GTZ, IFAD, World Bank)

RMFI rural and micro finance institutions

S&L Savings and Loans Company

SMEs Small and Medium-scale Enterprises

UNDP United Nations Development Program

USAID United States Agency for International Development

Table of Contents

Foreword ii

Abbreviations and Acronyms iv

I Background 1

A Introduction 1

B Macroeconomic and Policy Context 2

II Structure and Performance of Rural and Micro Finance Industry 3

A Agricultural Development Bank 5

B Rural and Community Banks 5

C Non-Bank Financial Institutions 9

D Credit Unions 11

E Non-Governmental and Community- Based Organizations 13

F Donor Programs 15

G Informal Finance 15

H Government Credit Programs 18

III Licensing and Regulatory Framework for Rural and Micro Finance 19

A Structure and Origins of the Licensing Framework 19

B Evolution of Regulatory Norms 20

C Supervision and Monitoring Mechanisms 26

D Performance of the Supervision System 29

IV Business and Contract Enforcement Environment 31

A Registration of RMFIs 31

B Regulation of Small Business Activity 31

C Financial Contracts 32

V Assessment of Impact of Regulation on the Evolution of Microfinance 33

A Advantages and Drawbacks of Ghana’s Approach 34

B Conclusions 38

C Recommendations for Ghana 38

Annex 1: Microfinance Legislation in Uganda and Ethiopia 40

Annex 2: Evolution of Legal Framework for RMFIs 43

Annex 3: Summary of Laws and Regulations for RMFIs and Businesses 46

Schedule 1 Legal and Regulatory Requirements for Different Types of MFIs - Ghana 46

Schedule 2 Classification of Regulations According to Objective – Ghana 47

Schedule 3 Legal Systems and Judicial Processes 47

Annex 4: Reports to Be Submitted by S&Ls, RCBs, and Banks 48

References 49

BOXES Box 1: Performance Monitoring Data and GHAMFIN 5

Box 2: Types of Group and Individual Savings and Credit Programs 8

Box 3: Inventory Credit Scheme 14

Box 4: Types of Susu (Savings Collection) in Ghana 16

TABLES

Table 2.1: Classification of Rural Banks 6

Table 2.2: Average Size of Ghana’s 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 12

Table 2.5: Performance of Sinapi Aba Trust 13

Table 3.1: Evolution of Minimum Capital Requirements, in Cedis and US$ 21

Table 3.2: New Reserve Requirements for Rural and Community Banks 23

Table 3.3: S&L Provisioning Rates 25

Table 3.4: RCBs’ Provisioning Rates 25

Table 3.5: Credit Exposure Limit as Percentage of Net Worth 26

Table 3.6: Selected Balance Sheet Items (2001) (¢ million) 29

Table 5.1: Assets of Depository Financial Institutions, 2001 (¢ million) 36

Review of Rural and Micro Finance Regulation in Ghana:

Implications for Development and Performance of the Industry

William F Steel and David O Andah

A Introduction

The purpose of this paper is to assess how the policy, le gal and regulatory framework has affected – 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, their financial performance and outreach (particularly to the rural and lower- income population) This review of Ghana’s 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 of RMFIs 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 regulatory environment in which they can develop innovative methodologies for reaching different market niches not served by commercial banks Nevertheless, at some point – in the sector’s 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 and micro finance (RMF) industry (especially through mobilization of savings from the public) and

to 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 to promote orderly development without unduly stifling innovation This review of Ghana’s experience, 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, outreach and sustainability of RMFIs

Ghana is particularly interesting because it has evolved a tiered system of different laws and regulations for different types of institutions, largely in response to local conditions, needs and institutio nal developments The resulting system resembles the tiered approach

1

“Microfinance” refers to small financial transactions with low-income households and microenterprises (both urban 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 the

characteristics (e.g., titled property as collateral) required by commercial banks or are located beyond the reach of commercial bank branches and that innovative methods and specialized products or institutions are needed to reach these markets

recommended by the World Bank’s 1999 study of microfinance regulation from the viewpoint of

a 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 would outweigh 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 licensed commercial bank offering mainly rural and micro finance services Uganda’s new (2002) Micro Deposit-taking Institutions Law provides for central bank licensing of specialized microfinance institutions 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 (Annex 1a) This approach stands in contrast to the approaches of countries such as Ethiopia, which allows only one category of licensed RMFI (Annex 1b).2 While Ghana’s approach has fostered a wide range of RMFIs, formal and informal (rural banks, savings and loan companies, credit unions, non-governmental organizations [NGOs], savings and credit associations of various types, and informal savings collectors and moneylenders), it has not been so successful in terms

of achieving strong financial performance, significant scale, and true commercialization of microfinance 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 Ghana’s flexible, evolutionary, tiered approach is leading the development of RMFIs in the right direction

After briefly reviewing Ghana’s macroeconomic and policy context in the remainder of this 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 for RMFIs 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 and regulatory environment has affected the development of rural and micro finance in Ghana

B Macroeconomic and Policy Context 3

Ghana has a population of about 18 million, which has been growing at about 3% per year Recent statistics (1999-2000) indicate that 63% of the population live in rural areas and 37% 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 the average 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 to 40.5% in 2000 before falling to 21.3% in 2001, with 91-day Treasury Bill (T-bill) rates reaching 42% in 2001 before declining to 22% in 2002 Ghana’s 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, Ghana’s economy is markedly vulnerable to external shocks

Ghana has focused on poverty reduction as the core of its development strategy This

approach was galvanized in 1995 with launching of the first version of Ghana – Vision 2020

initiation of institutional arrangements to promote and analyze poverty reduction The

Government prepared a Development Strategy for Poverty Reduction in 2000 and has since prepared the Ghana Poverty Reduction Strategy 2002-2004: An Agenda for Growth and

Prosperity 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 have tended 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 population living 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 slightly compared to the self-employed households engaged in export-crop agriculture and the wage employees in the public and private sectors

The overall policy framework for microfinance is informed by the poverty reduction strategy, which seeks to balance growth and macroeconomic stability with human development and empowerment in such a way as to positively reduce the country’s poverty levels in the medium 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 The overall strategy emp hasizes the reduction of inflation and the need to sharply reduce the fiscal deficit, as a key step to reduce the extent of the public sector’s 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, but was 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 best practices 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 Code

1963 (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) to provide 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 undertake foreign exchange operations, their clientele is drawn from their local catchment area, and their minimum capital requirement is significantly lower Some collaborate with NGOs using 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

financial institutions (NBFIs),5 the Savings and Loans Companies (S&Ls), which are restricted to a limited range of services, are most active in micro and small-scale financial intermediation using microfinance methodologies One leasing company has opened a micro- leasing window

• Non Governmental Organizations (NGOs) and the Credit Unions (CUs) are considered to

be the semi formal system, in that they are formally registered, but are not licensed by

the Bank of Ghana NGOs are incorporated as companies limited by guarantee (not for profit) under the Companies Code Their poverty focus leads them to relatively deep penetration to poor clients using microfinance methodologies, though mostly on a limited scale 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 the Department of Cooperatives as cooperative thrift societies that can accept deposits from and 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 to continue 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, including

individual 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 minimum deposit 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 Ghana’s private sector development and poverty reduction 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 finance institutions” (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) clientele among farmers, rural households, the poor, and microenterprises, and hence that different regulatory and supervisory instruments may be appropriate Although systematic data are not available across these different categories (see Box 1), the institutions in each segment are discussed 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

Box 1: Performance Monitoring Data and GHAM FIN

Information on the rural and micro finance industry is very dispersed, when it is available Data

on RCBs and S&Ls are available from three departments of BOG (Banking Supervision, NBFI and Research 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 the Department of Cooperatives The information published is scanty and does not address the main issues of RMF development No consistent data are available on the non-licensed semi-formal and informal RMFIs

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

GHAMFIN has developed a monitoring system based on the methodology of the Micro Banking Bulletin, which has been piloted with a small sample of rural banks It is also undertaking a geographic mapping of different types of RMFIs When well developed, the benchmarks and performance standards will be reference points that can be used by the unregulated RMFIs (especially NGOs) for self-regulation and by donors, BOG and MOF to monitor the growth and performance of the sector GHAMFIN also has

a simpler survey instrument that would give a basic profile of responding institutions In 2002-03 GHAMFIN and other apex bodies (supported by GTZ and the Rural Financial Services Project) collected basic data on the size, location and performance of different categories of RMFIs to provide a baseline as

a 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, and other problems, resulting in negative net worth by the end of the 1980s and restructuring in 1990 Furthermore, “the share of smallholder credit in ADB’s total lending declined to 15 per cent in

1992, while the share of lending to agriculture fell to 30 per cent,” and short-term loans accounted 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 of ADB 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 the rural areas Rural Banks (RBs) were first initiated in 1976 to expand savings mobilization and

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

by the government’s 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 government’s policy of paying cocoa farmers

by check had adverse consequences for their financial performance.7 Through a combination of rapid inflatio n, currency depreciation, economic decline, mismanagement of funds and natural disasters (especially in 1983), combined with weak supervision, only 23 of the 123 RCBs qualified 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 Bank’s Rural Finance Project, with half of them achieving “satisfactory” status by 1996 (Table 2.1) The combination of very high (62%) primary and secondary reserve requirements 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 reached

a peak of 133 in 1998, but fell to 111 in 1999 with the closure of 23 distressed banks and the commissioning 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 Between

1999 and 2001 there was 64% increase in the number of satisfactory banks

Table 2.1: Classification of Rural Banks

7

“The rural banks have been moderately successful at savings mobilization in the rural areas In 1993 their share of total deposits mobilized and credit extended to the agriculture sector by both banks and credit unions stood at 27 per cent 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)

During the 1990s, some of the RCBs adopted a more commercial approach and introduced innovative programs – often in collaboration with NGOs that offered prove n microfinance methodologies, such as Freedom From Hunger’s Credit with Education program

A few RCBs have succeeded in expanding to over 20,000 clients and reaching high levels of operational and financial sustainability.8 The total number of recorded depositors in all RCBs is 1.2 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 even

to 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 Ghana’s Rural Banks and Credit Unions Relative to African MFIs

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 voluntary membership, 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 carried out through advocacy and training Under the Rural Finance Project, financed with a World Bank/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 of Governance and Leadership, Management and Operations

ARB has no statutory authority and influences its members through persuasion and training 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 supervisory and 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 and Managers

Products and Practices

Originally, RBs made standard commercial loans to individuals or groups, often related

to 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 under 4%

investment in a productive asset, it tended to result in portfolio performance problems, as borrowers 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 on emerging 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 $50-75 but 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 other principal 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 a

joint bank savings account and mobilize initial savings deposits to qualify for a loan Group savings may

be used as security against loans, and also are used to invest in T-bills for the group Groups usually are made 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 5 members While both individual and group savings accounts are used as collateral, the individual account includes the member’s additional personal savings Loan repayments are made by individuals but handled 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 a

loan 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 the collection of savings and repayments, acts as the interface with the loan officer, and bears group responsibility for recovery (though the loans are made to individual members) Example: Freedom from Hunger’s Credit with Education program, operated through Brakwa, Lower Pra, Nsoatreman and Nandom RBs, Bulsa Community Bank, and Women’s World Banking Ghana (Quainoo 1997, p 47)

Individual savings with credit: direct lending to individuals, either those who had established a credible

history as a member of a group but who need larger or separate loans, or in cases where a group approach

is not suitable Examples: Lower Pra RB; Nsoatreman RB’s District Assembly Poverty Alleviation Program

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 RCBs may also use NGOs to perform ancillary services; for example, Nsoatreman Rural Bank pays a 2% 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 (Owusu

Ansah 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 the RCBs providing a decentralized network of licensed financial institutions in rural areas and the others providing the grassroots orientation that permits reaching relatively poor, remote clients with small transactions The Rural Financial Services Program includes measures specifically to promote such linkages, building on such approaches in previous IFAD programs

To facilitate savings collection, some RBs (such as Akwapem and Lower Pra) have introduced 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 this

to 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 new law in 1993.9 Except for finance ho uses, 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

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 BOG grappled 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 the number 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 1998 and 2000 restored the dollar value through a ten-fold increase in the nominal value, which stalled the 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 increased minimum 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 three types of MFIs through:

• transformation of NGOs into licensed financial intermediaries;

• formalization of actual or potential informal money- lending 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

The first license as an S&L went to Women’s 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 its Board 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 NGO transformation (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 termed potential moneylenders who wish to enter the formal financial system to be able to mobilize savings 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 high motivation Among the S&Ls, First Allied has become one of Ghana’s largest RMFIs, reaching 51,049 depositors with ¢25.5 billion (US$3.4 million) and 2,820 borrowers with a total loan portfolio of ¢10.3 billion (US$1.4 million) in 2001, although it serves only the local market around 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 The first in this category was Citi S&L, established in 1994 on commercial banking principles but

based 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 financial

performance has been constrained by earlier problems with its loan portfolio It represents both

an interesting success in applying commercial principles to microfinance and innovating in commercial- informal financial linkages; and a challenge to the supervisory authorities in applying 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 Consult

of Germany, which is designed to apply international best practices in microfinance to reach profitable 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 The increased 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

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 meet the new minimum capital requirements, it is shifting a larger proportion of its loan portfolio toward small and medium-scale enterprises

12

After raising sufficient capital pledges to reach the required minimum in 2000, the promoters had to return to their foreign 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

Products and Practices

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 savings

bank 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-leasing product 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 gone untapped in Ghana One leasing company initially targeted this market niche in the late 1990s and attempted to set up a “Micro-lease” subsidiary However, successive increases in the minimum capital requirement disrupted the planned establishment of this subsidiary as an independently 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, rather than spinning it off

D Credit Unions

Credit Unions are thrift societies offering savings and loan facilities exclusively to members The first credit union in Africa was established at Jirapa in the Northern Region (now Upper 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, there were 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 not particularly 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 Government’s labor redeployment 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, as well 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

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

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) discouraged mobilization 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 that meant low return on the investment

CUA is a private association of cooperative societies, independent of the go vernment 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 CUA’s own classification, over 70% of all Ghanaian credit unions were in an ‘unsatisfactory’ situation as of April 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 top rating for financial soundness had improved significantly to 29% (CUA 2002)

Products and Practices:

Individual members make predetermined periodic deposits15 into their accounts and may borrow 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 a guarantee from another member of the credit union who has adequate uncommitted savings

balance 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, up

to 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 of year-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

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 group solidarity 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, or other 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 “some CBOs also have procedures and modalities of doing things that may not suit the micro finance scheme.”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 – although they 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 (Women’s World Banking Ghana began as an NGO, but became an S&L) Although some 50 NGOs have active 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) The principal exception is Sinapi Aba Trust (SAT), which was established in 1994 and presently has

16 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 qualify and 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 funds

to finance its lending.17 The SAT S&L would be set up as a micro finance provider separate from 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 raise

15 times that amount, as well as by the costs of preparing to comply with BOG’s rigorous reporting requirements

Table 2.5: Performance of Sinapi Aba Trust

It is affiliated with Opportunity International, and receives funding from the Agence Française de Développement, DFID, Hilden Charitable Fund (UK), Microstart (UNDP), and USAID

Products and Practices

The models used by NGOs correspond to those described in Box 2, and indeed are often introduced 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 adaptation

of 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 donor agency, 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 the initial loans Loans are limited to the combined savings of the individual applicant and guarantor plus 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 Hunger’s (FFH) Credit with Education program uses individual savings with 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 a loan 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 the bookkeeping 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 le nding (Box 3) With respect to linkages between CBOs and RMFIs, conditions for success emerging from an evaluation of different schemes include (Chord 2000, para 3.2.7):

• “Empowerment of the groups through training and logistic support that enables them

to 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 obtain higher value for their crops by providing post-harvest credit through linkage with a RMFI, using stored crops as security for credit, through cooperative group management by farmers producing maize, oil palm and 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 and receive a loan of about 75-80% of the value of the stored crop, which serves as collateral This loan permits 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 either sell the stored crop or redeem it for home consumption Even after deducting a storage fee and a margin for the cooperative, farmers typically realize signific ant profits by waiting for the higher prices to sell (or avoiding having to buy at off-season prices for home consumption)

Source: Africa Region 1997; Quainoo 1997

F Donor Programs

Most donor-supported programs use the microfinance methodologies described above under 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 1990s was 25-30% for a 3- month loan; this represented a decrease from the 1983 rate of 100% on loans under 6 mont hs, 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 such

as buildings, farmland and undeveloped land Unlike commercial banks, moneylenders incur little 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 is repaid 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 accepted

as security

The importance, and certainly the registration, of individual moneylenders may have

been 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 two years (susu clubs), although credit is also a common feature All members of a susu ROSCA group except the last receive their lump sum earlier than if they saved on their own, and susu

club 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

before the end of the cycle.19 Even susu collectors give occasional advances to their best

customers 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 apart

from 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 with their own funds

Box 4: Types of Susu (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 in

the market) and return the accumulated amount at the end of the month, minus one day’s amount as

a 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 is allocated 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 be

lent 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 which

members commit to saving toward a sum that each decides over a 50- or 100-week cycle, paying a 10% commission on each payment and an additional fee when they are advanced the targeted amount 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 collected

daily savings using regular susu collector methodology, but promised loans (typically twice the

amount saved) after a minimum period of at least six months

• Some licensed financial institutions (commercial banks, insurance companies, RCBs, S&Ls, and

credit 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 Corporation

first introduced such a “Money Back” product in the 1980s, including a life insurance benefit for clients 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 mobilize

savings, the central bank has refrained from attempting to regulate them, leaving them to try to improve 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 sums

mobilized, but also by providing loans that would enable the operators to offer more advances than they would have been 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% commissio n on savings, because being able to make advances to a substantial number of clients improved their reputation and attractiveness to new clients (who pay an up-front membership fee) Another source of profits to operators is that clients who drop out befo re completing 100 payments do not get their accumulated amounts refunded – ostensibly as a means of enforcing savings 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 savings

at 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)

There are eight regional susu collectors cooperative societies, which are grouped into the

national Ghana Co-operative Susu Collectors Association (GCSCA) Registered members account for nearly a quarter of the estimated over 4,000 collectors nationwide, collecting an average 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 type products offered by licensed financial institutions) was the susu companies, whose

susu-guarantee of loans of double the amounts saved, combined with mismanagement of funds, made them 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 raise sufficient minimum capital and become registered as an S&L (which Women’s World Banking

Ghana 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 in

which clients can borrow a multiple of their savings after three months, while a portion of the savings (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 additional incentive of participation in a raffle In these cases, daily collection is carried out by sala ried or

commissioned agents, whereas Citi S&L works primarily through susu club operators, with

services that include receiving their weekly collections, providing checks for clients who are selected 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 has succeeded both in mobilizing savings from lower- income households and giving them access to financial 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 access

to formal financial institutions In this scheme, community committees select susu collection

agents 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 operate between producers in rural areas and urban markets, and often provide credit in the form of inputs on supplier’s 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 an agreed period; the implicit interest rate can be as much as 50% of the principal for the farming season (Offei 1965, cited in Aryeetey 1994 p.16) Fish traders similarly use advances to lock in their 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)

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

Other Informal Mechanisms

Apart from traders and moneylenders, loans from relatives, friends and neighbors constitute the other main source of credit available to farmers (Aryeetey 1994, p.16) In

addition, the traditional nnoboa system of mutual assistance through labor exchange sometimes includes financial arrangements (and indeed, may constitute an origin of the susu rotating

savings 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 partial exception 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 of Adjustment (PAMSCAD) (Quainoo 1997).23 PAMSCAD, launched in 1989, reached an average 83% cumulative recovery by the end 1996 (after substantial efforts to improve recovery), but only 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 in nominal 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 from ENOWID)

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 make wholesale funds available to local RMFIs for on- lending, more commonly it has been perceived and 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$57 million 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 from the 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 or donor funds at subsidized rates A particular hazard for RMFIs that handle such funds is that poor repayment may spill over to their own portfolio

III Licensing and Regulatory Framework

for Rural and Micro Finance

A Structure and Origins of the Licensing Framework

Formal banking began in Ghana (then the Gold Coast Colony) in 1896 with a branch of the Bank of British West Africa (Fry 1976) followed by Barclays Bank DCO in 1917 (Crossley and Blandford 1975) Both banks were operated and supervised as branches of their head offices

in London The first indigenous bank was the Gold Coast Cooperative Bank, which was established in 1945 with a share capital of £30,020 as a registered cooperative society under the Department of Cooperatives The main business was to support the marketing societies to buy cocoa from the farmers The registration was cancelled in 1961 and its operations absorbed into the Ghana Commercial Bank (Republic of Ghana 1970) In 1953 the Bank of the Gold Coast was established by Statute as the first indigenous commercial bank with some central bank functions It was only at independence in 1957 that the central banking functions and the commercial banking functions were separated between the Bank of Ghana and the Ghana Commercial Bank respectively

The banking system was subsequently regulated under the Bank of Ghana Act of 1963 (updated in 1992) and the Banking Act of 1970 (updated in 1989) A new Ghana Cooperative Bank was registered in 1970 with the Department of Cooperatives and started operations in

1974 In 1975/76 its operations encroached on the provisions of the Banking Act 1970 This created regulatory conflict, which was finally resolved by the passage of a legislative instrument restricting the use of the word “bank” in an institution’s name to those licensed under the Banking Act The restructured Ghana Cooperative Bank was thus brought under the authority of the Bank of Ghana, despite protests from the Department of Cooperatives that, by the Cooperative Decree, it was the sole province of Cooperatives The new Cooperative Bank had private individual and institutional shareholders, in addition to the cooperative societies

The first formal micro finance institution in Ghana arose out of the micro savings product

of the Post Office System The service was upgraded to Post Office Savings Bank under the Savings Bank Act 1962 (Act 129), to operate independently within the Post Office System It attained full bank status as National Savings and Credit Bank in 1972 under NRC Decree 38 The new management abandoned the use of the network of the Post Office System and developed its own, leading to the destruction of the micro savings product (Anin 2000)

Different tiers of Ghana’s legally recognized, specialized RMFIs come under different legislation, adopted at different points in time in response to different circumstances and objectives:

• Moneylenders: Moneylenders Ordinance, 1940 and 1957

• Credit Unions: Co-operative Decree, 1968 (NLCD 252); also the NBFI Law;

• Rural Banks: Banking Law, 1989 (PNDCL 225)

• Savings & Loans Companies: Financial Institutions (Non-Banking) Law, 1993 (PNDCL 328) (NBFI Law)

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 this framework

B Evolution of Regulatory Norms

This section discusses the evolution of regulations applicable to institutions that are licensed as financial intermediaries Prudential regulations refer to the standards and guidelines the 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 in Annex 3, Schedule 2) Regulations governing registration as a business (which applies to NGOs and 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 set

of Business Rules for application of the NBFI law, distinguishing between deposit-taking and non-deposit-taking institutions These Rules clarify procedures for compliance with capital adequacy and solvency requirements (10% capital adequacy ratio for deposit-taking NBFIs and 10:1 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 establish criteria for cla ssifying microfinance loans into current and delinquent, provisioning standards for delinquent 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 focusing regulation on the nature of the activities being undertaken The Rules have clarified the prudential 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 their management and boards BOG has since enforced penalties for breaches of regulatory requirements NBFIs are required to give action plans and definite time frame for the implementation of recommendations

These new Business Rules group NBFIs into four categories of licensed institutions for differential 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 minimum initial 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

the 1980s, and, more recently, businesses operating pyramid schemes, which BOG has actively shut 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) for foreign banks After a period of rapid inflation and currency depreciation, the 1989 Banking Law raised 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, bringing the 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$

0.2 0.5

5.0 8.0

0.09 0.22

0.94 1.5

3.52 7.04

3.33 6.66

0.5 0.5

1.0 0.5

0.22 0.22

0.19 0.09

2.1 1.4

2.0 1.3

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, the BOG 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, rent for 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 rural banks 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 have

repeatedly indicated no interest in attempting to supervise them, but rather the need to observe their activities for possible 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

working capital The minimum paid-up capital was then fixed at ¢20 million (US$22,000) By

1998 BOG was becoming more concerned with the threat posed by poor portfolio and compliance with capital adequacy ratios in a number of rural banks and S&Ls, and raised the minimum 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)

non-RCBs have attempted to raise additional capital to comply with minimum capital and capital adequacy requirements through appeals to both existing and potential new shareholders and by requiring customers (especially salaried workers) to purchase shares Nevertheless, only

30 RCBs ha ve been able to keep pace with the increase from ¢30 million to ¢100 million in

1999, let alone the further increase to ¢500 million in 2001 Difficulties in mobilizing funds arise because 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 that may engender hostility against RCB leadership

The Financial Institutions (Non-Banking) Law of 1993 prescribed a uniform minimum paid-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 capital requirement 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 to restore the value to the 1993 level in dollar terms Nevertheless, this represented a tenfold increase 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 present shareholders; unwillingness of present shareholders to cede some of their shares and dilute ownership by increasing the number of shareholders; and poor operational performance and profitability

In 2001, concerns about the health of the majority of the S&Ls and severe 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 requirements for 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

under-to adjust for the substantial depreciation of the Cedi in 2000-01, and the increase was proportionately 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 perhaps encouraging some consolidation.27 So far, the regulatory authorities have refrained from closing down existing S&Ls that cannot meet new requirements

Liquidity Reserve Requirements

All banks and deposit-taking commercial institutions are required to maintain a proportion of deposits in the form of liquidity reserves, consisting of primary reserves in cash and 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 p artners or equity funds

stocks The reserve requirements of 10% for primary and 15% for secondary have remained unchanged for S&Ls since 1993 The primary reserve requirement for commercial banks was reduced from 18% in 1996 to 9% in 2000, while the secondary reserve requirement was raised from 24% in 1996 to 35% 1999 In fact, the high returns on the relatively risk-free secondary reserve assets (T-bill rates averaged 35% from 1993 to 2001, ranging from 24% to 43%) made the requirement virtually redundant, as they accounted for as much as 75% of the combined total deposits of commercial banks (Camara 1996)

As part of the Government’s efforts to soak up liquidity, and also to improve the solvency

of RCBs by reducing the substantial delinquent loans on their books, in 1996 BOG raised the secondary liquidity reserve requirement of RCBs from 20% to 52% (the primary liquidity reserve of 10% was not changed) The combined reserve requirement of 62% served to restrain

lending by RCBs – although in practice most RCBs have held more than the required amount in

T-bills and other reserve assets While originally intended to strengthen poorly-performing institutions, the regulations did not distinguish between stronger and weaker ones, thereby penalizing the more efficient and commercial RCBs by limiting their ability to pursue profitable lending opportunities In 2002 BOG lowered the reserve requirements and varied them according to a classification system based on loan recovery performance, enabling those with good recovery to extend more credit and forcing relatively high liquidity on those with weaker recovery (Table 3.2)

Table 3.2: New Reserve Requirements for Rural and Community Banks

(as percentage of deposits)

During the 1970s and early 1980s, the government controlled interest rates and sectoral allocation of credit These and other restrictive policies no doubt retarded development of Ghana’s formal financial system However, contrary to the hypothesis that such “financial repression” can explain the existence of informal finance with unfettered interest rates, various forms of informal finance predated financially repressive policies in Ghana, and, furthermore,

they actually expanded after financial markets were liberalized in 1987 as part of the Economic Recovery Programme (Aryeetey 1994)

Although interest rates have not been officially controlled since 1987, the Government has nevertheless introduced a number of credit programs targeted for small business development or poverty alleviation whose interest rates are set well below market-determined rates Indeed, District Assemblies have been mandated since 1979 to provide 20% of their

“Common Funds” for micro and small enterprises at an interest rate of 75% of the commercial bank rate Furthermore, the Government in 2001 has pegged the interest rate for loans under the poverty reduction strategy at 20%

Check Clearing

The Rural Banks, credit unions and S&Ls are not directly included in the central check clearing and payments system This is part of the trade-off that allows the entry of specialized financial institutions with lower minimum capital than commercial banks, and is intended to mitigate the risks of relatively weak internal controls BOG cancelled check-clearing services for RBs in 1992, and did not allow fo r participation by NBFIs The demand for check-clearing services is one of the key motivations for RCBs to establish and join the new ARB Apex Bank, which is a member of the Clearing House and hence can service its members At least one S&L issues checks that can be cashed only at its branches BOG consider that S&Ls are licensed to operate as savings institutions and not as general deposit institutions, and it is not in favor of them issuing their own checks

Security

Licensed banks normally require that loans be secured by title to land or physical assets, deposit balances, or T-bills, following BOG guidelines for rating portfolio quality These options are clearly beyond the reach of poor households in the rural and urban areas Close coordination between the Ministry of Finance, BOG and the Ghana Microfinance Institutions Network (GHAMFIN) has led to a better understanding of the characteristics of microfinance loans and the methodologies underlying high repayment rates (Gallardo 2002, p.14), and personal and group guaranteed loans are now recognized as secured microfinance loans.28

Delinquency and Provisioning

All licensed financial institutions are required to monitor and review their portfolio of credit and other risk assets at least once every quarter on a regular basis For NBFIs, assets are classified into four grades of risk: (i) current; (ii) sub-standard; (iii) doubtful; and (iv) loss Assets in risk grades (ii) to (iv) are considered non-performing and, therefore, no income may be accrued on them BOG has specified prudential norms for microfinance and small business loans that take into account the characteristics of these activities Micro and small enterprise loans are required to be reviewed once monthly and are to be classified into (i) current or (ii)

28

Ideally, RMFI loan portfolios should be risk-weighted based on their repayment track record and the quality of the systems used to manage them The promise of repeat loans and the pressures of group or personal guarantees, and sometimes pledges of movable assets, are methods used by RMFIs to achieve exceptionally high repayment rates – often higher than commercial bank loans secured by titles to property