The Bank of Ghana has warned that microfinance companies that offer “unsustainable interest†on depositors’ funds could force the regulator to legislate the interest rate regime in the sector.
The central bank noted that attempts by some microfinance companies to attract depositors’ funds through high interest pricing might put the entire industry at risk, and said it will not hesitate to sanction and tighten regulation in the sector.
Raymond Amanfu, BoG’s Head of Other Financial Institutions Supervisory Department, the unit in charge of microfinance companies’ supervision, described such interest rates as “highly unsustainableâ€Â.
“Some of these things are compelling us to legislate the industry’s interest rates. We may be compelled to give the industry some boundaries to operate within if the practice continues, because some of these rates are highly unsustainable. It’s not good for us to legislate everything, but if you compel us we will do just that,†Mr. Amanfu said.
Mr. Amanfu issued the warning at the annual general meeting of the Ghana Association of Microfinance Companies in Accra last week.
He said the central bank has resolved to revoke licences of companies in the microfinance space that do not play by the rules.
The central bank has in recent times licensed hundreds of institutions to operate the microfinance business in an attempt to bring financial services to about 70 percent of the country's estimated 14 million adult population who still remain outside the formal financial services sector.
Currently, 447 microfinance institutions have been licensed to operate, out of which 390 are microfinance companies, 50 are money-lending companies and seven are financial non-governmental organisations.
At the end of June 2014, total assets of MFIs stood at GH¢768.81million, representing about 1 percent of total assets in the banking industry. Loans and advances granted by MFIs amounted to GH¢380.28milion during the period and represented about 1.57 percent of credit in the banking industry. Total deposits stood at GH¢204.28million.
However, regulating the high number of microfinance companies has been a tough challenge for the central bank, which recently created the Other Financial Institutions Supervisory Department to deal specifically with this rapidly-expanding financial sub-sector.
Some bankers in the commercial banking business have noted that the activities of a number of microfinance finance companies have shown that policymakers made a “mistake†by deciding to issue them licences to operate – a decision they contend has proved costly for the financial services sector.
Apart from concerns over their “outrageous†lending rates – sometimes reaching close to 300 percent per annum – microfinance companies have also been perceived as a conduit for the perpetration of fraud through Ponzi schemes that lure depositors with absurdly lucrative investment interest rates.
Last year, 50 microfinance institutions collapsed -- affecting confidence in the sector and leaving in their wake hundreds of depositors who lost their money.
Mr. Amanfu said some of the issues facing the industry are poor liquidity management skills; inter-microfinance institution borrowings which result in liquidity crunch; and diversion of loanable funds into unprofitable and unsustainable projects.
‘Challenging 2013’
Collins Amponsah-Mensah, the national board chairman of Ghana Association of Microfinance Companies, said the past year was very tough for microfinance companies.
He cited a “liquidity crunch†as the reason for the collapse of several MFIs.
“Although this situation affected our member companies, it also brought out lessons that needed to be learnt. Our systems were put through a sustainability test, which at the end of the day revealed our capacity to continue in business,†he said.
According to him, microfinance companies must build on their capacities in order to remain in business.
“As much as we agree that some member companies experienced crises due to their own lack of understanding of the microfinance business, others became victims of circumstances. It may interest all to note that liquidity risk, which was the cause of the crisis, ranked 19th in the global assessment report, with over-indebtedness, credit risk, competition and risk management taking the first, second, third and fourth respectively. This tells us that microfinance in Ghana is at the infant stage,†he said.
The association was able to grow its assets from GH¢300,384 in 2012 to GH¢367,032 last year. Its operating profit however dropped to GH¢147,647 from GH¢384,239 in the period.
By Richard Annerquaye Abbey | B&FT Online | Ghana
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