The economic condition currently prevailing in Ghana poses a challenge to enterprise development, its sustainability and growth processes.
Many enterprises including microfinance institutions will have to face realities and develop the needed approach in order to promote and sustain their operations.
The effect of the economic challenges on micro and small enterprises (MSE) will include but are not limited to increasing need for additional working capital to manage the same size of businesses, reduction in production or sales volumes, high production cost and cash-flow challenges .
Microfinance institutions (MFIs) as financiers of micro enterprises will face various challenges just like the enterprises they finance. This is largely because what happens to their clients in most cases is mirrored by their operations. For instance, the inability of clients to increase or maintain volumes and values of their sales can directly affect repayment of their loans. Low volumes of sales can also affect the volume of deposits that can be mobilised.
The challenge for MFIs and other financial institutions in difficult economic times will be evidenced by decline in deposits mobilisation, low loan recovery rates, high operational or transaction costs, as well as the high cost associated with borrowing and difficulty in raising necessary loans to support operations.
The decrease in deposits and low recovery rates are due to the fact that clients or micro and small entrepreneurs, in view of their need for additional capital, will quickly plough back available money in order to ensure their enterprises can operate and generate returns they are used to in order to be enabled for meeting other demands -- which includes repayment of loans, savings and household consumption. By this, therefore, income received from sales is directly used to restock their enterprises for fear of price-changes.
In some cases when clients are able to save they do so in reduced amounts, and such amounts do not stay long with the MFIs.
Microfinance operations are naturally expensive. This is due to the very nature of the microfinance business, which involves making small loans and taking small deposits. The cost of transacting one loan or taking a deposit is very expensive.
Owners and operators of microfinance institutions must not be oblivious to the challenging economic situation but must prepare and implement the needed operational or managerial strategies to ensure MFIs are able to continue providing the needed support for SMEs and still be financially and operationally sustainable.
What Should MFIs Expect?
Expensive Operations
The cost of operating MFIs is likely to increase due to a general increase in prices of goods and services.
The cost to income ratio is an important measure of profitability for MFIs, and with the current economic conditions MFIs will register high “additional†operating cost. The challenge here is that the interest income, which is the main source income for MFIs, will not proportionally grow in line with the operational cost.
The failure to control operational cost will therefore lead to a high cost to income ratio and further affect the operational fortunes of MFIs. MFIs will need to implement controls that lead to cost reduction. They must pay closer attention to growing and maintaining quality loans in order to improve their interest income.
High cost of capital
MFIs in Ghana incur a high cost in raising funds to support their operations. With the rise in inflation and other factors, MFIs in Ghana will be further required to pay more for the loans they contract. The high cost of loans is due to the unstable economic situation, which is perceived by investors -- whether local or foreign -- as a major high-risk factor. The high cost of capital is therefore to compensate for the risk associated with the entire macro-economic situation and to protect the value of their investments placed with MFIs.
Short-terms loans for MFIs
Aside from the high cost of capital, MFIs will witness that most investors are willing to offer short-term investments instead of providing for the long-term. Shorter-term credits will prevail because most investors are sceptical of future developments in the economy that can further affect the value of their funds.
The danger of shorter-term credit for MFIs is that it may affect their cash-flow position. The challenge with short-term loans made to MFIs is that MFIs are unable to fully invest these funds in order to record the needed returns and compensate for the cost incurred in raising such funds. MFIs can address this by ensuring they invest such funds in activities which have similar repayment patterns when compared with the borrowed facility.
Reduction in deposit mobilisation
MFIs will experience a reduction in deposits mobilisation. Deposits are one of the key sources of funding for MFIs: they spend in order to acquire the funds mobilised in loans and other investments. Under difficult economic situations, the enterprises of clients are financially stretched and income from these enterprises will dwindle.
This is expected to negatively affect the savings habit of these clients -- therefore meaning that clients will not have enough income to spend and save. Clients will prioritise their consumption needs instead of saving or loan repayments.
The other obvious thing is that because the general cost of items have gone up, micro-clients will have to use more of their little income to buy what they need. All these developments have the tendency to affect loan repayment potentials of the clients in questions.
Conclusion
Acknowledging the current economic challenges as an owner of a MFI is one step to ensuring MFIs will be able to stay financially sound to support their own operations and be able to reach out to their target clients.
With MFIs and difficult economic conditions, there is much evidence to support the fact they have the potential to survive harsh economic conditions if things are managed well. This is made evident by the growth registered by MFIs’ growth globally during the economic crisis.
Surviving is important to ensure that MFIs will be available to support the economic empowerment of their clients through provision of financial and non-financial services.
MFIs must ensure prioritisation for management of their liquidity, and this will include having to constantly or frequently review the liquidity positions. This can be performed on a weekly basis or at least monthly.
Instead of depending on only one person to make decisions on the liquidity status of MFIs, it is advisable to use small committees instead of one-man reviews.
MFIs must reduce or suspend capital investments and rather fund more liquid assets. This is because MFIs have challenges with raising funds, and therefore must be able to internally make funds available for investments in areas that will yield better returns to support increase in operational cost. MFIs can hold on for branch expansions and rather seek to improve the efficiency of their operations.
MFIs must ensure they do proper and detailed loan analyses for all their loan requests. Credit officers or managers should not assess the “ability to pay†loans based only on the financial position of the clients, but must include assessing entrepreneurial competencies of the clients to better make informed decisions in managing and growing their business enterprise.
In addition MFIs must ensure diversifying their loan portfolio by financing clients involved in different economic activities instead of specialising in one or two.
This is the time MFIs must place priority on efficiency instead of expansion. MFIs should improve their liquidity management to meet the frequent cash withdrawals, and also aim at lean operations. MFIs must survive to support the micro and small entrepreneurs; and this can be only achieved if owners and managers of MFIs make informed decisions regarding day to day operations of their enterprises.
By Roderick Okoampah Ayeh
The writer is a microfinance consultant
[email protected]
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