Microfinance has always been a big issue in Ghana. Whereas some see them as genuinely providing financial service for entrepreneurs and small scale businesses, others also see them as exploiting and ripping off their clients.
It all started about two years ago when Mrs. Mensah was in dire need of a loan to expand her petty trading business. The commercial banks were not ready to give her the loan because they considered her as “high risk”. She had almost given up on her plans of expansion until one of her friends introduced her to one of these microfinance institutions around. Fortunately, her prayers were answered and they gave Mrs. Mensah the loan she needed. She also played her part by working very hard to pay back the loan that she took from the microfinance company.
Let me now introduce you to Mr. Poku, Mrs. Mensah’s friend. After seeing how his friend had expanded her business, Mr. Poku also decided to go in for a loan at the same microfinance company that Mrs. Mensah had gone. Unfortunately for Mr. Poku, things didn’t turn out the way he expected them, so he lost everything. Mr. Poku could not pay back the loan that he took, so the microfinance company took his small scale business which he used as collateral to offset his debts, leaving him with nothing.
Now these are the two classical examples of people’s “bitter – sweet” experiences with the microfinance institutions. Whereas some see them as a blessing, others however see them as a curse.
The President of the Ghana Union of Traders Association (GUTA), Mr. George Ofori, is one of those people who see the microfinance institutions as a curse, accusing them of killing businesses in Ghana.
Speaking in an interview with “The General Telegraph,” Mr. Ofori said the high interest rate that the microfinance institutions charge on the loans that they give out to their clients go a long way to cripple businesses.
“Assuming they (microfinance) are charging about 5% per month, 6% per month or 7% per month, cumulatively, you are talking about 60% in a year if you are talking about 5%. If you are talking about 6% you are talking about 72% and 7% is 84% in a year, compare that to the commercial banks who charge about 30% in a year. Which is cheaper?” he quizzed.
According to Mr. Ofori, there is no business that makes a lot of profit to pay for such a high rate of interest charged by the microfinance and still make an impact in their job.
“That is why sometimes you would hear that a lot of these businessmen who went in for the money from these microfinance institutions are closing down their businesses because it is not productive. They are just killing us. If I had my own way I would advise them that nobody should venture those microfinance companies because at the end of the day you would kill your business” he lamented.
The General Manager of Trust Microfinance Ghana Limited, Mr. Sylvester Djabatey, totally disagrees with the GUTA President’s position. He believes in the financial principle that “risk goes with returns.”
“In finance there is one key word - risk goes with returns. The risk of lending to them, especially petty traders, is very high so it is the risk and the return that comes with it. Their default rate is also far higher than any other sector, that is why usually, you will find that the commercial banks will not be lending to these petty traders; it is very difficult accessing loans. Those genuine ones who collect the loans and use it for the purpose they took the loans are able to pay back” he told The General Telegraph in an interview.
He added that for their clients who are “faithful” and able to pay back their loan on time, they sometimes reduce the interest rate for them the next time they come in search for another loan.
“So usually with a client that has been with a microfinance for a very long time and is a very “good client” (able to pay back the loan we give him or her on time) that microfinance would reduce that person’s interest rate so it all boils down to the risk.”
However, Mr. Djabatey revealed that retrieving the loans from their clients sometimes become a problem, as they (microfinance companies) also fall victims, since their clients also take their loans and abscond with it.
“You give someone the money and the next time you go there to collect it, the shop is no longer there; it is closed. Where are you going to look for that person? At times, you lend without securing the loan. If you ask a petty trader who sells tomatoes to bring you collateral, where is she going to get it? That is why day-in day-out most microfinance companies are collapsing; how many banks are collapsing in this country? But with microfinance, you would hear every week that a microfinance has collapsed because of the debts that people don’t pay. You realize that the default rate with microfinance is very high so it is the risk level” he revealed.
It appears the Bank of Ghana, recognizes the important role that these microfinance institutions play in the country and have even created a new department called the “Other Financial Institution Supervisory Department” for them.
According to the Governor of the Central Bank, Dr. Kofi Wampah, the main purpose of this “is to focus on microfinance institutions because although there are problems with some of them, we also believe that they can also help because we also want financial inclusion,”
The Governor noted they still want to bring sanity and “order in that industry” despite the fact that some customers feel comfortable in dealing the microfinance companies as compared to the commercial banks.
The department, which is headed by Mr. Raymond Amanfu, will deal with four key arrears with regards to licensing, examination, surveillance and issuing policy directives for the microfinance companies.
Currently, the Bank of Ghana has increased the financial capital requirement for establishing a microfinance company in Ghana from 100,000 to 500,000GHC, of which 80% should be in cash (liquid), with the remaining 20% in assets. You would require an additional 100,000GHC if you are setting up any additional branch. This was done to make sure that these microfinance operators have a solid financial backbone to effectively carry out their services.
So, the choice is now left for you the individual to decide whether or not you would go in for a loan from these microfinance companies because they still play an important role in our financial sector. If you feel comfortable in dealing with the microfinance companies, then please go ahead but if you don’t then please backtrack before you start regretting that decision for the rest of your life.