1. ENHANCING THE EFFECTIVENESS OF MICROFINANCING IN GHANA A DEVELOPMENT PRACTITIONER’S PERSPECTIVE JUNE 2002

2. ACKNOWLEDGEMENT Presented by: Nana Opare Djan Executive Director Kraban Support Foundation Accra,Ghana. Paper presented at the 30 th International Conference on Social Welfare organised by the Netherlands Institute for Care and Welfare at “De Doelen” Conference Centre, Rotterdam,Netherlands, on Thursday 27 June 2002.

3. SUMMARIES OF PRESENTATION GOAL OF THE PRESENTATION MICRO FINANCE DEFINED THE PROBLEM AND EXISTING GAP OBJECTIVES OF THE PRESENTATION MODELS AND PRODUCTS CHARACTERISTICS OF GHANAIAN MFOs THE SIZE OF THE INDUSTRY IN GHANA

4. continue PERCENTAGE SIZE OF THE INDUSTRY TARGET CLIENTELE THE CASE OF AGRICULTURAL CREDIT AND FINANCING IN GHANA RISKS OF MICRO-FINANCE INITIATIVES IN GHANA

5. continue PLAUSIBLE PANACEA TO IDENTIFIED PROBLEMS CONCLUSION INCLUDING SUGGESTED POLICY GUIDE

6. GOAL FOR PRESENTING GHANA’S CASE THIS PRRESENTATION IS AN ATTEMPT AT EXPLORING VARIOUS WAYS OF IMPROVING THE SUSTAINABILITY OF MICROFINANCE SERVICES IN GHANA

7. MICRO FINANCE DEFINED A financial intermediation mechanism that seeks to enhance savings mobilization and access to credit and other related technical support services for informal sector operators

8. THE PROBLEM AND EXISTING GAP Access to Micro finance Services in Ghana is very low. In 1999, for instance, the Rural Finance Department of the Central Bank of Ghana indicated that access by low income clients to financial services provided by key microfinance institutions reached only 7% out of the targeted clientele of 3,600,000.

9. continue According to Ghana’s population census of 2000 and Ghana Poverty Reduction Strategy Paper, approximately, 40% of the population in Ghana is considered to be below the poverty line i.e they live below the National Per Capita Income of $390.

10. continue From the geographical perspective, five out of the ten Provinces/Regions had more than 40% of their population living in poverty. Significantly, the larger proportion are engaged in informal sector income generating activities and women form 70% of these operatives.

11. continue The low income levels resulting from the factors indicated earlier has had the ramifications of low savings mobilisation drive due to higher propensity to consume the limited disposable incomes by such informal sector operators the majority being women as stated earlier.

12. continue Formal financial institutions are unable to mop up excess incomes for on-lending with the view of generating further capital They typically mention: - Risks of default - High cost of delivery - Socio-economic factors - Cultural Barriers - Limited logistics and infrastructure are among the main reasons that prevent their entry into the microfinance industry.

13. OBJECTIVES OF THE PRESENTATION To suggest means of making financial services (especially savings and credit) available to low income persons with a view of providing them with the opportunities to organize themselves financially.

14. continue To suggest means of developing and promoting sustainable methodologies for providing micro- financial services to low income and disadvantaged groups in deprived communities in Ghana.

15. continue To suggest ways of strengthening the capacity of indigenous grassroots and related community-based institutions including Susu Associations, Cooperatives and fledgling NGOs that are involved in the provision of microfinance services to low- income micro-entrepreneurs.

16. continue To suggest ways of increasing client outreach (development and retention), MFI efficiency, productivity, profitability and sustainability of lending/savings programmes in Ghana

17. continue To suggest ways of improving local and global knowledge of the impact microfinance have on clients and suggest means of building the capacity of organisations wishing to provide direct microfinance services as part of Ghana’s Poverty Reduction Strategy.

18. MODELS/PRODUCTS INVENTORY CREDIT SCHEMES ( Some Rural Banks, Technoserve International) CREDIT WITH EDUCATION (Freedom from Hunger, Ghana and Selected Rural Banks) ROTATIONAL SAVINGS AND CREDIT (Citi Savings and Loans Co., Action aid, Enowid Foundation) CREDIT AND SPIRITUAL TRANSFORMATION SCHEMES (Sinapi Aba Trust, World Vision Ghana)

19. continue SUSU ON-LENDING (Rural banks,Gupt Kath Mali, Amasachina, Math an-Tudu) VILLAGE/MOBILE BANKING STRATEGY (Catholic Relief Services,SNV, Rural Banks)  MICRO INSURANCE SCHEMES (GHAMFIN)  TEACH STRATEGY (Kraban Support Foundation)  GOVERNMENTAL SCHEMES (PAMSCAD, /IFAD-Lacosrep,SDRP, SCIMP/,SIF and ESRP)

20. CHARACTERISTICS OF MFIs Group-lending based activities Commerce/agro-based activities Clientele-predominantly women microenterpreneurs Regular meetings of clients and programme officers(training and education offered) Ease of replicability and adaptability Inculcation of the savings habit Linkage programmes Flexibility of methodology/strategy Collateral based on joint and several liability.

21. continue Collective approach to monitoring programme services- (Usually Tripartite) - Group-members - Programme Officers - Community members Groups formed based on Trust, Solidarity and Voluntary Association not forced Fixed and regular deposits mobilisation Flexible Interest Rate Policy Repeat and increased Loans guaranteed Business development services offered

22. continue Targeting the very poor Simple procedures for reviewing and approving loans Quick disbursement of small, short-term loans (three months to one year) Accurate management and information systems that are actively used to make decisions, motivate performance, and provide accountability of management performance and the use of funds.

23. THE SIZE OF THE INDUSTRY IN GHANA FORMAL Commercial Banks,Rural Banks,Savings & Loans Companies SEMI-FORMAL Credit-oriented NGOs,Cooperative Credit Unions INFORMAL Susu groups/clubs * Susu are traditional and unregulated forms of voluntary/informal associations in Ghana for mobilising savings

24. PERCENTAGE SIZE OF THE INDUSTRY IN GHANA FORMAL MFIs =37% SEMI-FORMAL MFIs =52% INFORMAL MFIs =11% * Source : GHAMFIN Quarterly Bulletin, June 2000

25. TARGET CLIENTELE INFORMAL SECTOR OPERATORS UNEMPLOYED YOUTH WHO HAVE COMPLETED TRAINING WOMEN IN SMALL & MICRO ENTERPRISES LOW INCOME SALARIED WORKERS

26. continue SUBSISTENCE AND SMALLHOLDER PRODUCERS IN AGRICULTURE VULNERABLE GROUPS, ESPECIALLY THE DISABLED * WOMEN FORM 65% OF THE TARGET CLIENTELE IN GHANA

27. AGRICULTURAL CREDIT FINANCING IN GHANA DEFINITION THE KIND OF FINANCE REQUIRED TO SUPPORT AGRICULTURAL PRODUCTION AND VALUED ADDED ACTIVITIES. ITS DEMAND IS DERIVED FROM AGRICULTURAL PRODUCERS WHOSE DEMAND FOR INPUTS ARE TIED TO FINANCE.

28. POLICY OBJECTIVES OF GHANA’S AGRICULTURAL DEVELOPMENT BASED ON THE GHANA POVERTY REDUCTION STRATEGY

29. continue TO ENSURE FOOD SECURITY AND NUTRITION FOR ALL GHANAIANS TO ADEQUATELY SUPPLY RAW MATERIALS TO FEED AGRO-BASED INDUSTRIES

30. continue TO CONTRIBUTE SUBSTANTIALLY TO B.O.P. THROUGH INCREASED FOREIGN EXCHANGE EARNINGS AND PRODUCTION OF IMPORT SUBSTITUTES

31. continue TO ENSURE THAT AGRICULTURAL PRODUCERS RECEIVE FAIR INCOMES TO CONTRIBUTE TO POVERTY REDUCTION

32. AGRICULTURAL POLICY GUIDELINES 1980s THE POLICY OF AGRICULTURAL FINANCE WAS REGULATED AND ENSURED CREDIT CEILINGS

33. continue  All Banks were required to channel 20% of their Loanable Funds to agriculture  Interest rates were decreed and administered at below market rates

34. continue RESULTS The outcome of these was that between 1980 and 1990 only 15% of all Loanable Funds could be advanced to the agricultural sector due to the ineffectiveness of these policies.

35. continue 1990s THE FINANCIAL SECTOR ADJUSTMENT PROGRAMME WAS IMPLEMENTED.

36. continue  Credit ceilings were abolished and interest rates de-regulated.  Banks operated as they saw fit to ensure allocative efficiency.

37. continue RESULTS By 1994 there was a drop from the 15% to 8.5% of Bank Loanable funds to Agriculture. *However attempts to address this resulted in progressive increases in Bank Loans to the agricultural sector between 1994 to 1997. 1997 - ¢128 billion : Agric. Credit ¢108 billion : Manu./Cons. ¢ 538 billion : Commerce Sectors

38. CURRENT REQUIREMENTS 2000s BASED ON ESTIMATES IN THE GPRS, AGRICULTURE REQUIRES 934.3 BILLION CEDIS TO GROW AT 6% PER ANNUM. ONLY 313 BILLION CEDIS OF THIS AMOUNT WAS AVAILABLE, CREATING THE DEMAND GAP OF 616 BILLION CEDIS OR 66%

39. continue Secondly, the present allocation of GDP to agriculture is 2%, which is far below the 20%, recommended by the World Food Summit in 1996.

40. continue RESULTS An Emergency Social Relief Programme had been launched since July 2001 as part of National effort to reduce poverty in Ghana. Total disbursements as at May 31 2002  ¢ 9.3 billion = 3,379(Clients/Fish processors) 500(Poultry Farmers)

41. continue ¢1.96 billion was disbursed to 2,610 women small-scale fish processors representing 21% of the total disbursements in 2001. ¢ 2.5 billion was disbursed to 493 Poultry Farmers in 2001. ¢ 4.3 billion has been earmarked for 4,300 Women in Food Marketing 2002.

42. continue ¢ 1.7 billion distributed to Conflict and Disaster prone areas in the 2 Regions of Northern Ghana. 269 Outboard Motors purchased and supplied to fishermen  The programme is expected to cost ¢ 700 billion over a 3 year period * Source : Daily Graphic,Friday, June 7 2002 : 28. Minutes of Staff Monthly Meetings, Flagstaff House,Ghana, Friday, March 1 2002.

43. RISKS OF MICROFINANCE INITIATIVES IN GHANA EXOGENOUS FACTORS 1. Macroeconomic Variables -High rates of inflation resulting in problems for long-term investment. - Interest rate risk. Non- competitive - Frequency at which the national currency depreciates relatively to the major external currencies.Value for money seems unachievable.

44. continue 2. Limited Loanable Funds - Government sources funds from (IFAD,IDA,African Development Bank,etc) for various Agricultural credit schemes in Ghana. However,this is not enough given the present gap between the demand and supply of funds. * Refer to the 2000 Current Requirements.

45. continue 3. Production/Marketing risks - The main problem with loan recovery depends on the system of loan administration. In times of unfavourable market conditions or natural disasters,the burden of loan repayment rests solely with the financial service providers. No remedies had been identified for this situation.

46. continue - Low technology resulting in low yield per unit cost of production - Poor client education coupled with an attitude that portrays government money to be free - Over-reliance on rain-fed agriculture resulting in the huge production risk of and repayment problems for programme formulators and implementers

47. continue ENDOGENOUS 1. Low level of Savings and the considerably high cost of savings mobilization, which is invariably passed on to the consumer. 2. Attitude of Bankers to micro- finance programmes, especially agricultural credit. 3. High transaction cost in advancing credit. 4.Corruption 5.Poor Supervision

48. PLAUSIBLE PANACEA TO IDENTIFIED PROBLEMS  Umbrella Network of MFOs must be strengthened to provide resources and information sharing for members.  Close collaboration and regular dialogue must be forged between regulators and government as an essential element for capacity building of MFOs.  Training at all levels ( i.e. beneficiaries,communities,progr ammers/ management) is crucial to the micro finance service delivery process.

49. continue Training could take the following forms: understudying experienced persons in the industry, attachments and exposure to other MFOs through field and office visits, workshops,seminars and conferences, community sensitization programmes.

50. continue systematic and regular beneficiary conscientisation programmes.Recipient need to see credit as a necessary factor to facilitate their businesses and must be paid back for other members of the society to benefit.

51. continue developing a well defined loan administration system to ensure efficient and loan recovery. The capacity to administer funds effectively should depend on the readiness of clients to define effective demand for credit, i.e., the ability to repay loans based on the level of production and productivity,marketability of products and client’s intrinsic habits of repaying loans.

52. continue developing a well defined loan administration system to ensure efficient and loan recovery. The capacity to administer funds effectively should depend on the readiness of clients to define effective demand for credit, i.e., the ability to repay loans based on the level of production and productivity,marketability of products and client’s intrinsic habits of repaying loans.

53. continue developing a well defined loan administration system to ensure efficient and loan recovery. The capacity to administer funds effectively should depend on the readiness of clients to define effective demand for credit, i.e., the ability to repay loans based on the level of production and productivity,marketability of products and client’s intrinsic habits of repaying loans.

54. continue developing a well defined loan administration system to ensure efficient and loan recovery. The capacity to administer funds effectively should depend on the readiness of clients to define effective demand for credit, i.e., the ability to repay loans based on the level of production and productivity,marketability of products and client’s intrinsic habits of repaying loans.

55. continue  Time of credit delivery must be streamlined.Proper timing is necessary for all micro- credit programmes, especially production credit, to succeed. The bureaucracy in the administration of these credits schemes make them useless and non-functional by the time the clients receive the credit.

56. continue  Improving conditions of granting loans and adopting competitive interest rate. Formal financial institutions demand landed properties from clients as collateral to secure production credit which clients find very difficult to meet. Other less severe forms of collateral such as : Group guarantee based on solidarity and the Trust Banks systems, Micro-insurance schemes and the promotion of a Bad Debt Reserve Account through Voluntary Offertory schemes should be developed.

57. continue  Also, the main problem with production credits in Ghana is high interest rates. This stands presently between 45-65% which is too high for poor microenterpreneurs who need capital to break even in their small entrepreneurial ventures. A competitive but flexible interest rate regime should be developed

58. continue  Improve service delivery to client by financial service providers. Most commercial banks with the exception of few rural banks are located in urban areas. Clients travel long distances to look for small loans which often times becomes a mirage.This discourages clients not to even save the little they hold.

59. continue Semi-formal and informal MFOs who provide community financial services must be strengthened to provide door-to-door services to their target clientele,thus filling the gap where formal financial institutions had failed.

60. SUGGESTED POLICY GUIDE  Leadership and Good Governance Policy. The success of any microfinance business lies in its leadership and governance policies of the body that would ensure proper conduct, control and professional management of MFOs.  Strategic Planning Policy. Planning is so crucial to the industry and it is imperative that Ghanaian MFOs must encompass budgeting and periodic reviews of anticipated revenues and expenses necessary for growth of such MFOs.

61. continue  Credit Risks Management Policy. MFOs must devise credit policies, procedures and analytical capabilities. This would help ensure that the origination,approval,monitori ng and delinquent loans are managed properly.

62. continue  Control Systems and Information Technology Policy. To ensure that micro-finance institutions operate in a sound and safer manner, it is imperative that MFI personnel perform their duties in accordance with laid down policies, procedures and even the law. An Information Technology policy should ensure that this is done efficiently.

63. continue  Capacity Building and Human Resource Management Policy. The greatest asset of any institution is its human resource and in a competitive sector such as this, well qualified and highly motivated personnel are a must. Ghanaian MFOs must have good personnel policies and procedures to ensure that vital staff development and continued staff loyalty are ensured. This would foster an effective and successful microfinance culture that ensures the inculcation of requisite attitudinal and behaviourial changes in consonance with microfinance institutional sector vision

64. continue  Product Research and Development policy. Many MFIs in Ghana seems to do a good job of offering loan products that clients do not like. In some cases, individual loans supersede group loans as the lending methodology of choice. This shift has resulted from the high demand of borrowers who do not like guaranteeing the loans of others. Hence, many MFOs are having difficulty in offering competitive products because they followed a model that was more concerned with outreach than with efficiency. Research into Loan products must therefore be developed and tailored to suit the needs of clienteles.

65. CONCLUSION AND PROPOSED LINKAGE POLICY Some of the informal savings and credit systems in Ghana, as indicated earlier, are Susu groups, Credit Unions, NGOs,Community Commodity Savings,Money Lenders among others. These operate through group formation and group dynamics, compulsory savings, use of group collateral. They tend to have more limited bureaucracy, flexible and variable terms than the formal financial institutions.

66. continue The weaknesses of these agencies show up when they source funds, manage risk, and in their strategy for repayment. They are normally faced with problems of inadequate capital, lack of logistics, weaknesses in human resource,lack of logistics, weaknesses in human resource, lack of safety of money collected, and micro-finance information.

67. continue The Government of Ghana need to come to the aid of these informal savings and credit groups by providing training, logistics, information and also to link them up with the formal financial institutions.

68. THANK YOU FOR YOUR AUDIENCE