1 REGIONAL SEMINAR ON NON-BANK FINANCIAL INSTITUTIONS DEVELOPMENT IN AFRICA December 09 – 11, 2003 Mauritius Potential Contribution of Microfinance to Financial and Economic Development and the Challenges for Regulation Presenter: Dr. David O. Andah Managing Consultant Consultant Management Enterprise Accra – Ghana Former Director Non-Bank Financial Institutions Department Bank of Ghana Accra

2 ENTERPRISE STRUCTURE Large Scale Small & Medium Scale Micro Scale (Informal Sector)

3 TARGET CLIENTELE  Economically Active Poor –Micro-entrepreneurs  Vulnerable  Mostly Women  Low Income Workers  Micro Finance Services Loans Savings Insurance Transfers

4 USE OF FINANCIAL SERVICES  Business Opportunities Expansion of business Sub-units New business creation Stocking of inputs  Business Asset Procurement Irrigation pumps Sewing machines Corn mills Fabrication equipment Labour saving devices  Social Responsibilities Health Education Household emergencies

5 OUTCOME OF FINANCIAL SERVICE  Employment Generation Creates income earning opportunities Provides skills training Abatement of rural urban drift  Increase in Personal Networth Increase in Income Savings accumulation Investment in household assets Improvement innutrition Education of children and other relations Improved access to health facilities  Empowerment Confidence Active participation in Community activities

6 Table I: QUALITATIVE RESPONSES Source: Afrane Sam, 2002 NEGATIVE CHANGE NO CHANGE POSITIVE CHANGE Business Opportunity13465 Market Opportunity Household Asset Housing Condition Health Conditions Food & Nutrition Children’s Education

7 Table II: CHANGES (%) IN QUANTITATIVE INDICATORS Financial Variables Increase in Turnover % Increase in Value of Inputs % Increase in Machinery % Employment Variables Increase in Employees % Enterprises hiring new Employees % Source: Afrane Sam, 2002

8 Table III: MICROFINANCE INSTITUTIONS –SAVINGS/DEPOSITS No. of Institutions No. of Clients Amount USD (x1000) Rural & Community Banks1161,129,3168,220 Savings & Loans Companies 9141,9858,763 Credit Unions253123,209 (Members) 2,039 Susu Collectors (Ave. per month) 82850, Source: GTZ, 2003 (Dec. 2002)

9  Capital Requirement Ensures financial cushion Entry barrier *Low requirements for MFIs  Challenges Compliance difficulties Exclusion of unbanked areas Too high for transformation  Capital Adequacy Ratio Ensures prudent use of depositors’ funds  Challenges Compliance difficulties Weaker institutions to have higher ratios

10  Reporting Requirements Provide off-site information for monitoring Provides information on controls External Auditors provide independent judgments  Challenges Low compliance in submission Often integrity of information is doubtful Not used for governance decisions Poor communication system Over burdened staff

11  Liquidity Ratios Ensure availability of cash Prevent run down Depositors and borrowers can withdraw cash  Challenges Cash shortages Over lending Poor portfolio quality Breach of confidence Inappropriate maturity matching

12  Governance Provides informed leadership and direction Supervises management  Challenges Poor Board composition Lack of effectiveness Lack of transparency and accountability Entrenched positions of Board Membership Inadequate understanding of duties and responsibilities

13  Management and Staff Manage day-to-day operations to achieve set targets Provide appropriate information to Board Make recommend policies for Board’s consideration  Challenges Poor quality staffing Heavy seasonal workload Inadequate understanding of tasks resulting in delays and errors Poor remuneration Intrusive Board Members Expansion beyond staffing capacity

14  Regulatory Authority Monitors and Supervises compliance with Laws and Directions  Challenges Low institutional capacity Inadequacy of well trained and experienced staff Inadequate funding Over burdened staff Low inclination to enforce sanctions

15 TYPES OF MF SERVICE PROVIDERS  Statutorily Regulated Banks Savings & Loans Companies Mutuele (Credit Unions) Benin Insurance Companies Leasing Companies  External Self Regulation Credit Unions (Ghana) Daily Savings Collectors  Unregulated Financial NGOs Money lenders (partially) Friends and Family Members ROSCAS Village Banks  Rationale for Regulation Deposit Protection Safety and Soundness of Financial System Competitive Market Structure

16 REGULATORY ISSUES  Enabling Laws Creates legal and regulatory framework for MFIs Provides transparency in the roles of the regulator and procedure for licensing Provides sanctions for non-compliance  Challenges Should there be special law (Ethiopia, Uganda, Tanzania, Benin) Develop out of existing Laws (Ghana,. Tanzania, South Africa) What to regulate, institutions or activities Regulatory arbitrage Deposit- taking institutions only

17 SOLUTIONS  Capacity Building Regulator Regulated MFIs Legislature and other stakeholders Well resourced regulatory bodies Promotion of self-regulation Regulation of retail deposit-taking MFIs only