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REGIONAL SEMINAR ON NON-BANK FINANCIAL INSTITUTIONS DEVELOPMENT IN AFRICA

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

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REGIONAL SEMINAR ON NON-BANK FINANCIAL INSTITUTIONS DEVELOPMENT IN AFRICA

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  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

  7. Table II: CHANGES (%) IN QUANTITATIVE INDICATORS Source: Afrane Sam, 2002

  8. Table III: MICROFINANCE INSTITUTIONS –SAVINGS/DEPOSITS 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

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