ENHANCING THE EFFECTIVENESS OF MICROFINANCING IN GHANA

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 30th 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 Incomeof $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’sPoverty 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 REQUIREMENTS2000s 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,programmers/ 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.