Rural and Micro Finance Regulation in Ghana: Implications for Development and Performance of the Industry
William F. Steel
University of Ghana - Adminstration
David O. Andah
affiliation not provided to SSRN
June 10, 2003
THE ECONOMY OF GHANA: ANALYTICAL PERSPECTIVES ON STABILITY, GROWTH AND POVERTY, Ernest Aryeetey and Ravi Kanbur, eds., Woeli Publishing Services and James Currey, 2008
World Bank Policy Research Working Paper No. 49
Legislation and regulations governing rural and micro finance institutions (RMFIs) in Ghana have evolved with the market, both opening up possibilities for new types of institutions and tightening up to restrain excessive entry and weak performance in the face of inadequate supervision capacity. The result – though not entirely by conscious design – is several tiers of different types of RMFIs with a strong savings orientation and a much greater role of licensed institutions relative to NGOs than is found in many countries. Small unit Rural and Community Banks (RCBs) are accommodated in the Banking Act; savings and loan companies in the Non-Bank Financial Institutions (NBFIs) Law; and credit unions under a new law being prepared to recognize their dual nature as cooperatives and financial institutions. The informal sector is dominated by a variety of savings-based methodologies, both individual and group.
Supervision of a large number of RMFIs is costly relative to their potential impact on the financial system (about 7% of assets), and the Bank of Ghana has adopted a number of strategies to cope with its limited supervision capacity: raising reserve requirement for RCBs to as high as 62%; drastically raising the minimum capital requirement for NBFIs; and permitting self-regulation of credit unions by their apex body. It is currently establishing an Apex Bank to serve the RCBs, link them more effectively to the commercial banking system, and take the lead in building their capacity and, eventually, in undertaking front-line supervision. Although the US$2 million minimum capital requirement makes the S&Ls less accessible for NGO transformation, it has led to introduction of foreign capital.
While the RCBs have had limited outreach, some have effectively partnered with NGOs to introduce microfinance methodologies such as village banking, and they are now being strengthened as the backbone for expansion of rural financial services. Linkages also occur between informal savings-based “susu” institutions and both RCBs and S&Ls. The Bank of Ghana has taken a relatively laissez-faire position vis-à-vis the informal sector.
Liberalization of financial policies in the late 1980s has enabled RMFIs to develop with relatively little interference, and without a clearly articulated national strategy. Nevertheless, continued high inflation and interest rates (particularly on Treasury Bills) has limited the incentive for commercial financial institutions to reach out to smaller, poorer clients (though enabling weak RCBs to improve their capital adequacy with highly restricted lending). Furthermore, directed, subsidized loans under current government poverty programs threaten to undermine loan performance and weaken the long-run potential for developing sound, self-sustaining RMFIs on a significant scale.
While Ghana’s approach has yielded a wide range of RMFIs and products with the potential for substantial outreach to the poor and sustainability based on savings mobilization, it has also permitted easy entry of institutions with weak management and internal controls. Ghana’s experience demonstrates the difficulty of striking the right balance between encouraging entry and innovation on the one hand and establishing adequate supervision capacity on the other. In several segments – RCBs, credit unions, S&Ls – Ghana has gone through a cycle of easy entry, weak performance, tightening up regulations, and some restructuring (through closing insolvent units, takeovers, or infusion of new investment). The Bank of Ghana has exercised considerable regulatory forbearance in allowing weak units time to comply with stricter regulations (or, in the case of the credit unions, to establish a self-regulating system while awaiting passage of a new law). On the whole, this approach appears to have succeeded in giving Ghana a very diverse, reasonably robust system of RMFIs, with relatively little cost in terms of outright failed institutions (and lost deposits) and moderate drain on supervisory resources. Nevertheless, the system has failed to achieve impressive outreach, especially to the rural poor, and remains burdened by a number of weak units that the regulatory authorities are not well equipped to turn around.
Number of Pages in PDF File: 60
Keywords: Microfinance, regulation, Ghana, Rural Banks, supervision, financial system
JEL Classification: G18, G29, N27, O16
Date posted: May 7, 2011