the concept of microfinance
is not new in Ghana. There has always been the tradition of people saving
and/or taking small loans from individuals and groups within the context
of self-help to start businesses or farming ventures.
For example, available evidence suggests that the first credit union in Africa was established in Northern Ghana in 1955 by Canadian Catholic missionaries. However, Susu, which is one of the microfinance schemes in Ghana, is thought to have originated from Nigeria and spread to Ghana in the early twentieth century.
Over the years, the microfinance sector has thrived and evolved into its current state thanks to various financial sector policies and programmes undertaken by different governments since independence. Among these are:
The policies have led to the emergence of three broad categories of microfinance institutions. These are:
In terms of the regulatory framework, rural and community banks are regulated under the Banking Act 2004 (Act 673), while the Savings and Loans Companies are currently regulated under the Non-Bank Financial Institutions (NBFI) Law 1993 (PNDCL 328).
On the other hand, the regulatory framework for credit unions is now being prepared, and this would recognize their dual nature as cooperatives and financial institutions. The rest of the players such as FNGOs, ROSCAS, and ASCAs do not have legal and regulatory frameworks.
currently addressing the sub-sector in Ghana include the Financial Sector
Improvement Project, Financial Sector Strategic Plan (FINSSP), the Rural
Financial Services Project (RFSP), the United Nations Development Programme
(UNDP) Microfinance Project, the Social Investment Fund (SIF), the Community
Based Rural Development Programme (CBRDP), Rural Enterprise Project (REP),
and Agricultural Services Investment Project (ASSIP).
Microfinance encompasses the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients . It includes loans, savings, insurance, transfer services and other financial products and services. Microfinance is thus one of the critical dimensions of the broad range of financial tools for the poor, and its increasing role in development has emanated from a number of key factors that include:
Studies have shown that micro-finance plays three broad roles in development:
The literature suggests that micro- finance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty. By providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society (Otero, 1999).
The aim of micro-finance according to Otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. Littlefield and Rosenberg (2004) argue that the poor are generally excluded from the financial services sector of the economy so MFIs have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, an MFI can become part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach (Otero, 1999). More recently, commentators such as Littlefield, Murduch and Hashemi (2003), Simanowitz and Brody (2004) and the IMF (2005) have commented on the critical role of micro-credit in achieving the Millennium Development Goals.
According to Simanowitz and Brody (2004, p.1), micro-credit is a key strategy in reaching the MDGs and in building global financial systems that meet the needs of the most poor people." Littlefield, Murduch and Hashemi (2003) state "micro-credit is a critical contextual factor with strong impact on the achievements of the MDGs. Micro-credit is unique among development interventions: it can deliver social benefits on an ongoing, permanent basis and on a large scale".
However, some schools of thought remain skeptical about the role of micro-credit in development. For example, while acknowledging the role micro-credit can play in helping to reduce poverty, Hulme and Mosley (1996) concluded from their research on micro-credit that "most contemporary schemes are less effective than they might be" (1996, p.134). The authors argued that micro-credit is not a panacea for poverty-alleviation and that in some cases the poorest people have been made worse-off.
microfinance has emerged globally as a leading and effective strategy
for poverty reduction with the potential for far-reaching impact in transforming
the lives of poor people. It is argued that microfinance can facilitate
the achievement of the Millennium Development Goals (MDGs) as well as
National Policies that target poverty reduction, empowering women, assisting
vulnerable groups, and improving standards of living. As pointed out by
the former UN Secretary General Kofi Annan during the launch of the International
Year of Micro Credit (2005),
Although microfinance is not a panacea for poverty reduction and its related development challenges, when properly harnessed it can make sustainable contributions through financial investment leading to the empowerment of people, which in turn promotes confidence and self-esteem, particularly for women.
The main goal of Ghana's Growth and Poverty Reduction Strategy (GPRS II) is to ensure "sustainable equitable growth, accelerated poverty reduction and the protection of the vulnerable and excluded within a decentralized, democratic environment". The intention is to eliminate widespread poverty and growing income inequality, especially among the productive poor who constitute the majority of the working population.
According to the 2000 Population and Housing Census, 80% of the working populations are found in the private informal sector. This group is characterized by lack of access to credit, which constrains the development and growth of that sector of the economy. Clearly, access to financial services is imperative for the development of the informal sector and also helps to mop up excess liquidity through savings that can be made available as investment capital for national development . Unfortunately, in spite of the obvious roles that microfinance institutions have been playing in the economy particularly over the last twenty years, there is lack of data on their operations.
It is known that loans advanced by microfinance institutions are normally for purposes such as housing, petty trade, and as "start up" loans for farmers to buy inputs for farming and this includes rice seeds, fertilizers and other agricultural tools.
Some of the loans are used for a variety of non-crop activities such as: dairy cow raising, cattle fattening, poultry farming, weaving, basket making, leasing farm and other capital machinery and woodworking. Of course, funds may be used for a number of other activities, such as crop and animal trading, cloth trading and pottery manufacture. There are other instances where credit is given to groups consisting of a number of borrowers for collective enterprises, such as: irrigation pumps, building sanitary latrines, power looms, leasing markets or leasing land for cooperative farming.
For example, trends in loans and advances extended to small businesses, individuals and groups by the Non-Bank Financial Institutions(NBFIs) in Ghana amounted to GH¢50.97 million in 2002 as against GH¢39.64 million in 2001, indicating about 28.6 per cent growth.
The amount of loans
extended by NBFIs further increased from GH¢70.63 million in 2003
to GH¢72.85 million in 2004, suggesting 3.1 per cent growth. In 2006
alone, total of GH¢160.47 million was extended to clients, which
represents 48.8 per cent higher than the previous year's total loans and
advances granted by these microfinance institutions(see Chart). The upward-
trending NBFI's credit to individuals, small businesses, groups and others
indicates marked improvements in level of microfinance in the country.
The Rural and Community banks also play very important role in microfinance in the country. These banks were established specifically to advance loans to small enterprises, farmers, individuals and others within their catchment areas. Total loans advanced to clients by all community and rural banks in Ghana was GH¢20.68 million in 2002 compared to GH¢13.12 million in 2001, suggesting an increase of 28.6 per cent. The amount of loans further increased from GH¢71.63 million in 2005 to GH¢115.10 million in 2006, thus indicating 35.4 per cent respectively (see chart).
The structure and key microfinance stakeholders in Ghana consist of the following:
Microfinance Institutions, including
The Bank of Ghana's history of promoting the financing of Micro, Small and Medium Enterprises (MSME) began from the Credit Guarantee for Small Borrowers scheme in 1969 through the Development Finance Department of the Bank. The Bank was further instrumental in administering the IDA-financed Fund for Small and Medium Enterprise Development (FUSMED) Project, and also with the Private Enterprise and Export Development (PEED) Project, as well as other direct projects that were ended after BOG decided to focus on its core areas of operation. Currently, BoG is actively participating in the Rural Financial Services Project (RFSP). This project was supported by donors such as the International Development Agency (IDA) of the World Bank, the International Fund for Agricultural Development (IFAD), and the African Development Bank (AfDB). It is aimed at broadening and deepening financial intermediation in rural areas through measures such as; Capacity Building of the Informal Financial Sector, Capacity Building of Rural and Community Banks, and the establishment of an Apex Bank for Rural Banks in Ghana. Generally, the range of players in providing financing facilities for the MSME sector is shown in Table 1 below.
From 1990, support
for micro, small and medium enterprises was intensified with the establishment
of the National Board for Small-Scale Industries (NBSSI). In 1991, the
NBSSI was merged with the Ghanaian Enterprises Development Commission
(GEDC) and this made the NBSSI to take over the functions of the latter
- in particular the delivery of credit to small scale entrepreneurs. Its
main financing window was a USD30 million Fund for Small and Medium Enterprise
Development (FUSMED) - that was provided under the World Bank's small
and medium enterprises project and managed at the Bank of Ghana. The fund
offered credit to enterprises in all sectors of the economy except primary
agriculture, real estate and trading. However the repayment perfomance
turned out to be less than satisfactory.
Table 1: Credit Flow to Micro Enterprises and SMEs in Ghana
Source: Compiled from various sources
Currently, the projects that are on-going for the MSME sector include the Financial Sector Improvement Project, Financial Sector Strategic Plan (FINSSP), the Rural Financial Services Project (RFSP), the United Nations Development Programme (UNDP) Microfinance Project, the Social Investment Fund (SIF), the Community Based Rural Development Programme (CBRDP), Rural Enterprise Project (REP), and Agricultural Services Investment Project (ASSIP). A recent impact assessment  of the plethora of MSME financing programs that have been implemented across the country suggests that significant challenges remain in ensuring the effectiveness of MSME programs. The study found that access to finance was a significant problem for MSMEs, even though other problems such as low cash flow, energy, high cost of non-labour inputs, increasing competition, and high cost of credit were also cited. The next section outlines some of the remaining challenges facing the microfinance sector in Ghana.Table 2: Examples of facilities for MSMEs administered by the NBSSI
Source: Compiled from records obtained from the NBSSI
Generally, since the beginning of government involvement in microfinance in the 1950s, the sub-sector has operated without specific policy guidelines and goals. This partially accounts for the slow growth of the sub-sector, and the apparent lack of direction, fragmentation and lack of coordination. There has so far not been a coherent approach to dealing with the constraints facing the sub-sector. Among the constraints are inappropriate institutional arrangements, poor regulatory environment, inadequate capacities, lack of coordination and collaboration, poor institutional linkages, no specific set of criteria developed to categorize beneficiaries, channeling of funds by MDAs, lack of linkages between formal and informal financial institutions, inadequate skills and professionalism, and inadequate capital. Better coordination and collaboration among key stakeholders including the development partners, government and other agencies, could help to better integrate microfinance with the development of the overall financial sector.
traditional commercial banking approaches to microfinance delivery often
does not work. According to traditional commercial banking principles,
the credit methodology requires documentary evidence, long-standing bank-customer
relationship and collateral, which most micro and small businesses do
not possess. The commercial banking system, which has about twenty-three
(23) major banks, reaches only about 5% of households and captures 40%
of money supply
Therefore there is room for expanding the microfinance sector in Ghana.
For example, Barclays Bank of Ghana (BBG) Ltd launched a microbanking scheme in December 2005 which establishes a formal link between modern finance and susu  (one of Africa's most ancient forms of banking) collection in an unconventional mobile initiative across the country. The scheme aims to extend microfinance to some of the least affluent in Ghana, like the small trader at the market or the micro-entrepreneur selling from road-side stalls. Though their individual income is apparently too small for 'high street' banking, collectively it estimated at about a $150 million economy thriving below the traditional banking radar. Ghana's 4,000-strong Susu Collectors offer basic banking to the needy. For a small fee they personally gather the income of their clients and return it at the end of each month, providing greater security for their client's money. In addition, with finance from Barclays the Susu Collectors are able to provide their clients with loans, helping them to establish or develop their business. In the words of the CEO of BBG Margaret Mwanakatwe,
"What we are doing is somewhat unique. Not only are we creating an account for Susu Collectors to deposit their funds, we are also providing them with loans of their own, which they can 'lend-on' to their customers, helping them build their capital. In the process, we are laying the building blocks for a truly financially inclusive society. Currently, over three quarters of Ghanaian society may not have access to high street banking. We are also providing capacity building training to Susu Collectors to make sure that they do their credit risk correctly and any training needs they may need".
It is gratifying to note that the Government of Ghana has adopted microfinance as one of the important strategies for poverty reduction and wealth creation. Recognizing the role various institutions and individuals can play to ensure the achievement of this national vision of achieving the MDGs and also becoming a middle income country by the year 2015, there is the need to quicken the pace of reforms in the microfinance sector in order to unleash its full potential for accelerated growth and poverty reduction.
Finally, while Ghana has a reasonably diversified and supervised regulatory framework for formal financial institutions licensed by BoG, there is concern that appropriate regulation needs to be extended to other institutions operating in the microfinance sub-sector (for example the legal framework for credit unions) in order to improve the outreach, sustainability and efficiency of savings, facilitate credit delivery, and institutional arrangements.
The specific challenges facing the industry are discussed into more detail below.
Capacity Building and Funding for the Sector
Credit Delivery and Management
Targeting the Vulnerable and the Marginalized
Data/Information Gathering and Dissemination
Collaboration and Coordination
In this regard, the role of GHAMFIN as an umbrella body for microfinance apex institutions, as well as their member institutions, needs to be strengthened to ensure the transfer of best practices and setting of standards for the industry. The existing institutional structure does not include all practitioners and service providers, and needs to be addressed.
In all, the potential economic benefits of sustainable microfinance in Ghana are compelling, and its potential effects on the development process cannot be understated. This calls for a holistic approach, as discussed to facilitate the development of the microfinance sub sector and thereby unleash its potential for accelerated growth and development.
- Adventist Relief Agency
World Bank, Rural and Micro Finance Regulation in Ghana: Implications for Development of the Industry, World Bank, New York (2004)
Impact Assessment of MSME Programs . Study conducted by Ernst & Young and ISSER for the Bank of Ghana
Hulme, D and Mosley, P (1996) Finance Against Poverty, volumes 1 and 2, London: Routledge
Simanowitz and Brody .2004. Realising the potential of microfinance, id21 insights, December, Issue -51
United Nations, Concept Paper: Building Inclusive Financial Sectors to Achieve the Millennium Development Goals (International Year of Microcredit, United Nations, 2005)
United Nations, Microfinance and Poverty Eradication: Strengthening Africa's Microfinance Institutions (New York, United Nations, 2000)
M. 2004. "Never the twain shall meet", English Teaching Professional
 The authors can be contacted at email@example.com or
firstname.lastname@example.org. An earlier version of this paper has been included
in the Bank of Ghana publications.