Bank of Ghana tightens noose on the operations of Microfinance

Despite the important role Microfinance companies play in the economy of developing countries including Ghana, the recent happenings in the sector with regards to fraud and diversion of funds have cast some dark shadows on their activities, raising concerns for industry players and the need for state protection of prospective investor funds; prompting the Central Bank of Ghana to tighten the noose on the sector.

Given the fact that Microfinance encompasses and refers to the provision of small loans and other facilities like savings, insurance transfer services to poor low income households and microenterprises made up of poor entrepreneurs and small business owners who do not qualify for a loan from the traditional banks, it was almost suicidal to an economy that has a large number of these targeted low income clients, to permit the kind of discomfort that was witnessed in the sector a few months ago.

There is no doubt about the fact that the incident that occurred in the country where hundreds of depositors lost their investment through some irregularities in the microfinance space was due to lack of regular supervision and monitoring of the operations of the microfinance sector by the regulatory body, the Bank of Ghana.

In 2015, the Bank of Ghana became aware of the activities of some five unlicensed microfinance companies who were operating illegally, namely God is Love Fan Club, Jaster Motors Investment Limited, Little Drops Helping Hands Association, Perfect Edge Group, and Care for Humanity International Fun Club.

A lot of depositors who were lured by the promise of abnormal profits on their investment lost some or their entire life investment to these scams which caused so much anxiety in the country at the time and same resulted in the resignation of the then Governor of the Bank of Ghana, Dr. Kofi Wampah, some four months ahead of his official retirement age because the Central Bank under his watch, failed to exercise proper oversight over the sector.

Since then, the Bank of Ghana has been making efforts to be a little more proactive with its supervisory role over the sector to avoid issues of such national embarrassment that has threatened to diminish the status of the national financial regulatory body in the eyes of the financial sector players and international financial bodies as well as ordinary Ghanaians.

The socio-economic effect of sham microfinance companies and the reported cases of financial irregularities by Diamond Microfinance (DKM) among others cannot be over emphasized because it stands the risk of eroding confidence in the activities of financial institutions by the already large unbanked population in the country to the detriment of small scale businesses that depend on their services.

In view of this, a new Business and Sanctions Rules has been developed by the Bank of Ghana to streamline the operations of Microfinance companies and to tighten supervision as well as to reposition the companies in order to avoid a repeat of the Microfinance scandals that have rocked the nation in recent times.

The new Governor of the Bank of Ghana, Dr. Ernest Addison, informed the Parliamentary Select Committee on Finance in a recent encounter with the committee on the effective regulation of the microfinance sector that the new Business and Sanction Rules by his outfit has introduced some changes that would effectively curb the situation going forward.

For example, the ceiling for deposits has been limited to GHC 50,000 per depositor; lending to a client has also been limited to GHC 50,000 per client; capital requirements have been increased, and reporting requirements have been strengthened.

Microfinance companies are now encouraged to focus on providing financial services to people who are in the lower income bracket and small scale entrepreneurs. The idea is to encourage these people to save and get small loans when required.

The Business Rules also require the MFCs to have a public governance policy. Under the governance policy, MFCs are to establish a number of committees including credit management committee, risk management committee and liquidity contingency committee, among others and submit reports of these meetings to the Central Bank. Other reports are also to be submitted by the companies to the Central Bank. The MFCs have up to the end of April, 2018 to comply with the new guidelines.

The Bank indicated that the measures were critical to prevent what happened in the recent past and protect the micro finance operations, observing that the compliance to the rules by the micro finance companies is encouraging.

Sanctions

Conceding that the previous regime was not punitive enough, the Central Bank has now introduced stiffer sanctions for the Microfinance Companies under the Business Rules. According to the Governor, the rules have adequate deterrent sanctions that the Bank is applying and since the introduction of this measure, the Bank is recording higher compliance.

Under the current regime, upon the discovery of an unregistered micro finance company the Bank of Ghana sends a report to the Financial Intelligence Center and other law enforcers for the appropriate action to be taken.

Revision of capital requirements for Microfinance Companies

As part of efforts to refocus MFCs, the Bank of Ghana has revised the capital requirements of MFCs. The MFCs have been grouped into four distinguished by the capital requirements for each group ranging from Tier 1 to Tier 4.

Tier 1 group comprise of Savings and Loans Companies and Rural and Community Banks with a capital requirement of GHC 15,000,000 and GHC 1,000,000 respectively. The Tier 2 group also comprise Deposit taking micro finance companies with a capital requirement of GHC 2,000,000.

The other groups are Tier 3, who are made up of non-deposit taking money lending companies and Financial Non-Governmental Organizations with capital requirements of GHC 2,000,000 and GHC 300,000 respectively. And Tier 4, which also comprises individual money lenders and susu collectors that are supervised by their umbrella associations under the supervision of Bank of Ghana without minimum capital requirements.

Licensing procedure

As a stop gap measure to sanitize the sector, the Bank of Ghana has suspended the issuance of licenses to prospective micro finance institutions. However the procedure to operate as a Micro Finance Company has been carefully outlined to ensure sanity. The Bank first conducts an appraisal of prescribed information and records. If satisfied, the Bank would issue a provisional license on terms and conditions that the Bank considers appropriate.

The Bank then issues a final approval and license to the applicant if it is satisfied with organizational and infrastructural arrangements made and that the applicant has passed the BoG’s “fit and proper” test and has complied with the terms and conditions stipulated in the provisional approval.

Improved Monitoring and Supervision

Contained in the new Business Rules and Sanctions for the sector is a number of monitoring tools the Bank deploys to monitor Micro Finance Companies. One of the tools is “off-site review and analysis” where the BoG reviews weekly and monthly prudential returns submitted by Micro Finance Institutions on liquidity, capital adequacy, profitability, depositor concentration, credit concentration and credit portfolio performance for early warning signals of distress and prompt corrective actions.

Another tool is the “on-site examination”. Under this tool, the Bank undertakes on-site inspection to confirm the financial state of the Microfinance Companies. After the on-site examination, a report is prepared detailing the findings together with directives and recommendations for prompt corrective actions. The Bank is further undertaking training for MFCs in the application of the new rules to ensure that the appropriate sanctions are applied without any excuses where there is no compliance.

Payment of outrageous Profits

What is worrying though is the Central Banks inability to directly control the advertisement and payment of outrageous and unsustainable interest by financial institutions in the country that lure unsuspecting clients into their nefarious activities.

Due to the liberalization of the market which is supposed to be determined largely by market forces, the regulatory body cannot arbitrary determine and control the payment of interest rates by financial institutions in the country.

However, the Bank has resorted to publishing information about MFCs in their Annual Reports as part of its public education. The information includes rates on deposits and lending rates.

Further, when the Bank observes that the rates are high, it impresses on the MFCs to justify the rates. Where they are unable to do so, the regulatory body prevails upon them to reduce their rates.

Concerns about capping of Loanable funds and Non-Cash equity of MFCs

Some stakeholders and industry watchers have expressed the concern that since Microfinance Companies have different equities, capping the loanable funds at GHC 50,000 per client might not augur well for some companies. But the Central Bank authorities have explained that this move was made to ensure that MFCs concentrate on their core role as microfinance entities.

It was observed that when previously the MFCs borrowed in relation to their equity it created challenges as MFCs began to increase their capital thereby attracting higher deposits. And therefore, with the consent of the MFCs, the new policy is that the loanable fund to client should be capped at GHC 50,000.

Another challenge that the Bank observed was that most of the distressed companies held a huge chunk of their equity in non-cash equivalent. Converting them into cash was a huge challenge for them. Going forward and to ensure sanity in their activities, the MFCs can only hold up to twenty five percent (25%) cash equivalent as capital. This is to prevent MFCs from investing in non-cash assets and rather hold more cash to meet their cash demands timeously.

Additional Efforts to get rid of unlicensed MFCs

The Bank of Ghana has resorted mainly to the use of public education in its efforts to address the issue of unlicensed MFCs. In view of this, the Bank has been conducting a number of public sensitization programmes throughout the country and also by establishing a call center to address the concerns of the public.

Also, licensed MFCs are now made to display approved logos at their premises that help to identify them from the unlicensed ones. The Bank, periodically also publishes the list of all MFCs in good standing for the records.

Furthermore, the Central Bank has established the Other Financial Institution Supervision Department (OFISD) to oversee the operations of the MFCs.

And following the implementation of the above mentioned efforts, the Bank recently closed down three unlicensed micro finance entities operating in the country namely, Agro Development Fund Services Limited (ADF Services Ltd), Hebron Financial Investment Limited and Fast Loans Money Lending Limited. ADF Services is in court challenging it closure. Hebron Investment Services has filed a complaint with CHRAJ challenging its closure and Ghana Police is assisting to locate the directors of Fast Loan Money Lending Limited.

Update on Diamond MicroFinance (DKM)

DKM was a duly licensed microfinance company which obtained its license on 25th October, 2013. However, following reports from the general as well as its on-site and off-site inspection including additional reports from the Bank’s Regional Manager in Sunyani, it came to the fore that the company had committed some regulatory and supervisory breaches that threated the safety of customer funds. It also triggered panic withdrawals from the banks and other deposit taking institutions in the country, especially Sunyani and its environs.

In view of the above, the Bank decided to take a number of actions against DKM. First, the BoG requested the Financial Intelligence Center to freeze the accounts of DKM. The Bank also imposed a nine-day moratorium on the operations of DKM and appointed Lobban Hyde and Partners to audit the books of DKM to ascertain its assets and liabilities. After several opportunities were given to the company to turn their operations around failed, the Bank revoked their license on 29th March 2016.

At a special meeting held by Bank of Ghana, a road map for liquidation of DKM was approved and the Registrar-General appointed an official liquidator. So far, 62,304 depositors have submitted 93,413 claims totaling GHC 540,621,416.00 to the official liquidator. Currently, 58,140 depositors have been validated amounting to GHC 502,120,644.00.

The Bank has indicated that the official liquidator is to realize the assets and pay off any outstanding liabilities. This process, according to them, is ongoing and where some funds are available, depositors will be paid accordingly.

Despite the important role Microfinance companies play in the economy of developing countries including Ghana, the recent happenings in the sector with regards to fraud and diversion of funds have cast some dark shadows on their activities, raising concerns for industry players and the need for state protection of prospective investor funds; prompting the Central Bank of Ghana to tighten the noose on the sector.

Given the fact that Microfinance encompasses and refers to the provision of small loans and other facilities like savings, insurance transfer services to poor low income households and microenterprises made up of poor entrepreneurs and small business owners who do not qualify for a loan from the traditional banks, it was almost suicidal to an economy that has a large number of these targeted low income clients, to permit the kind of discomfort that was witnessed in the sector a few months ago.

There is no doubt about the fact that the incident that occurred in the country where hundreds of depositors lost their investment through some irregularities in the microfinance space was due to lack of regular supervision and monitoring of the operations of the microfinance sector by the regulatory body, the Bank of Ghana.

In 2015, the Bank of Ghana became aware of the activities of some five unlicensed microfinance companies who were operating illegally, namely God is Love Fan Club, Jaster Motors Investment Limited, Little Drops Helping Hands Association, Perfect Edge Group, and Care for Humanity International Fun Club.

A lot of depositors who were lured by the promise of abnormal profits on their investment lost some or their entire life investment to these scams which caused so much anxiety in the country at the time and same resulted in the resignation of the then Governor of the Bank of Ghana, Dr. Kofi Wampah, some four months ahead of his official retirement age because the Central Bank under his watch, failed to exercise proper oversight over the sector.

Since then, the Bank of Ghana has been making efforts to be a little more proactive with its supervisory role over the sector to avoid issues of such national embarrassment that has threatened to diminish the status of the national financial regulatory body in the eyes of the financial sector players and international financial bodies as well as ordinary Ghanaians.

The socio-economic effect of sham microfinance companies and the reported cases of financial irregularities by Diamond Microfinance (DKM) among others cannot be over emphasized because it stands the risk of eroding confidence in the activities of financial institutions by the already large unbanked population in the country to the detriment of small scale businesses that depend on their services.

In view of this, a new Business and Sanctions Rules has been developed by the Bank of Ghana to streamline the operations of Microfinance companies and to tighten supervision as well as to reposition the companies in order to avoid a repeat of the Microfinance scandals that have rocked the nation in recent times.

The new Governor of the Bank of Ghana, Dr. Ernest Addison, informed the Parliamentary Select Committee on Finance in a recent encounter with the committee on the effective regulation of the microfinance sector that the new Business and Sanction Rules by his outfit has introduced some changes that would effectively curb the situation going forward.

For example, the ceiling for deposits has been limited to GHC 50,000 per depositor; lending to a client has also been limited to GHC 50,000 per client; capital requirements have been increased, and reporting requirements have been strengthened.

Microfinance companies are now encouraged to focus on providing financial services to people who are in the lower income bracket and small scale entrepreneurs. The idea is to encourage these people to save and get small loans when required.

The Business Rules also require the MFCs to have a public governance policy. Under the governance policy, MFCs are to establish a number of committees including credit management committee, risk management committee and liquidity contingency committee, among others and submit reports of these meetings to the Central Bank. Other reports are also to be submitted by the companies to the Central Bank. The MFCs have up to the end of April, 2018 to comply with the new guidelines.

The Bank indicated that the measures were critical to prevent what happened in the recent past and protect the micro finance operations, observing that the compliance to the rules by the micro finance companies is encouraging.

Sanctions

Conceding that the previous regime was not punitive enough, the Central Bank has now introduced stiffer sanctions for the Microfinance Companies under the Business Rules. According to the Governor, the rules have adequate deterrent sanctions that the Bank is applying and since the introduction of this measure, the Bank is recording higher compliance.

Under the current regime, upon the discovery of an unregistered micro finance company the Bank of Ghana sends a report to the Financial Intelligence Center and other law enforcers for the appropriate action to be taken.

Revision of capital requirements for Microfinance Companies

As part of efforts to refocus MFCs, the Bank of Ghana has revised the capital requirements of MFCs. The MFCs have been grouped into four distinguished by the capital requirements for each group ranging from Tier 1 to Tier 4.

Tier 1 group comprise of Savings and Loans Companies and Rural and Community Banks with a capital requirement of GHC 15,000,000 and GHC 1,000,000 respectively. The Tier 2 group also comprise Deposit taking micro finance companies with a capital requirement of GHC 2,000,000.

The other groups are Tier 3, who are made up of non-deposit taking money lending companies and Financial Non-Governmental Organizations with capital requirements of GHC 2,000,000 and GHC 300,000 respectively. And Tier 4, which also comprises individual money lenders and susu collectors that are supervised by their umbrella associations under the supervision of Bank of Ghana without minimum capital requirements.

Licensing procedure

As a stop gap measure to sanitize the sector, the Bank of Ghana has suspended the issuance of licenses to prospective micro finance institutions. However the procedure to operate as a Micro Finance Company has been carefully outlined to ensure sanity. The Bank first conducts an appraisal of prescribed information and records. If satisfied, the Bank would issue a provisional license on terms and conditions that the Bank considers appropriate.

The Bank then issues a final approval and license to the applicant if it is satisfied with organizational and infrastructural arrangements made and that the applicant has passed the BoG’s “fit and proper” test and has complied with the terms and conditions stipulated in the provisional approval.

Improved Monitoring and Supervision

Contained in the new Business Rules and Sanctions for the sector is a number of monitoring tools the Bank deploys to monitor Micro Finance Companies. One of the tools is “off-site review and analysis” where the BoG reviews weekly and monthly prudential returns submitted by Micro Finance Institutions on liquidity, capital adequacy, profitability, depositor concentration, credit concentration and credit portfolio performance for early warning signals of distress and prompt corrective actions.

Another tool is the “on-site examination”. Under this tool, the Bank undertakes on-site inspection to confirm the financial state of the Microfinance Companies. After the on-site examination, a report is prepared detailing the findings together with directives and recommendations for prompt corrective actions. The Bank is further undertaking training for MFCs in the application of the new rules to ensure that the appropriate sanctions are applied without any excuses where there is no compliance.

Payment of outrageous Profits

What is worrying though is the Central Banks inability to directly control the advertisement and payment of outrageous and unsustainable interest by financial institutions in the country that lure unsuspecting clients into their nefarious activities.

Due to the liberalization of the market which is supposed to be determined largely by market forces, the regulatory body cannot arbitrary determine and control the payment of interest rates by financial institutions in the country.

However, the Bank has resorted to publishing information about MFCs in their Annual Reports as part of its public education. The information includes rates on deposits and lending rates.

Further, when the Bank observes that the rates are high, it impresses on the MFCs to justify the rates. Where they are unable to do so, the regulatory body prevails upon them to reduce their rates.

Concerns about capping of Loanable funds and Non-Cash equity of MFCs

Some stakeholders and industry watchers have expressed the concern that since Microfinance Companies have different equities, capping the loanable funds at GHC 50,000 per client might not augur well for some companies. But the Central Bank authorities have explained that this move was made to ensure that MFCs concentrate on their core role as microfinance entities.

It was observed that when previously the MFCs borrowed in relation to their equity it created challenges as MFCs began to increase their capital thereby attracting higher deposits. And therefore, with the consent of the MFCs, the new policy is that the loanable fund to client should be capped at GHC 50,000.

Another challenge that the Bank observed was that most of the distressed companies held a huge chunk of their equity in non-cash equivalent. Converting them into cash was a huge challenge for them. Going forward and to ensure sanity in their activities, the MFCs can only hold up to twenty five percent (25%) cash equivalent as capital. This is to prevent MFCs from investing in non-cash assets and rather hold more cash to meet their cash demands timeously.

Additional Efforts to get rid of unlicensed MFCs

The Bank of Ghana has resorted mainly to the use of public education in its efforts to address the issue of unlicensed MFCs. In view of this, the Bank has been conducting a number of public sensitization programmes throughout the country and also by establishing a call center to address the concerns of the public.

Also, licensed MFCs are now made to display approved logos at their premises that help to identify them from the unlicensed ones. The Bank, periodically also publishes the list of all MFCs in good standing for the records.

Furthermore, the Central Bank has established the Other Financial Institution Supervision Department (OFISD) to oversee the operations of the MFCs.

And following the implementation of the above mentioned efforts, the Bank recently closed down three unlicensed micro finance entities operating in the country namely, Agro Development Fund Services Limited (ADF Services Ltd), Hebron Financial Investment Limited and Fast Loans Money Lending Limited. ADF Services is in court challenging it closure. Hebron Investment Services has filed a complaint with CHRAJ challenging its closure and Ghana Police is assisting to locate the directors of Fast Loan Money Lending Limited.

Update on Diamond MicroFinance (DKM)

DKM was a duly licensed microfinance company which obtained its license on 25th October, 2013. However, following reports from the general as well as its on-site and off-site inspection including additional reports from the Bank’s Regional Manager in Sunyani, it came to the fore that the company had committed some regulatory and supervisory breaches that threated the safety of customer funds. It also triggered panic withdrawals from the banks and other deposit taking institutions in the country, especially Sunyani and its environs.

In view of the above, the Bank decided to take a number of actions against DKM. First, the BoG requested the Financial Intelligence Center to freeze the accounts of DKM. The Bank also imposed a nine-day moratorium on the operations of DKM and appointed Lobban Hyde and Partners to audit the books of DKM to ascertain its assets and liabilities. After several opportunities were given to the company to turn their operations around failed, the Bank revoked their license on 29th March 2016.

At a special meeting held by Bank of Ghana, a road map for liquidation of DKM was approved and the Registrar-General appointed an official liquidator. So far, 62,304 depositors have submitted 93,413 claims totaling GHC 540,621,416.00 to the official liquidator. Currently, 58,140 depositors have been validated amounting to GHC 502,120,644.00.

The Bank has indicated that the official liquidator is to realize the assets and pay off any outstanding liabilities. This process, according to them, is ongoing and where some funds are available, depositors will be paid accordingly.

Source: Clement Akoloh || Businessweek Africa

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