Microfinance Institutions (MFIs) in Ghana, a must to survive

Generally, since the beginning of government’s 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 categorise beneficiaries, channelling of funds by Ministries, Departments and Agencies (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 development partners, government and other agencies, could help to better integrate microfinance with the development of the overall financial sector.

We did discover some important patterns. For instance, in India, we saw an increase in business start-ups for households that had no business to begin with. If they already had a business, though, we didn't see any increase in what they were doing. Microenterprises are not growing into the small and medium enterprises (SMEs) that are engines for growth.

Objectives of MFIs

The aim of a microfinance, according to Otero, 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 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. More recently, commentators such as Littlefield, Murduch and Hashemi, Simanowitz and Brody and the International Monetary Fund (IMF) have commented on the critical role of micro-credit in achieving the Millennium Development Goals.

When you look at what's actually happening on the ground, there is a lot of tension that you cannot get rid of. The notion that you can help poor people without having to engage in important trade-offs is very appealing, but a lot of it ends up being false. We have made an assumption in microfinance that profitability is not at odds with having an impact, but in many cases it has to be. In many places, it's very expensive to provide micro-credit, so the interest rates that you have to charge in order to get the sustainable machine going end up negating a lot of the reasons why you even started doing it in the first place.

To figure out why, we did two things. For some, we gave them money. For others, we gave them loans for farming, just the promise of money if there's bad rainfall. If they are credit constrained, getting the Agric or farming loan is nice but it's not going to help them make a bigger investment because there's no money attached to it. Likewise, if you just give them money, but it's the risk of rainfall that's preventing them from making an investment, then they're not going to invest the money you gave them.

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.