Ghana: Social Microfinance in the era of Microfinance Regulation

By Roderick Okoampah Ayeh

The move to regulate the Ghanaian microfinance sector has come to allay the fears of many microfinance developmental watchers in Ghana and the world over. This development is expected to streamline the activities of the entire microfinance in order to ensure safety and soundness of the sector.

The refreshing thing about this regulation is that it will forestall any happenings in the microfinance sector which might have a negative effect on the entire banking sector. This is especially important because most of the clients being targeted by microfinance institutions are the same clients who may graduate to become clients of the traditional banks. These clients, therefore, may carry the impression they have about the services of microfinance companies on the overall banking sector depending on the experience they have with these companies. For instance some of the negative activities encountered by some microfinance clients as a result of the self styled microfinance Institutions can affect the confidence levels of these people and further keep more people outside the formal financial sector.

It is important for all to be guided by the fact that trust is a very important ingredient in any banking environment and these cannot be toyed with especially in the Ghanaian case where there are close to about 70% of the population yet to be drawn into the formal financial sector.

The Microfinance Regulation as I indicated earlier is great move which must be made to work. Inspite of the several advantages it will bring on the sector it cannot be said to be without some challenges. This challenges I think should be raised as red flags to guide and ensure that the regulation produces the best results to ensuring that microfinance in Ghana becomes an effective tool for the reduction poverty amongst the many under/non – banked population.

In this vain, it is important for all stakeholders to find ways on how to enable microfinance in Ghana to keep their social objectives under the regulation in order to support governmental and donor agenda in reducing urban and rural poverty.

Social return started microfinance

Going through the development of microfinance in Ghana it can be noticed that the initial stages had developmental or social objective with most of the actors acting as Non Governmental Organizations (NGOs). This was when these NGOs had several sources of funding in the form of grants or aid to support their activities. In view of this, the NGOs at the time were not bothered about profitability since that was not a requirement for their sustainability. This, therefore, allowed most Financial NGOs to concentrate on providing capacity building to their clients through client education, business empowerment, family health education, etc. This era also did not give micro credit and savings the needed attention it deserved because it was perceived during this state of microfinance development that the poor could not save and they did not have the capacity to manage commercially priced credit extended to them.

One of the things that went wrong during this era was that all poor people were considered to be the same or that the degree of poverty amongst the target clients was the same. This opinion, however, in today’s concept is not the case because it has been proven that the degrees of poverty amongst poor people are not the same that is to conclude that the incidence of poverty varies among the poor even for the poor within the same economic jurisdiction.

The new revelation, therefore, infers that the poverty reduction strategies directed at these clients should be different because their situations and conditions are not the same. Developmental expert now acknowledge that poor people can be categorized into absolute or hardcore poor and economically active poor. For the hardcore poor, a commercial microcredit loan cannot be relied on to help them to move out of poverty. Their conditions are such that they are so poor that their “debt capacity is zero” meaning that they are unable to manage and pay any amount given to them as a loan. Their state are mainly worsen by the absence of any economic activities that can enable them to repay any amount of loan granted them. This people according studies would need grants/ aid or subsidizes credit instead of commercial micro credit to better their livelihoods.

Although there are still a number of financial NGOs around, it can be observed that current number of microfinance companies in Ghana far outnumber the financial NGOs that have largely social objectives. The current developments indicates that financial NGOs who even have social objective as their core mandates are now adding financial objective to ensure operational sustainability mainly as a result of the decline in donor support for the microfinance sector.

Microfinance today

The current state of microfinance is now largely dominated by the commercial microfinance institutions or microfinance companies. The companies are mainly focused on putting their assets into profitable investment in order to achieve appreciable returns on their assets. These microfinance companies are looking beyond covering their cost in order to make profits to support their existence. To sum it up commercial microfinance institutions have a singular objective to make money for their investors and other shareholders and this is very normal desire for any business.

Achieving financial objectives for microfinance companies are very important especially if microfinance institution need to attract external capital from Microfinance Investment Vehicles (MIV) as well as from private investors who may be interested in either profit or social returns or both to support their operations.

The strict adherence to achieving financial returns can be described as a necessity to safeguard the activities of microfinance especially in the decade of decline in grant for microfinance across the world. The danger, however, that may arise when the microfinance sector becomes engrossed in achieving only financial return is that it can lead to a situation where these institutions will reduce the investments in non -financial services they provide to their clients. However, it is these non – financial services like training in financial or business management and others that have been found to enhance the client (women’s) feelings of self-worth as well as courage and have further helped a number of women clients to contribute more to household well-being through providing improved nutrition and home care.

Today majority of Ghanaian microfinance companies are quick to form groups and quickly disburse loans to clients without first of all orienting them on basic things that can help their day to day activities. This “quick goal” to provide credit to microfinance clients is either to beat the competition or start recording returns on the funds which might have been contracted at a high cost and for a short term period. It is important to note that credit alone cannot necessary support the reduction of poverty that is why current development in microfinance has come up with certain indicators for measuring social performance in order to promote the development agenda of microfinance which if not taken seriously will soon be on “extinction” within the Ghanaian sector.

Why social return?

The positive impact of social return is enormous both for the microfinance Institutions (MFIs) and the client themselves. For the MFIs it can lead to high repayment rates due to the fact that these clients have improved ability to be efficient users of the microcredit they received. This can also reduce the high non-loan performance that majority of the microfinance companies around have started recording. Social benefits to the clients within a group, can also serve as an additional binder for the group and every member within that group now sees the group as another family that can help them to face the various challenges within the communities they leave in.

This can, therefore, help to prolong the life span of the group and further help to increase the level of the members of the group which include timely repayment of loans. There are several examples in Ghana where some well organized groups provide support to bereaved members to enable them to bury their dead relatives by assisting in cash or kind towards the burial ceremony. In Bangladesh as indicated by Mohammad Yunus in his book and title ; banker to the poor, some microfinance groups have provided support to women who have been abused by their husbands by confronting such men to resolve such abuses and this have led to low incidence of wife abuses amongst women who belong to Grameen groups.


The current microfinance regulations across the world and that to be implemented in Ghana mainly focus on financial discipline of the microfinance companies without much focus on social performance. Regulation, however, should be used to protect and enforce the social contribution of microfinance so that microfinance does not become a prototype of traditional banking because the two financial models are not the same.

Additionally in order for the microfinance sector to keep up with supporting developmental agenda, there is the need for skill orientation of all key microfinance players to approach microfinance as a developmental tool and not only as a business of giving credit and taking deposit. It is therefore important for microfinance actors to become aware of the social importance of microfinance in order to enable the sector to achieve the full benefit of microfinance on it target client.

The absence of social return in microfinance will only make microfinance beneficial to microfinance investors and shareholders at the expense of the microfinance clients who have been the reason behind this financial revolution across the world.

Roderick Okoampah Ayeh

ARB Apex Bank

Microfinance Technical Officer

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