Micro Finance Credit Up

Despite persistent complaints by the private sector of a squeeze in credit, there has in recent times been an explosion of finance in the micro finance sector.

The Chief Executive Officer of Dalex Finance & Leasing Company Limited, Mr. Kenneth Kwamina Thompson, in an interview with Business and Financial Times observed that the expansion of credit to the sector is a good thing.

As at 31st March 2011, Survey of Apex Bodies indicate that at least 200 microfinance companies operating under the Money Lenders Ordinance had registered with the Association of Microfinance Companies. However, estimates of over 1,000 such companies exist throughout Ghana. Some individual Susu Collectors have graduated into such companies. In the informal financial sector, at least 2,000 Susu collectors have registered with the Ghana Cooperative Susu Collectors Association, but estimates of over 5,000 exist nationwide. “In the light of increasing complaints by Ghanaian entrepreneurs that lack of access to credit hinders growth, the proliferation of financial institutions that provide entrepreneurs easy access to credit is a positive development; however, regulation needs to be formalised to minimise the risks to both lenders and borrowers.”

Most organisations operating in the sector are typically owned by people who themselves are not involved in the day to day management, as they have other commitments. The micro-finance institutions, usually located in marketplaces such as Kasoa and Agblogbloshie, advance loans with interest rates ranging between 10 – 30 percent per month. Money is lent to individuals, but mainly to groups with no security required except for reliance on the collective responsibility of the group to ensure repayment.

The main issues of concern to the micro finance institutions include how to keep their operational costs down as monitoring costs are high whilst staff wages, which are typically low, could affect risk assessment. “The expansion of credit is good for the national economy as it helps nurture businesses; however lessons can be learnt from the Indian state of Andhra Pradesh” Mr. Thompson noted.

In India, the head of a network of private micro-finance companies predicted that India's roaring private micro-finance industry will hit the buffers. He was worried by the reckless lending and feckless borrowing by micro-credit companies and villagers respectively. This has now led to borrowers defaulting on payments and taking their lives, and banks cutting off lending to the cash-strapped micro-loan companies.

At the root of it, many say, is the increasing greed of the private micro finance industry in India. Some of these companies are atrociously profitable. They lend more and more money to the same people, who then renege on repayments. Also, the uses of small loans have changed over the years, with mixed results. In the beginning, the loans were given out to help small traders sell vegetables or buy livestock, or for basic farming needs.

In recent years those farming commercial crops (cotton, groundnut, vegetables) or larger livestock (high-yielding buffaloes and cows) received micro-credit. Industry experts say this is all very well, but requires the borrower to be more astute about handling the "assets" bought with the loans. Also, small farmers often lack the education needed to handle "income shocks" arising from one bad crop or a glut in the market, leading to a lowering of prices.

But what has made the situation worse, say analysts, is that micro-loans have been given away freely to villagers to build homes, repay old debts, buy consumer durables like TV-sets and pay for family marriages. The bulk of the current micro finance lending is towards consumption. Now a state government has pushed through a tough new law that seeks to regulate the industry. These lessons affect an organisations level of risk and sometimes have more direct social consequences.

Mr. Thompson disclosed that, as a non-bank finance institution, Dalex Finance believes that, as a way forward for the industry, some form of annual inspection akin to the supervisory regime of the Bank of Ghana should be looked into. He observed: “If the industry contracts due to defaults, borrowers will be driven to money lenders who charge higher interest rates and have more unorthodox loan monitoring and collection mechanisms.”

There is also need for intensified public education on the industry; addressing questions on whether the Ghana Police is adequately resourced to vet applications of Lenders; and whether the industry provides opportunities for money laundering. Over the long-term the establishment of institutions similar to the Citizen Advice Bureaus in the UK, which amongst other things provide independent legal advice to borrowers, would be helpful.

Mr. Thompson noted that the future looked promising for Dalex Finance, which is a wholly Ghanaian owned company. Established in 2005 and headquartered at the Ringway Estates in Accra, the company has over 50 full-time employees, 270 Sales Executives and branches in Asylum Down, Accra, Kumasi and Takoradi. An office in Tamale is expected to be opened in July.

Dalex Finance provides business loans and loans to government workers, as well as operating leases, mainly for vehicles to companies in the telecoms, mining and oil and gas sectors.

Source: B&FT